Youngevity International, Inc. - Annual Report: 2017 (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, 2017
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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Registrant’s telephone number, including area code:
619-934-3980
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
Common Stock, par value $0.001
per share
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Name of Each Exchange on which Registered
NASDAQ Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
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,” “smaller reporting company” or an
emerging growth company. See the definitions of
“large accelerated filer, “accelerated filer”
“smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (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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Emerging growth company [X]
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standard
provided pursuant to Section 13(a) of the Exchange Act. [
]
Indicate by check mark whether the registrant 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, 2017, the last
business day of the registrants recently completed second quarter,
was approximately $32,806,560 based upon the closing stock price
reported on the NASDAQ Market on June 30, 2017 on that
date.
The number of shares of registrant's Common Stock outstanding on
March 28, 2018 was 19,728,772.
Documents incorporated by reference: None.
YOUNGEVITY INTERNATIONAL,
INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2017
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YOUNGEVITY INTERNATIONAL,
INC.
Annual Report (Form 10-K)
For Year Ended December 31, 2017
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
Overview
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, we offer 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, 2017, we derived approximately 86% of our
revenue from our direct sales and approximately 14% of our revenue
from our commercial coffee sales and 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 - 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 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 5,500 products to
support a healthy lifestyle including:
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 also
substantially expanded our distributor base by merging the assets
that we have acquired under our web-based independent distributor
network, as well as providing our distributors with additional new
products to add to their product offerings.
Set forth below is information regarding each of our acquisitions
since 2012.
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Business
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Date of
Acquisition
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Product Categories
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ViaViente
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March
1, 2018
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Nutritional
Supplements
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Nature
Direct
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February
12, 2018
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A
manufacturer and distributor of essential-oil based nontoxic
cleaning and care products for personal, home and professional
use
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BeautiControl,
Inc.
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December
13, 2017
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Cosmetic and Skin
Care Products
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Future
Global Vision, Inc.
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November
6, 2017
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Nutritional
Supplements and Automotive Fuel Additive
Products
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Sorvana
International, LLC
(FreeLife
International, Inc.)
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July 1,
2017
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Health
and wellness products
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Ricolife,
LLC
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March
1, 2017
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Teas
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Bellavita
Group, LLC
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March
1, 2017
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Health
and Beauty Products
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Legacy
for Life, LLC
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September
1, 2016
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Nutritional
Supplements
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Nature’s
Pearl Corporation
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September
1, 2016
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Nutritional
Supplements and Skin Care Products
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Renew
Interest, LLC (SOZO Global, Inc.)
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July
29, 2016
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Nutritional
Supplements and Skin Care Products
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South
Hill Designs Inc.
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January
20, 2016
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Jewelry
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PAWS
Group, LLC
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July 1,
2015
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Pet
treats
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Mialisia
& Co., LLC
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June 1,
2015
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Jewelry
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JD
Premium LLC
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March
4, 2015
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Dietary
Supplement Company
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Sta-Natural,
LLC
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February
23, 2015
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Vitamins, Minerals
and Supplements for families and their pets
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Restart
Your Life, LLC
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October
1, 2014
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Dietary
Supplements
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Beyond
Organics, LLC
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May 1,
2014
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Organic
Food and Beverages
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Good
Herbs, Inc.
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April
28, 2014
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Herbal
Supplements
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Biometics
International, Inc.
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November
19, 2013
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Liquid
Supplements
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GoFoods
Global, LLC
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October
1, 2013
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Packaged
Foods
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Heritage
Markers, LLC
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August
14, 2013
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Digital
Products
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Livinity,
Inc.
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July
10, 2012
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Nutritional
Products
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GLIE,
LLC (DBA True2Life)
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March
20, 2012
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Nutritional
Supplements
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Set forth below is information regarding each of our 2017 and 2016
acquisitions.
BeautiControl, Inc.
On
December 13, 2017, we entered into an agreement with BeautiControl
whereby we acquired certain assets of the BeautiControl cosmetic
company. BeautiControl is a direct sales company specializing in
cosmetics and skincare products. The contingent consideration’s estimated
fair value at the date of acquisition was $2,625,000 as determined
by management using a discounted cash flow methodology. We are
obligated to make monthly payments based on a percentage of
BeautiControl’s distributor revenue and royalty revenue until
the earlier of the date that is twelve (12) years from the closing
date or such time as we have paid BeautiControl’s aggregate
cash payments of BeautiControl’s distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price. (See Note 2, to the consolidated financial
statements)
Future Global Vision, Inc.
Effective
November 6, 2017, we acquired certain assets and assumed certain
liabilities of Future Global Vision, Inc., a direct selling company
that offers a unique line of products that include a fuel additive
for vehicles that improves the efficiency of the engine and reduces
fuel consumption. In addition, Future Global Vision, Inc., offers a
line of nutraceutical products designed to provide health benefits
that the whole family can use. The
contingent consideration’s estimated fair value at the date
of acquisition was $875,000 as determined by management using a
discounted cash flow methodology. We are obligated to make monthly
payments based on a percentage of Future Global Vision,
Inc.’s distributor revenue and
royalty revenue until the earlier of the date that is twelve (12)
years from the closing date or such time as we have paid Future
Global Vision Inc. aggregate cash payments of Future Global Vision
Inc.’s distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price. (See Note 2,
to the consolidated financial statements)
Sorvana International, LLC
Effective July 1, 2017, we acquired certain assets and assumed
certain liabilities of Sorvana International “Sorvana”.
Sorvana was the result of the unification of the two companies
FreeLife International, Inc. “FreeLife”, and
L’dara. Sorvana offers a variety of products with the
addition of the FreeLife and L’dara product lines. Sorvana
offers an extensive line of health and wellness product solutions
including healthy weight loss supplements, energy and performance
products and skin care product lines as well as organic product
options. The contingent consideration’s estimated fair value
at the date of acquisition was $4,247,000 as determined by
management using a discounted cash flow methodology. We are
obligated to make monthly payments based on a percentage of
Sorvana’s distributor revenue and royalty revenue until the
earlier of the date that is twelve (12) years from the closing date
or such time as we have paid Sorvana’s aggregate cash
payments of Sorvana’s distributor revenue and royalty revenue
equal to the maximum aggregate purchase price. (See Note 2, to the
consolidated financial statements)
BellaVita Group, LLC
Effective March 1, 2017, we acquired certain assets of BellaVita
Group, LLC “BellaVita” a direct sales company and
producer of health and beauty products with locations and customers
primarily in the Asian market. The contingent consideration’s
estimated fair value at the date of acquisition was $1,650,000 as
determined by management using a discounted cash flow methodology.
In addition, we have assumed certain liabilities in accordance with
the agreement. We are obligated to make monthly payments based on a
percentage of the BellaVita distributor revenue derived from sales
of our products and a percentage of royalty revenue derived from
sales of BellaVita products until the earlier of the date that is
twelve (12) years from the closing date or such time as we have
paid to BellaVita aggregate cash payments of the BellaVita
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price. (See Note 2, to the consolidated
financial statements)
Ricolife, LLC
Effective March 1, 2017, we acquired certain assets of Ricolife,
LLC “Ricolife” a direct sales company and producer of
teas with health benefits contained within its tea formulas. The
contingent consideration’s estimated fair value at the date
of acquisition was $845,000 as determined by management using a
discounted cash flow methodology. In addition, we have assumed
certain liabilities in accordance with the agreement. We are
obligated to make monthly payments based on a percentage of the
Ricolife distributor revenue derived from sales of our products and
a percentage of royalty revenue derived from sales of Ricolife
products until the earlier of the date that is twelve (12) years
from the closing date or such time as we have paid to Ricolife
aggregate cash payments of the Ricolife distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price. (See Note 2, to the consolidated financial
statements)
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. During the period
ended September 30, 2017 the purchase accounting was finalized, and
we determined that the initial purchase price should be reduced by
$92,000 from $1,046,000 to $954,000. In addition, we paid $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. We are obligated to make monthly payments
based on a percentage of the Legacy for Life distributor revenue
derived from sales of our products and a percentage of royalty
revenue derived from sales of Legacy for Life products until the
earlier of the date that is fifteen (15) years from the closing
date or such time as we have paid to Legacy for Life aggregate cash
payments of the Legacy for Life distributor revenue and royalty
revenue equal to a predetermined maximum aggregate purchase price.
(See Note 2, to the consolidated financial statements)
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 $2,765,000. During the period ended December 31,
2016, we determined that the initial estimated fair value of the
acquisition should be reduced $1,290,000 from the initial purchase
price of $2,765,000 to $1,475,000. During the period ended
September 30, 2017 the purchase accounting was finalized, and we
determined that the purchase price should be reduced by $266,000 to
$1,209,000. We paid $200,000 for the purchase of certain
inventories, which has been applied against and reduced the maximum
aggregate purchase price. We are obligated to make monthly payments
based on a percentage of the Nature Pearl’s distributor
revenue derived from sales of our products and a percentage of
royalty revenue derived from sales of Nature Pearl’s products
until the earlier of the date that is ten (10) years from the
closing date or such time as we have paid to Nature Pearl’s
aggregate cash payments of the Nature Pearl distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price. (See Note 2, to the consolidated financial
statements)
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.
During the period ended September 30, 2017 the purchase accounting
was finalized, and we determined that the initial purchase price
should be reduced by $30,000 from $465,000 to $435,000. We paid
$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. We are obligated to make monthly payments based
on a percentage of the Renew’s distributor revenue derived
from sales of our products and a percentage of royalty revenue
derived from sales of Renew’s products until the earlier of
the date that is twelve (12) years from the closing date or such
time as we have paid to Renew’s aggregate cash payments of
the Renew’s distributor revenue and royalty revenue equal to
a predetermined maximum aggregate purchase price. (See Note 2, to
the consolidated financial statements)
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. We are obligated to make
monthly payments based on a percentage of the South Hill
distributor revenue derived from sales of our products and a
percentage of royalty revenue derived from sales of South
Hill’s products until the earlier of the date that is seven
(7) years from the closing date. (See Note 2, to the consolidated
financial statements)
Coffee Segment - We engage in
the commercial sale of one of our products, our coffee through our
subsidiary CLR Roasters, LLC (“CLR”). 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. CLR was established in 2001 and is
our 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. In April 2017, CLR reached an
agreement with Major League Baseball's Miami Marlins to feature
CLR’s Café La Rica Gourmet Espresso coffee as the
"Official Cafecito of the Miami Marlins" at Marlins Park in Miami,
Florida.
Our roasting facility is located in Miami, Florida, is 50,000
square foot and is SQF Level 2 certified, which is a stringent food
safety process that verifies the coffee bean processing plant and
distribution facility is in compliance with Certified HACCP (Hazard
Analysis, Critical Control Points) food safety plans.
In March 2014, we expanded our coffee segment and started our new
green coffee business with CLR’s acquisition of Siles
Plantation Family Group, which is 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 2018 harvest season started in November 2017 and will
continue through April of 2018.
Products
Direct Selling Segment - Youngevity®
We offer more than 5,500 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
Osteofx™ (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 nonGMO
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 30Day 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.
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 and 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 WalMart®,
WinnDixie, Jetro, American Grocers, Publix, Home Goods,
Marshalls and T.J. Maxx®.
During 2015 CLR invested in the KCup® coffee equipment
and capabilities and began the production of the KCup®
line of singleserve coffee products. In addition, we
registered our own YCup® 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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Halfcaff
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 years ended December 31, 2017 and 2016 approximately 10%
and 9% of our sales were derived from sales outside the U.S.,
respectively. We primarily sell our products to the ultimate
consumer through the direct selling channel. Our distributors are
required to pay a onetime enrollment fee and receive a
welcome kit specific to that country region that consists of forms,
policy and procedures, selling aids, and access to our distributor
website, prior to commencing services for us as a distributor.
Distributors are independent contractors and not our employees.
Distributors earn a profit by purchasing products directly from us
at a discount from a published brochure price and selling them to
their customers, the ultimate consumer of our products. We
generally have no arrangements with end users of our products
beyond the distributors, except as described below.
A distributor may contact customers directly, selling primarily
through our online or printed brochures, which highlight new
products and special promotions for each of our sales campaigns. In
this sense, the distributor, together with the brochure, is the
“store” through which our products are sold. A brochure
introducing new sales campaigns is frequently produced and our
websites and social networking activity take place on a continuous
basis. Generally, distributors and 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 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 or 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 can 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 can produce 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 CLR 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
operation 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. To support the efforts of distributors to reach new
customers, specially designed sales aids, promotional pieces,
customer flyers, radio and print advertising are used. In addition,
we seek to motivate our distributors using special incentive
programs that reward superior sales performance. Periodic sales
meetings with our independent distributors are conducted by our
home office staff. The meetings are designed to keep distributors
abreast of product line changes, explain sales techniques and
provide recognition for sales performance.
Several merchandising techniques are used, including the
introduction of new products, the use of combination offers, the
use of trial sizes and samples, and the promotion of products
packaged as gift items. In general, for each sales campaign, a
distinctive brochure or flyer is published, in which new products
are introduced and selected items are offered as special promotions
or are given prominence in the brochure. A key current priority for
our merchandising is to continue the use of pricing and promotional
models to enable a deeper, fact-based understanding of the role and
impact of pricing within our product portfolio.
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, 2017, we made
purchases from three vendors that individually comprised more than
10% of total purchases and in aggregate approximated 57% 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
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., and Columbia
Nutritional, LLC.
Sufficient raw materials were available during the year ended
December 31, 2017 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 also produce green coffee from CLR’s own plantation it
acquired in Nicaragua in 2014. We do not believe that CLR is
substantially dependent upon nor exposed to any significant
concentration risk related to purchases from any single vendor,
given the availability of alternative sources from which we may
purchase inventory. The supply and price of coffee are subject to
high volatility. Supply and price of all coffee grades are affected
by multiple factors, such as weather, pest damage, politics,
competitive pressures, the relative value of the United States
currency and economics in the producing countries. To achieve
certain economies of scale, best pricing and uniform quality, we
rely primarily on a few principal suppliers, namely: Rothfos
Corporation and H&H Coffee Group.
Intellectual Property
We have developed, and we use registered trademarks in our
business, particularly relating to our corporate and product names.
We own several trademarks that are registered with the U.S. Patent
and Trademark Office and we also own trademarks in Canada,
Australia, New Zealand, Singapore, Mexico, and Russia. Registration
of a trademark enables the registered owner of the mark to bar the
unauthorized use of the registered trademark in connection with a
similar product in the same channels of trade by any third-party in
the respective country of registration, regardless of whether the
registered owner has ever used the trademark in the area where the
unauthorized use occurs.
We also claim ownership and protection of certain product names,
unregistered trademarks, and service marks under common law. Common
law trademark rights do not provide the same level of protection
that is afforded by the registration of a trademark. In addition,
common law trademark rights are limited to the geographic area in
which the trademark is used. We believe these trademarks, whether
registered or claimed under common law, constitute valuable assets,
adding to recognition of our brands and the effective marketing of
our products. We intend to maintain and keep current all our
trademark registrations and to pay all applicable renewal fees as
they become due. The right of a trademark owner to use its
trademarks, however, is based on a number of factors, including
their first use in commerce, and trademark owners can lose
trademark rights despite trademark registration and payment of
renewal fees. We therefore believe that these proprietary rights
have been and will continue to be important in enabling us to
compete, and if for any reason we were unable to maintain our
trademarks, our sales of the related products bearing such
trademarks could be materially and negatively affected. See
“Risk Factors”.
We own certain intellectual property, including trade secrets that
we seek to protect, in part, through confidentiality agreements
with employees and other parties. Most of our products are not
protected by patents and therefore such agreements are often our
only form of protection. Even where these agreements
exist, there can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or
independently developed by competitors. Our proprietary product
formulations are generally considered trade secrets but are not
otherwise protected under intellectual property laws.
We intend to protect our legal rights concerning intellectual
property by all appropriate legal action. Consequently, we may
become involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing
proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical
personnel.
Industry Overview
We are engaged in two industries, the direct selling industry and
the 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.
The Direct Selling Association (“DSA”) reported in its
“2016 An Overview” that the fastest growing product was
Wellness followed by Services & Other, the two categories alone
representing approximately $20 billion in sales in 2016. 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. In the United States, as reported by the
DSA, a record 20.5 million people were involved in direct selling
in 2016, an increase of 1.5% compared to 2015. Estimated direct
retail sales for 2016 was reported by the 2017 Growth & Outlook
Report to be $35.54 billion compared to $36.12 billion in
2015.
Coffee Industry
Our coffee segment includes coffee bean roasting and the sales of
green coffee beans. Our roasting facility, located in Miami,
Florida, procures coffee primarily from Central America. Our green
coffee business procures coffee from Nicaragua by way of growing
our own coffee beans and purchasing green coffee beans directly
from other farmers. CLR sells coffee to domestic and international
customers, both green and roasted coffee.
The United States Department of Agriculture (“USDA”)
reported in its June 2017 “Coffee: World Markets and
Trade” report for the 2017/18 Forecast Overview that world
coffee production is forecasted at 159 million bags (60 kilograms
or approximately 132 pounds), which is unchanged from the previous
year. World exports of green coffee are expected to remain steady
totaling 111 million bags in 2018, with global consumption
forecasted at a record 158 million bags. For 2018, Central America
and Mexico are forecasted to contribute 18.1 million bags of coffee
beans and approximately 40 percent of the exports are destined to
the United States and 35 percent to the European Union. The United
States imports the second-largest amount of coffee beans worldwide
and is forecasted at 26 million bags.
Competition
Direct Selling Segment –
The diet fitness and health food industries, as well as the food
and drink industries in general, are highly competitive, rapidly
evolving and subject to constant change. The number of competitors
in the overall diet, fitness, health food, and nutraceutical
industries is virtually endless. We believe that existing industry
competitors are likely to continue to expand their product
offerings. Moreover, because there are few, if any, substantial
barriers to entry, we expect that new competitors are likely to
enter the “functional foods” and nutraceutical markets
and attempt to market “functional food” or
nutraceutical coffee products similar to our products, which would
result in greater competition. We cannot be certain that we will be
able to compete successfully in this extremely competitive
market.
We face competition from competing products in each of our lines of
business, in both the domestic and international markets.
Worldwide, we compete against products sold to consumers by other
direct selling and direct sales companies and through the Internet,
and against products sold through the mass market and prestige
retail channels. We also face increasing competition in our
developing and emerging markets.
Within the direct selling channel, we compete on a regional and
often country-by-country basis, with our direct selling
competitors. There are also a number of direct selling companies
that sell product lines similar to ours, some of which also have
worldwide operations and compete with us globally. We compete
against large and well-known companies that manufacture and sell
broad product lines through various types of retail establishments
such as General Foods and Nestlé. In addition, we compete
against many other companies that manufacture and sell in narrower
product lines sold through retail establishments. This industry is
highly competitive, and some of our principal competitors in the
industry are larger than we are and have greater resources than we
do. Competitive activities on their part could cause our sales to
suffer. We have many competitors in the highly competitive energy
drink, skin care and cosmetic, coffee, pet line and pharmacy card
industries globally, including retail establishments, principally
department stores, and specialty retailers, and direct-mail
companies specializing in these products. Our largest direct sales
competitors are Herbalife, Amway, USANA and NuSkin. In the energy
drink market, we compete with companies such as Red Bull, Gatorade
and Rock Star. Our beauty, skin care and cosmetic products compete
with Avon and Bare Essentials. From time to time, we need to reduce
the prices for some of our products to respond to competitive and
customer pressures or to maintain our position in the marketplace.
Such pressures also may restrict our ability to increase prices in
response to raw material and other cost increases. Any reduction in
prices as a result of competitive pressures, or any failure to
increase prices when raw material costs increase, would harm profit
margins and, if our sales volumes fail to grow sufficiently to
offset any reduction in margins, our results of operations would
suffer.
We are also subject to significant competition from other network
marketing organizations for the time, attention, and commitment of
new and existing distributors. Our ability to remain competitive
depends, in significant part, on our success in recruiting and
retaining distributors. There can be no assurance that our programs
for recruiting and retaining distributors will be successful. The
pool of individuals who may be interested in network marketing is
limited in each market and it is reduced to the extent other
network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive
opportunity for distributors, there can be no assurance that other
network marketing companies will not be able to recruit our
existing distributors or deplete the pool of potential distributors
in a given market.
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 (S3546), 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 20, 2018, we had 431 employees worldwide. We believe
that our current personnel can meet our operating requirements in
the near term. We expect that as our business grows we may hire
additional personnel to handle the increased demands on our
operations and to handle some of the services that are currently
being outsourced, such as brand management and sales
efforts.
Our Corporate History
Youngevity International, Inc., formerly AL International, Inc.,
founded in 1996, operates through two segments including the
following wholly-owned subsidiary: CLR Roasters, LLC
(“CLR”) which operates our commercial coffee business,
including the Siles Plantation Family Group S.A. located in
Nicaragua. Our direct selling network includes the domestic
operations of AL Global Corporation, 2400 Boswell LLC, MK
Collaborative LLC, and Youngevity Global LLC.
Our foreign wholly-owned subsidiaries include Youngevity Australia
Pty. Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV,
Youngevity Israel, Ltd., Youngevity Russia LLC, Youngevity Colombia
S.A.S., Youngevity International Singapore Pte. Ltd., and Mialisia
Canada, Inc. The Company also operates through the BellaVita Group
LLC, with operations in; Taiwan, Hong Kong, Singapore, Indonesia,
Malaysia and Japan.
The Company also operates subsidiary branches of Youngevity Global
LLC in the Philippines, Hong Kong and Taiwan.
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 June 7, 2017, an amendment to our Certificate of Incorporation
became effective which effectuated: (i) a 1-for-20 reverse stock
split (the “Reverse Split”) of the issued and
outstanding shares of Common Stock; (ii) a decrease in the number
of shares of (a) Common Stock authorized from 600,000,000 to
50,000,000 and (b) preferred stock authorized from 100,000,000 to
5,000,000.
Emerging Growth Company
We are an emerging growth company under 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 $1.07 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 $1.0 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.
Our telephone number is (619) 934-3980 and our facsimile number is
(619) 934-3205.
Available Information
Since June 21, 2017, our Common Stock has been traded on the NASDAQ
National Market under the symbol “YGYI.” From June 2013
until June 2017, the Common Stock has been 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 furnish it 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) 934-3205.
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 22 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.
There is substantial risk about our ability to continue as a going
concern, which may hinder our ability to obtain future
financing.
The accompanying consolidated financial statements as of December
31, 2017 have been prepared and presented on a basis assuming we
will continue as a going concern. We have sustained a significant
loss of $12,677,000 during the year ended December 31, 2017
compared to net losses during the year ended December 31, 2016 of
$398,000. The losses for the year ended December 31, 2017 were
primarily due to lower than anticipated revenues, increases in
legal fees, distributor events and sales and marketing costs. Net
cash used in operating activities was $2,773,000 for the year ended
December 31, 2017. Based on our current cash levels as of December
31, 2017, our current rate of cash requirements, we will need to
raise additional capital and we will need to significantly reduce
our expenses from current levels to be able to continue as a going
concern. There can be no assurance that we can raise capital
upon favorable terms, if at all, or that we can significantly
reduce our expenses.
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
the Company.
We currently have outstanding 2015 Notes which are convertible
notes in the principal amount of $3,000,000 that we issued to
investors in November 2015 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 2014 Notes. The 2014 Private Placement is
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). In July and August of 2017, we issued 2017 Notes in the
aggregate principal amount of $7,254,349, all of which are
outstanding. Stephan Wallach, our Chief Executive Officer, has also
personally guaranteed the repayment of the 2015 Notes and the 2014
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 2015 Notes mature in 2018, the 2014
Notes mature in 2019 and the 2017 Notes mature in 2020. The 2015
Notes and the 2014 Notes require us, among other things, to
maintain the security interest given by CLR for the notes and all
of the notes require us to 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 identified a material weakness in our internal controls in prior
periods, and we cannot provide assurances that additional material
weaknesses will not occur in the future. If our internal control
over financial reporting or our disclosure controls and procedures
are not effective, we may not be able to accurately report our
financial results, prevent fraud, or file our periodic reports in a
timely manner, which may cause investors to lose confidence in our
reported financial information and may lead to a decline in our
stock price.
Our
management is responsible for establishing and maintaining adequate
internal control over our financial reporting, as defined in Rule
13a- 15(f) under the Exchange Act. Due to an error in our
Statements of Cash Flows for the year ended December 31, 2016, and
the quarters ended March 31, 2016, June 30, 2016, September 30,
2016 and March 31, 2017, we have restated our Statements of Cash
Flows for such prior periods and certain related matters. Although
we have added an additional review process that we believe has
eliminated the identified material weakness in our internal
controls, there can be no assurances that additional material
weaknesses will not occur in the future.
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.
We generate a substantial portion of our revenue from the sale of
The Beyond Tangy Tangerine line, Osteo-fx line and, Ultimate EFA
line of products. A decrease in sales of these products could
seriously harm our business.
A significant portion of our revenue during the years ended
December 31, 2017 and 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 Food and Drug Administration (FDA), the Federal Trade
Commission (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 the FDA and recordkeeping requirements. This
legislation could raise our costs and negatively impact our
business. In June 2007, the FDA adopted final regulations on GMPs
in manufacturing, packaging, or holding dietary ingredients and
dietary supplements, which apply to the products we manufacture and
sell. These regulations require dietary supplements to be prepared,
packaged, and held in compliance with certain rules. These
regulations could raise our costs and negatively impact our
business. Additionally, our third-party suppliers or vendors may
not be able to comply with these rules without incurring
substantial expenses. If our third-party suppliers or vendors are
not able to timely comply with these new rules, we may experience
increased cost or delays in obtaining certain raw materials and
third-party products. Also, the FDA has announced that it plans to
publish guidance governing the notification of new dietary
ingredients. Although FDA guidance is not mandatory, it is a strong
indication of the FDA’s current views on the topic discussed
in the guidance, including its position on
enforcement.
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 FDA. The failure of our third-party manufacturers to produce
merchandise that adheres to our quality control standards could
damage our reputation and brands and lead to customer litigation
against us. If our manufacturers are unable or unwilling to recall
products failing to meet our quality standards, we may be required
to remove merchandise or issue voluntary or mandatory recalls of
those products at a substantial cost to us. We may be unable to
recover costs related to product recalls. We also may incur various
expenses related to product recalls, including product warranty
costs, sales returns, and product liability costs, which may have a
material adverse impact on our results of operations. While we
maintain a reserve for our product warranty costs based on certain
estimates and our knowledge of current events and actions, our
actual warranty costs may exceed our reserve, resulting in a need
to increase our accruals for warranty costs in the
future.
In addition, selling products for human consumption such as coffee
and energy drinks involve a number of risks. We may need to recall
some of our products if they become contaminated, are tampered with
or are mislabeled. A widespread product recall could result in
adverse publicity, damage to our reputation, and a loss of consumer
confidence in our products, which could have a material adverse
effect on our business results and the value of our brands. We also
may incur significant liability if our products or operations
violate applicable laws or regulations, or in the event our
products cause injury, illness or death. In addition, we could be
the target of claims that our advertising is false or deceptive
under U.S. federal and state laws as well as foreign laws,
including consumer protection statutes of some states. Even if a
product liability or consumer fraud claim is unsuccessful or
without merit, the negative publicity surrounding such assertions
regarding our products could adversely affect our reputation and
brand image.
Returns are part of our business. Our return rate since the
inception of selling activities has been minimal. We replace
returned products damaged during shipment wholly at our cost, which
historically has been negligible. Future return rates or costs
associated with returns may increase. In addition, to date, product
expiration dates have not played any role in product returns;
however, it is possible they will increase in the
future.
A general economic downturn, a recession globally or in one or more
of our geographic regions or sudden disruption in business
conditions or other challenges may adversely affect our business
and our access to liquidity and capital.
A downturn in the economies in which we sell our products,
including any recession in one or more of our geographic regions,
or the current global macro-economic pressures, 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 2018 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 and
Maria, 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 Essentials. In addition, we compete against many other
companies that manufacture and sell in narrower product lines sold
through retail establishments. This industry is highly competitive
and some of our principal competitors in the industry are larger
than we are and have greater resources than we do. Competitive
activities on their part could cause our sales to suffer. From time
to time, we need to reduce the prices for some of our products to
respond to competitive and customer pressures or to maintain our
position in the marketplace. Such pressures also may restrict our
ability to increase prices in response to raw material and other
cost increases. Any reduction in prices as a result of competitive
pressures, or any failure to increase prices when raw material
costs increase, would harm profit margins and, if our sales volumes
fail to grow sufficiently to offset any reduction in margins, our
results of operations would suffer.
If our advertising, promotional, merchandising, or other marketing
strategies are not successful, if we are unable to deliver new
products that represent technological breakthroughs, if we do not
successfully manage the timing of new product introductions or the
profitability of these efforts, or if for other reasons our end
customers perceive competitors' products as having greater appeal,
then our sales and financial results may suffer.
If we do not succeed in effectively differentiating ourselves from
our competitors’ products, including by developing and
maintaining our brands or our competitors adopt our strategies,
then our competitive position may be weakened and our sales, and
accordingly our profitability, may be materially adversely
affected.
We are also subject to significant competition from other network
marketing organizations for the time, attention, and commitment of
new and existing distributors. Our ability to remain competitive
depends, in significant part, on our success in recruiting and
retaining distributors. There can be no assurance that our programs
for recruiting and retaining distributors will be successful. The
pool of individuals who may be interested in network marketing is
limited in each market, and it is reduced to the extent other
network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive
opportunity for distributors, there can be no assurance that other
network marketing companies will not be able to recruit our
existing distributors or deplete the pool of potential distributors
in a given market.
Our coffee segment also faces strong competition. The coffee
industry is highly competitive, and coffee is widely distributed
and readily available. Our competition will seek to create
advantages in many areas including better prices, more attractive
packaging, stronger marketing, more efficient production processes,
speed to market, and better-quality verses value opportunities.
Many of our competitors have stronger brand recognition and will
reduce prices to keep our brands out of the market. Our competitors
may have more automation built into their production lines allowing
for more efficient production at lower costs. We compete not only
with other widely advertised branded products, but also with
private label or generic products that generally are sold at lower
prices. Consumers’ willingness to purchase our products will
depend upon our ability to maintain consumer confidence that our
products are of a higher quality and provide greater value than
less expensive alternatives. If the difference in quality between
our brands and private label products narrows, or if there is a
perception of such a narrowing, then consumers may choose not to
buy our products at prices that are profitable for us.
Our success depends, in part, on the quality and safety of our
products.
Our success depends, in part, on the quality and safety of our
products, including the procedures we employ to detect the
likelihood of hazard, manufacturing issues, and unforeseen product
misuse. If our products are found to be, or are perceived to be,
defective or unsafe, or if they otherwise fail to meet our
distributors' or end customers' standards, our relationship with
our distributors or end customers could suffer, we could need to
recall some of our products, our reputation or the appeal of our
brand could be diminished, and we could lose market share and or
become subject to liability claims, any of which could result in a
material adverse effect on our business, results of operations, and
financial condition.
Our ability to anticipate and respond to market trends and changes
in consumer preferences could affect our financial
results.
Our continued success depends on our ability to anticipate, gauge,
and react in a timely and effective manner to changes in consumer
spending patterns and preferences. We must continually work to
discover and market new products, maintain and enhance the
recognition of our brands, achieve a favorable mix of products, and
refine our approach as to how and where we market and sell our
products. While we devote considerable effort and resources to
shape, analyze, and respond to consumer preferences, consumer
spending patterns and preferences cannot be predicted with
certainty and can change rapidly. If we are unable to anticipate
and respond to trends in the market for beauty and related products
and changing consumer demands, our financial results will
suffer.
Furthermore, material shifts or decreases in market demand for our
products, including as a result of changes in consumer spending
patterns and preferences or incorrect forecasting of market demand,
could result in us carrying inventory that cannot be sold at
anticipated prices or increased product returns. Failure to
maintain proper inventory levels or increased product returns could
result in a material adverse effect on our business, results of
operations and financial condition.
If we are unable to protect our intellectual property rights,
specifically patents and trademarks, our ability to compete could
be negatively impacted.
Most of our products are not protected by patents. The labeling
regulations governing our nutritional supplements require that the
ingredients of such products be precisely and accurately indicated
on product containers. Accordingly, patent protection for
nutritional supplements often is impractical given the large number
of manufacturers who produce nutritional supplements having many
active ingredients in common. Additionally, the nutritional
supplement industry is characterized by rapid change and frequent
reformulations of products, as the body of scientific research and
literature refines current understanding of the application and
efficacy of certain substances and the interactions among various
substances. In this respect, we maintain an active research and
development program that is devoted to developing better, purer,
and more effective formulations of our products. We protect our
investment in research, as well as the techniques we use to improve
the purity and effectiveness of our products, by relying on trade
secret laws. Notwithstanding our efforts, there can be no assurance
that our efforts to protect our trade secrets and trademarks will
be successful. We intend to maintain and keep current all of our
trademark registrations and to pay all applicable renewal fees as
they become due. The right of a trademark owner to use its
trademarks, however, is based on a number of factors, including
their first use in commerce, and trademark owners can lose
trademark rights despite trademark registration and payment of
renewal fees. We therefore believe that these proprietary rights
have been and will continue to be important in enabling us to
compete and if for any reason we were unable to maintain our
trademarks, our sales of the related products bearing such
trademarks could be materially and negatively affected. Nor can
there be any assurance that third-parties will not assert claims
against us for infringement of their intellectual proprietary
rights. If an infringement claim is asserted, we may be required to
obtain a license of such rights, pay royalties on a retrospective
or prospective basis, or terminate our manufacturing and marketing
of our infringing products. Litigation with respect to such matters
could result in substantial costs and diversion of management and
other resources and could have a material adverse effect on our
business, financial condition, or operating results.
We consider our roasting methods essential to the flavor and
richness of our coffee and, therefore, essential to our various
brands. Because our roasting methods cannot be patented, we would
be unable to prevent competitors from copying our roasting methods,
if such methods became known. If our competitors copy our roasting
methods, the value of our brands could be diminished, and we could
lose customers to our competitors. In addition, competitors could
develop roasting methods that are more advanced than ours, which
could also harm our competitive position.
We may become involved in the future in legal proceedings that, if
adversely adjudicated or settled, could adversely affect our
financial results.
We are a party to litigation at
the present time and may become party to litigation in the future.
In general, litigation claims can be expensive, and time consuming
to bring or defend against and could result in settlements or
damages that could significantly affect financial results. However,
it is not possible to predict the final resolution of any
litigation to which we are, or may be party to, and the impact of
certain of these matters on our business, results of operations,
and financial condition could be material.
Government reviews, inquiries, investigations, and actions could
harm our business or reputation.
As we operate in various locations around the world, our operations
in certain countries are subject to significant governmental
scrutiny and may be harmed by the results of such scrutiny. The
regulatory environment with regard to direct selling in emerging
and developing markets where we do business is evolving and
officials in such locations often exercise broad discretion in
deciding how to interpret and apply applicable regulations. 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, 2017 approximately 12% of our sales
were derived from sales outside the United States. 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, 2017, approximately 12% of our
sales were derived from sales outside the United States. 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.
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. An increase in the “C”
coffee commodity price does increase the price of high-quality
arabica coffee and also impacts our ability to enter into
fixed-price purchase commitments. We frequently enter into supply
contracts whereby the quality, quantity, delivery period, and other
negotiated terms are agreed upon, but the date, and therefore
price, at which the base “C” coffee commodity price
component will be fixed has not yet been established.
These are known as price-to-be-fixed contracts. We also enter into
supply contracts whereby the quality, quantity, delivery period,
and price are fixed. The supply and price of coffee we purchase can
also be affected by multiple factors in the producing countries,
including weather, natural disasters, crop disease, general
increase in farm inputs and costs of production, inventory levels,
and political and economic conditions, as well as the actions of
certain organizations and associations that have historically
attempted to influence prices of green coffee through agreements
establishing export quotas or by restricting coffee supplies.
Speculative trading in coffee commodities can also influence coffee
prices. Because of the significance of coffee beans to our
operations, combined with our ability to only partially mitigate
future price risk through purchasing practices, increases in the
cost of high-quality arabica coffee beans could have an adverse
impact on our profitability. In addition, if we are not able to
purchase 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 COMPANY AND OUR
SECURITIES
There is no public market for our Series A Convertible Preferred
Stock or our Series B Convertible Preferred Stock and prospective
investors may not be able to resell their shares at or above the
offering price, if at all.
There
is no public market for any of our Preferred Stock and no assurance
can be given that an active trading market will develop for any of
our Preferred Stock or, if one does develop, that it will be
maintained. We have not applied for listing of any of our Preferred
Stock on any securities exchange or other stock market. In the
absence of a public trading market, an investor may be unable to
liquidate his investment in our company.
The
stock market in general may experience extreme price and volume
fluctuations. Continued market fluctuations could result in extreme
volatility in the price of the Common Stock, which could cause a
decline in the value of the Common Stock and our Preferred Stock.
Investors should also be aware that price volatility may be worse
if the trading volume of the Common Stock is low.
The
liquidity of the trading market, if any, and future trading prices
of our Preferred Stock will depend on many factors, including,
among other things, the market price of our common stock,
prevailing interest rates, our operating results, financial
performance and prospects, the market for similar securities and
the overall securities market, and may be adversely affected by
unfavorable changes in these factors. It is possible that the
market, if any, for our Preferred Stock will be subject to
disruptions which may have a negative effect on the holders of our
Preferred Stock, regardless of our operating results, financial
performance or prospects.
Conversion of our outstanding
convertible notes and our Preferred Stock will dilute the ownership
interest of existing stockholders, including holders who had
previously converted their Preferred Stock
To the
extent we issue Common Stock upon conversion of our convertible
notes or our Preferred Stock, such conversions will dilute the
ownership interests of existing stockholders, including holders who
had previously converted their Preferred Stock. Any sales in the
public market of the Common Stock issuable upon such conversion
could adversely affect prevailing market prices of our common
stock. In addition, the existence of the Preferred Stock may
encourage short selling by market participants because the
conversion of the Preferred Stock could depress the price of the
Common Stock.
Holders of our Preferred Stock have extremely limited voting
rights.
The
voting rights as a holder of our Preferred Stock is limited.
Shares of the Common Stock are currently the only class of our
securities carrying full voting rights. Voting rights for holders
of our Preferred Stock exist
primarily with respect to voting on amendments to our charter that
alter or change adversely the powers, preferences or rights of the
Preferred Stock.
The automatic conversion feature may not adequately compensate
holders of Series B Convertible Preferred Stock and may make it
more difficult for a party to take over our company or discourage a
party from taking over our company.
Upon the two-year anniversary of issuance, each share of Series B
Convertible Preferred Stock automatically converts into two shares
of Common Stock. If the Common Stock price is less 50% of the price
paid for each share of Series B Convertible Preferred Stock, the
value of the Series B Convertible Preferred Stock will be less than
the price paid for the Series B Convertible Preferred Stock
excluding the merchandise
credit.
Our ability to pay dividends is limited by the requirements of
Delaware law.
Our
ability to pay dividends on our Preferred Stock is limited by the
laws of Delaware. Under applicable Delaware law, a Delaware
corporation generally may not make a distribution if, the
corporation’s net assets (total assets minus total
liabilities) do not exceed its capital. Accordingly, we generally
may not make a distribution on the Preferred Stock if, we have not
been able to pay our debts as they become due in the usual course
of business or our total assets would be less than the sum of our
total liabilities plus the par value of each share of issued
stock.
We are controlled by two principal stockholders who are also our
Chief Executive Officer and Chairman and Chief Operating Officer
and director.
Through their voting power, each Mr. Stephan Wallach, our Chief
Executive Officer and Chairman, and Michelle Wallach, our Chief
Operating Officer and Director 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 and Michelle Wallach, his wife, together
beneficially own approximately 71.2% of our total equity securities
(assuming exercise of the options to purchase Common Stock held by
Mr. Wallach and Ms. Wallach). 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 $1.07 billion or more; (ii) the last day of our
fiscal year following the fifth anniversary of the date of our
first sale of common equity securities pursuant to an effective
registration statement; (iii) the date on which we have issued more
than $1.0 billion in nonconvertible debt during the previous three
years; or (iv) the date on which we are deemed to be a large
accelerated filer. We have elected to use the extended transition
period for complying with new or revised accounting standards under
Section 102(b)(2) of the Jobs Act, that 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 the shares of Common Stock may be based on factors that
may not be indicative of future market performance. Consequently,
the market price of the Common Stock may vary greatly. If an active
market for the Common Stock develops, there is a significant risk
that the stock price may fluctuate dramatically in the future in
response to any of the following factors, some of which are beyond
our control:
|
●
|
variations in our quarterly operating results;
|
|
●
|
announcements that our revenue or income/loss levels are below
analysts’ expectations;
|
|
●
|
general economic slowdowns;
|
|
●
|
changes in market valuations of similar companies;
|
|
●
|
announcements by us or our competitors of significant contracts;
or
|
|
●
|
acquisitions, strategic partnerships, joint ventures or capital
commitments.
|
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 Common Stock are held by
two of our principal shareholders. If any of these principal
shareholders were to decide to sell large amounts of stock over a
short period of time such sales could cause the market price of the
Common Stock to decline.
Our stock price has been volatile and subject to various market
conditions.
The trading price of the Common Stock has been subject to wide
fluctuations. The price of the Common Stock may fluctuate in the
future in response to quarter-to-quarter variations in operating
results, material announcements by us or our competitors,
governmental regulatory action, conditions in the nutritional
supplement industry, negative publicity, or other events or
factors, many of which are beyond our control. In addition, the
stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market
prices of many dietary and nutritional supplement companies and
which have, in certain cases, not had a strong correlation to the
operating performance of these companies. Our operating results in
future quarters may be below the expectations of securities
analysts and investors. If that were to occur, the price of the
Common Stock would likely decline, perhaps
substantially.
We may issue preferred stock with rights senior to the Common
Stock, Series A Convertible Preferred Stock and B Convertible
Preferred Stock.
Our certificate of incorporation authorizes the issuance of up to
five million shares of preferred stock without shareholder approval
and on terms established by our directors. We may issue shares of
preferred stock in order to consummate a financing or other
transaction, in lieu of the issuance of Common Stock. The rights
and preferences of any such class or series of preferred stock
would be established by our board of directors in its sole
discretion and may have dividend, voting, liquidation and other
rights and preferences that are senior to the rights of the Common
Stock and existing Preferred Stock.
You should not rely on an investment in our Common Stock for the
payment of cash dividends.
We intend to retain future profits, if any, to expand our business.
We have never paid cash dividends on the Common Stock and do not
anticipate paying any cash dividends on the Common Stock in the
foreseeable future. You should not make an investment in the Common
Stock if you require dividend income. Any return on investment in
the Common Stock would only come from an increase in the market
price of our stock, which is uncertain and
unpredictable.
We cannot assure you that the common stock will remain listed on
the NASDAQ Capital Market.
The
Common Stock is currently listed on the NASDAQ Capital
Market. Although we currently meet the listing standards of
the NASDAQ Capital Market, we cannot assure you that we will be
able to maintain the continued listing standards of the NASDAQ
Capital Market. If we fail to satisfy the continued listing
requirements of the NASDAQ Capital Market, such as the corporate
governance requirements, minimum bid price requirement or the
minimum stockholder’s equity requirement, the NASDAQ Capital
Market may take steps to de-list our common stock. If we are
delisted from the NASDAQ Capital Market then our common stock will
trade, if at all, only on the over-the-counter market, such as the
OTC Bulletin Board securities market, and then only if one or more
registered broker-dealer market makers comply with quotation
requirements. In addition, delisting of our common stock could
depress our stock price, substantially limit liquidity of our
common stock and materially adversely affect our ability to raise
capital on terms acceptable to us, or at all. Delisting from the
NASDAQ Capital Market could also have other negative results,
including the potential loss of confidence by suppliers and
employees, the loss of institutional investor interest and fewer
business development opportunities.
The reverse stock split that was effected in June 2017 may decrease
the liquidity of the shares of the Common Stock.
The
liquidity of the Common Stock may be affected adversely by the
reverse stock split given the reduced number of shares that are now
outstanding. In addition, the reverse stock split increased the
number of shareholders who own odd lots (less than 100 shares) of
the Common Stock, creating the potential for such shareholders to
experience an increase in the cost of selling their shares and
greater difficulty effecting such sales.
Although
we believe that a higher market price of the Common Stock may help
generate greater or broader investor interest, there can be no
assurance that the reverse stock split will result in a share price
that will attract new investors, including institutional
investors.
A majority of our directors are not required to be "independent"
and several of our directors and officers have other business
interests.
We
qualify as a "controlled company" for listing purposes on the
NASDAQ Capital Market because Stephen Wallach and Michelle Wallach
continue to hold in excess of 50% of our voting securities. As a
controlled company, we qualify for certain exemptions to the NASDAQ
Capital Market listing requirements, including the requirement that
a majority of our directors be independent, and the requirements to
have a compensation committee and a nominating/corporate governance
committee, each composed of entirely independent directors. A
majority of our directors are not currently "independent" under the
NASDAQ Capital Market independence standards. This lack of
"independence" may interfere with our directors' judgment in
carrying out their responsibilities as directors.
Several
of our directors have other business interests, including Richard
Renton, Paul Sallwasser, William Thompson and Kevin Allodi. Those
other interests may come into conflict with our interests and the
interests of our shareholders. We may compete with these other
business interests for such directors' time and
efforts.
Anti-takeover provisions in our charter documents and under
Delaware law could make an acquisition of us more difficult, limit
attempts by our stockholders to replace or remove our current
management and limit the market price of our Common
Stock.
Provisions
in our certificate of incorporation and bylaws, as amended and
restated in connection with this Offering, may have the effect of
delaying or preventing a change in control or changes in our
management. Our amended and restated certificate of incorporation
and amended and restated bylaws includes provisions
that:
●
authorize our
board of directors to issue Preferred Stock, without further
stockholder action and with voting liquidation, dividend and other
rights superior to our Common Stock; and
●
provide that
vacancies on our board of directors may be filled only by the vote
of a majority of directors then in office, even though less than a
quorum.
These
provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making
it more difficult for stockholders to replace members of our board
of directors, which is responsible for appointing the members of
our management. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware (the
“DGCL”), which generally prohibits a Delaware
corporation from engaging in any of a broad range of business
combinations with any “interested” stockholder for a
period of three years following the date on which the stockholder
became an “interested” stockholder. Any of the
foregoing provisions could limit the price that investors might be
willing to pay in the future for shares of Common Stock, and they
could deter potential acquirers of our company, thereby reducing
the likelihood that you would receive a premium for the Common
Stock in an acquisition.
Our failure to fulfill all of our registration requirements may
cause us to suffer liquidated damages, which may be very
costly.
Pursuant
to the terms of the registration rights agreement that we entered
into with investors in our recent private placement offering, we
are required to file a registration statement with respect to
securities issued to them within a certain time period and maintain
the effectiveness of such registration statement. The failure to do
so could result in the payment of damages by us. There can be no
assurance we will be able to maintain the effectiveness of any
registration statement subject to certain conditions, and therefore
there can be no assurance that we will not incur damages with
respect to such agreements.
Reports published by securities or industry analysts, including
projections in those reports that exceed our actual results, could
adversely affect our Common Stock price and trading
volume.
Securities
research analysts, including those affiliated with our selling
agents establish and publish their own periodic projections for our
business. These projections may vary widely from one another and
may not accurately predict the results we actually achieve. Our
stock price may decline if our actual results do not match
securities research analysts' projections. Similarly, if one or
more of the analysts who writes reports on us downgrades our stock
or publishes inaccurate or unfavorable research about our business
or if one or more of these analysts ceases coverage of our company
or fails to publish reports on us regularly, our stock price or
trading volume could decline. While we expect securities research
analyst coverage following this offering, if no securities or
industry analysts begin to cover us, the trading price for our
stock and the trading volume could be adversely
affected.
Item 1B. Unresolved
Staff Comments
None.
Item 2. Properties
Operation Properties
Our corporate headquarters are located at 2400 Boswell, Road, 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.
Our corporate headquarters 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, 2017, the balance on the
long-term mortgage was $3,289,000 and the balance on the promissory
note was $22,000.
Our Commercial Coffee Segment, CLR Roasters headquarters, is a
coffee roaster processing facility, warehouse, and distribution
center located in Miami, Florida, consisting of 50,000 square feet.
Our lease for this space expires in May 2023. During the years
ended December 31, 2017 and 2016 we incurred lease expense of
approximately $442,000 and $414,000,
respectively.
Below
is a summary of our facilities by location:
|
Location
|
Approximate Square Footage of Facilities
|
Land in Acres
|
Own/Lease
|
Approximate Rent Expense $
|
|
Chula
Vista, CA
|
59,000
|
-
|
Own
|
$-
|
|
Scottsdale,
AZ
|
1,248
|
-
|
Lease
|
$10,000
|
|
Miami,
FL
|
50,110
|
-
|
Lease
|
$442,000
|
|
Phoenix,
AZ
|
3,096
|
-
|
Lease
|
$21,000
|
|
Matagalpa,
Nicaragua
|
60,505
|
500
|
Own (1)
|
$-
|
|
Provo,
UT
|
7,156
|
-
|
Lease
|
$120,000
|
|
Auckland,
New Zealand
|
3,570
|
-
|
Lease
|
$74,000
|
|
Moscow,
Russia
|
1,669
|
-
|
Lease
|
$91,000
|
|
Singapore
|
3,222
|
-
|
Lease
|
$246,000
|
|
Guadalajara,
Mexico
|
6,830
|
-
|
Lease
|
$35,000
|
|
Manila,
Philippines
|
4,473
|
-
|
Lease
|
$99,000
|
|
Bogota,
Colombia
|
2,153
|
-
|
Lease
|
$13,000
|
|
Lai
Chi Kok Kin, Hong Kong
|
1,296
|
-
|
Lease
|
$51,000
|
|
Taipei,
Taiwan
|
4,722
|
-
|
Lease
|
$22,000
|
|
Taipei,
Taiwan
|
3,955
|
-
|
Lease
|
$39,000
|
|
Indonesia
|
1,884
|
-
|
Lease
|
$6,000
|
|
Malaysia
|
3,945
|
-
|
Lease
|
$11,000
|
|
Japan
|
98
|
-
|
Lease
|
$7,000
|
|
(1) CLR Arabica coffee bean plantation and dry-processing
facility and mill.
|
|
|
|
We believe that we have adequate space for our anticipated needs
and that suitable additional space will be available at
commercially reasonable prices as needed.
|
Item 3. Legal
Proceedings
We are a party to litigation at the present time and
may become party to litigation in the future. In general,
litigation claims can be expensive, and time consuming to bring or
defend against and could result in settlements or damages that
could significantly affect financial results. It is not possible to
predict the final resolution of the current litigation to which we
are party to, and the impact of certain of these matters on our
business, results of operations, and financial condition could be
material. Regardless of the outcome, litigation has adversely
impacted our business because of defense costs, diversion of
management resources and other
factors.
Item 4. Mine Safety
Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Since June 21, 2017, the Common Stock has been traded on the NASDAQ
National Market under the symbol “YGYI.” From June 2013
until June 20, 2017, the Common Stock has been traded on the OTCQX
Marketplace operated by the OTC Markets Group under the symbol
“YGYI”. Previously, the Common Stock was quoted on the
OTC Markets OTC Pink Market system under the symbol
“JCOF”. The range of high and low sales prices for the
years ended December 31, 2017 and 2016 is presented in the table
below:
The trading price of the Common Stock has been subject to wide
fluctuations. The price of the Common Stock may fluctuate in the
future in response to quarter-to-quarter variations in operating
results, material announcements by us or our competitors,
governmental regulatory action, conditions in the nutritional
supplement industry, negative publicity, or other events or
factors, many of which are beyond our control. In addition, the
stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market
prices of many dietary and nutritional supplement companies and
which have, in certain cases, not had a strong correlation to the
operating performance of these companies. Our operating results in
future quarters may be below the expectations of securities
analysts and investors. If that were to occur, the price of the
Common Stock would likely decline, perhaps
substantially.
|
|
2017
|
2016
|
||
|
|
High
|
Low
|
High
|
Low
|
|
First
Quarter
|
$5.96
|
$5.00
|
$6.60
|
$4.40
|
|
Second
Quarter
|
$7.00
|
$3.00
|
$6.40
|
$4.80
|
|
Third
Quarter
|
$6.75
|
$4.28
|
$6.40
|
$4.60
|
|
Fourth
Quarter
|
$5.16
|
$3.79
|
$6.40
|
$5.20
|
The
last reported sale price of the Common Stock on the NASDAQ National
Market on March 29, 2018, was $4.15 per share.
Holders
As of the close of business on March 29, 2018, there were 541
holders of record of our common stock. The number of
holders of record is based on the actual number of holders
registered on the books of our transfer agent and does not reflect
holders of shares in "street name" or persons, partnerships,
associations, corporations or other entities identified in security
position listings maintained by depository trust
companies.
Dividend Policy
We have never declared or paid any cash dividends on our common
stock and we do not currently intend to pay any cash dividends on
the Common Stock in the foreseeable future. Other than the payment
of dividends on our preferred stock, we expect to retain all
available funds and future earnings, if any, to fund the
development and growth of our business. Any future determination to
pay dividends, if any, on the Common Stock will be at the
discretion of our board of directors and will depend on, among
other factors, our results of operations, financial condition,
capital requirements and contractual restrictions.
Series B Convertible Preferred Stock
On
March 2, 2018 our board of directors designated 1,052,631 shares as
Series B Convertible Preferred Stock, par value $.001 per share
(“Series B Convertible Preferred”).
The Series B Convertible Preferred Stock will pay cumulative
dividends from the date of issuance at a rate of 5% per
annum payable quarterly in
arrears on or about the last day of March, June, September and
December of each year beginning June 30, 2018. If the aggregate
amount of dividends accrued and payable to a holder is less than
$10.00, we may, at our option, retain and not make payment in the
respect of such dividends until the aggregate number of dividends
then accrued and payable to the holder is not less than
$10.00.
Sales of Unregistered Securities
We did not sell any unregistered shares of our common stock during
the year ended December 31, 2017 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 Common Stock
On December 11, 2012, we authorized a share repurchase program to
repurchase up to 750,000 of the Company's issued and outstanding
shares of Common Stock from time to time on the open market or via
private transactions through block trades. A total of
196,594 shares have been repurchased to-date as of December 31,
2017 at a weighted-average cost of $5.30. There were no repurchases
during the year ended December 31, 2017. We repurchased a total of
6,285 shares at a weighted-average cost of $5.60 per shares in
2016. The remaining number of shares authorized for repurchase
under the plan as of December 31, 2017 is
553,406.
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, 2017, 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
|
2,084,523
|
$4.70
|
1,885,789
|
|
Total
|
2,084,523
|
$4.70
|
1,885,789
|
|
|
|
|
|
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 increased 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 2,000,000 to
4,000,000 shares authorized (as adjusted for the 1-for-20 reverse
stock split, which was effective on June 7, 2017). The Plan as
amended allows 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.
As a
Smaller Reporting Company as defined by Rule12b-2 of the Exchange
Act and in item 10(f)(1) of Regulation S-K, we are electing scaled
disclosure reporting obligations and therefore are not required to
provide the information requested by this Item.
ITEM 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion of our financial condition and results of
operation should be read in conjunction with the audited
consolidated financial statements and related notes, which are
included elsewhere in this Annual Report on Form 10-K. In addition
to historical information, the following discussion contains
certain forward-looking statements that involve risks,
uncertainties and assumptions. Where possible, we have tried to
identify these forward-looking statements by using words such as
“anticipate,” “believe,”
“intends,” or similar expressions. Our actual results
could differ materially from those anticipated expressed or implied
by the forward-looking statements due to important factors and
risks including, but not limited to, those set forth under
“Risk Factors” in Part I, Item 1A of this Annual
Report. All share and per share numbers reflect the one-for-twenty
reverse stock split that we effected on June 5, 2017.
Overview
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, 2017, we derived approximately 86% of our
revenue from direct sales and approximately 14% of our revenue from
our commercial coffee sales. 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.
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.
We conduct our operations primarily in the United States. For the
year ended December 31, 2017 and the year ended December 31, 2016
approximately 88% and 91%, respectively, of our revenues were
derived from sales within the United States.
Recent Events
Series B Convertible Preferred Stock Offering
On
February 14, 2018, we commenced our offering to sell up to $10
million of our Series B Convertible Preferred Stock on a best
effort basis without any minimum
offering amount. The offering (the “Offering”)
terminated on March 31, 2018. The Series B Convertible
Preferred Stock pays cumulative
dividends from the date of original issue at a rate of 5.0% per
annum payable quarterly in
arrears on or about the last day of March, June, September and
December of each year, beginning June 30, 2018. The Series B
Convertible Preferred Stock ranks senior to our outstanding Series
A Convertible Preferred Stock and our common stock par value $0.001
(the "Common Stock") with respect to dividend rights and rights
upon liquidation, dissolution or winding up. Each holder of Series
B Convertible Preferred Stock received a credit towards our
merchandise equal to ten percent (10%) of the amount of their
investment up to a maximum credit of $1,000. Holders of the Series
B Convertible Preferred Stock have limited voting rights. Each
share of Series B Convertible Preferred Stock is initially
convertible at any time, in whole or in part, at the option of the
holders, at an initial conversion price of $4.75 per share, into
two shares of common stock and automatically converts into two
shares of Common Stock on its two-year anniversary of issuance. The
offering price of the Series B Convertible Preferred Stock was
$9.50 per share.
On
March 2, 2018 our board of directors designated 1,052,631 shares as
Series B Convertible Preferred Stock, par value $.001 per share
(“Series B Convertible Preferred Stock”).
Offering
On March 30, 2018, we completed our best efforts Offering of Series
B Convertible Preferred Stock, pursuant to which we sold an
aggregate of 381,173 shares of Series B Convertible Preferred Stock
at an offering price of $9.50 per share and received gross proceeds
in aggregate of $3,621,143. The shares of Series B Convertible
Preferred Stock issued in the Offering were sold pursuant to the
our Registration Statement, which was declared effective on
February 13, 2018.
The net proceeds to us from Offering were $3,328,761 after
deducting commissions and Offering expenses of the selling agent
payable by us.
Tripoint
Global Equities, LLC (“Tripoint”), acted as the selling
agent for the Offering pursuant to the terms of a Selling Agency
Agreement that was entered into on March 15, 2018, the form of
which was filed as an exhibit to our registration statement on Form
S-1, as amended (File No. 333-221847) (the “Registration
Statement”). Under the Selling Agency Agreement, we paid
TriPoint a fee of 4.0% of the gross proceeds of the Offering and
agreed to reimburse TriPoint for up to $45,000 of its
expenses.
Use of Proceeds
The Company currently intends to use the net proceeds from the sale
of shares of the Series B Convertible Preferred Stock in the
Offering for general working capital purposes.
New Acquisitions During the Years Ended 2017 and 2018
Pursuant
to an agreement dated March 1, 2018, we acquired certain assets of
ViaViente. ViaViente is the distributor of The ViaViente Miracle, a
highly-concentrated, energizing whole fruit puree blend that is
rich in Anti-Oxidants and naturally-occurring vitamins and
minerals. ViaViente, was introduced to the public in 2003 following
years of research that included studies of mineral rich waters
whose source is found in the Andes Mountains and flow thru
Vilcabamba, Ecuador, a region known for its high concentration of
centenarians. In 2007 ViaViente became the first product in the
market to receive the coveted Brunswick Labs ORAC Seal of
Certification for its Anti-Oxidant content.
Pursuant
to an agreement dated February 12, 2018, we acquired certain
liabilities of Nature Direct. Nature Direct, a manufacturer and
distributor of essential-oil based nontoxic cleaning and care
products for personal, home and professional use. Nature Direct was
formed in Australia in 2007 to create eco-friendly, effective and
affordable home cleaning products using essential-oils. Since then
the company has grown its product lines to include personal care
and professional use nontoxic disinfectant products. Until now,
Nature Direct sales force has been located in and focused on the
Australian market. Nature Direct products will now be made
available to our social selling program.
Effective
December 13, 2017, we acquired certain assets of BeautiControl
cosmetic company. BeautiControl is a direct sales company
specializing in cosmetics and skincare products.
Effective
November 6, 2017, we acquired certain assets and assumed certain
liabilities of Future Global Vision, Inc., a direct selling company
that offers a unique line of products that include a fuel additive
for vehicles that improves the efficiency of the engine and reduces
fuel consumption. In addition, Future Global Vision, Inc., offers a
line of nutraceutical products designed to provide health benefits
that the whole family can use.
Effective July 1, 2017, we acquired certain assets and assumed
certain liabilities of Sorvana International, LLC
“Sorvana”. Sorvana was the result of the unification of
the two companies FreeLife International, Inc.
“FreeLife”, and L’dara. Sorvana offers a variety
of products with the addition of the FreeLife and L’dara
product lines. Sorvana offers an extensive line of health and
wellness product solutions including healthy weight loss
supplements, energy and performance products and skin care product
lines as well as organic product options.
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.
2017 Financing
During July and August 2017, we engaged in the July
2017 Private Placement pursuant to which we offered for sale a
minimum of $100,000 of units up to a maximum of $10,000,000 of
units, with each unit (a “Unit”) consisting of: (i) a
three (3) year convertible note in the principal amount of $25,000
initially convertible into shares of Common Stock, at $4.60 per
share (subject to adjustment); and (ii) a Series D Warrant (the
“Class D Warrant”), exercisable to purchase 50% of the
number of shares issuable upon conversion of the 2017 Note at an
exercise price equal to $5.56.
In July and August 2017, we entered into a Note Purchase Agreement
with 28 accredited investors that participated in the July 2017
Private Placement pursuant to which we raised gross cash proceeds
of $3,054,000 in the 2017 Private Placement and sold 2017 Notes in
the aggregate principal amount of $3,054,000, convertible into
663,914 shares of our common stock, at a conversion price of $4.60
per share, subject to adjustment as provided therein; and 2017
Warrants to purchase 331,956 shares of common stock at an exercise
price of $5.56.
In
addition, as part of the 2017 Private Placement, three (3)
investors in our November 2015 Private Placement (the “Prior
Investors”), converted their 8% Series C Convertible Notes in
the aggregate principal amount of $4,200,349 together with accrued
interest thereon into new convertible notes for an equal principal
amount, convertible into 913,119 shares of Common Stock and 2017
Warrants to purchase an aggregate of 456,560 shares of Common
Stock. The new note carries the same interest rate as the prior
note. The Prior Investors also exchanged their Series A Warrants
dated October 26, 2015 to purchase an aggregate of 279,166 shares
of Common Stock for a new 2017 Warrant to purchase an aggregate of
182,065 shares of Common Stock. We used the proceeds from the 2017
Private Placement for working capital purposes.
For
twelve (12) months following the closing, the investors in the 2017
Private Placement have the right to participate in any future
equity financings by us including the Offering, up to their pro
rata share of the maximum Offering amount in the
aggregate.
The
2017 Notes bear interest at a rate of eight percent (8%) per annum.
We have the right to prepay the 2017 Notes at any time after the
one-year anniversary date of the issuance of the 2017 Notes at a
rate equal to 110% of the then outstanding principal balance and
accrued interest. The 2017 Notes automatically convert to Common
Stock if prior to the maturity date we sell Common Stock, preferred
stock or other equity-linked securities with aggregate gross
proceeds of no less than $3,000,000 for the purpose of raising
capital. The 2017 Notes provide for full ratchet price protection
for a period of nine months after their issuance and thereafter
weighted average price adjustment.
We paid
a placement fee of $321,248, excluding legal expenses and issued to
the selling agent, who was the placement agent in the 2017 Private
Placement, three-year warrants to purchase 179,131 shares of Common
Stock at an exercise price of $5.56 per share and we issued the
placement agent 22,680 shares of Common Stock.
In connection with the 2017 Private Placement, we also entered into
the “Registration Rights Agreement” with the investors
in the 2017 Private Placement. The Registration Rights Agreement
requires that we file a registration statement (the
“Registration Statement”) with the Securities and
Exchange Commission within ninety (90) days of the final closing
date of the Private Placement for the resale by the investors of
all of the shares Common Stock underlying the senior convertible
notes and 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”) and that the Initial Registration Statement be
declared effective by the SEC within 180 days of the final closing
date of the 2017 Private Placement or if the registration statement
is reviewed by the SEC 210 days after the final closing date or the
2017 Private Placement. 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. The Registration
Statement on Form S-3 was declared effective on September 27,
2017.
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 our direct selling segment
products directly to the distributors primarily via UPS, USPS or
FedEx and receives substantially all payments for these sales in
the form of credit card transactions. We regularly monitor our use
of credit card or merchant services to ensure that its financial
risk related to credit quality and credit concentrations is
actively managed. Revenue is recognized upon passage of title and
risk of loss to customers when product is shipped from the
fulfillment facility. We ship the majority of our 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.
Fair Value of Financial Instruments
Certain of our financial instruments including cash and cash
equivalents, accounts receivable, inventories, prepaid expenses,
accounts payable, accrued liabilities and deferred revenue are
carried at cost, which is considered to be representative of their
respective fair values because of the short-term nature of these
instruments. Our notes payable and derivative liabilities are
carried at estimated fair value (see Note 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, using the effective interest method.
Inventory and Cost of Sales
Inventory is stated at the lower of cost or net realizable value.
Cost is determined using the first-in, first-out method. We record
an inventory reserve for estimated excess and obsolete inventory
based upon historical turnover, market conditions and assumptions
about future demand for its products. When applicable, expiration
dates of certain inventory items with a definite life are taken
into consideration.
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
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.
Segment
revenue as a percentage of total revenue is as follows (in
thousands):
|
|
For the Years ended
|
|
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Revenues
|
|
|
|
Direct
selling
|
$142,450
|
$145,418
|
|
As a % of Revenue
|
86%
|
89%
|
|
Commercial
coffee
|
23,246
|
17,249
|
|
As a % of Revenue
|
14%
|
11%
|
|
Total
revenues
|
$165,696
|
$162,667
|
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.
We
conduct our operations primarily in the United States. For the
years ended December 31, 2017 and 2016 approximately 12% and 9%,
respectively, of our sales were derived from outside the United
States.
The
comparative financials discussed below show the consolidated
financial statements of Youngevity International, Inc. as of and
for the years ended December 31, 2017 and 2016.
Year ended December 31, 2017 compared to year ended December 31,
2016
Revenues
For the
year ended December 31, 2017, our revenues increased 1.9% to
$165,696,000 as compared $162,667,000 for the year ended December
31, 2016. During the year ended December 31, 2017, we derived
approximately 86% of our revenue from our direct sales and
approximately 14% of our revenue from our commercial coffee
sales. Direct selling segment revenues decreased by $2,968,000
or 2.0% to $142,450,000 as compared to $145,418,000 for the year
ended December 31, 2016. This decrease was primarily attributed to
a decrease of $14,791,000 in revenues from existing business offset
by additional revenues of $11,823,000 derived from our
Company’s 2017 and 2016 acquisitions compared to the prior
period. The decrease in existing business was primarily due to
reduction in revenues related to key management and distributors
moving to another direct selling company and decline in revenues in
certain non-nutrition related products. For the year ended December
31, 2017, commercial coffee segment revenues increased by
$5,997,000 or 34.8% to $23,246,000 as compared to $17,249,000 for
the year ended December 31, 2016. This increase was primarily
attributed to increased revenues in our green coffee business and
coffee roasting business.
The following table summarizes our revenue in thousands by
segment:
|
|
For the years ended
December 31,
|
|
|
|
Segment
Revenues
|
2017
|
2016
|
Percentage
change
|
|
Direct
selling
|
$142,450
|
$145,418
|
(2.0)%
|
|
Commercial
coffee
|
23,246
|
17,249
|
34.8%
|
|
Total
|
$165,696
|
$162,667
|
1.9%
|
Cost of Revenues
For the year ended December 31, 2017, overall cost of revenues
increased approximately 8.7% to $70,131,000 as compared to
$64,530,000 for the year ended December 31, 2016. The direct
selling segment cost of revenues decreased 2.3% when compared to
the same period last year, primarily as a result of lower revenues
and lower shipping costs during the year ended December 31, 2017.
The commercial coffee segment cost of revenues increased 41.2% when
compared to the same period last year. This was primarily
attributable to increases in
revenues related to the green coffee business, increase in raw
material costs in the roasting business and additional costs
incurred due to increased direct labor costs, repairs and
maintenance and depreciation expense.
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, 2017, gross profit decreased
approximately 2.6% to $95,565,000 as compared to $98,137,000 for
the year ended December 31, 2016. Overall gross profit as a
percentage of revenues decreased to 57.7%, compared to 60.3% in the
same period last year.
Gross profit in the direct selling segment decreased by 1.9% to
$95,379,000 from $97,219,000 in the prior period primarily as a
result of the decrease in revenues discussed above. Gross profit as
a percentage of revenues in the direct selling segment increased by
approximately 0.1% to 67.0% for the year ended December 31, 2017,
compared to 66.9% in the same period last year.
Gross profit in the commercial coffee segment decreased by
79.7% to $186,000 compared to $918,000 in the prior period. The
decrease in gross profit in the commercial coffee segment was
primarily due to an increase in costs discussed above. Gross profit
as a percentage of revenues in the commercial coffee segment
decreased by 4.5% to 0.8% for the year ended December 31, 2017,
compared to 5.3% in the same period last year.
Below is a table of gross profit by segment (in thousands) and
gross profit as a percentage of segment revenues:
|
|
For the years
ended December 31,
|
Percentage
|
|
|
Segment
Gross Profit
|
2017
|
2016
|
change
|
|
Direct
selling
|
$95,379
|
$97,219
|
(1.9)%
|
|
Gross Profit % of Revenues
|
67.0%
|
66.9%
|
0.1%
|
|
Commercial
coffee
|
186
|
918
|
(79.7)%
|
|
Gross Profit % of Revenues
|
0.8%
|
5.3%
|
(4.5)%
|
|
Total
|
$95,565
|
$98,137
|
(2.6)%
|
|
Gross Profit % of Revenues
|
57.7%
|
60.3%
|
(2.7)%
|
Operating Expenses
For the year ended December 31, 2017, our operating expenses
increased approximately 6.1% to $101,447,000 as compared to
$95,622,000 for the year ended December 31, 2016.
For the year ended December 31, 2017, the distributor compensation
paid to our independent distributors in the direct selling segment
decreased 1.9% to $65,856,000 from $67,148,000 for the year ended
December 31, 2016. This decrease was primarily attributable to the
decrease in revenues. Distributor compensation as a percentage of
direct selling revenues remained the same at 46.2% for the year
ended December 31, 2017 as compared to 46.2% for the year ended
December 31, 2016.
For the year ended December 31, 2017, the sales and marketing
expense increased 31.6% to $13,708,000 from $10,413,000 for the
year ended December 31, 2016 primarily due to increases in
convention and distributor events costs, increased wages and
related benefits and increased marketing expenses. The increase in
convention cost was primarily due to the 20th
anniversary celebration of the
Company.
For the year ended December 31, 2017, the general and
administrative expense increased 21.2% to $21,883,000 from
$18,061,000 for the year ended December 31, 2016 primarily due to
increased legal fees related to litigation, computer and internet
related costs, international expansion, investor relations,
depreciation, amortization and stock-based compensation costs. In
addition, the contingent liability revaluation resulted in a
benefit of $1,664,000 for the year ended December 31, 2017 compared
to a benefit of $1,462,000 for the year ended December 31,
2016.
Operating (Loss) Income
For the year ended December 31, 2017, there was an operating loss
of $5,882,000 as compared to operating income of $2,515,000 for the
year ended December 31, 2016. This was primarily due to the lower
gross profit and the increase in operating expenses discussed
above.
Total Other Expense
For the year ended December 31, 2017, total other expense increased
by $965,000 to $4,068,000 as compared to $3,103,000 for the year
ended December 31, 2016. Total other expense includes net interest
expense, the change in the fair value of derivative liabilities and
extinguishment loss on debt.
Net interest expense increased by $1,311,000 for the year ended
December 31, 2017 to $5,785,000 compared to $4,474,000 in 2016.
Interest expense includes the imputed interest portion of the
payments related to contingent acquisition debt and other operating
debt, interest payments to investors associated with our Private
Placement transactions of $3,923,000, $1,777,000 of non-cash
amortization costs and $30,000 of other non-cash interest. In
addition, we recorded $125,000 related to issuance costs associated
with our 2017 Private Placement. Net interest expense also includes
$71,000 in interest income.
Change in fair value of derivative liabilities increased by
$654,000 for the year ended December 31, 2017 to $2,025,000, which
includes $130,000 related to the embedded conversion feature
compared to $1,371,000 for the year ended December 31, 2016. (see
also Note 7, to the consolidated financial
statements.)
Various factors are considered in the pricing models we use to
value the warrants and the
embedded conversion feature, including our current stock price, the
remaining life of the warrants and Notes, the volatility of our
stock price, and the risk-free interest rate. Future changes in
these factors may have a significant impact on the computed fair
value of the Company’s derivative liabilities. As such, we
expect future changes in the fair value of the warrants and the
embedded conversion feature to continue and may vary significantly
from year to year (see Note 7, to the consolidated financial
statements.)
We recorded a non-cash extinguishment loss on debt of $308,000 in
the year ended December 31, 2017 as a result of the repayment of
$4,200,349 in notes including interest to the three investors from
the November 2015 Private Placement through issuance of a new July
2017 note. This loss represents the difference between the
reacquisition value of the new debt to the holders of the notes and
the carrying amount of the holder’s extinguished debt (see
Note 6, to the consolidated financial statements.)
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in
income in the period that includes the effective date of the
change. As of December 31, 2017, we evaluated the realizability of
the deferred tax asset, based upon achieved and estimated future
results and determined that it is more likely than not that the
deferred tax asset will not be realized. Therefore, we have
recorded 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 change
in valuation allowance increased approximately $3,550,000 for the
year ended December 31, 2017. We have recognized income tax benefit
of $823,000, which is our estimated federal, state and foreign
income tax benefit for the year ended December 31, 2017, offset by
income tax expense of $3,550,000 as a result of the change in
deferred taxes, for a net income tax expense of $2,727,000 for the
year ended December 31, 2017. The difference between the current
effective rate and the Federal statutory rate of 35.0% is primarily
due to the change in our valuation allowance account.
Net Income (loss)
For the year ended December 31, 2017, the Company reported a net
loss of $12,677,000 as compared to net loss of $398,000 for the
year ended December 31, 2016. The primary reason for the increase
in net loss when compared to the prior period was due to a net loss
before income taxes of $9,950,000 in 2017 compared to net loss
before income taxes in 2016 of $588,000 and the additional tax
expense of $3,550,000 that was recorded in the current year to
increase the deferred tax valuation allowance.
Adjusted EBITDA
EBITDA (earnings before interest, income taxes, depreciation and
amortization) as adjusted to remove the effect of
stock-based compensation expense, the change in the fair value of
the warrant derivative and extinguishment loss on debt or "Adjusted EBITDA,"
decreased to a negative $549,000 for the year ended December 31,
2017 compared to $6,772,000 in 2016.
Management believes that Adjusted EBITDA, when viewed with our
results under GAAP and the accompanying reconciliations, provides
useful information about our period-over-period growth. Adjusted
EBITDA is presented because management believes it provides
additional information with respect to the performance of our
fundamental business activities and is also frequently used by
securities analysts, investors and other interested parties in the
evaluation of comparable companies. We also rely on Adjusted EBITDA
as a primary measure to review and assess the operating performance
of our company and our management team.
Adjusted EBITDA is a non-GAAP financial measure. We calculate
adjusted EBITDA by taking net income, and adding back the expenses
related to interest, income taxes, depreciation, amortization,
stock-based compensation expense, extinguishment loss on debt and
the change in the fair value of the warrant derivative, as each of
those elements are calculated in accordance with
GAAP. Adjusted EBITDA should not be construed as a
substitute for net income (loss) (as determined in accordance with
GAAP) for the purpose of analyzing our operating performance or
financial position, as Adjusted EBITDA is not defined by
GAAP.
A reconciliation of our adjusted EBITDA to net loss for the
years ended December 31, 2017 and 2016 is included in the table
below (in thousands):
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Net
loss
|
$(12,677)
|
$(398)
|
|
Add/Subtract:
|
|
|
|
Interest,
net
|
5,785
|
4,474
|
|
Income
tax provision (benefit)
|
2,727
|
(190)
|
|
Depreciation
|
1,556
|
1,518
|
|
Amortization
|
2,782
|
2,344
|
|
EBITDA
|
173
|
7,748
|
|
Add/Subtract:
|
|
|
|
Stock
based compensation
|
654
|
395
|
|
Fair
value of warrants
|
341
|
-
|
|
Change
in the fair value of derivatives
|
(2,025)
|
(1,371)
|
|
Extinguishment
loss on debt
|
308
|
-
|
|
Adjusted
EBITDA
|
$(549)
|
$6,772
|
Liquidity and Capital Resources
Sources of Liquidity
At December 31, 2017 we had cash and cash equivalents of
approximately $673,000 as compared to cash and cash equivalents of
$869,000 as of December 31, 2016.
Cash Flows
Cash used in operating activities. Net cash used in operating activities for the
year ended December 31, 2017 was $2,773,000 as compared to net
cash used in operating activities of $1,827,000 for the year ended
December 31, 2016. Net cash used in operating activities consisted
of a net loss of $12,677,000, offset by net non-cash operating
activity of $6,468,000 and by $3,436,000 in changes in operating
assets and liabilities.
Net non-cash operating expenses included $4,338,000 in depreciation
and amortization, $654,000 in stock-based compensation expense,
$1,777,000 related to the amortization of debt discounts and
issuance costs associated with our Private Placements, $56,000
prepaid advisory fees, $200,000 for stock issued for services,
$106,000 related to stock issuance costs associated with debt
financing, $125,000 related to debt issuance costs associated with
the 2017 Notes, $341,000 for the fair value of warrants, $308,000
in extinguishment of debt and $2,447,000 related to the change in
deferred taxes. Offset by $1,895,000 related to the change in the
fair value of warrant derivative liability, $130,000 related to the
change in the fair value of the embedded conversion feature
derivative liability, $195,000 in expenses allocated in profit
sharing agreement that relates to contingent debt and $1,664,000
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 changes in accounts
receivable of $2,165,000, inventory of $581,000, and prepaid
expenses and other current assets of $968,000. Increases in working
capital primarily related to changes in, accounts payable of
$3,554,000, accrued distributor compensation of $114,000, changes
in deferred revenues of $1,516,000, $205,000 related to income tax
receivable and changes in accrued expenses and other liabilities of
$1,761,000.
Cash used in investing activities. Net cash used in investing activities for
the year ended December 31, 2017 was $982,000 as compared to net
cash used in investing activities of $1,445,000 for the year ended
December 31, 2016. Net cash used in investing activities consisted
of purchases of property and equipment, leasehold improvements and
cash expenditures related to business acquisitions.
Cash provided by financing activities. Net cash provided by financing activities was
$3,622,000 for the year ended December 31, 2017 as compared to net
cash provided by financing activities of $158,000 for the year
ended December 31, 2016.
Net cash provided by financing activities consisted of proceeds
from the exercise of stock options and warrants of $28,000,
proceeds from factoring of $1,558,000, proceeds from line of credit
of $960,000 and $2,720,000 of net proceeds related to the
Convertible Notes Payable associated with our July 2017 Private
Placement, offset by $962,000 in payments related to capital lease
financing obligations, $220,000 in payments to reduce notes
payable, and $462,000 in payments related to contingent acquisition
debt.
Contractual Obligations - Payments Due by Period
The following table summarizes our expected contractual obligations
and commitments subsequent to December 31, 2017 (in
thousands):
|
|
|
Current
|
Long-Term
|
||||
|
|
Total
|
2018
|
2019
|
2020
|
2021
|
2022
|
Thereafter
|
|
Operating
Leases
|
$4,341
|
$1,299
|
$936
|
$744
|
$585
|
$525
|
$252
|
|
Capital
Leases
|
1,677
|
983
|
546
|
118
|
30
|
-
|
-
|
|
Purchase
Obligations
|
2,345
|
2,345
|
-
|
-
|
-
|
-
|
-
|
|
Convertible
Notes Payable (*)
|
15,004
|
3,000
|
4,750
|
7,254
|
-
|
-
|
-
|
|
Notes
Payable
|
4,548
|
176
|
118
|
165
|
172
|
177
|
3,740
|
|
Contingent
Acquisition Debt
|
14,404
|
587
|
106
|
321
|
55
|
200
|
13,135
|
|
Total
|
$42,319
|
$8,390
|
$6,456
|
$8,602
|
$842
|
$902
|
$17,127
|
(*) The Convertible Notes Payable includes the principal
balances associated with our 2017, 2015 and 2014 Private
Placements.
“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.
“Purchase obligations” are minimum future purchase
commitments for green coffee to be used in the Company’s
commercial coffee segment. Each individual contract requires the
Company to purchase and take delivery of certain quantities at
agreed upon prices and delivery dates. 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.
In September 2014, we completed the 2014 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 2014 Notes in the aggregate
principal amount of $4,750,000, that are currently convertible into
shares of Common Stock. The 2014 Notes are due in 2019 if the
option to convert has not been exercised. 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. The principal
balance of the 2014 Note of $4,750,000 remains
outstanding.
In
November 2015, we completed the 2015 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 (which included $4,000,000
owed on a prior debt that was applied to the purchase of units in
the 2015 Private Placement, that were convertible into shares of
common stock. In July 2017, as part of the 2017 Private Placement
(see below), three (3) investors in the 2015 Private Placement (the
“Prior Investors”), converted their 2015 Notes in the
aggregate principal amount of $4,200,349 together with accrued
interest thereon into new convertible notes for an equal principal
amount (included in the 2017 Notes referred to below). The 2015 Notes are due in 2018 if the option to
convert has not been exercised. The outstanding 2015 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 in October 2018. The principal balance
of the 2015 Notes of $3,000,000 remains outstanding.
In August 2017 we completed the 2017 Private Placement and entered
into Note Purchase Agreements with 26 accredited investors pursuant
to which we sold the 2017 Notes in the aggregate principal amount
of $7,254,349 that are currently convertible into shares of Common
Stock. As part of the 2017 Private Placement, three (3) investors
in the 2015 Private Placement (the “Prior Investors”),
converted their 2015 Notes in the aggregate principal amount of
$4,200,349 together with accrued interest thereon into 2017 Notes
for an equal principal amount (included in the notes referred to
above). The July 2017 Notes automatically convert to Common Stock
if prior to the maturity date we sell common stock, preferred stock
or other equity-linked securities with aggregate gross proceeds of
no less than $3,000,000 for the purpose of raising capital. The
2017 Notes are due in 2020 if the option to convert has not been
exercised. The outstanding 2017 Notes 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 August 2020. The
principal balance of the 2017 Notes of $7,254,349 remains
outstanding. (See Note 12, to the consolidated financial
statements.)
Notes Payable, 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, 2017, the
balance on the long-term mortgage was approximately $3,289,000 and
the balance on the promissory note was approximately $22,000, both
of which are included in notes payable.
“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 $1,706,000 as of December 31, 2017. This amount is
not included in the table above.
Line of Credit - Loan and Security Agreement
CLR had a factoring agreement (“Factoring Agreement”)
with Crestmark Bank (“Crestmark”) related to accounts
receivable resulting from sales of certain products within our
commercial coffee segment. Effective May 1, 2016, CLR entered into
a third amendment to the
Factoring Agreement. Under the terms of the third amendment, all
new receivables assigned to Crestmark shall be “Client Risk
Receivables” and no further credit approvals were to be
provided by Crestmark. Additionally, the third amendment expanded
the factoring facility to include advanced borrowings against
eligible inventory up to 50% of landed cost of finished goods
inventory that meet certain criteria, not to exceed the lesser of
$1,000,000 or 85% of the value of the accounts receivables already
advanced with a maximum overall borrowing of $3,000,000. Interest
accrued on the outstanding balance and a factoring commission was
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
was recorded as interest expense. In addition, the Company and our
Company’s CEO, Mr. Wallach entered into a Guaranty and
Security Agreement with Crestmark guaranteeing payments in the
event that our commercial coffee segment CLR were to default. The
third amendment was effective until February 1,
2019.
On November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark which amended
and restated the original Factoring Agreement dated February 12,
2010 with Crestmark and subsequent agreement amendments thereto.
CLR is provided with a line of credit related to accounts
receivables resulting from sales of certain products and includes
borrowings to be advanced against acceptable eligible inventory
related to CLR. Effective December 29, 2017, CLR entered into a
First Amendment to the Agreement, to include an increase in the
maximum overall borrowing to $6,250,000 (the, “Loan”).
The Loan amount may not exceed an amount which is the lesser of (a)
$6,250,000 or (b) the sum of up to (i) 85% of the value of the
eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of
eligible inventory or 50% of (i) above (iii) the lesser of $250,000
or eligible inventory or 75% of certain specific inventory
identified within the Agreement.
The Agreement contains certain financial and nonfinancial covenants
for which the Company must comply to maintain its borrowing
availability and avoid penalties.
The outstanding principal balance of the Agreement will bear
interest based upon a year of 360 days with interest being charged
for each day the principal amount is outstanding including the date
of actual payment. The interest rate will be a rate equal to the
prime rate plus 2.50% with a floor of 6.75%. In addition, other
fees expenses are incurred for the maintenance of the loan in
accordance with the Agreement. Other fees may be incurred if in the
event the minimum loan balance of $2,000,000 is not maintained. The
Agreement is effective until November 16, 2020.
The Company and our Company’s CEO, Mr. Wallach have entered
into a Corporate Guaranty and Personal Guaranty, respectively, with
Crestmark guaranteeing payments in the event that our commercial
coffee segment CLR were to default. In addition, our President and
Chief Financial Officer, Mr. Briskie personally entered into a
Guaranty of Validity representing the Company’s financials so
long as the indebtedness is owing to Crestmark, maintaining certain
covenants and guarantees.
We account for the sale of receivables that were factored under the
previous Agreement as secured borrowings with the 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 sheet in the amount of approximately
$1,078,000 as of December 31, 2016, reflects the related
collateralized accounts.
Our outstanding liability related to the Agreement was
approximately $3,808,000 as of December 31, 2017. The liability
associated with the Factoring Agreement as of December 31, 2016 was
$1,290,000 and is included in other current liabilities on the
consolidated balance sheet.
Future Liquidity Needs
The accompanying consolidated financial statements have been
prepared and presented on a basis assuming we will continue as a
going concern. We have sustained significant operating losses
during the year ended December 31, 2017 of $5,882,000, compared to
operating income in the prior year of $2,515,000. The losses in the
current year were primarily due to lower than anticipated revenues,
increases in legal fees related to our ongoing litigation,
distributor events and sales and marketing costs. Net cash used in
operating activities was $2,773,000 in the current year. We do not
currently believe that our existing cash resources are sufficient
to meet our anticipated needs over the next twelve months from the
date hereof. Based on our current cash levels and our current rate
of cash requirements, we will need to raise additional capital and
will need to significantly reduce our expenses from current levels.
These factors raise substantial doubt about our ability to continue
as a going concern.
We have
increased our Crestmark line of credit during the fourth quarter of
this year and raised additional capital through our Series B
Convertible Preferred Stock Offering that closed March 30, 2018. We
are also considering additional alternatives, including, but not
limited to equity financings and debt financings. Depending on
market conditions, we cannot be sure that additional capital will
be available when needed or that, if available, it will be obtained
on terms favorable to us or to our stockholders.
We
believe our legal fees related to litigation will decrease in the
future from the levels spent in 2017. We also expect costs related
to distributor events will decrease in 2018 as our costs in 2017
were unusually high due to the twentieth anniversary convention held in Dallas in August and
events held at the beginning of the year to stabilize the sales
force due to the departure of the previous president and high-level
sales management and distributors. We anticipate revenues to start
growing again and we intend to make necessary cost reductions
related to our international programs that are not performing and
also reduce non-essential expenses.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect our
ability to operate as a going concern. The financial statements do
not include any adjustments that might be necessary from the
outcome of this uncertainty.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of December 31,
2017 and 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
|
47
|
|
|
|
|
|
48
|
|
|
49
|
|
|
50
|
|
|
51
|
|
|
52
|
|
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of:
Youngevity International, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of
Youngevity
International, Inc. and Subsidiaries (“Company”)
as of December 31, 2017 and 2016, and the related consolidated
statements of operations,
comprehensive loss, stockholders’ equity, and cash flows for
each of the two years in the period ended December 31, 2017,
and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of
America.
Going Concern Uncertainty
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company incurred operating
losses in 2017 and is dependent on additional financing to fund
operations. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 1 to the financial statements. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting 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.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Mayer Hoffman McCann P.C.
We have
served as the Company's auditor since 2011.
San
Diego, California
March
30, 2018
|
Youngevity International, Inc. and Subsidiaries
|
||
|
Consolidated Balance Sheets
|
||
|
(In
thousands, except share amounts)
|
||
|
|
As of
|
|
|
|
December 31,
2017
|
December 31,
2016
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$673
|
$869
|
|
Accounts
receivable, due from factoring company
|
-
|
1,078
|
|
Accounts
receivable, trade
|
4,314
|
1,071
|
|
Income
tax receivable
|
106
|
311
|
|
Inventory
|
22,073
|
21,492
|
|
Prepaid
expenses and other current assets
|
3,999
|
3,087
|
|
Total
current assets
|
31,165
|
27,908
|
|
|
|
|
|
Property
and equipment, net
|
13,707
|
14,006
|
|
Deferred
tax assets
|
286
|
2,857
|
|
Intangible
assets, net
|
20,908
|
14,914
|
|
Goodwill
|
6,323
|
6,323
|
|
Total
assets
|
$72,389
|
$66,008
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable
|
$11,728
|
$8,174
|
|
Accrued
distributor compensation
|
4,277
|
4,163
|
|
Accrued
expenses
|
5,437
|
3,701
|
|
Deferred
revenues
|
3,386
|
1,870
|
|
Line
of credit
|
3,808
|
-
|
|
Other
current liabilities
|
1,144
|
2,389
|
|
Capital
lease payable, current portion
|
983
|
821
|
|
Notes
payable, current portion
|
176
|
219
|
|
Convertible
notes payable, current portion (Note 5)
|
2,828
|
-
|
|
Warrant
derivative liability
|
3,365
|
3,345
|
|
Contingent
acquisition debt, current portion
|
587
|
628
|
|
Total
current liabilities
|
37,719
|
25,310
|
|
|
|
|
|
Capital
lease payable, net of current portion
|
694
|
1,569
|
|
Notes
payable, net of current portion
|
4,372
|
4,431
|
|
Convertible
notes payable, net of current portion (Note 5)
|
8,336
|
8,327
|
|
Contingent
acquisition debt, net of current portion
|
13,817
|
7,373
|
|
Total
liabilities
|
64,938
|
47,010
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
Convertible
Preferred Stock, $0.001 par value: 5,000,000 shares authorized;
161,135 shares issued and outstanding at December 31, 2017 and
December 31, 2016
|
-
|
-
|
|
Common
Stock, $0.001 par value: 50,000,000 shares authorized; 19,723,285
and 19,634,345 shares issued and outstanding at December 31, 2017
and December 31, 2016, respectively
|
20
|
20
|
|
Additional
paid-in capital
|
171,405
|
170,212
|
|
Accumulated
deficit
|
(163,693)
|
(151,016)
|
|
Accumulated
other comprehensive loss
|
(281)
|
(218)
|
|
Total
stockholders’ equity
|
7,451
|
18,998
|
|
Total Liabilities and
Stockholders’ Equity
|
$72,389
|
$66,008
|
See accompanying notes.
Youngevity International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
|
|
Years Ended
December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Revenues
|
$165,696
|
$162,667
|
|
Cost
of revenues
|
70,131
|
64,530
|
|
Gross
profit
|
95,565
|
98,137
|
|
Operating
expenses
|
|
|
|
Distributor
compensation
|
65,856
|
67,148
|
|
Sales
and marketing
|
13,708
|
10,413
|
|
General
and administrative
|
21,883
|
18,061
|
|
Total
operating expenses
|
101,447
|
95,622
|
|
Operating
(loss) income
|
(5,882)
|
2,515
|
|
Interest
expense, net
|
(5,785)
|
(4,474)
|
|
Extinguishment
loss on debt
|
(308)
|
-
|
|
Change
in fair value of derivative liabilities
|
2,025
|
1,371
|
|
Total
other expense
|
(4,068)
|
(3,103)
|
|
Net
loss before income taxes
|
(9,950)
|
(588)
|
|
Income
tax provision (benefit)
|
2,727
|
(190)
|
|
Net
loss
|
(12,677)
|
(398)
|
|
Preferred
stock dividends
|
(12)
|
(12)
|
|
Net
loss available to common stockholders
|
$(12,689)
|
$(410)
|
|
Basic
and diluted loss per share:
|
|
|
|
Basic
loss per share
|
$(0.65)
|
$(0.02)
|
|
Basic
weighted average shares outstanding
|
19,672,445
|
19,632,086
|
|
Diluted
loss per share
|
$(0.68)
|
$(0.05)
|
|
Diluted
weighted average shares outstanding
|
19,751,892
|
19,806,133
|
|
|
|
|
See accompanying notes.
Youngevity International, Inc.
and Subsidiaries
Consolidated Statements of Comprehensive Loss
(In thousands)
|
|
Years Ended
December 31,
|
|
|
|
2017
|
2016
|
|
|
|
|
|
Net
loss
|
$(12,677)
|
$(398)
|
|
Foreign
currency translation
|
(63)
|
108
|
|
Total
other comprehensive (loss) income
|
(63)
|
108
|
|
Comprehensive
loss
|
$(12,740)
|
$(290)
|
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 Stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Loss
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
161,135
|
$-
|
19,628,567
|
$20
|
$169,805
|
$(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
|
-
|
-
|
1,963
|
-
|
10
|
-
|
-
|
10
|
|
Issuance of common stock pursuant to the exercise of stock
options
|
-
|
-
|
5,100
|
-
|
20
|
-
|
-
|
20
|
|
Issuance of common stock for services
|
-
|
-
|
5,000
|
-
|
30
|
-
|
-
|
30
|
|
Repurchase of common stock
|
-
|
-
|
(6,285)
|
-
|
(36)
|
-
|
-
|
(36)
|
|
Dividends on preferred stock
|
-
|
-
|
-
|
-
|
(12)
|
-
|
-
|
(12)
|
|
Stock based compensation expense
|
-
|
-
|
-
|
-
|
395
|
-
|
-
|
395
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
161,135
|
$-
|
19,634,345
|
$20
|
$170,212
|
$(218)
|
$(151,016)
|
$18,998
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(12,677)
|
(12,677)
|
|
Foreign currency
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
(63)
|
-
|
(63)
|
|
Issuance of common stock pursuant to the exercise of
warrants
|
-
|
-
|
21,875
|
-
|
28
|
-
|
-
|
28
|
|
Issuance of common stock pursuant to the exercise of stock
options
|
-
|
-
|
6,885
|
-
|
-
|
-
|
-
|
-
|
|
Issuance of common stock for services
|
-
|
-
|
37,500
|
-
|
200
|
-
|
-
|
200
|
|
Dividends on preferred stock
|
-
|
-
|
-
|
-
|
(12)
|
-
|
-
|
(12)
|
|
Common Stock issued related to debt financing
|
-
|
-
|
22,680
|
-
|
106
|
-
|
-
|
106
|
|
Deferred tax liability associated with beneficial conversion
feature associated with Convertible Notes Payable
|
-
|
-
|
-
|
-
|
(124)
|
-
|
-
|
(124)
|
|
Fair value warrant issuance
|
-
|
-
|
-
|
-
|
341
|
-
|
-
|
341
|
|
Stock based compensation expense
|
-
|
-
|
-
|
-
|
654
|
-
|
-
|
654
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
161,135
|
$-
|
19,723,285
|
$20
|
$171,405
|
$(281)
|
$(163,693)
|
$7,451
|
See accompanying notes.
Youngevity International,
Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In
thousands, except share amounts)
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Cash Flows from Operating Activities:
|
|
(As
Restated)
|
|
Net
loss
|
$(12,677)
|
$(398)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
4,338
|
3,862
|
|
Stock
based compensation expense
|
654
|
395
|
|
Amortization
of debt discounts and issuance costs
|
1,777
|
1,541
|
|
Amortization
of prepaid advisory fees
|
56
|
58
|
|
Stock
issuance for services
|
200
|
30
|
|
Stock
issuance related to debt financing
|
106
|
-
|
|
Issuance
cost related to debt financing
|
125
|
-
|
|
Change
in fair value of warrant derivative liability
|
(1,895)
|
(1,371)
|
|
Change
in fair value of embedded conversion feature
|
(130)
|
-
|
|
Expenses
allocated in profit sharing agreement
|
(195)
|
(698)
|
|
Change
in fair value of contingent acquisition debt
|
(1,664)
|
(1,462)
|
|
Fair
value of warrants
|
341
|
-
|
|
Extinguishment
loss on debt
|
308
|
-
|
|
Deferred
income taxes
|
2,447
|
(325)
|
|
Changes
in operating assets and liabilities, net of effect from business
combinations:
|
|
|
|
Accounts
receivable
|
(2,165)
|
(525)
|
|
Inventory
|
(581)
|
(3,515)
|
|
Prepaid
expenses and other current assets
|
(968)
|
(733)
|
|
Income
taxes receivable
|
205
|
(138)
|
|
Accounts
payable
|
3,554
|
1,159
|
|
Accrued
distributor compensation
|
114
|
(60)
|
|
Deferred
revenues
|
1,516
|
(710)
|
|
Accrued
expenses and other liabilities
|
1,761
|
1,063
|
|
Net Cash Used in Operating Activities
|
(2,773)
|
(1,827)
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
Acquisitions,
net of cash acquired
|
(52)
|
(48)
|
|
Purchases
of property and equipment
|
(930)
|
(1,397)
|
|
Net Cash Used in Investing Activities
|
(982)
|
(1,445)
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
Proceeds
from the exercise of stock options and warrants, net
|
28
|
30
|
|
Proceeds
from factoring company, net
|
1,558
|
833
|
|
Proceeds
from line of credit, net
|
960
|
-
|
|
Proceeds
from issuance of convertible notes, net of offering
costs
|
2,720
|
-
|
|
Proceeds
(payments) of capital leases
|
(962)
|
557
|
|
Payments
of notes payable, net
|
(220)
|
(453)
|
|
Payments
of contingent acquisition debt
|
(462)
|
(773)
|
|
Repurchase
of common stock
|
-
|
(36)
|
|
Net Cash Provided by Financing Activities
|
3,622
|
158
|
|
Foreign Currency Effect on Cash
|
(63)
|
108
|
|
Net
decrease in cash and cash equivalents
|
(196)
|
(3,006)
|
|
Cash and Cash Equivalents, Beginning of Period
|
869
|
3,875
|
|
Cash and Cash Equivalents, End of Period
|
$673
|
$869
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$3,922
|
$2,966
|
|
Income
taxes
|
$168
|
$181
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
Purchases
of property and equipment funded by capital leases and accounts
payable agreements
|
$378
|
$1,582
|
|
Acquisitions
of net assets in exchange for contingent acquisition debt (see Note
2)
|
$8,724
|
$3,604
|
|
Fair
value of the warrants issued in connection with financing recorded
as a derivative (see Note 6)
|
$2,344
|
$-
|
|
Conversion
of Factoring Agreement to Line of Credit –
Crestmark
|
$2,847
|
$-
|
During the year ended December 31, 2017, the purchase accounting
was finalized for the Company’s Legacy for Life, LLC,
Nature’s Pearl Corporation and Renew Interest, LLC
acquisitions and reduced the initial purchase of the intangibles
acquired and the contingent debt by $388,000 (see Note
2).
During the year ended December 31, 2016, the purchase accounting
was finalized for the Company’s South Hill Design, Mialisia
& Co., LLC, acquisitions and reduced the initial purchase of
the intangibles acquired and the contingent debt by
$1,919,000.
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
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 its direct
selling networks, CLR Roasters, LLC (“CLR”), its
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. (“Siles”), 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 through the
BellaVita Group LLC, with operations in Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Japan. The Company also operates subsidiary branches of
Youngevity Global LLC in the Philippines and
Taiwan.
Reverse Stock Split
On June 5, 2017, the Company filed a certificate to amend its
Articles of Incorporation to effect a reverse split on a
one-for-twenty basis (the “Reverse Split”), whereby,
every twenty shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock or “common
stock”), were exchanged for one share of its common stock.
The Reverse Split became effective on June 7, 2017. The Common
Stock began trading on a reverse split basis at the market opening
on June 8, 2017. All common stock share and per share amounts have
been adjusted to reflect retrospective application of the Reverse
Split.
NASDAQ Listing
Effective June 21, 2017, the Common Stock began trading on the
NASDAQ Stock Market LLC’s NASDAQ Capital Market, under the
symbol “YGYI”. Prior to the Company’s uplisting
to the NASDAQ, the Company’s common stock had been traded on
the OTCQX market.
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 the Company has controlling
influence and variable interest entities where it has 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”) 2015-17 pertaining
to the presentation of deferred
tax assets and liabilities as noncurrent with retrospective application effective January
1, 2017. This resulted in a reclassification from deferred tax
assets current to deferred tax assets, long-term. These reclassifications did not affect revenue,
total costs and expenses, income (loss) from operations, or net
income (loss). The adoption of
ASU No. 2015-17 resulted in a reclassification of deferred tax
assets, net current of $565,000 to deferred tax assets,
net long-term on the
Company’s consolidated financial statements as of December
31, 2016.
As
previously reported on the Annual Report on Form 10-K/A for the
year ended December 31, 2016 filed with the Securities and Exchange
Commission on August 14, 2017, the Company restated the
Consolidated Statement of Cash Flows for the year ended December
31, 2016 previously filed by the Company in its annual report on
Form 10-K for the same period. This was due to an error in the
presentation of cash flow activity under the Company’s
factoring facility. This annual report for the year ended December
31, 2017 reflects the restated numbers for the year ended December
31, 2016.
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
year ended December 31, 2017 we derived approximately 86% of our
revenue from our direct sales segment and approximately 14% of our
revenue from our commercial coffee sales
segment. During
the year ended December 31, 2016 we derived approximately 89% of
our revenue from our direct sales segment and approximately 11% of
our revenue from our commercial coffee sales
segment.
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 awards 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, fair 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 and Going Concern
The accompanying consolidated financial statements have been
prepared and presented on a basis assuming the Company will
continue as a going concern. The Company has sustained significant
operating losses during the year ended December 31, 2017 of
$5,882,000, compared to operating income in the prior year of
$2,515,000. The losses in the current year were primarily due to
lower than anticipated revenues, increases in legal fees related to
its ongoing litigation, distributor events and sales and marketing
costs. Net cash used in operating activities was $2,773,000 in the
current year. The Company does not currently believe that its
existing cash resources are sufficient to meet the Company’s
anticipated needs over the next twelve months from the date hereof.
Based on its current cash levels and its current rate of cash
requirements, the Company will need to raise additional capital and
will need to significantly reduce its expenses from current levels.
These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The
Company believes that legal fees will decrease in the future from
the levels spent in the current year. The Company has been
reimbursed from its insurance company for certain legal fees
already incurred and anticipates further reimbursements in 2018.
The Company expects costs related to distributor events will
decrease next year from current year levels as its costs in the
current year were unusually high due to the twentieth anniversary
convention held in Dallas in August and events held at the
beginning of the year to stabilize the sales force due to the
departure of the previous president and high-level sales management
and distributors. The Company anticipates revenues to start growing
again and it intends to make necessary cost reductions related to
international operations that are not performing and also reduce
expenses.
The
Company is also considering multiple alternatives including, but
not limited to, additional equity financings and debt
financings.
On
February 14, 2018, the Company commenced its offering to sell up to
$10 million of the Company’s Series B Convertible Preferred
Stock on a best effort basis without
any minimum offering amount. The Offering terminated on March 30,
2018. The Series B Convertible Preferred Stock pays
cumulative dividends from the date of
original issue at a rate of 5.0% per annum payable quarterly in arrears on or about the last
day of March, June, September and December of each year, beginning
June 30, 2018. The Series B Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock and the Company’s common stock par value
$0.001 with respect to dividend rights and rights upon liquidation,
dissolution or winding up. Each holder of Series B Convertible
Preferred Stock received a credit towards our merchandise equal to
ten percent (10%) of the amount of their investment up to a maximum
credit of $1,000. Holders of the Series B Convertible Preferred
Stock have limited voting rights. Each share of Series B
Convertible Preferred Stock is initially convertible at any time,
in whole or in part, at the option of the holders, at an initial
conversion price of $4.75 per share, into two shares of common
stock and automatically converts into two shares of Common Stock on
its two-year anniversary of issuance. The offering price of the
Series B Convertible Preferred Stock was $9.50 per
share.
On March 30, 2018, the Company completed its best efforts Offering
of Series B Convertible Preferred Stock, pursuant to which the
Company sold 381,173 shares of Series B Convertible Preferred Stock
at an offering price of $9.50 per share and received gross proceeds
in aggregate amount of $3,621,143.
The net proceeds to the Company from Offering were $3,328,761 after
deducting commissions and Offering expenses of the selling agent
payable by the Company.
The shares of Series B Convertible Preferred Stock issued in the
Offering were sold pursuant to the Company’s Registration
Statement, which was declared effective on February 13, 2018. Upon
the receipt of the proceeds of the Company’s best effort
Offering of Series B Convertible Preferred Stock, the 2017
Notes in the principal amount of $7,254,349 automatically converted
into 1,577,033 shares of common stock.
On November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark Bank
(“Crestmark”) which amended and restated the original
Factoring Agreement dated February 12, 2010 with Crestmark and
subsequent agreement amendments thereto. CLR is provided with a
line of credit related to accounts receivables resulting from sales
of certain products and includes borrowings to be advanced against
acceptable eligible inventory related to CLR. Effective December
29, 2017, CLR entered into a First Amendment to the Agreement, to
include an increase in the maximum overall borrowing to $6,250,000
(the, “Loan”). The Loan amount may not exceed an amount
which is the lesser of (a) $6,250,000 or (b) the sum of up (i) to
85% of the value of the eligible accounts; plus, (ii) the lesser of
$1,000,000 or 50% of eligible inventory or 50% of (i) above (iii)
the lesser of $250,000 or eligible inventory or 75% of certain
specific inventory identified within the Agreement.
The Agreement contains certain financial and nonfinancial covenants
for which the Company must comply to maintain its borrowing
availability and avoid penalties.
Depending
on market conditions, we cannot be sure that additional capital
will be available when needed or that, if available, it will be
obtained on terms favorable to us or to our
stockholders.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect the
Company’s ability to operate as a going concern. The
financial statements do not include any adjustments that might be
necessary from the outcome of this uncertainty.
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. As of December 31,
2017, the Company’s allowance for doubtful accounts
associated with CLR outstanding receivables is
$10,000.
Inventory and Cost of Revenues
Inventory is stated at the lower of cost or net realizable value,
net of a valuation allowance. 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,
|
|
|
|
2017
|
2016
|
|
Finished
goods
|
$10,994
|
$11,550
|
|
Raw
materials
|
12,143
|
11,006
|
|
Total
inventory
|
23,137
|
22,556
|
|
Reserve
for excess and obsolete
|
(1,064)
|
(1,064)
|
|
Inventory,
net
|
$22,073
|
$21,492
|
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 include warrant issuance costs and debt discounts of
approximately $4,040,000 and $3,611,000, as of December 31,
2017 and 2016, respectively, are associated with our 2017, 2015 and
2014 Private Placement transactions and are included with
convertible notes payable on the Company's consolidated balance
sheets. Deferred issuance costs related to our private
placement offerings are amortized over the life of the notes to
interest expense. See Note 5, below.
Plantation Costs
The Company’s commercial coffee segment includes the results
of Siles, which is a 500-acre coffee plantation and a
dry-processing facility located on 26 acres located in Matagalpa,
Nicaragua. Siles is a wholly-owned subsidiary of CLR, and the
results of CLR include the depreciation and amortization of
capitalized costs, development and maintenance and harvesting costs
of Siles. In accordance with GAAP plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate 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 costs are
then recognized as the inventory value.
Costs associated with the 2017 harvest as of December 31, 2016
totaled approximately $452,000. In April 2017, the Company
completed the 2017 harvest in Nicaragua and approximately $552,000
of deferred harvest costs were reclassified as
inventory.
Costs associated with the 2018 harvest as of December 31, 2017
total approximately $400,000. The 2018 harvest is expected to be
completed during the Company’s second quarter of
2018.
The remaining inventory from our previously harvested coffee as of
December 31, 2017 and as of December 31, 2016 is $334,000 and
$112,000, respectively.
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).
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, 2017 or 2016.
Property and equipment consist of the following (in
thousands):
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Building
|
$3,879
|
$3,873
|
|
Leasehold
improvements
|
2,779
|
2,532
|
|
Land
|
2,544
|
2,544
|
|
Land
improvements
|
606
|
602
|
|
Producing
coffee trees
|
553
|
553
|
|
Manufacturing
equipment
|
5,022
|
4,570
|
|
Furniture
and other equipment
|
1,707
|
1,580
|
|
Computer
software
|
1,322
|
1,236
|
|
Computer
equipment
|
767
|
699
|
|
Vehicles
|
225
|
103
|
|
Construction
in process
|
1,986
|
1,859
|
|
|
21,390
|
20,151
|
|
Accumulated
depreciation
|
(7,683)
|
(6,145)
|
|
Total
property and equipment
|
$13,707
|
$14,006
|
Depreciation expense totaled approximately $1,556,000 and
$1,518,000 for the years ended December 31, 2017 and 2016,
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, 2017
|
December 31, 2016
|
||||
|
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|
Distributor
organizations
|
$16,204
|
$8,363
|
$7,841
|
$12,930
|
$7,162
|
$5,768
|
|
Trademarks
and tradenames
|
7,779
|
1,229
|
6,550
|
5,394
|
815
|
4,579
|
|
Customer
relationships
|
10,966
|
4,711
|
6,255
|
7,846
|
3,642
|
4,204
|
|
Internally
developed software
|
720
|
458
|
262
|
720
|
357
|
363
|
|
Intangible
assets
|
$35,669
|
$14,761
|
$20,908
|
$26,890
|
$11,976
|
$14,914
|
Amortization expense related to intangible assets was approximately
$2,782,000 and $2,344,000 for the years ended December 31, 2017 and
2016, respectively.
As of December 31, 2017, future expected amortization expense
related to definite lived
intangible assets for the next five years is as follows (in
thousands):
|
Years ending December 31,
|
|
|||
|
2018
|
|
$
|
3,050
|
|
|
2019
|
|
|
2,441
|
|
|
2020
|
|
|
2,352
|
|
|
2021
|
|
|
2,276
|
|
|
2022
|
|
|
2,252
|
|
As of December 31, 2017, the weighted-average remaining
amortization period for intangibles assets was approximately 5.66
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. As of December 31, 2017 and December
31, 2016, approximately $1,649,000 and $2,267,000, respectively, in
trademarks from business combinations have been identified as
having indefinite lives. During the year ended December 31, 2017,
the Company considered the guidance of ASC 350 and concluded that
certain intangible assets with indefinite lives should be changed
to a definite life. As a result, the Company changed the
classification of approximately $618,000 trademark/tradename
intangible assets to a definite lived intangible
asset.
The Company has determined that no impairment occurred for its
definite and indefinite lived intangible assets for the years ended
December 31, 2017 and 2016.
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, 2017 and December 31,
2016 was $6,323,000.
The Company has determined that no impairment of its goodwill
occurred for the years ended December 31, 2017 and
2016.
Goodwill activity for the years ended December 31, 2017 and 2016 by
reportable segment consists of the following (in
thousands):
|
|
Direct selling
|
Commercial coffee
|
Total
|
|
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
|
|
Goodwill
recognized
|
-
|
-
|
-
|
|
Goodwill
impaired
|
-
|
-
|
-
|
|
Balance
at December 31, 2017
|
$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 primarily via UPS, USPS or FedEx 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 or region that consists of forms, policy and procedures,
selling aids, 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.
Deferred Revenues and Costs
As of December 31, 2017, and December 31, 2016, the balance in
deferred revenues was approximately $3,386,000 and $1,870,000,
respectively. Deferred revenue related to the Company’s
direct selling segment is attributable to the Heritage Makers
product line and also for future Company convention and distributor
events. In addition, the Company recognizes deferred revenue from
the commercial coffee segment.
Deferred revenues related to Heritage Makers was approximately
$1,882,000 and $1,662,000, as of December 31, 2017, and December
31, 2016, respectively. The deferred revenue represents Heritage
Maker’s obligation for points purchased by customers that
have not yet been redeemed for product. Cash received for points
sold is recorded as deferred revenue. Revenue is recognized when
customers redeem the points and the product is
shipped.
Deferred costs relate to Heritage Makers prepaid commissions that
are recognized in expense at the time the related revenue is
recognized. As of December 31, 2017 and December 31, 2016, the
balance in deferred costs was approximately $433,000 and $415,000,
respectively, and was included in prepaid expenses and current
assets.
Deferred revenues related to CLR as of December 31, 2017 is
approximately $1,291,000 and represents deposits on customer orders
that have not yet been completed and shipped. There was no related
deferred revenue during the year ended December 31,
2016.
Deferred revenues related to pre-enrollment in upcoming conventions
and distributor events of approximately $213,000 and $208,000
as of December 31, 2017 and 2016, respectively, relate primarily to
the Company’s 2018 and 2017 events. The Company does not
recognize this revenue until the conventions occur.
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. As of December
31, 2017 and 2016 the Company has an allowance of $75,000 related
to product returns. 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
$9,101,000 and $9,927,000 for the years ended December 31, 2017 and
2016, 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 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.
Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
computed by dividing net loss attributable to common stockholders
by the sum of the weighted-average number of common shares
outstanding during the period and the weighted-average number of
dilutive common share equivalents outstanding during the period,
using the treasury stock method. Dilutive common share equivalents
are comprised of stock options, restricted stock, warrants,
convertible preferred stock and common stock associated with the
Company's convertible notes based on the average stock price for
each period using the treasury stock method. Potentially dilutive
shares are excluded from the computation of diluted net loss per
share when their effect is anti-dilutive. In periods where a net
loss is presented, all potentially dilutive securities are
anti-dilutive and are excluded from the computation of diluted net
loss per share.
Potentially dilutive securities for the year ended December 31,
2017 were 6,565,529. For the year ended December 31, 2016,
potentially dilutive securities were 4,353,023. Prior year diluted
loss per share and the weighted average shares outstanding have
been adjusted for the dilutive effect of the Company’s 2014
warrants. The impact of this change was not material.
The
calculation of diluted loss per share requires that, to the extent
the average market price of the underlying shares for the reporting
period exceeds the exercise price of the warrants and the presumed
exercise of such securities are dilutive to loss per share for the
period, an adjustment to net loss used in the calculation is
required to remove the change in fair value of the warrants, net of
tax from the numerator for the period. Likewise, an adjustment to
the denominator is required to reflect the related dilutive shares,
if any, under the treasury stock method. During the years ended
December 31, 2017 and 2016, the Company recorded net of tax gain of
$667,000 and $629,000, respectively, on the valuation of the
Warrant Derivative Liability which has a dilutive impact on loss
per share.
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Loss per Share - Basic
|
|
|
|
Numerator
for basic loss per share
|
$(12,689,000)
|
$(410,000)
|
|
Denominator
for basic loss per share
|
19,672,445
|
19,632,086
|
|
Loss
per common share – basic
|
$(0.65)
|
$(0.02)
|
|
|
|
|
|
Loss per Share - Diluted
|
|
|
|
Numerator
for basic loss per share
|
$(12,689,000)
|
$(410,000)
|
|
Adjust:
Fair value of dilutive warrants outstanding
|
(667,000)
|
(629,000)
|
|
Numerator
for dilutive loss per share
|
$(13,356,000)
|
$(1,039,000)
|
|
|
|
|
|
Denominator
for diluted loss per share
|
19,672,445
|
19,632,086
|
|
Plus:
Incremental shares underlying “in the money” warrants
outstanding
|
79,447
|
174,047
|
|
Denominator
for diluted loss per share
|
19,751,892
|
19,806,133
|
|
Loss
per common share - diluted
|
$(0.68)
|
$(0.05)
|
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 2017 and
2016.
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 cumulative 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)
The Company records 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 February 2018, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2018-02,
Income Statement -
Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income, (ASU 2018-02).
The amendments in this Update allow a reclassification from
accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act
(H.R.1) (the Act). Consequently, the amendments eliminate the
stranded tax effects resulting from the Act and will improve the
usefulness of information reported to financial statement users.
However, because the amendments only relate to the reclassification
of the income tax effects of the Act, the underlying guidance that
requires that the effect of a change in tax laws or rates be
included in income from continuing operations is not affected. The
amendments in this Update also require certain disclosures about
stranded tax effects. This ASU is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2018. The Company does not expect this new guidance to have a
material impact on its consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09, which clarifies when
changes to the terms or conditions of a share-based payment award
must be accounted for as modifications. ASU 2017-09 will reduce
diversity in practice and result in fewer changes to the terms of
an award being accounted for as modifications. Under ASU 2017-09,
an entity will not apply modification accounting to a share-based
payment award if the award’s fair value, vesting conditions
and classification as an equity or liability instrument are the
same immediately before and after the change. ASU 2017-09 will be
applied prospectively to awards modified on or after the adoption
date. The guidance is effective for annual periods, and interim
periods within those annual periods, beginning after December 15,
2017. Early adoption is permitted. The Company does not expect this
new guidance to have a material impact on its consolidated
financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share
(Topic 260), Distinguishing
Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic
815): I. Accounting for Certain Financial Instruments with Down
Round Features and II. Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. Part I of this update
addresses public entities that issue warrants, convertible debt or
convertible preferred stock that contain down round features.
Part II of this update recharacterizes the indefinite deferral of
certain provisions of Topic 480 that now are presented as pending
content in the Codification, to a scope exception. Those amendments
do not have an accounting effect. This ASU is effective for fiscal
years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is
permitted. The Company does not expect this new guidance to have a
material impact on its consolidated financial
statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments, to improve financial
reporting in regard to how certain transactions are classified in
the statement of cash flows. The ASU requires that (1) debt
extinguishment costs be classified as cash outflows for financing
activities and provides additional classification guidance for the
statement of cash flows, (2) the classification of cash receipts
and payments that have aspects of more than one class of cash flows
to be determined by applying specific guidance under generally
accepted accounting principles, and (3) each separately
identifiable source or use within the cash receipts and payments be
classified on the basis of their nature in financing, investing or
operating activities. The ASU is effective for fiscal years
beginning after December 15, 2018, including interim periods
beginning after December 15, 2019. The Company has
assessed the adoption of ASU No. 2016-15 and it is not expected to
have a material impact on the Company’s consolidated
financial position, results of operations or cash
flows.
In March 2016, the FASB issued ASU No. 2016-09, Compensation–Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The ASU
includes various provisions to simplify the accounting for
share-based payments with the goal of reducing the cost and
complexity of accounting for share-based payments. The amendments
may significantly impact net income, earnings per share and the
statement of cash flows as well as present implementation and
administration challenges for companies with significant
share-based payment activities. ASU No. 2016-09 is effective for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The adoption of this standard is
not expected to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for
Measurement-Period Adjustments. The amendments in this update require that during
the measurement period, the acquirer shall recognize adjustments to
the provisional amounts with a corresponding adjustment to goodwill
in the reporting period in which the adjustments to the provisional
amounts are determined. ASU 2015-16 requires an entity to present
separately on the face of the income statement or disclose in the
notes the portion of the amount recordedin current-period earnings
by line item that would have been recorded in previous reporting
periods if the adjustment to the provisional amounts had been
recognized as of the acquisition date. ASU 2015-16 is effective for
annual reporting periods beginning after December 15, 2016. Early
application is permitted. The adoption of this standard did not
have a material impact on the Company’s consolidated
financial position, results of operations or cash
flows.
In
January 2017, the FASB issued
ASU No. 2017-04, Intangibles
— Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. This ASU simplifies the test for
goodwill impairment by removing Step 2 from the goodwill impairment
test. Companies will now perform the goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount, recognizing an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value
not to exceed the total amount of goodwill allocated to that
reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. The amendments in this
update are effective for goodwill impairment tests in fiscal years
beginning after December 15, 2021, with early adoption permitted
for goodwill impairment tests performed after January 1, 2017. The
Company is evaluating the potential impact of this adoption on its
consolidated financial statements.
In October 2016, the FASB issued 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 was effective for fiscal years beginning after December
15, 2016, and early adoption was not permitted. The Company adopted
ASU 2016-17 effective the quarter ended March 31, 2017. The
adoption of ASU 2016-17 did not have a significant impact on its
consolidated financial statements.
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. The Company is expected to adopt the standard no
later than January 1, 2019. The Company is currently assessing the
impact that the new standard will have on its consolidated
financial statements, which will consist primarily of a balance
sheet gross up of our operating leases. The Company has not
evaluated the impact of this new standard will have on its
consolidated financial statements; however, it is expected to
gross-up the consolidated balance sheet as a result of recognizing
a lease asset along with a similar lease liability.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes. This guidance requires that
entities with a classified statement of financial position present
all deferred tax assets and liabilities as noncurrent. This update
is effective for annual and interim periods for fiscal years
beginning after December 15, 2016, which required the Company to
adopt the new guidance in the first quarter of fiscal 2017. Early
adoption was permitted for financial statements that have not been
previously issued and may be applied on either a prospective or
retrospective basis. The Company adopted ASU 2015-17 effective the
quarter ended March 31, 2017. The adoption of ASU 2015-17 did not
have a significant impact on its consolidated financial statements
other than the netting of current and long-term deferred tax assets
and liabilities in the non-current section of the balance sheet and
footnote disclosures.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory (Topic 330): Simplifying the Measurement
of Inventory.” The amendments in ASU 2015-11
require an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments do not apply to inventory that is measured using
last-in, first out (LIFO) or the retail inventory
method. The amendments apply to all other inventory,
which includes inventory that is measured using first-in, first-out
(FIFO) or average cost. The amendments should be applied
prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. The
adoption of ASU No. 2015-11 did not have a significant impact on
the Company’s consolidated financial
statements.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606). The new revenue recognition standard provides a
five-step analysis of contracts to determine when and how revenue
is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. In August 2015, the FASB deferred the effective
date of ASU No. 2014-09 for all entities by one year to annual
reporting periods beginning after December 15, 2018. The FASB has
issued several updates subsequently including implementation
guidance on principal versus agent considerations, on how an entity
should account for licensing arrangements with customers, and to
improve guidance on assessing collectability, presentation of sales
taxes, noncash consideration, and contract modifications and
completed contracts at transition. The amendments in this series of
updates shall be applied either retrospectively to each period
presented or as a cumulative-effect adjustment as of the date of
adoption. Early adoption is permitted. The Company continues to
assess the impact of this ASU, and related subsequent updates, will
have on its consolidated financial statements. As of December 31,
2017, the Company is in the process of reviewing the guidance to
identify how this ASU will apply to the Company's revenue reporting
process in 2019. The final impact of this ASU on the Company's
financial statements will not be known until the assessment is
complete. We will update our disclosures in future periods as the
analysis is completed.
Note 2. Acquisitions and Business
Combinations
During 2017 and 2016, the Company entered into five and four
acquisitions, respectively, 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.
2017 Acquisitions
BeautiControl, Inc.
On
December 13, 2017, the Company entered into an agreement with
BeautiControl whereby the Company acquired certain assets of the
BeautiControl cosmetic company. BeautiControl is a direct sales
company specializing in cosmetics and skincare
products.
The Company is obligated to make monthly payments based on a
percentage of the BeautiControl’s distributor revenue derived
from sales of the Company’s products and a percentage of
royalty revenue derived from sales of BeautiControl’s
products until the earlier of the date that is twelve (12) years
from the closing date or such time as the Company has paid to
BeautiControl’s aggregate cash payments of the
BeautiControl’s distributor revenue and royalty revenue equal
to the maximum aggregate purchase price of
$20,000,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $2,625,000 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 assets acquired were recorded at estimated fair values as of
the date of the acquisition. 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 Company did not
acquire any inventory or assumed liabilities with this acquisition.
The preliminary purchase price allocation is as follows (in
thousands):
|
Distributor
organization
|
$1,275
|
|
Customer-related
intangible
|
765
|
|
Trademarks
and trade name
|
585
|
|
Total
purchase price
|
$2,625
|
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 valuations within one (1) year
from the acquisition date.
There was no revenue earned as of December 31, 2017 for the
BeautiControl acquisition.
The pro-forma effect assuming the business combination with
BeautiControl discussed above had occurred at the beginning of the
year is not presented as the information was not
available.
Future Global Vision, Inc.
Effective
November 6, 2017, the Company acquired certain assets and assumed
certain liabilities of Future Global Vision, Inc., a direct selling
company that offers a unique line of products that include a fuel
additive for vehicles that improves the efficiency of the engine
and reduces fuel consumption. In addition, Future Global Vision,
Inc., offers a line of nutraceutical products designed to provide
health benefits that the whole family can use.
The Company is obligated to make monthly payments based on a
percentage of the Future Global Vision, Inc., distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of the Future Global Vision, Inc.,
products until the earlier of the date
that is twelve (12) years from the closing date or such time as the
Company has paid to Future Global Vision, Inc., aggregate cash payments of the Future
Global Vision, Inc., distributor
revenue and royalty revenue equal to the maximum aggregate purchase
price of $1,800,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $875,000 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 Company received approximately $53,000 of
inventories and has agreed to pay for the inventory. This payment
is applied to the maximum aggregate purchase price.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. 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 preliminary
purchase price allocation is as follows (in
thousands):
|
Inventory
|
$53
|
|
Distributor
organization
|
425
|
|
Customer-related
intangible
|
250
|
|
Trademarks
and trade name
|
200
|
|
Accrued
liabilities
|
(53)
|
|
Total
purchase price
|
$875
|
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 valuations within one (1) year
from the acquisition date.
The revenue impact from the Future Global Vision, Inc.,
acquisition, included in the
consolidated statements of operations for the year ended December
31, 2017 was approximately $63,000.
The pro-forma effect assuming the business combination with
Future Global Vision, Inc., discussed
above had occurred at the beginning of the year is not presented as
the information was not available.
Sorvana International, LLC
Effective July 1, 2017, the Company acquired certain assets and
assumed certain liabilities of Sorvana International, LLC
“Sorvana”. Sorvana was the result of the unification of
the two companies FreeLife International, Inc.
“FreeLife”, and L’dara. Sorvana offers a variety
of products with the addition of the FreeLife and L’dara
product lines. Sorvana offers an extensive line of health and
wellness product solutions including healthy weight loss
supplements, energy and performance products and skin care product
lines as well as organic product options. As a result of this
business combination, the Company’s distributors and
customers will have access to Sorvana’s unique line of
products and Sorvana’s distributors and clients will gain
access to products offered by the Company.
The Company is obligated to make monthly payments based on a
percentage of the Sorvana distributor revenue derived from sales of
the Company’s products and a percentage of royalty revenue
derived from sales of Sorvana’s products until the earlier of
the date that is twelve (12) years from the closing date or such
time as the Company has paid to Sorvana aggregate cash payments of
the Sorvana distributor revenue and royalty revenue equal to the
maximum aggregate purchase price of $14,000,000.
The Company received approximately $700,000 of inventories and has
agreed to pay for the inventory. This payment is applied to the
maximum aggregate purchase price. In addition, the Company assumed
certain liabilities payable in the approximate amount of $68,000
which is not applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $4,247,000 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 year ended December 31, 2017 the Company determined that
the initial estimated fair value of the acquisition should be
reduced by $1,105,000 from $4,247,000 to $3,142,000.
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 preliminary purchase price
allocation is as follows (in thousands):
|
Inventory
|
$700
|
|
Distributor
organization
|
910
|
|
Customer-related
intangible
|
1,300
|
|
Trademarks
and trade name
|
1,000
|
|
Accrued
liabilities, inventory
|
(700)
|
|
Accrued
liabilities, assumed liabilities
|
(68)
|
|
Total
purchase price
|
$3,142
|
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 valuations within one (1) year
from the acquisition date.
The revenue impact from the Sorvana acquisition, included in the
consolidated statements of operations for the year ended December
31, 2017 was approximately $3,891,000.
The pro-forma effect assuming the business combination with Sorvana
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
BellaVita Group, LLC
Effective
March 1, 2017, the Company acquired certain assets of BellaVita
Group, LLC “BellaVita” a direct sales company and
producer of health and beauty products with locations and customers
primarily in the Asian market.
The Company is obligated to make monthly payments based on a
percentage of the BellaVita distributor revenue derived from sales
of the Company’s products and a percentage of royalty revenue
derived from sales of BellaVita products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to BellaVita aggregate cash payments of the
BellaVita distributor revenue and royalty revenue equal to the
maximum aggregate purchase price of $3,000,000.
The Company assumed certain liabilities payable in the approximate
amount of $100,000 and is applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,650,000 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 year ended December 31, 2017 the Company determined that
the initial estimated fair value of the acquisition should be
increased by $156,000 from $1,650,000 to $1,806,000.
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 preliminary purchase price
allocation is as follows (in thousands):
|
Distributor
organization
|
$981
|
|
Customer-related
intangible
|
525
|
|
Trademarks
and trade name
|
400
|
|
Accrued
liabilities
|
(100)
|
|
Total
purchase price
|
$1,806
|
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 valuations within one (1) year
from the acquisition date.
The revenue impact from the BellaVita acquisition, included in the
consolidated statements of operations for the year ended December
31, 2017 was approximately $2,390,000.
The pro-forma effect assuming the business combination with
BellaVita discussed above had occurred at the beginning of the year
is not presented as the information was not available.
Ricolife, LLC
Effective
March 1, 2017, the Company acquired certain assets of Ricolife, LLC
“Ricolife” a direct sales company and producer of teas
with health benefits contained within its tea
formulas.
The Company is obligated to make monthly payments based on a
percentage of the Ricolife distributor revenue derived from sales
of the Company’s products and a percentage of royalty revenue
derived from sales of Ricolife products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to Ricolife aggregate cash payments of the
Ricolife distributor revenue and royalty revenue equal to the
maximum aggregate purchase price of $1,700,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $845,000 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 Company assumed certain liabilities
payable in the approximate amount of $75,000 and is applied to the
maximum aggregate purchase price.
During the year ended December 31, 2017 the Company determined that
the initial estimated fair value of the acquisition should be
reduced by $372,000 from $845,000 to $473,000.
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 preliminary purchase price
allocation is as follows (in thousands):
|
Distributor
organization
|
$68
|
|
Customer-related
intangible
|
280
|
|
Trademarks
and trade name
|
200
|
|
Accrued
liabilities
|
(75)
|
|
Total
purchase price
|
$473
|
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 valuations within one (1) year
from the acquisition date.
The revenue impact from the Ricolife acquisition, included in the
consolidated statements of operations for the year ended December
31, 2017 was approximately $896,000.
The pro-forma effect assuming the business combination with
Ricolife discussed above had occurred at the beginning of the year
is not presented as the information was not available.
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 patented 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
purchased certain inventories and assumed 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 the
maximum aggregate purchase price of
$2,000,000.
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. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
During the period ended September 30, 2017 the purchase accounting
was finalized and the Company determined that the initial purchase
price of $1,046,000 should be reduced by $92,000 to $954,000. The
final 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
|
298
|
|
Total
intangible assets acquired, non-cash
|
733
|
|
Total
purchase price
|
$954
|
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 Legacy for Life acquisition, included
in the consolidated statement of operations for the years ended
December 31, 2017 and 2016 was approximately $1,920,000 and
$507,000, respectively.
The pro-forma effect assuming the business combination with Legacy
for Life discussed above had occurred at the beginning of 2016 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 the maximum aggregate purchase price of
$15,000,000.
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 at the
date of acquisition was $2,765,000 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 year ended December 31, 2016, the Company determined
that the initial estimated fair value of the acquisition should be
reduced by $1,290,000 from the initial purchase price of $2,765,000
to $1,475,000. During the period ended September 30, 2017 the
purchase accounting was finalized and the Company determined that
the purchase price should be reduced by $266,000 to
$1,209,000.
The final purchase price allocation for the acquisition of
Nature’s Pearl (in thousands) is as follows:
|
Inventory
|
$200
|
|
Distributor
organization
|
559
|
|
Customer-related
intangible
|
400
|
|
Trademarks
and trade name
|
250
|
|
Accrued
liabilities
|
(200)
|
|
Total
purchase price
|
$1,209
|
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 Nature’s Pearl acquisition,
included in the consolidated statement of operations for the years
ended December 31, 2017 and 2016 was approximately $3,756,000 and
$1,488,000, respectively.
The pro-forma effect assuming the business combination with
Nature’s Pearl discussed above had occurred at the beginning
of 2016 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 a percentage of royalty
revenue until the earlier of the date that is twelve (12) years
from the closing date or such time as the Company has paid to
Renew, aggregate cash payments of Renew distributor revenue and
revenue equal to the maximum aggregate purchase price of
$2,500,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $465,000 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 Company paid approximately $250,000 for certain inventories and
$48,000 for assumed liabilities, which payment was applied to the
maximum aggregate purchase price.
During the period ended September 30, 2017 the purchase accounting
was finalized and the Company determined that the initial purchase
price should be reduced by $78,000 including the assumed
liabilities of $48,000, from $465,000 to $387,000. The final
purchase price allocation for the acquisition of Renew (in
thousands) is as follows:
|
Inventory
|
$250
|
|
Distributor
organization
|
170
|
|
Customer-related
intangible
|
155
|
|
Trademarks
and trade name
|
110
|
|
Accrued
liabilities, inventory
|
(250)
|
|
Accrued
liabilities, assumed liabilities
|
(48)
|
|
Total
purchase price
|
$387
|
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 Renew acquisition, included in the
consolidated statement of operations for the years ended December
31, 2017 and 2016 was approximately $920,000 and $432,000,
respectively.
The pro-forma effect assuming the business combination with Renew
discussed above had occurred at the beginning of 2016 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 period 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 for the acquisition of 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 years ended December
31, 2017 and 2016 was approximately $1,268,000 and $4,283,000,
respectively.
The pro-forma effect assuming the business combination with South
Hill discussed above had occurred at the beginning of 2016 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 $1,706,000 and $1,806,000 as of December 31, 2017 and
2016, 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, 2017 and 2016, 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 $182,000 and $126,000
from Northwest Nutraceuticals Inc., for the years ended December
31, 2017 and 2016, respectively. In addition, Mr. Renton and his
wife are distributors of the Company and the Renton’s were
paid distributor commissions for the years ended December 31, 2017
and 2016 approximately $398,000 and $457,000
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 beans and in March 2014 as part of the
Siles acquisition, CLR engaged the owners of H&H as employees
to manage Siles. The Company made purchases of approximately
$10,394,000 and $8,810,000 from this supplier for the years ended
December 31, 2017 and 2016, respectively.
In addition, CLR sold approximately $6,349,000 and $2,637,000 for
the years ended December 31, 2017 and 2016, respectively, of green
coffee beans to H&H Coffee Group Export, a Florida based
company which is affiliated with H&H.
In March 2017, the Company entered a settlement agreement and
release with H&H Coffee Group Export pursuant to which it was
agreed that $150,000 owed to H&H Coffee Group Export for
services that had been rendered would be settled by the issuance of
Common Stock. In May 2017, the Company issued to H&H Coffee
Group Export 27,500 shares of Common Stock in accordance with this
agreement.
In May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s Common Stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September 30, 2017 the Company replaced the non-qualified stock
option and issued a warrant agreement with the same terms. There
was no financial impact related to the cancellation of the option
and the issuance of the warrant. As of December 31, 2017, the
warrant remains outstanding.
Carl Grover
Mr. Carl Grover, is the beneficial owner of in excess of five
percent (5%) of our outstanding common shares, is the sole
beneficial owner of 2,354,492 shares of Common Stock. Mr. Grover
owns a 2014 Note in the principal amount of $4,000,000 convertible
into 571,428 shares of Common Stock and a 2014 Warrant exercisable
for 782,602 shares of Common Stock. Mr. Grover also owns a 2015
Note in the principal amount of $3,000,000 convertible into 428,571
shares of Common Stock and a 2015 Warrant exercisable for 200,000
shares of Common Stock. Mr. Grover acquired two 2017 Notes in the
aggregate principal amount of $5,162,273 convertible into 1,122,233
shares of Common and two 2017 Warrants exercisable for 735,030
shares of Common Stock in the 2017 Private Placement. He also owns
257,562 shares of Common Stock. On March 29, 2018, the Company completed its Series
B Convertible Stock Offering, whereby in accordance with the terms
of the 2017 Notes that the 2017 Notes would automatically convert
upon the Company raising a minimum of $3,000,000 in subsequent
offerings. See Note 12
below.
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board directors and owns a
2014 Note in the principal amount of $75,000 convertible into
10,714 shares of Common Stock and a 2014 Warrant exercisable for
14,673 shares of Common Stock. Mr. Sallwasser acquired in the 2017
Private Placement a 2017 Note in the principal amount of $37,615
convertible into 8,177 shares of Common Stock and a 2017 Warrant
exercisable for 5,719 shares of Common Stock. Mr. Sallwasser also
acquired in the 2017 Private Placement in exchange for the 2015
Note he owned, a 2017 Note in the principal amount of $5,000
convertible into 1,087 shares of Common Stock and a 2017 Warrant
exercisable for 543 shares of Common Stock. He also owns 58,129
shares of Common Stock and an option to purchase 5,000 shares of
Common Stock that are immediately exercisable. On March 29, 2018,
the Company completed its Series B Convertible Stock Offering,
whereby in accordance with the terms of the 2017 Notes that the
2017 Notes would automatically convert upon the Company raising a
minimum of $3,000,000 in subsequent offerings. See Note 12
below.
2400 Boswell LLC
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. The Company and its Chief
Executive Officer are both co-guarantors of the mortgage. As of
December 31, 2017, the balance on the long-term mortgage is
approximately $3,289,000 and the balance on the promissory note is
approximately $22,000.
Note 4. Notes Payable and Other Debt
In August 2017, the Company completed a private placement and
entered into Note Purchase Agreements with accredited investors
pursuant to which the Company sold convertible notes in the
aggregate principal amount of $3,054,000, that are convertible into
shares of Common Stock. Concurrent with the 2017 private placement,
three investors in the Company’s 2015 private placement,
exchanged their notes purchased in that offering, in the aggregate
principal amount of $4,200,349, accrued interest thereon. As of
December 31, 2017, the aggregate principal amount of $7,254,000
remains outstanding. The Notes are due in July 2020 if the option
to convert has not been exercised (see Note 5, below.)
In November 2015, the Company completed a private
placement and entered into Note Purchase Agreements with accredited
investors pursuant to which the Company sold senior secured
convertible notes in the aggregate principal amount of $7,187,500,
that are convertible into shares of Common Stock. The remaining
balance in the November 2015 note is $3,000,000 and is due in
October 2018 if the option to convert has not been exercised (see
Note 5, below.)
In July 2014, the Company completed a private placement
and entered into Note Purchase Agreements with accredited investors
pursuant to which the Company sold senior secured convertible Notes
in the aggregate principal amount of $4,750,000, that are
convertible into shares of 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. The Company and its Chief
Executive Officer are both co-guarantors of the mortgage. As of
December 31, 2017, the balance on the long-term mortgage is
approximately $3,289,000 and the balance on the promissory note is
approximately $22,000.
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, 2017 and 2016, the carrying
value of the liability was approximately $1,113,000 and $1,156,000,
respectively. The interest associated with the note for the
years ended December 31, 2017 and 2016 was minimal.
The Company’s other notes relate to loans for commercial vans
at CLR in the amount of $123,000 as of December 31, 2017 which
expire at various dates through 2023.
The following summarizes the maturities of notes payable (including
convertible notes payable) (in thousands):
|
Years
ending December 31,
|
|
|
2018
|
$3,176
|
|
2019
|
4,868
|
|
2020
|
7,419
|
|
2021
|
172
|
|
2022
|
177
|
|
Thereafter
|
3,740
|
|
Total
|
$19,552
|
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, 2017 excluding
interest was approximately $1,677,000, of which $983,000 will
be paid in 2018 and the remaining balance of $694,000 will be paid
through 2021.
The
following summarizes the maturities of capital leases (in
thousands):
|
Years ending
December 31,
|
|
|
2018
|
$1,078
|
|
2019
|
573
|
|
2020
|
124
|
|
2021
|
31
|
|
2022
|
-
|
|
Total
|
1,806
|
|
Amount representing
interest
|
(129)
|
|
Present value of
minimum lease payments
|
1,677
|
|
Less current
portion
|
(983)
|
|
Long term
portion
|
$694
|
Depreciation expense related to the capitalized lease obligations
was approximately $110,000 and $103,000 for the years ended
December 31, 2017 and 2016, respectively.
Line of Credit - Loan and Security Agreement
CLR had a factoring agreement (“Factoring Agreement”)
with Crestmark Bank (“Crestmark”) related to accounts
receivable resulting from sales of certain products within our
commercial coffee segment. Effective May 1, 2016, CLR entered into
a third amendment to the Factoring Agreement. Under the terms of
the third amendment, all new receivables assigned to Crestmark
shall be “Client Risk Receivables” and no further
credit approvals were to be provided by Crestmark. Additionally,
the third amendment expanded the factoring facility to include
advanced borrowings against eligible inventory up to 50% of landed
cost of finished goods inventory that meet certain criteria, not to
exceed the lesser of $1,000,000 or 85% of the value of the accounts
receivables already advanced with a maximum overall borrowing of
$3,000,000. Interest accrued on the outstanding balance and a
factoring commission was 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 was recorded as interest expense. In addition,
the Company and our Company’s CEO, Mr. Wallach entered into a
Guaranty and Security Agreement with Crestmark guaranteeing
payments in the event that our commercial coffee segment CLR were
to default. The third amendment was effective until February 1,
2019.
On November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark which amended
and restated the original Factoring Agreement dated February 12,
2010 with Crestmark and subsequent agreement amendments thereto.
CLR is provided with a line of credit related to accounts
receivables resulting from sales of certain products and includes
borrowings to be advanced against acceptable eligible inventory
related to CLR. Effective December 29, 2017, CLR entered into a
First Amendment to the Agreement, to include an increase in the
maximum overall borrowing to $6,250,000 (the, “Loan”).
The Loan amount may not exceed an amount which is the lesser of (a)
$6,250,000 or (b) the sum of up (i) to 85% of the value of the
eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of
eligible inventory or 50% of (i) above (iii) the lesser of $250,000
or eligible inventory or 75% of certain specific inventory
identified within the Agreement.
The Agreement contains certain financial and nonfinancial covenants
for which the Company must comply to maintain its borrowing
availability and avoid penalties.
The outstanding principal balance of the Agreement will bear
interest based upon a year of 360 days with interest being charged
for each day the principal amount is outstanding including the date
of actual payment. The interest rate will be a rate equal to the
prime rate plus 2.50% with a floor of 6.75%. In addition, other
fees expenses are incurred for the maintenance of the loan in
accordance with the Agreement. Other fees may be incurred if in the
event the minimum loan balance of $2,000,000 is not maintained. The
Agreement is effective until November 16, 2020.
The Company and our Company’s CEO, Mr. Wallach have entered
into a Corporate Guaranty and Personal Guaranty, respectively, with
Crestmark guaranteeing payments in the event that our commercial
coffee segment CLR were to default. In addition, our President and
Chief Financial Officer, Mr. Briskie personally entered into a
Guaranty of Validity representing the Company’s financials so
long as the indebtedness is owing to Crestmark, maintaining certain
covenants and guarantees.
We account for the sale of receivables that were factored under the
previous Agreement as secured borrowings with the 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 as of December 31, 2016, reflects the related
collateralized accounts.
Our outstanding liability related to the Agreement was
approximately $3,808,000 as of December 31, 2017. The liability
associated with the Factoring Agreement as of December 31, 2016 was
$1,290,000 and is included in other current liabilities on the
consolidated balance sheets.
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,
2017 is $14,404,000 and is attributable to debt associated with the
Company’s direct selling segment.
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.
Note 5. Convertible Notes Payable
Our total convertible notes payable as of December 31, 2017 and
December 31, 2016, net of debt discount outstanding consisted of
the amount set forth in the following table (in
thousands):
|
|
December 31,
2017
|
December 31,
2016
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$4,750
|
$4,750
|
|
Debt
discounts
|
(1,659)
|
(2,707)
|
|
Carrying
value of 2014 Notes
|
3,091
|
2,043
|
|
|
|
|
|
8%
Convertible Notes due October and November 2018 (2015 Notes),
principal
|
3,000
|
7,188
|
|
Debt
discounts
|
(172)
|
(904)
|
|
Carrying
value of 2015 Notes
|
2,828
|
6,284
|
|
|
|
|
|
8%
Convertible Notes due July and August 2020 (2017 Notes),
principal
|
7,254
|
-
|
|
Fair
value of bifurcated embedded conversion option of 2017
Notes
|
200
|
-
|
|
Debt
discounts
|
(2,209)
|
-
|
|
Carrying
value of 2017 Notes
|
5,245
|
-
|
|
|
|
|
|
Total
carrying value of convertible notes payable
|
$11,164
|
$8,327
|
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 678,568 shares of our
Common Stock, at a conversion price of $7.00 per share, and
warrants to purchase 929,346 shares of Common Stock at an exercise
price of $4.60 per share. The 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, 2017 and December 31, 2016 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
1.5 million shares of the Common Stock that he owns so long as his
personal guaranty is in effect.
The Company recorded debt discounts of $4,750,000 related to the
beneficial conversion feature of $1,053,000 and $3,697,000 related
to the detachable warrants. The beneficial conversion feature
discount and the detachable warrants discount are amortized to
interest expense over the life of the Notes. As of December 31,
2017 and December 31, 2016 the remaining balance of the debt
discounts is approximately $1,504,000 and $2,454,000, respectively.
The quarterly amortization of the debt discounts is approximately
$238,000 and is recorded as interest expense.
With respect to the aggregate offering, the Company paid $490,000
in expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes. As of
December 31, 2017 and December 31, 2016 the remaining balance of
the issuance costs is approximately $155,000 and $253,000,
respectively. The quarterly amortization of the issuance costs is
approximately $25,000 and is recorded as interest
expense.
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the consolidated
balance sheets.
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 Company’s January 2015 Private Placement to
this offering in consideration of the sale of aggregate units
consisting of three-year senior secured convertible Notes in the
aggregate principal amount of $7,187,500, convertible into
1,026,784 shares of Common Stock, at a conversion price of $7.00
per share, subject to adjustment as provided therein; and five-year
Warrants exercisable to purchase 479,166 shares of the
Company’s common stock at a price per share of $9.00. 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.
In connection with the July 2017 Private Placement, three (3)
investors from the November 2015 Private Placement, converted their
2015 Notes in the aggregate amount of $4,200,349 including
principal and accrued interest thereon into new convertible notes
for an equal principal amount in the 2017 Private Placement as
discussed below. The remaining principal balance in the 2015 Note
of $3,000,000 remains outstanding as of December 31, 2017. The
Company accounted for the conversion of the notes as an
extinguishment in accordance with ASC 470-20 and ASC
470-50.
The Company recorded a non-cash extinguishment loss on debt of
$308,000 during the year ended December 31, 2017 as a result of the
conversion of $4,200,349 in notes including accrued interest to the
three investors from the November 2015 Private Placement through
issuance of a new July 2017 Note. This loss represents the
difference between the reacquisition value of the new debt to the
holders of the notes and the carrying amount of the holders’
extinguished debt.
The Company recorded at issuance debt discounts associated with the
2015 Notes of $309,000 related to the beneficial conversion feature
of $15,000 and $294,000 related to the detachable warrants. The
beneficial conversion feature discount and the detachable warrants
discount are amortized to interest expense over the life of the
Notes. During the year ended December 31, 2017 the Company
allocated approximately $75,000 for the remaining proportionate
share of the unamortized debt discounts to the extinguished portion
of the debt.
As of December 31, 2017 and December 31, 2016 the remaining
balances of the debt discounts is approximately $36,000 and
$189,000 respectively. The quarterly amortization of the remaining
debt discount is approximately $11,000 and is recorded as interest
expense.
With respect to the aggregate offering, the Company paid $786,000
in expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes.
During the year ended December 31, 2017 the Company allocated
approximately $190,000 for the remaining proportionate share of the
unamortized issuance costs to the extinguished portion of the
debt.
As of December 31, 2017 and December 31, 2016 the remaining
balances of the issuance cost is approximately $92,000 and
$480,000, respectively. The quarterly amortization of the remaining
issuance costs is approximately $30,000 and is recorded as interest
expense.
In addition, the Company issued warrants to the placement agent in
connection with the Notes which were valued at approximately
$384,000. These warrants were not protected against down-round
financing and accordingly, were classified as equity instruments
and the corresponding deferred issuance costs are amortized over
the term of the Notes. During the year ended December 31, 2017 the
Company allocated approximately $93,000 for the remaining
proportionate share of the unamortized issuance costs to the
extinguished portion of the debt.
As of December 31, 2017 and December 31, 2016, the remaining
balance of the warrant issuance cost is approximately $45,000 and
$235,000, respectively. The quarterly amortization of the remaining
warrant issuance costs is approximately $15,000 and is recorded as
interest expense.
July 2017 Private Placement
During July and August 2017,
we engaged in the July 2017 Private Placement pursuant to
which we offered for sale a minimum of $100,000 of units up to
a maximum of $10,000,000 of units, with each unit (a
“Unit”) consisting of: (i) a three (3) year convertible
note in the principal amount of $25,000 initially convertible into
shares of Common Stock, at $4.60 per share (subject to adjustment);
and (ii) a Series D Warrant (the “Class D Warrant”),
exercisable to purchase 50% of the number of shares issuable upon
conversion of the 2017 Note at an exercise price equal to
$5.56.
During July and August 2017, the Company entered into note
purchase agreements with accredited investors in a private
placement offering (the “2017 Private Placement”)
pursuant to which the Company sold notes in the aggregate principal
amount of $3,054,000, convertible into 663,913 shares of the
Company’s common stock, at a conversion price of $4.60 per
share, subject to adjustment (the “2017 Notes), and
three-year warrants to purchase 331,957 shares of the
Company’s common stock at an exercise price of $5.56
(“2017 Warrants”), for gross cash proceeds of
$3,054,000.
In
addition, concurrent with the 2017 Private Placement, three (3)
investors in the Company’s November 2015 Private Placement,
exchanged their notes purchased in that offering, in the aggregate
amount of $4,200,349, including principal and accrued interest
thereon, and warrants to purchase an aggregate of 279,166 shares of
the Company’s common stock at $9.00 per share for 2017 Notes
in the aggregate principal amount of $4,200,349, convertible into
1,577,033 shares of common stock at $4.60 per share and 2017
Warrants to purchase an aggregate of 638,625 shares of the
Company’s common stock at $5.56 per share.
The
2017 Notes mature on July 28, 2020 and bear interest at a rate of
eight percent (8%) per annum. The Company has the right to prepay
the 2017 Notes at any time after the one-year anniversary date of
the issuance of the 2017 Notes at a rate equal to 110% of the then
outstanding principal balance and accrued interest. The 2017 Notes
automatically convert to common stock if, prior to the maturity
date, the Company sells common stock, preferred stock or other
equity-linked securities with aggregate gross proceeds of no less
than $3,000,000 for the purpose of raising capital. The 2017 Notes
provide for full ratchet price protection on the conversion price
for a period of nine months after their issuance and subject to
adjustments.
The
Company's use of the proceeds from the 2017 Private Placement was
for working capital purposes. As of
December 31, 2017 the aggregate principal amount of $7,254,000
remains outstanding.
For
twelve (12) months following the closing, the investors in the 2017
Private Placement have the right to participate in any future
equity financings, subject to certain conditions.
The
Company paid a placement fee of $321,248, issued the placement
agent three-year warrants to purchase 179,131 shares of the
Company’s common stock at an exercise price of $5.56 per
share, and issued the placement agent 22,680 shares of the
Company’s common stock.
Upon issuance of the 2017 Notes, the Company recognized an
aggregate debt discount of approximately $2,565,000, resulting from
the allocated portion of issuance costs to the 2017 Notes and to
the allocation of offering proceeds to the separable warrant
liabilities, and to the bifurcated embedded conversion feature
option. See Notes 6 & 7 below.
The Company recorded $1,931,000 of debt discounts which included an
embedded conversion feature of $330,000 and $1,601,000 related to
the detachable warrants. The embedded conversion feature discount
and the detachable warrants discount are amortized to interest
expense over the life of the Notes. During the year ended December
31, 2017 the Company recorded $268,000 of amortization related to
the debt discounts. The quarterly amortization of the debt
discounts is approximately $161,000. As of December 31, 2017 the
remaining balance of the unamortized debt discount is approximately
$1,663,000
With respect to the aggregate offering, the Company paid $634,000
in issuance costs. The issuance costs are amortized to interest
expense over the term of the Notes. During the year ended December
31, 2017 the Company recorded $88,000 of amortization related to
the issuance costs. The quarterly amortization of the issuance
costs is approximately $53,000 and is recorded as interest expense.
As of December 31, 2017 the remaining balance of the unamortized
issuance cost is approximately $546,000.
In connection with the 2017 Private Placement, the Company also
entered into the “Registration Rights Agreement” with
the investors in the 2017 Private Placement. The Registration
Rights Agreement requires that the Company file a registration
statement (the “Registration Statement”) with the
Securities and Exchange Commission within ninety (90) days of the
final closing date of the Private Placement for the resale by the
investors of all of the shares of Common Stock underlying the
senior convertible notes and 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”) and that the
Initial Registration Statement be declared effective by the SEC
within 180 days of the final closing date of the 2017 Private
Placement or if the registration statement is reviewed by the SEC
210 days after the final closing date of the 2017 Private
Placement. Upon the occurrence of certain events (each an
“Event”), the Company 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. The Registration
Statement was declared effective on September 27,
2017.
Note 6. Derivative Liability
The Company recognizes and measures the warrants and the
embedded conversion features issued in conjunction with our July
2017, November 2015, and July 2014 Private Placements in accordance
with ASC Topic 815, Derivatives and
Hedging. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both
(i) indexed to the entity’s own stock and
(ii) classified in the stockholders’ equity section of
the entity’s balance sheet. The Company determined
that certain warrants and embedded conversion features issued in
our private placements are ineligible for equity classification due
to anti-dilution provisions set forth therein.
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. The Company 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.
Various factors are considered in the pricing models the Company
uses to value the derivative liabilities, including its current
stock price, the remaining life, the volatility of its 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
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on our working capital, liquidity or
business operations.
Warrants
In July and August of 2017, the Company issued 1,149,712 three-year
warrants to investors and the placement agent in the 2017 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
$2,334,000 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 model, with
the following assumptions: stock price volatility 63.32%, risk-free
rate 1.51%, annual dividend yield 0% and expected life 3.0
years.
The estimated fair value of the outstanding warrant liabilities was
$3,365,000 and $3,345,000 as of December 31, 2017 and
December 31, 2016, 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 $1,895,000 and $1,371,000 for the years ended December
31, 2017 and 2016, respectively.
The estimated fair value of the warrants was computed as of
December 31, 2017 and 2016 using the Monte Carlo and the
Black-Scholes option pricing models, using the following
assumptions:
|
|
December 31,
2017
|
December 31,
2016
|
|
Stock
price volatility
|
61.06%
|
60% - 65%
|
|
Risk-free
interest rates
|
1.96%
|
1.34%-1.70%
|
|
Annual
dividend yield
|
0%
|
0%
|
|
Expected
life
|
1.58
- 2.78 years
|
2.6-3.9
years
|
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Embedded Conversion Derivatives
Upon issuance of the 2017 Notes, the Company recorded an embedded
conversion option which was classified as a derivative of
$330,000.
The estimated fair value of the embedded conversion option was
$200,000 as of December 31, 2017 and is a component of Convertible
Notes Payable, net on the Company’s balance
sheet.
Increases
or decreases in fair value of the
embedded conversion option derivative are included as a
component of total other expense in the accompanying consolidated
statements of operations for the respective period. The change
resulted in a decrease of $130,000 for the year ended December 31,
2017.
The Company estimated the fair value of the embedded conversion
option, as of the issuance date and as of December 31, 2017 using
the Monte Carlo option pricing model using the following
assumptions:
|
Inputs
|
|
December 31,
2017
|
|
Initial
Valuation
|
|
Stock
price
|
|
$4.13
|
|
$4.63-$4.73
|
|
Conversion
price
|
|
$4.60
|
|
$4.60
|
|
Stock
price volatility
|
|
60.98%-61.31%
|
|
63.07%-63.32%
|
|
Risk-free
rate
|
|
1.9%
|
|
0.92%-0.94%
|
|
Expected
life
|
|
2.57-2.63
|
|
3.0
|
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 Company’s Private Placements, the
Company issued warrants to purchase shares of its Common Stock and
recorded embedded conversion features which are accounted for as
derivative liabilities (see Note 6 above.) The estimated fair value
of the derivatives 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
fair value hierarchy of the Company’s financial instruments,
which includes the Level 3 liabilities (in thousands):
|
|
Fair Value at December 31, 2017
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$587
|
$-
|
$-
|
$587
|
|
Contingent
acquisition debt, less current portion
|
13,817
|
-
|
-
|
13,817
|
|
Warrant
derivative liability
|
3,365
|
-
|
-
|
3,365
|
|
Embedded
conversion option derivative
|
200
|
-
|
-
|
200
|
|
Total
liabilities
|
$17,969
|
$-
|
$-
|
$17,969
|
|
|
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
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
2017, 2015 and 2014 Private Placements measured at fair value using
Level 3 inputs (in thousands):
|
|
Warrant Derivative Liability
|
|
Balance
at December 31, 2015
|
$4,716
|
|
Issuance
|
-
|
|
Adjustments
to estimated fair value
|
(1,371)
|
|
Balance
at December 31, 2016
|
3,345
|
|
Issuance
|
2,334
|
|
Adjustments
to estimated fair value
|
(1,895)
|
|
Adjustment
related to the extinguishment loss on exchange of warrants, 2015
Notes (Note 5)
|
(419)
|
|
Balance
at December 31, 2017
|
$3,365
|
The following table reflects the activity for the Company’s
embedded conversion feature derivative liability associated with
the Company’s 2017 Private Placement Notes measured at fair
value using Level 3 inputs (in thousands):
|
|
Embedded
Conversion Feature Derivative Liability
|
|
Balance
at December 31, 2016
|
$-
|
|
Issuance
|
330
|
|
Adjustment
to estimated fair value
|
(130)
|
|
Balance
at December 31, 2017
|
$200
|
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, 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
|
|
Level
3 liabilities acquired
|
9,657
|
|
Level
3 liabilities settled
|
(462)
|
|
Adjustments
to liabilities included in earnings
|
(1,664)
|
|
Expenses
allocated to profit sharing agreement
|
(195)
|
|
Adjustment
to purchase price allocation
|
(933)
|
|
Balance
at December 31, 2017
|
$14,404
|
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, 2017 and 2016, the net adjustment to the
fair value of the contingent acquisition debt was a decrease of
$1,664,000 and a decrease of $1,462,000, respectively.
The weighted-average of the discount rates used was 18.4% and 18.2%
as of December 31, 2017 and 2016, respectively. The projected year
of payment ranges from 2018 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”.
Common Stock
On May 31, 2017, the Board of Directors of the Company authorized a
reverse stock split of the Company’s Common Stock in order to
meet certain criteria in preparation for the Company’s
uplisting on the NASDAQ Capital Market in June 2017.
On June 5, 2017, the Company filed a certificate of amendment to
the Company’s Articles of Incorporation with the Secretary of
State of the State of Delaware to effect a one-for-twenty reverse
stock split of the Company’s issued and outstanding common
stock. As a result of the Reverse Split, every twenty shares of the
Company issued and outstanding common stock were automatically
combined and reclassified into one share of the Company’s
common stock. The Reverse Split affected all issued and outstanding
shares of common stock, as well as common stock underlying stock
options, restricted stock units and warrants outstanding, and
common stock equivalents issuable under convertible notes and
preferred shares. No fractional shares were issued in connection
with the Reverse Split. Stockholders who would otherwise hold a
fractional share of common stock will receive cash payment for the
fractional share.
The Reverse Split became effective on June 7, 2017. All disclosures
of shares and per share data in these consolidated financial
statements and related notes have been retroactively adjusted to
reflect the Reverse Split for all periods presented.
In addition to the Reverse Split, the certificate of amendment to
the certificate of incorporation also reduced the total number of
authorized shares of common stock from 600,000,000 to
50,000,000. The total number of shares of stock which the
Company has authority to issue is 50,000,000 shares of common
stock, par value $.001 per share and 5,000,000 shares of preferred
stock, par value $.001 per share, of which 161,135 shares have been
designated as Series A convertible preferred stock, par value $.001
per share (“Series A Convertible
Preferred”).
As of December 31, 2017, and December 31, 2016 there were
19,723,285 and 19,634,345 shares of Common Stock outstanding,
respectively. The holders of the Common Stock are entitled
to one vote for each share held at all meetings of stockholders
(and written actions in lieu of meetings).
2017 Private Placement
As part of the 2017 Private
Placement, the Company issued the placement agent 22,680 shares of
Common Stock. (See Note 5 above).
Convertible Preferred Stock
The Company has 161,135 shares of Series A Convertible Preferred
Stock outstanding as of December 31, 2017, and December 31, 2016
and accrued dividends of approximately $124,000 and $112,000,
respectively. The holders of the Series A Convertible 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. Each share
of Series A Convertible Preferred is convertible into Common Stock
at a conversion rate of .10. The holders of Series A Convertible
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 Convertible
Preferred have no voting rights, except as required by
law.
Repurchase of Common Stock
On December 11, 2012, we authorized a share repurchase program to
repurchase up to 750,000 of the Company's issued and outstanding
shares of Common Stock from time to time on the open market or via
private transactions through block trades. A total of
196,594 shares have been repurchased to-date as of December 31,
2017 at a weighted-average cost of $5.30. There were no repurchases
during the year ended December 31, 2017. We repurchased a total of
6,285 shares at a weighted-average cost of $5.60 per shares in
2016. The remaining number of shares authorized for repurchase
under the plan as of December 31, 2017 is
553,406.
Advisory Agreements
ProActive Capital Resources Group, LLC. On September 1,
2015, the Company entered into an agreement with ProActive
Capital Resources
Group, LLC (“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 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to the September 1, 2015 initial agreement, the agreement has been
extended through August 2018 under six-month increment services
agreements under the same terms with the monthly cash payment
remaining at $6,000 per month and 5,000 shares of restricted common
stock for every six (6) months of service performed.
As of December 31, 2017, the Company has issued 15,000
shares of restricted common stock in
connection with this agreement and accrued for the estimated per
share value on each subsequent six (6) month periods based on the
price of Company’s common stock at each respective date. As
of December 31, 2017, the Company has accrued for 10,000 shares of
restricted stock that have been earned and not issued. The fair
value of the shares to be issued are recorded as prepaid advisory
fees and are included in prepaid expenses and other current assets
on the Company’s consolidated balance sheets and is amortized
on a pro-rata basis over the term of the respective
periods. During the years ended December 31, 2017 and
2016, the Company recorded expense of approximately
$56,000 and $58,000, respectively, in connection with amortization
of the stock issuance.
Warrants
As of December 31, 2017, warrants to purchase 2,710,066 shares
of the Company's common stock at prices ranging from
$2.00 to $10.00 were outstanding. All warrants are exercisable as
of December 31, 2017 and expire at various dates through November
2020 and have a weighted average remaining term of approximately
2.11 years and are included in the table below as of December 31,
2017.
In May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s Common Stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September of 2017, the Company cancelled the non-qualified stock
option and issued a warrant agreement with the same terms. The fair
value of the warrant was $232,000 and was recorded in general and
administrative expense in the consolidated statements of
operations. There was no
financial impact to the change in the valuation related to the
cancellation of the option and the issuance of the warrant. As of
December 31, 2017, the warrant remains
outstanding.
In May 2017, the Company issued a warrant as compensation to an
associated Youngevity distributor to purchase 37,500 shares of the
Company’s Common Stock at a price of $2.00 with an expiration
date of three years. During the year ended December 31, 2017, the
warrant was exercised on a cashless basis based on the
Company’s closing stock price of $4.66 and 21,875 shares of
common stock were issued . The fair value of the warrant was
$109,000 and was recorded in distributor compensation in the
consolidated statements of operations.
The Company uses the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate the fair value of
the warrants.
A summary of the warrant activity for the years ended December 31,
2017 and 2016 is presented in the following table:
|
Balance at December 31, 2015
|
|
|
2,083,722
|
|
|
Issued
|
|
|
-
|
|
|
Expired / cancelled
|
|
|
(182,275
|
)
|
|
Exercised
|
|
|
(2,062
|
)
|
|
Balance at December 31, 2016
|
|
|
1,899,385
|
|
|
Issued
|
|
|
1,262,212
|
|
|
Expired / cancelled
|
|
|
(414,031
|
)
|
|
Exercised
|
|
|
(37,500
|
)
|
|
Balance at December 31, 2017
|
|
|
2,710,066
|
|
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
2,000,000 shares of Common Stock. On February 23, 2017, the
Company’s board of directors received the approval of our
stockholders, to amend 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
increased the number of authorized shares of the Company’s
common stock that may be delivered pursuant to awards granted
during the life of the plan from 2,000,000 to 4,000,000
shares.
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 allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At December 31, 2017, the Company had
1,884,197 shares of Common Stock available for issuance under the
Plan.
A summary of the Plan stock option activity for the years ended
December 31, 2017 and 2016 is presented in the following
table:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contract Life (years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|||
|
Outstanding December 31, 2015
|
|
|
1,175,544
|
|
|
$
|
4.40
|
|
|
6.24
|
|
$
|
2,044
|
|
|
Issued
|
|
|
639,612
|
|
|
|
5.40
|
|
|
|
|
|
|
|
|
Canceled/expired
|
|
|
(149,067
|
)
|
|
|
4.80
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,125
|
)
|
|
|
4.20
|
|
|
|
|
|
-
|
|
|
Outstanding December 31, 2016
|
|
|
1,660,964
|
|
|
|
4.80
|
|
|
6.75
|
|
|
1,346
|
|
|
Issued
|
|
|
21,624
|
|
|
|
4.60
|
|
|
|
|
|
|
|
|
Canceled / expired
|
|
|
(91,180
|
)
|
|
|
4.39
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,885
|
)
|
|
|
4.28
|
|
|
|
|
|
-
|
|
|
Outstanding December 31, 2017
|
|
|
1,584,523
|
|
|
$
|
4.76
|
|
|
6.16
|
|
$
|
126
|
|
|
Exercisable December 31, 2017
|
|
|
1,040,678
|
|
|
$
|
4.58
|
|
|
4.92
|
|
$
|
87
|
|
The weighted-average fair value per share of the granted options
for the years ended December 31, 2017 and 2016 was approximately
$2.90 and $3.00, respectively.
Stock-based compensation expense related to stock options included
in the consolidated statements of operations was charged as follows
(in thousands):
|
|
|
Years ended December 31,
|
|
|||||
|
|
|
2017
|
|
|
2016
|
|
||
|
Cost of revenues
|
|
$
|
14
|
|
|
$
|
10
|
|
|
Distributor compensation
|
|
|
4
|
|
|
|
215
|
|
|
Sales and marketing
|
|
|
51
|
|
|
|
10
|
|
|
General and administrative
|
|
|
496
|
|
|
|
160
|
|
|
Total
stock-based compensation related to stock options
|
|
$
|
565
|
|
|
$
|
395
|
|
As of December 31, 2017, there was approximately $1,574,000 of
total unrecognized compensation expense related to unvested stock
options granted under the Plan. The expense is expected to be
recognized over a weighted-average period of 3.54
years.
Valuation Inputs
The Company uses the Black-Scholes model to estimate the fair value
of equity-based options. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
The following were the factors used in the Black-Scholes model to
calculate the compensation cost:
|
|
Years
ended December 31,
|
|
|
|
2017
|
2016
|
|
Dividend
yield
|
-
|
-
|
|
Stock
price volatility
|
56% - 64
% |
57% - 90%
|
|
Risk-free
interest rate
|
1.22 - 2.06%
|
0.71 - 2.25%
|
|
Expected life of options
|
1.0 - 5.61 years
|
2.6 - 6.5 years
|
Restricted Stock Units
On August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock units. Vesting occurs on the
sixth-year anniversary of the grant date, over a six-year period,
with 10% vesting on the third-year, 15% on the fourth-year, 50% on
the fifth-year and 25% on the sixth-year anniversary of the vesting
commencement date. There were no other grants during the year ended
December 31, 2017.
The fair value of each restricted stock units issued to employees
is based on the closing price on the grant date of $4.53 and
restricted stock units issued to consultants are revalued as they
vest and is recognized as stock-based compensation expense over the
vesting term of the award. Stock-based compensation expense
included in sales and marketing was $9,000 and $80,000 was included
in general and administration in the consolidated statements of
operations for the year ended December 31,
2017.
As of December 31, 2017, total unrecognized stock-based
compensation expense related to restricted stock units to employees
and consultants was approximately $2,098,000, which will be
recognized over a weighted average period of 5.61
years.
Note 9. Commitments and Contingencies
Credit Risk
The Company maintains cash balances at various financial
institutions primarily located in the United States. Accounts held
at the United States 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. There is credit risk
related to the Company’s ability to collect on its trade
account receivables from its major customers. Management believes
that the Company is not exposed to any significant credit risk with
respect to its cash and cash equivalent balances and trade accounts
receivables.
Litigation
The Company is party to litigation at the present time and may
become party to litigation in the future. In general, litigation
claims can be expensive, and time consuming to bring or defend
against and could result in settlements or damages that could
significantly affect financial results. However, it is not possible
to predict the final resolution of any litigation to which the
Company is, or may be party to, and the impact of certain of these
matters on the Company’s business, results of operations, and
financial condition could be material.
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, 2017, future minimum lease commitments are as
follows (in thousands):
|
2018
|
|
$
|
1,299
|
|
|
2019
|
|
|
936
|
|
|
2020
|
|
|
744
|
|
|
2021
|
|
|
585
|
|
|
2022
|
|
|
525
|
|
|
Thereafter
|
|
|
252
|
|
|
Total
|
|
$
|
4,341
|
|
Rent expense was approximately $1,413,000 and $1,558,000 for the
years ended December 31, 2017 and 2016, 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 $1,706,000 as of December 31,
2017 (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 57% and 54% of total
purchases for the years ended December 31, 2017 and 2016,
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. 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, 2017, have minimum future purchase
commitments of approximately $2,345,000, which are to be
delivered in 2018. 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,
|
|
|
|
2017
|
2016
|
|
Current
|
|
|
|
Federal
|
$135
|
$3
|
|
State
|
12
|
(18)
|
|
Foreign
|
132
|
150
|
|
Total
current
|
279
|
135
|
|
Deferred
|
|
|
|
Federal
|
$2,617
|
$(304)
|
|
State
|
(156)
|
(21)
|
|
Foreign
|
(13)
|
-
|
|
Total
deferred
|
2,448
|
(325)
|
|
Net
income tax provision (benefit)
|
$2,727
|
$(190)
|
Income before income taxes relating to non-U.S. operations were
$130,000 and $590,000 in the years ended December 31, 2017 and
2016, 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,
|
|
|
|
2017
|
2016
|
|
Income
tax benefit at federal statutory rate
|
$(3,483)
|
$(206)
|
|
|
|
|
|
Adjustments
for tax effects of:
|
|
|
|
Foreign
rate differential
|
(38)
|
(35)
|
|
State
taxes, net
|
(382)
|
(112)
|
|
Other
nondeductible items
|
246
|
(50)
|
|
Change
in foreign entity tax status
|
-
|
(77)
|
|
Rate
change
|
-
|
6
|
|
Tax
reform rate change
|
2,022
|
-
|
|
Deferred
tax asset adjustment
|
95
|
(201)
|
|
Change
in valuation allowance
|
4,032
|
183
|
|
Foreign
tax credit
|
-
|
275
|
|
Undistributed
foreign earnings
|
-
|
17
|
|
Other
|
235
|
10
|
|
Net income tax provision
(benefit)
|
$2,727
|
$(190)
|
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Deferred
tax assets:
|
|
|
|
Amortizable
assets
|
$1,089
|
$1,117
|
|
Inventory
|
510
|
726
|
|
Accruals
and reserves
|
155
|
222
|
|
Stock
options
|
170
|
285
|
|
Net
operating loss carry-forward
|
4,674
|
3,554
|
|
Credit
carry-forward
|
305
|
309
|
|
Total
deferred tax asset
|
6,903
|
6,213
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Prepaids
|
(228)
|
(383)
|
|
Other
|
(288)
|
(608)
|
|
Depreciable
assets
|
(168)
|
(464)
|
|
Total
deferred tax liability
|
(685)
|
(1,455)
|
|
Net
deferred tax asset
|
6,219
|
4,758
|
|
Less
valuation allowance
|
(5,933)
|
(1,901)
|
|
Net
deferred tax asset
|
$286
|
$2,857
|
The Company has determined through consideration of all positive
and negative evidence that the US deferred tax assets are not more
likely than not to be realized. The Company recorded a valuation
allowance in the US Federal tax jurisdiction for the year ended
December 31, 2017.The Tax Cuts and Jobs Act ("TCJA") enacted in
December 2017 repealed the corporate AMT for tax years beginning on
or after January 1, 2018 and provides for existing AMT tax credit
carryovers to be refunded beginning in 2018. The Company has
approximately $272,000 in refundable credits, and it expects that a
substantial portion will be refunded between 2018 and 2021. As
such, the Company does not have a valuation allowance relating to
the refundable AMT credit carryforward. A valuation allowance
remains on the state and foreign tax attributes that are likely to
expire before realization. The valuation allowance increased
approximately $3,956,000 for the year ended December 31, 2017 and
increased approximately $183,000 for the year ended December 31,
2016.
At December 31, 2017, the Company had approximately $11,914,000 in
federal net operating loss carryforwards, which begin to expire in
2029, and approximately $30,752,000 in net operating loss
carryforwards from various states. The Company had
approximately $1,862,000 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.
There was no uncertain tax position related to federal, state and
foreign reporting as of December 31, 2017.
U.S. Tax Reform
The TCJA reduces the U.S. federal corporate tax rate from 35% to
21% beginning in 2018, requires companies to pay a one-time
transition tax on previously unremitted earnings of non-U.S.
subsidiaries that were previously tax deferred, and creates new
taxes on certain foreign sourced earnings. The SEC staff issued
Staff Accounting Bulletin (SAB) 118, which provides guidance on
accounting for enactment effects of the TCJA. SAB 118 provides a
measurement period of up to one year from the TCJA’s
enactment date for companies to complete their accounting under ASC
740. In accordance with SAB 118, to the extent that a
Company’s accounting for certain income tax effects of the
TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial
statements. If a Company cannot determine a provisional estimate to
be included in its financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the
TCJA.
Note 11. Segment and Geographical
Information
The
Company is 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 top selling retail
categories: health/nutrition, home/family, food/beverage (including
coffee), spa/beauty, apparel/jewelry, as well as innovative
services. The Company operates 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 roasted and
green coffee bean products are sold directly to
businesses.
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,
|
|
|||||
|
|
|
2017
|
|
|
2016
|
|
||
|
Revenues
|
|
|
|
|
|
|
||
|
Direct
selling
|
|
$
|
142,450
|
|
|
$
|
145,418
|
|
|
Commercial
coffee
|
|
|
23,246
|
|
|
|
17,249
|
|
|
Total
revenues
|
|
$
|
165,696
|
|
|
$
|
162,667
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
|
$
|
95,379
|
|
|
$
|
97,219
|
|
|
Commercial
coffee
|
|
|
186
|
|
|
|
918
|
|
|
Total
gross margin
|
|
$
|
95,565
|
|
|
$
|
98,137
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
|
$
|
(2,526
|
)
|
|
$
|
4,564
|
|
|
Commercial
coffee
|
|
|
(3,356
|
)
|
|
|
(2,049
|
)
|
|
Total
operating (loss) income
|
|
$
|
(5,882
|
)
|
|
$
|
2,515
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
|
$
|
(3,922
|
)
|
|
$
|
1,894
|
|
|
Commercial
coffee
|
|
|
(8,755
|
)
|
|
|
(2,292
|
)
|
|
Total
net loss
|
|
$
|
(12,677
|
)
|
|
$
|
(398
|
)
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
|
$
|
854
|
|
|
$
|
1,922
|
|
|
Commercial
coffee
|
|
|
449
|
|
|
|
903
|
|
|
Total
capital expenditures
|
|
$
|
1,303
|
|
|
$
|
2,825
|
|
|
|
|
December 31,
|
|
|||||
|
|
|
2017
|
|
|
2016
|
|
||
|
Total assets
|
|
|
|
|
|
|
||
|
Direct
selling
|
|
$
|
44,082
|
|
|
$
|
40,127
|
|
|
Commercial
coffee
|
|
|
28,307
|
|
|
|
25,881
|
|
|
Total
assets
|
|
$
|
72,389
|
|
|
$
|
66,008
|
|
Total tangible assets, net located outside the United States were
approximately $5.3 million and $5.4 million as of December 31, 2017
and December 31, 2016, respectively.
The Company conducts its operations primarily in the United States.
For the years ended December 31, 2017 and 2016 approximately 12%
and 9%, respectively, of the Company’s sales were derived
from sales outside the United States.
The following table displays revenues attributable to the
geographic location of the customer (in thousands):
|
|
|
Years ended
|
|
|||||
|
|
|
December 31,
|
|
|||||
|
|
|
2017
|
|
2016
|
|
|||
|
Revenues
|
|
|
|
|
||||
|
United
States
|
|
$
|
146,206
|
|
|
$
|
147,548
|
|
|
International
|
|
|
19,490
|
|
|
|
15,119
|
|
|
Total
revenues
|
|
$
|
165,696
|
|
|
$
|
162,667
|
|
Note 12. Subsequent Events
Series B Convertible Preferred Stock Offering
On
February 14, 2018, the Company commenced its offering to sell up to
$10 million of the Company’s Series B Convertible Preferred
Stock on a best effort basis without
any minimum offering amount. The offering (the
“Offering”) terminated on March 30, 2018. The
Series B Convertible Preferred Stock pays cumulative dividends from the date of
original issue at a rate of 5.0% per annum payable quarterly in arrears on or about the last
day of March, June, September and December of each year, beginning
June 30, 2018. The Series B Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock and the Company’s common stock par value
$0.001 (the "Common Stock") with respect to dividend rights and
rights upon liquidation, dissolution or winding up. Each holder of
Series B Convertible Preferred Stock received a credit towards our
merchandise equal to ten percent (10%) of the amount of their
investment up to a maximum credit of $1,000. Holders of the Series
B Convertible Preferred Stock have limited voting rights. Each
share of Series B Convertible Preferred Stock is initially
convertible at any time, in whole or in part, at the option of the
holders, at an initial conversion price of $4.75 per share, into
two shares of common stock and automatically converts into two
shares of Common Stock on its two-year anniversary of issuance. The
offering price of the Series B Convertible Preferred Stock was
$9.50 per share.
On
March 2, 2018 the Company’s board of directors designated
1,052,631 shares as Series B Convertible Preferred Stock, par value
$.001 per share (“Series B Convertible Preferred
Stock”).
Offering Close
On March 30, 2018, the Company completed its best efforts Offering
of Series B Convertible Preferred Stock, pursuant to which the
Company sold 381,173 shares of Series B Convertible Preferred Stock
at an offering price of $9.50 per share and received gross proceeds
in aggregate of $3,621,143.
The net proceeds to the Company from Offering were $3,328,761 after
deducting commissions and Offering expenses of the selling agent
payable by the Company.
The shares of Series B Convertible Preferred Stock issued in the
Offering were sold pursuant to the Company’s Registration
Statement, which was declared effective on February 13, 2018. Upon
the receipt of the proceeds of the Company’s best effort
Offering of Series B Convertible Preferred Stock, the 2017
Notes in the principal amount of $7,254,349 automatically converted
into 1,577,033 shares of common stock.
Tripoint
Global Equities, LLC (“Tripoint”), acted as the selling
agent for the Offering pursuant to the terms of a Selling Agency
Agreement that was entered into on March 15, 2018, the form of
which was filed as an exhibit to the Company’s registration
statement on Form S-1, as amended (File No. 333-221847) (the
“Registration Statement”). Under the Selling Agency
Agreement, the Company paid TriPoint a fee of 4.0% of the gross
proceeds of the Offering and agreed to reimburse TriPoint for up to
$45,000 of its expenses.
Amendments to Articles of Incorporation or Bylaws
On
March 2, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series B Convertible Preferred
Stock with the Secretary of State of the State of Delaware (the
“Certificate of Designation”). On March 14, 2018, the
Company filed a Certificate of Correction to the Certificate of
Designation to correct two typographical errors in the Certificate
of Designation (the “Certificate of
Correction”).
Pursuant to the Certificate of
Designation, the Company has agreed to pay cumulative dividends on
the Series B Convertible Preferred Stock from the date of original
issue at a rate of 5.0% per annum payable quarterly in arrears on or about the last
day of March, June, September and December of each year, beginning
June 30, 2018. The Series B Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock and the Common Stock with respect to dividend
rights and rights upon liquidation, dissolution or winding up. Each
holder of Series B Convertible Preferred Stock receives a credit
towards the Company’s merchandise equal to ten percent (10%)
of the amount of their investment up to a maximum credit of $1,000.
Holders of the Series B Convertible Preferred Stock have limited
voting rights. Each share of Series B Convertible Preferred Stock
is initially convertible at any time, in whole or in part, at the
option of the holders, at an initial conversion price of $4.75 per
share, into two (2) shares of Common Stock and automatically
converts into two (2) shares of Common Stock on its two-year
anniversary of issuance.
New Acquisitions
Pursuant to an agreement dated March 1, 2018, the Company acquired
certain assets of ViaViente. ViaViente is the distributor of The
ViaViente Miracle, a highly-concentrated, energizing whole fruit
puree blend that is rich in Anti-Oxidants and naturally-occurring
vitamins and minerals. As a result of this business combination,
the Company’s distributors and customers will have access to
ViaViente’s unique line of products and ViaViente
distributors and clients will gain access to products offered by
the Company. The maximum consideration payable by the Company
is $3,000,000, subject to adjustments. The Company will make
monthly payments based on a percentage of ViaViente distributor
revenue and royalty revenue until the earlier of the date that is
five (5) years from the closing date or such time as the Company
has paid ViaViente aggregate cash payments of ViaViente distributor
revenue and royalty revenue equal to the maximum aggregate purchase
price. The final purchase price allocation has not been
determined as of the filing of this report.
Pursuant to an agreement dated February 12, 2018, the Company
acquired certain assets and assumed certain liabilities of Nature
Direct. Nature Direct, a manufacturer and distributor of
essential-oil based nontoxic cleaning and care products for
personal, home and professional use. As a result of this business
combination, the Company’s distributors and customers will
have access to the Nature Direct unique line of products and Nature
Direct distributors and clients will gain access to products
offered by the Company. The maximum consideration payable by
the Company is $2,600,000, subject to adjustments. The Company will
make monthly payments based on a percentage of Nature Direct
distributor revenue and royalty revenue until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid Nature Direct aggregate cash payments of
Nature Direct distributor revenue and royalty revenue equal to the
maximum aggregate purchase price. The final purchase price
allocation has not been determined as of the filing of this
report.
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 13a15(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, 2017
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, 2017.
During the preparation of the Form 10Q for the quarter ended
June 30, 2017, we discovered an error in the Consolidated Statement
of Cash Flows in the Company’s previously issued consolidated
financial statements for the year ended December 31, 2016 and for
the quarters ended March 31, 2016, June 30, 2016, September 30,
2016 and March 31, 2017. The Company has restated Consolidated
Statements of Cash Flows for all the prior affected periods. The
restatement corrected an error in the presentation of cash flow
activity under the factoring facility to properly reflect net
borrowings and net payments. To remediate the issue, the Company
added an additional review process for oversight and review of the
Consolidated Statements of Cash Flows.
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.
This Annual Report on Form 10K 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
10K.
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.
Item 9B. Other Information
Our
Board of Directors has established July 23, 2018 as the date of the
Company’s 2018 Annual Meeting of Stockholders (the
“2018 Annual Meeting”). Because this our first annual
meeting of stockholders, in accordance with Rule 14a-5(f) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), we are informing stockholders of such date. The
exact time and location of the 2018 Annual Meeting will be
specified in our proxy statement for the 2018 Annual Meeting.
Pursuant to Rule 14a-8 under the Exchange Act, some stockholder
proposals may be eligible for inclusion in our 2018 proxy
statement. Any stockholder proposal under Rule 14a-8 must be
submitted, along with proof of ownership of our stock in accordance
with Rule 14a-8(b)(2), to our principal executive offices in care
of our Secretary by letter to 2400 Boswell Road, Chula Vista,
California 91914. Failure to deliver a proposal in accordance
with this procedure may result in the proposal not being deemed
timely received. We must receive all submissions no later than the
close of business (5:00 p.m. Eastern Time) on May 5, 2018, which we
have determined to be a reasonable time before we expect to begin
to print and send our proxy materials. We encourage any stockholder
interested in submitting a proposal to contact our Secretary in
advance of this deadline to discuss the proposal, and stockholders
may find it helpful to consult knowledgeable counsel with regard to
the detailed requirements of applicable securities laws. Submitting
a stockholder proposal does not guarantee that we will include it
in our proxy statement. The Board of Directors reviews all
stockholder proposals and will take appropriate action on such
proposals.
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 seven members.
Information
Regarding the Board of Directors
Information with respect to our current directors is shown
below.
|
Name
|
|
Age
|
|
Director Since
|
|
Position
|
|
Stephan Wallach
|
|
51
|
|
2011*
|
|
Chairman and Chief Executive Officer
|
|
David Briskie
|
|
57
|
|
2011
|
|
President, Chief Financial Officer and Director
|
|
Michelle Wallach
|
|
47
|
|
2011*
|
|
Chief Operating Officer and Director
|
|
Richard Renton
|
|
62
|
|
2012
|
|
Director
|
|
William Thompson
|
|
57
|
|
2013
|
|
Director
|
|
Paul Sallwasser
|
|
64
|
|
2017
|
|
Director
|
|
Kevin Allodi
|
|
61
|
|
2017
|
|
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. We purchase 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.
Paul Sallwasser, Director
Mr. Paul Sallwasser was appointed to our Board of Directors on June
5, 2017. Mr. Sallwasser is a certified CPA, joined the audit staff
of Ernst & Young LLP in 1976 and remained with Ernst &
Young LLP for 38 years. Mr. Sallwasser served a broad range of
clients primarily in the healthcare and biotechnology industries of
which a significant number were SEC registrants. He became a
partner of Ernst & Young in 1988 and from 2011 until he retired
from Ernst & Young LLP Mr. Sallwasser served in the national
office as a member of the Quality and Regulatory Matters Group
working with regulators and the Public Company Accounting Oversight
Board (PCAOB). Mr. Sallwasser’s qualification as an
“audit committee financial expert,” as defined by the
rules of the SEC, and his vast audit experience serves as the basis
for his position on the Board and its Audit Committee.
Kevin Allodi, Director
Mr. Kevin Allodi was appointed to our Board of Directors on June 5,
2017. Mr. Allodi is currently the CEO and Co-Founder of Philo
Broadcasting, a media holding company that includes award-winning
digital content studio Philo Media and a broadcast television
production company Backyard Productions. Philo is headquartered in
Chicago with production offices in Los Angeles. Prior to joining
Portal (described above) Mr. Allodi spent ten years with
Communications Industry Division of Computer Sciences Corporation
(NYSE:CSC) where he was VP Global Billing & Customer Care
practice. Currently, Mr. Allodi also serves as a Managing Partner
of KBA Holdings, LLC, a private equity investment firm active in
the digital media, hi-tech, alternative energy and bio-tech
industries. Mr. Allodi serves as a partner, limited partner,
director and/or advisory board member to several portfolio
companies including G2T3V LLC, uBid, LynxIT Solutions, Ridge
Partners LLC, Social Ventures Partners Chicago and is on the Board
of Directors of FNBC Bank & Trust. Mr. Allodi’s business
experience and investment experience serves as the basis for his
position on the Board and its Audit Committee.
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
|
|
Chairman
|
|
|
-
|
|
|
-
|
|
|
Paul
Sallwasser
|
|
Member
|
|
|
-
|
|
|
-
|
|
|
Kevin
Allodi
|
|
Member
|
|
|
-
|
|
|
-
|
|
Director Independence
Our Board of Directors has determined that William Thompson, Paul
Sallwasser and Kevin Allodi are each independent directors in
accordance with the definition of independence applied by the
NASDAQ Stock Market. Since we qualify as a “controlled
company” we qualify for certain exemptions to the NASDAQ
Capital Market listing requirements.
Board Committees
Audit Committee. The Audit
Committee of the Board of Directors currently consists of William
Thompson (Chair), Paul Sallwasser and Kevin Allodi. 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,
Paul Sallwasser and Kevin Allodi are each an “independent
director” under the listing standards of The NASDAQ Stock
Market. The Board of Directors has also determined that each of Mr.
Thompson and Mr. Sallwasser 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.
Information contained on our website are not incorporated by
reference into and do not form any part of this registration
statement. We have included the website address as a factual
reference and do not intend it to be an active link to the
website.
Compensation Committee. The
Compensation Committee of the Board of Directors currently consists
of Stephan Wallach (Chair) and David Briskie. As a controlled
company we are exempt from the NASDAQ independence requirements for
the Compensation Committee. 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.
Information contained on our website
are not incorporated by reference into and do not form any part of
this registration statement. We have included the website
address as a factual reference and do not intend it to be an active
link to the website.
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. As a controlled company we are exempt from
the NASDAQ independence requirements for the Nominating
Committee.
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 and Chief Financial
Officer. 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 and Mr. Briskie as our President and Chief Financial
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 us and our 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.
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. 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.
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, 2017 other than late filings of a Form 3 for Mr.
Allodi, a Form 4 to report stock
option issuances for Mr. Briskie, Mr. Renton and Mr. Thompson and a
Form 4 to report the issuance of securities in connection with our
2017 private placement to Mr. Sallwasser upon exchange of
securities issued to Mr. Sallwasser in our 2015 private
placement.
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, 2017 and 2016 by our
“named executive officers,” consisting of each
individual serving as (i) principal Chief Executive Officer, (ii)
our principal Chief Financial Officer, and (iii) Chief Operating
Officer.
|
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards (2)
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
Stephan Wallach (1)
|
2017
|
357,212
|
-
|
-
|
357,212
|
|
Chief Executive Officer
|
2016
|
282,500
|
179,730
|
-
|
462,230
|
|
|
|
|
|
|
|
|
David Briskie (1)(2)
|
2017
|
357,212
|
-
|
670,875
|
1,028,087
|
|
President and Chief Financial Officer
|
2016
|
282,500
|
179,730
|
748,500
|
1,210,730
|
|
|
|
|
|
|
|
|
Michelle Wallach (1)
|
2017
|
192,660
|
-
|
-
|
192,660
|
|
Chief Operating Officer
|
2016
|
192,660
|
179,730
|
-
|
372,390
|
|
(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
an aggregate of $362,292 and $357,002 in 2017 and 2016,
respectively related to their distributor positions, which are not
included above. Mr. Briskie beneficially received $19,196 and
$23,889 in 2017 and 2016, respectively, related to his
spouse’s distributor position, which is not included
above.
|
|
(2)
|
We
use a Black-Scholes option-pricing model (Black-Scholes model) to
estimate the fair value of the stock option grant. Expected
volatility is calculated based on the historical volatility of the
Company’s stock. The risk-free interest rate is based on the
U.S. Treasury yield for a term equal to the expected life of the
options at the time of grant. The amounts do not represent the
actual amounts paid to or released by any of the Named Executive
Officers during the respective periods.
|
Outstanding Equity Awards at Fiscal Year-End
The
table below reflects all outstanding equity awards made to each of
the named executive officers that are outstanding as of December
31, 2017. We currently grant stock-based awards pursuant to our
2012 Stock Option Plan.
|
|
Option Awards
|
Stock Awards
|
||||||
|
|
No. Of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
No. Of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option
Exercise
Price
($)
|
|
No.
Of Shares
or Units
of Stock
That Have Not
Vested (#)
|
Market Value
Of Shares or
Units of
Stock That
Have Not
Vested ($)
|
|
|
Stephan
Wallach
|
125,000
|
(1)
|
-
|
$4.40
|
5/31/2022
|
|
|
|
|
|
||||||||
|
David
Briskie
|
250,000
|
(2)
|
-
|
$4.40
|
5/31/2022
|
|
|
|
|
|
40,000
|
(3)
|
10,000
|
$3.60
|
10/31/2023
|
|
|
|
|
|
60,000
|
(4)
|
40,000
|
$3.80
|
10/30/2024
|
|
|
|
|
|
50,000
|
(5)
|
200,000
|
$5.40
|
12/27/2026
|
250,000
|
(6)
|
$1,032,500
|
|
|
||||||||
|
Michelle
Wallach
|
125,000
|
(7)
|
-
|
$4.40
|
5/31/2022
|
|
|
|
|
(1)
|
125,000
stock options granted on May 31, 2012, vested and
exercisable.
|
|
(2)
|
250,000
stock options granted on May 31, 2012, vested and
exercisable.
|
|
(3)
|
50,000
stock options granted on October 31, 2013, 40,000 stock options
vested and are exercisable, with the remaining option shares
vesting on October 31, 2018.
|
|
(4)
|
100,000
stock options granted on October 30, 2014, 60,000 stock options
vested and are exercisable, with the remaining option shares
vesting in equal annual amounts over the next two years as of
December 31, 2017.
|
|
(5)
|
250,000
stock options granted on December 27, 2016, 50,000 stock options
vested and are exercisable, with the remaining option shares
vesting in equal annual amounts over the next four years as of
December 31, 2017.
|
|
(6)
|
250,000
restricted stock units were granted on August 9, 2017, each unit
representing contingent right to receive one share of Common Stock,
vesting as follows: (i) Year 3 - 25,000 shares; (ii) Year 4 –
37,500 shares; (iii) Year 5 - 125,000 shares; and (iv) Year 6
– 62,500 shares; if Mr. Briskie continues to serve as an
executive officer or otherwise is not terminated for cause prior to
such dates. The market value of the restricted stock units was
multiplied by the closing market price of our common stock at the
end of the 2017 fiscal year, which was $4.13 on December 29, 2017
(the last business day of the 2017 fiscal year.)
|
|
(7)
|
125,000
stock options granted on May 31, 2012, vested and
exercisable.
|
Employment Agreements
Our executive officers work as at-will employees. We do not have
any written employment agreements with any of our executive
officers.
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 $1 million paid to the Chief Executive
Officer or any of the four most highly compensated officers.
Performance-based compensation arrangements may qualify for an
exemption from the deduction limit if they satisfy various
requirements under Section 162(m). Although we consider the impact
of this rule when developing and implementing our executive
compensation programs, we believe it is important to preserve
flexibility in designing compensation programs. Accordingly, we
have not adopted a policy that all compensation must qualify as
deductible under Section 162(m) of the Code. While our stock
options are intended to qualify as “performance-based
compensation” (as defined by the Code), amounts paid under
our other compensation programs may not qualify as
such.
2017 Director Compensation
The following table sets forth information for the fiscal year
ended December 31, 2017 regarding the compensation of our directors
who at December 31, 2017 were not also named executive
officers.
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Option
Awards ($)(1)
|
Other
Compensation ($)
|
Total ($)
|
|
Richard
Renton
|
-
|
20,437
|
-
|
20,437
|
|
William
Thompson
|
-
|
20,437
|
-
|
20,437
|
|
Paul
Sallwasser
|
-
|
14,708
|
-
|
14,708
|
|
Kevin
Allodi
|
-
|
14,708
|
-
|
14,708
|
|
(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, 2017 in accordance with FASB ASC Topic 718. The
fair value of the options was determined using the Black-Scholes
model.
|
As of December 31, 2017, 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
|
15,000
|
|
William
Thompson
|
17,500
|
|
Paul
Sallwasser
|
5,000
|
|
Kevin
Allodi
|
5,000
|
We grant 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 2017, we
granted each non-employee director a ten-year option to purchase
5,000 shares of our Common Stock at an exercise price of $4.53, all
of which vested immediately. For the year ending December 31, 2018,
we intend to grant each non-employee director an option to acquire
shares of common stock having a value of $50,000 on the grant
date.
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, 2017, 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
|
2,084,923
|
4.70
|
1,885,789
|
|
Total
|
2,084,923
|
$4.70
|
1,885,789
|
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 increased 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 2,000,000 to
4,000,000 shares authorized (as adjusted for the 1-for-20 reverse
stock split, which was effective on June 7, 2017). The Plan as
amended allows 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 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The following table provides information regarding the beneficial
ownership of the Common Stock as of March 28, 2018 (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. 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. We know of no other person or group of
affiliated persons who beneficially own more than five percent of
our Common Stock. 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 19,728,772 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 the 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
|
14,127,811(2)
|
71.2%
|
|
David Briskie, President, Chief Financial Officer and
Director
|
920,457 (3)
|
4.6%
|
|
Michelle Wallach, Chief Operating Officer and
Director
|
14,125,000(2)
|
71.2%
|
|
Richard Renton, Director
|
25,603(4)
|
*
|
|
William Thompson, Director
|
12,000(5)
|
*
|
|
Paul Sallwasser, Director
|
104,042(6)
|
*
|
|
Kevin Allodi, Director
|
31,490(7)
|
*
|
|
All
Executive Officers & Directors, as a group
(7 persons)
|
15,351,295
|
75.0%
|
|
|
|
|
|
Stockholders owning 5% or more
|
|
|
|
Carl
Grover
|
2,354,492(8)
|
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 Youngevity
International, Inc., 2400 Boswell Road, Chula Vista, California
91914.
|
|
(2)
|
Mr. Stephan Wallach, our Chief Executive Officer, owns 14,000,000
shares of Common Stock through joint ownership with his wife,
Michelle Wallach, with whom he shares voting and dispositive
control. Mr. Wallach also owns 2,811 shares and options to purchase
125,000 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 125,000 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
170,429 shares of Common Stock, and beneficially owns 100,028
shares of Common Stock owned by Brisk Investments, LP, 250,000
shares of Common Stock owned by Brisk Management, LLC. Mr. Briskie
also owns options to purchase 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. Does
not include 250,000 restricted stock units issued to Mr. Briskie in
August 2017, of which each unit represents a contingent right to
receive one share of Common Stock, vesting as follows: (i)
Year 3 - 25,000 shares; (ii) Year 4 – 37,500 shares; (iii)
Year 5 - 125,000 shares; and (iv) Year 6 – 62,500 shares;
provided that Mr. Briskie continues to serve as an executive
officer or otherwise is not terminated for cause prior to such
dates.
|
|
(4)
|
Mr. Renton is a director of the Company, owns 4,242 shares of
Common Stock and 9,374 shares of Common Stock through joint
ownership with his wife, Roxanna Renton, with whom he shares voting
and dispositive control. Mr. Renton also owns 9,500 options to
purchase Common Stock and 2,487 options to purchase Common Stock
held in joint ownership with his wife, Roxanna Renton which are
exercisable within 60 days of the Evaluation Date.
|
|
(5)
|
Mr. Thompson is a director of the Company, owns 12,000 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. Sallwasser is a director of the Company and owns a 2014 Note in
the principal amount of $75,000 convertible into 10,714 shares of
Common Stock and a 2014 Warrant exercisable for 14,673 shares of
Common Stock. Mr. Sallwasser also owns a 2017 Note in the principal
amount of $37,615 convertible into 8,177 shares of Common Stock and
a 2017 Warrant exercisable for 5,719 shares of Common Stock. Mr.
Sallwasser also owns a 2017 Note in the principal amount of $5,000
convertible into 1,087 shares of Common Stock and a 2017 Warrant
exercisable for 543 shares of Common Stock. He also owns 58,129 shares of Common Stock and an
option to purchase 5,000 shares of Common
Stock.
|
|
(7)
|
Mr. Allodi is a director of the Company and owns 13,888 shares of
Common Stock directly and 12,602 shares of Common Stock through
joint ownership with his wife Nancy Larkin Allodi. Mr. Allodi also
owns an option to purchase 5,000 shares of Common
Stock.
|
|
(8)
|
Mr. Grover is the sole beneficial owner of 2,354,492 shares of
Common Stock. Mr. Grover owns a 2014 Note in the principal amount
of $4,000,000 convertible into 571,428 shares of Common Stock and a
2014 Warrant exercisable for 782,602 shares of Common Stock. Mr.
Grover also owns a 2015 Note in the principal amount of $3,000,000
convertible into 428,571 shares of Common Stock and a 2015 Warrant
exercisable for 200,000 shares of Common Stock. Mr. Grover also
owns two 2017 Notes in the aggregate principal amount of $5,162,273
convertible into 1,122,233 shares of Common and two 2017 Warrants
exercisable for 735,030 shares of Common Stock. He also owns
257,562 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, and
Director Independence.
The
following is a summary of transactions since January 1, 2016 to
which we have been a party in which the amount involved exceeded
$120,000 and in which any of our executive officers, directors or
beneficial holders of more than 5% of our capital stock have or
will have a direct or indirect interest, other than compensation
arrangements which are described in the sections of this Annual
Report on Form 10-K entitled Part III, Item 10 “Directors,
Executive Officers and Corporate Governance” and Item 11
“Executive Compensation.”
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 us 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 $126,000
from Northwest Nutraceuticals Inc., for the years ended December
31, 2017 and 2016, 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,
2017 and 2016 approximately $398,000 and $457,000
respectively.
Carl Grover
As of December 31, 2017, Mr. Carl Grover, is the beneficial owner
of in excess of five percent (5%) of our outstanding common shares,
is the sole beneficial owner of 2,354,492 shares of Common Stock.
Mr. Grover owns a 2014 Note in the principal amount of $4,000,000
convertible into 571,428 shares of Common Stock and a 2014 Warrant
exercisable for 782,602 shares of Common Stock. Mr. Grover also
owns a 2015 Note in the principal amount of $3,000,000 convertible
into 428,571 shares of Common Stock and a 2015 Warrant exercisable
for 200,000 shares of Common Stock. Mr. Grover acquired two 2017
Notes in the aggregate principal amount of $5,162,273 convertible
into 1,122,233 shares of Common and two 2017 Warrants exercisable
for 735,030 shares of Common Stock in the 2017 Private Placement.
He also owns 257,562 shares of Common Stock. On March 29, 2018, the Company completed its
Series B Convertible Stock Offering, whereby in accordance with the
terms of the 2017 Notes that the 2017 Notes would automatically
convert upon the Company raising a minimum of $3,000,000 in
subsequent offerings. See Note 12 below. (See Note 12, to
the consolidated financial statements.)
Paul Sallwasser
As of December 31, 2017, Mr. Paul Sallwasser is a member of the
board directors and owns a 2014 Note in the principal amount of
$75,000 convertible into 10,714 shares of Common Stock and a 2014
Warrant exercisable for 14,673 shares of Common Stock. Mr.
Sallwasser acquired in the 2017 Private Placement a 2017 Note in
the principal amount of $37,615 convertible into 8,177 shares of
Common Stock and a 2017 Warrant exercisable for 5,719 shares of
Common Stock. Mr. Sallwasser also acquired in the 2017 Private
Placement in exchange for the 2015 Note he owned, a 2017 Note in
the principal amount of $5,000 convertible into 1,087 shares of
Common Stock and a 2017 Warrant exercisable for 543 shares of
Common Stock. He also owns 58,129 shares of Common Stock and an
option to purchase 5,000 shares of Common Stock that are
immediately exercisable. On March 29, 2018, the Company completed its
Series B Convertible Stock Offering, whereby in accordance with the
terms of the 2017 Notes that the 2017 Notes would automatically
convert upon the Company raising a minimum of $3,000,000 in
subsequent offerings. (See Note 12, to the consolidated
financial statements.)
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company
Our coffee segment, CLR, is associated with Hernandez, Hernandez,
Export Y Company (“H&H”), a Nicaragua company,
through sourcing arrangements to procure Nicaraguan green coffee
beans and in March 2014 as part of the Siles acquisition, CLR
engaged the owners of H&H as employees to manage Siles. We made
purchases of approximately $10,394,000 and $8,810,000 from this
supplier for the years ended December 31, 2017 and 2016,
respectively.
In addition, CLR sold approximately $6,349,000 and $2,637,000 for
the years ended December 31, 2017 and 2016, respectively, of green
coffee beans to H&H Coffee Group Export, a Florida based
company which is affiliated with H&H.
In March 2017, the Company entered a settlement agreement and
release with H&H Coffee Group Export pursuant to which it was
agreed that $150,000 owed to H&H Coffee Group Export for
services that had been rendered would be settled by the issuance of
Common Stock. In May 2017, the Company issued to H&H Coffee
Group Export 27,500 shares of Common Stock in accordance with this
agreement.
In May 2017, we entered a settlement agreement with Alain Piedra
Hernandez, one of the owners of H&H and the operating manager
of Siles, who was issued a non-qualified stock option for the
purchase of 75,000 shares of the Company’s Common Stock at a
price of $2.00 with an expiration date of three years, in lieu of
an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September 30, 2017 the Company replaced the non-qualified stock
option and issued a warrant agreement with the same terms. There
was no financial impact related to the cancellation of the option
and the issuance of the warrant. As of December 31, 2017, the
warrant remains outstanding.
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 and Director
Compensation” of this registration statement.
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 Accountant 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,
2017 and 2016. 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,
2017
|
|
|
December 31,
2016
|
|
||
|
Audit Fees and Expenses (1)
|
|
$
|
364,000
|
|
|
$
|
264,000
|
|
|
Audit Related Fees (2)
|
|
|
53,000
|
|
|
|
17,000
|
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
417,000
|
|
|
$
|
281,000
|
|
|
(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)
The following
documents have been filed as part of this Annual Report on Form
10-K:
1.
Consolidated
Financial Statements of Youngevity International, Inc.: The
information required by this item is included in Item 8 of Part II
of this Annual Report.
2.
Financial
Statement Schedules: Financial statement schedules required under
the related instructions are not applicable for the years ended
December 31, 2017 and 2016 and have therefore been
omitted.
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
|
|||||||
|
|
Form
of Selling Agent Agreement (Incorporated by reference to the
Company’s Amendment No. 2 to Form S-1, File No. 333-221847,
filed with the Securities and Exchange Commission on January 23,
2018)
|
||||||||
|
|
Form
of Selling Agent Agreement (Amendment) (Incorporated by reference
to the Company’s Amendment No. 2 to Form S-1, File No.
333-221847, filed with the Securities and Exchange Commission on
January 23, 2018)
|
||||||||
|
|
Form
of Selling Agency Agreement between Youngevity International, Inc.
and Tripoint Global Equities, LLC (Incorporated by reference to the
Company’s Amendment No. 2 to Form S-1, File No. 333-221847,
filed with the Securities and Exchange Commission on February 7,
2018)
|
||||||||
|
|
Certificate of
Incorporation Dated July 15, 2011 (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)
|
||||||||
|
|
Bylaws
(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)
|
||||||||
|
|
Certificate of
Amendment to the Certificate of Incorporation dated June 5, 2017
(Incorporated by reference to the Company’s Form 8-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
June 7, 2017)
|
||||||||
|
|
Certificate of
Designations for Series B Convertible Preferred Stock (Incorporated
by reference to the Company’s Form 8-K, File No. 001-38116,
filed with the Securities and Exchange Commission on March 8,
2018)
|
||||||||
|
|
Certificate of
Correction to Certificate of Designation of Powers, Preferences and
Rights of Series B Convertible Preferred Stock (Incorporated by
reference to the Company’s Form 8-K, File No. 001-38116,
filed with the Securities and Exchange Commission on March 16,
2018)
|
||||||||
|
|
Specimen Common
Stock certificate (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)
|
||||||||
|
|
Warrant for
Common Stock issued to David Briskie (Incorporated by reference to
the Company’s Form 1012G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
||||||||
|
|
Stock Option
issued to Stephan Wallach (Incorporated by reference to the
Company’s Form 1012G, File No. 000-54900, Filed with the
Securities and Exchange Commission on February 12,
2013)
|
||||||||
|
|
Stock Option
issued to Michelle Wallach (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)
|
||||||||
|
|
Stock Option
issued to David Briskie (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)
|
||||||||
|
|
Stock Option
issued to William Andreoli (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)
|
||||||||
|
|
Stock Option
issued to Richard Renton (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)
|
||||||||
|
|
Stock Option
issued to John Rochon (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)
|
||||||||
|
|
Form
of Purchase Note Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
||||||||
|
|
Form
of Secured Convertible Notes (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
||||||||
|
|
Form
of Series A Warrants (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
||||||||
|
|
Form
of Registration Rights Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
||||||||
|
|
Form
of Note Purchase Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on January 7, 2015)
|
||||||||
|
|
Form
of Secured Note (Incorporated by reference to the Company’s
8-K, File No. 000-54900, filed with the Securities and Exchange
Commission on January 7, 2015)
|
||||||||
|
|
Form
of Purchase Note Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on October 16, 2015)
|
||||||||
|
|
Form
of Secured Note (Incorporated by reference to the Company’s
8-K, File No. 000-54900, filed with the Securities and Exchange
Commission on October 16, 2015)
|
||||||||
|
|
Form
of Warrant (Incorporated by reference to the Company’s 8-K,
File No. 000-54900, filed with the Securities and Exchange
Commission on October 16, 2015)
|
||||||||
|
|
Form
of Notice of Award of Restricted Stock Units (Incorporated by
reference to the Company’s Form S-8 Registration Statement,
File No. 333-219027 filed with the Securities and Exchange
Commission on June 29, 2017)
|
||||||||
|
|
Form
of Restricted Stock Unit Award Agreement (Incorporated by reference
to the Company’s Form S-8 Registration Statement, File No.
333-219027 filed with the Securities and Exchange Commission on
June 29, 2017)
|
||||||||
|
|
Form
of Note Purchase Agreement (Incorporated by reference to the
Company’s Current Report on Form 8-K, File No. 001-38116,
filed with the Securities and Exchange Commission on August 3,
2017)
|
||||||||
|
|
Form
of Convertible Note (Incorporated by reference to the
Company’s Current Report on Form 8-K, File No. 001-38116,
filed with the Securities and Exchange Commission on August 3,
2017)
|
||||||||
|
|
Form
of Series D Warrant (Incorporated by reference to the
Company’s Current Report on Form 8-K, File No. 001-38116,
filed with the Securities and Exchange Commission on August 3,
2017)
|
||||||||
|
|
Form
of Selling Agent’s Warrant (Incorporated by reference to the
Company’s Amendment No. 2 to Form S-1, File No. 333-221847,
filed with the Securities and Exchange Commission on February 7,
2018)
|
||||||||
|
|
Form
of First Amendment to Series D Warrant Agreement (Incorporated by
reference to the Company’s Current Report on Form 8-K, File
No. 001-38116, filed with the Securities and Exchange Commission on
January 23, 2018)
|
||||||||
|
|
Purchase
Agreement with M2C Global, Inc. dated March 9, 2007 (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)
|
||||||||
|
|
First Amendment
to Purchase Agreement with M2C Global, Inc. dated September 7, 2008
(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)
|
||||||||
|
|
Asset Purchase
Agreement with MLM Holdings, Inc. dated June 10, 2010 (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)
|
||||||||
|
|
Agreement of
Purchase and Sale with Price Plus, Inc. dated September 21, 2010
(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)
|
||||||||
|
|
Amended and
Restated Agreement and Plan of Reorganization Javalution Coffee
Company, YGY Merge, Inc. dated July 11, 2011 (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)
|
||||||||
|
|
Asset Purchase
Agreement with R-Garden Inc. dated July 1, 2011 (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)
|
||||||||
|
|
Re-Purchase
Agreement with R-Garden dated September 12, 2012 (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)
|
||||||||
|
|
Agreement and
Plan of Reorganization with Javalution dated July 18, 2011
(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)
|
||||||||
|
|
Asset Purchase
Agreement with Adaptogenix, LLC dated August 22, 2011 (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)
|
||||||||
|
|
Amended Asset
Purchase Agreement with Adaptogenix, LLC dated January 27, 2012
(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)
|
||||||||
|
|
Asset Purchase
Agreement with Prosperity Group, Inc. dated October 10, 2011
(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)
|
||||||||
|
|
Amended and
Restated Equity Purchase Agreement with Financial Destination,
Inc., FDI Management Co, Inc., FDI Realty, LLC, and MoneyTRAX, LLC
dated October 25, 2011 (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)
|
||||||||
|
|
Exclusive
License/Marketing Agreement with GLIE, LLC dba True2Life dated
March 20, 2012 (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)
|
||||||||
|
|
Bill
of Sale with Livinity, Inc. dated July 10, 2012 (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)
|
||||||||
|
|
Consulting
Agreement with Livinity, Inc. dated July 10, 2012 (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)
|
||||||||
|
|
Employment
Agreement with William Andreoli dated October 25, 2011
(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)
|
||||||||
|
|
Promissory Note
with 2400 Boswell LLC dated July 15, 2012 (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)
|
||||||||
|
|
Promissory Note
with William Andreoli dated July 1, 2012 (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)
|
||||||||
|
|
2012
Stock Option Plan (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)
|
||||||||
|
|
Form
of Stock Option (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)
|
||||||||
|
|
Lease with 2400
Boswell LLC dated May 1, 2001 (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)
|
||||||||
|
|
Lease with FDI
Realty LLC dated July 29, 2008 (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)
|
||||||||
|
|
First Amendment
to Lease with FDI Realty LLC dated October 25, 2011(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)
|
||||||||
|
|
Lease with Perc
Enterprises dated February 6, 2008 (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)
|
||||||||
|
|
Lease with Perc
Enterprises dated September 25, 2012 (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)
|
||||||||
|
|
Factoring
Agreement with Crestmark Bank dated February 12, 2010 (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)
|
||||||||
|
|
First Amendment
to Factoring Agreement with Crestmark Bank dated April 6,
2011(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)
|
||||||||
|
|
Second Amendment
to Factoring Agreement with Crestmark Bank dated February 1,
2013(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)
|
||||||||
|
|
Lease with Perc
Enterprises dated March 19, 2013 (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)
|
||||||||
|
|
Purchase
Agreement with Ma Lan Wallach dated March 15, 2013 (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)
|
||||||||
|
|
Promissory Note
with Plaza Bank dated March 14, 2013 (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)
|
||||||||
|
|
Form
of Security Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
||||||||
|
|
Guaranty
Agreement made by Stephan Wallach (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
||||||||
|
|
Form
of Security Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on January 7, 2015)
|
||||||||
|
|
Guaranty
Agreement made by Stephan Wallach (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on January 7, 2015)
|
||||||||
|
|
Credit Agreement
with Wells Fargo Bank, National Association dated October 10, 2014
(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)
|
||||||||
|
|
Amended and
Restated 2012 Stock Incentive Plan (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)
|
||||||||
|
|
Form
of Stock Option (Incorporated by reference to the Company’s
Form 10-K, File No. 000-54900, filed with the Securities and
Exchange Commission on March 30, 2017)
|
||||||||
|
|
Third Amendment
with Crestmark Bank dated May 1, 2016 (Incorporated by reference to
the Company’s Form 10-K, File No. 000-54900, filed with the
Securities and Exchange Commission on March 30, 2017)
|
||||||||
|
|
Form
of Subscription Agreement (BANQ and other subscribers)
(Incorporated by reference to the Company’s Amendment No. 2
to Form S-1, File No. 333-221847, filed with the Securities and
Exchange Commission on February 7, 2018)
|
||||||||
|
|
Form
of Registration Rights Agreement (incorporated by reference to the
Company's Current Report on Form 8-K, File No. 001-38116, filed
with the Securities and Exchange Commission on August 3,
2017)
|
||||||||
|
|
Form
of Subscription Agreement (Folio subscribers) (Incorporated by
reference to the Company’s Amendment No. 2 to Form S-1, File
No. 333-221847, filed with the Securities and Exchange Commission
on February 7, 2018)
|
||||||||
|
|
Loan and
Security Agreement with Crestmark Bank and related schedules dated
November 16, 2017 *
|
||||||||
|
|
Amendment No. 1
to the Loan and Security Agreement with Crestmark Bank, dated
December 29, 2017 *
|
||||||||
|
|
Subsidiaries of
Youngevity International, Inc. *
|
||||||||
|
|
|
|
||||||
|
|
Consent of
Independent Registered Public Accounting Firm *
|
|||||||
|
|
Certification of
Stephan Wallach, Chief Executive Officer, pursuant to Rule
13a14(a)/15d14(a) *
|
|||||||
|
|
Certification of
David Briskie, Chief Financial Officer pursuant to Rule
13a14(a)/15d14(a)*
|
|||||||
|
|
Certification of
Stephan Wallach, Chief Executive Officer pursuant to Section 1350
of the SarbanesOxley Act of 2002 *
|
|||||||
|
|
Certification
David Briskie, Chief Financial
Officer pursuant to Section 1350 of the SarbanesOxley Act of
2002 *
|
|||||||
|
101.INS
|
|
XBRL
Instance Document
|
||||||
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
||||||
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
||||||
|
101.LAB
|
|
XBRL Taxonomy
Extension Definition Linkbase Document
|
||||||
|
101.PRE
|
|
XBRL Taxonomy
Extension Label Linkbase Document
|
||||||
|
|
|
XBRL Taxonomy
Extension Presentation Linkbase Document
|
|
*
|
Filed herewith
|
Item 16. Form 10K
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, 2018
|
By:
|
/s/ Stephan Wallach
|
|
|
|
Stephan Wallach,
|
|
|
|
Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Taylor Crouch and
Jennifer Bush, and each of them individually, as the
undersigned’s true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the
undersigned and in the undersigned’s name, place, and stead,
in any and all capacities, to sign any and all amendments to this
Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and
confirming that all said attorneys-in-fact and agents, or any of
them or their respective substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
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 Chairman (Principal Executive
Officer)
|
March 30, 2018
|
|
Stephan Wallach
|
|
|
|
|
|
|
|
/s/ David Briskie
|
President,
Chief Financial Officer and Director (Principal Financial and
Accounting Officer)
|
March 30, 2018
|
|
David Briskie
|
|
|
|
/s/ Michelle Wallach
|
Chief
Operating Officer and Director
|
March 30, 2018
|
|
Michelle Wallach
|
|
|
|
/s/ William Thompson
|
Director
|
March 30, 2018
|
|
William Thompson
|
|
|
|
/s/ Richard Renton
|
Director
|
March 30, 2018
|
|
Richard Renton
|
|
|
|
/s/ Kevin Allodi
|
Director
|
March 30, 2018
|
|
Kevin Allodi
|
|
|
|
|
|
|
|
/s/ Paul Sallwasser
|
Director
|
March 30, 2018
|
|
Paul Sallwasser
|
|
|
-99-