Youngevity International, Inc. - Annual Report: 2018 (Form 10-K)

 

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 World Federation of Direct Selling Association reported in its “2017 Global Sales by Product Category” that the fastest growing product category was wellness followed by cosmetics & personal care, representing 66% of retail sales. Top product categories that 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 Direct Selling Association (“DSA”), 18.6 million people were involved in direct selling in 2017 compared to 20.5 million people in 2016, a decrease of approximately 9.27%. Estimated direct retail sales for 2017 was reported by the DSA’s 2018 Growth & Outlook Report to be $34.9 billion compared to $35.54 billion in 2016. 

 

 

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 primarily 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 December 2018 “Coffee: World Markets and Trade” report for 2018/2019 that world coffee production is forecasted to be 174.5 million bags, up 15.6 million from previous year. Global consumption is forecasted at a record of 163.6 million bags. The report further indicated that for 2019, Central America and Mexico are forecasted to contribute 20.6 million bags of coffee beans and more than 45% of the exports are destined to the European Union, followed by about one-third to the United States. The United States imports the second-largest amount of coffee beans worldwide and is forecasted at 26.5 million bags in 2019. 

 

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:

  

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

 

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

 

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

 

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

 

The regulatory landscape regarding the sale of hemp-derived products is rapidly changing. The 2018 Farm Bill modified the definition of “marijuana” in the Controlled Substances Act so that the definition of “marijuana” no longer includes hemp. The 2018 Farm Bill defines hemp as the “plant Cannabis sativa L” and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3% on a dry weight basis. All of our hemp-derived products contain less than 0.3% delta-9 tetrahydrocannabinol concentration content. As such, we believe that the manufacture, packaging, labeling, advertising, distribution and sale of our hemp-derived products are permissible under the laws of the United States and such activities do not violate the Controlled Substances Act. Further, we believe that the sale of our hemp-derived products is in compliance with all applicable state regulations since our hemp-derived products are only sold in states in the United States that have not prohibited the sale of hemp products. We believe that we are in compliance with the U.S. Food and Drug Administration marketing and labeling requirements imposed on dietary supplements. New legislation or regulations may be introduced at either the federal and/or state level which, if passed, could impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products, such as our Hemp FX™ CBD oil products. New legislation or regulations may also require the reformulation, elimination or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials, and it is possible that the costs of complying with these new regulatory requirements could be material. The rapidly changing regulatory landscape regarding hemp-derived products presents a substantial risk to the success and ongoing viability of the hemp industry in general and our ability to offer and market hemp-derived products. Any violation of United States federal laws and regulations and/or state laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings. Any such actions could have a material adverse effect on our business.

 

 

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 April 10, 2019, we had 469 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 in the following three segments (which includes our new segment added in February 2019), through the subsidiaries listed below:

 

 

 

 

 

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

 

As of December 31, 2018, we are no longer an emerging growth company under the JOBS ACT. However, we were an emerging growth company during 2018 and 2017 until December 31, 2018. Under the JOBS ACT, which was enacted in April 2012 a company should 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 were subject to reduced public company reporting requirements and were exempt from Section 404(b) of Sarbanes Oxley. Section 404(a) requires issuers to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. Section 404(b) requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.

 

As an emerging growth company, we were also exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934 which require the shareholder approval, on an advisory basis, of executive compensation and golden parachutes.

 

We had elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allowed us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements for the year ended December 31, 2017 may not be comparable to companies that comply with public company effective dates. However, our financial statements for the year ended December 31, 2018 as presented in this annual report are in compliance with the 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 Capital 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 five years, we completed 18 business acquisitions of companies in the direct selling line of business, substantially increasing our Youngevity® health and wellness product lines. It is too early to predict whether consumers will accept, and continue to use on a regular basis, the products we added from these new acquisitions since we have had limited recent operating history as a combined entity. In addition, in February 2019 we entered into a new business segment, our commercial hemp segment, which includes field-to-finish hemp-CBD oil, isolate, and distillate market. 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, 2018 have been prepared and presented on a basis assuming we will continue as a going concern. We have sustained a significant loss of approximately $20,070,000 during the year ended December 31, 2018 compared to net losses during the year ended December 31, 2017 of $12,677,000. The losses for the year ended December 31, 2018 were primarily due to lower than anticipated revenues and significant costs related to financing events. Net cash used in operating activities was $12,352,000 for the year ended December 31, 2018. Based on our current cash levels as of December 31, 2018, our current rate of cash requirements, we will need to raise additional capital and we will need to increase revenues and significantly reduce our expenses from current levels to be able to continue as a going concern. There can be no assurance that we can raise capital upon favorable terms, if at all, or that we can significantly reduce our expenses.

 

 

We 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. During the year ended December 31, 2018 and January, February and March of 2019, we raised an aggregate of approximately $24,000,000 from debt and equity financings. Our ability to raise capital through the sale of securities may be limited by the rules of the SEC and Nasdaq that place limits on the number and dollar amount of securities that may be sold. There can be no assurances that we will be able to raise the funds needed, especially in light of the fact that our ability to sell securities registered on our registration statement on Form S-3 will be limited until such time the market value of our voting securities held by non-affiliates is $75 million or more.

 

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

 

We currently have outstanding $750,000 in principal amount related to the balance of our 2014 Notes from the Company’s 2014 Private Placement. The 2014 Notes are 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 Crestmark agreement and certain equipment leases but senior to all of its other obligations). Stephan Wallach, our Chief Executive Officer, has also personally guaranteed the repayment of the 2014 Notes, and has agreed not to sell, transfer or pledge 1,500,000 shares of our common stock that he owns so long as his personal guaranty is in effect. The 2014 Notes mature in 2019. The 2014 Notes require us, among other things, to maintain the security interest given by CLR for the notes and 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.

 

On December 13, 2018, CLR, entered into a Credit Agreement with one lender (the “Credit Agreement”) pursuant to which CLR borrowed $5,000,000 secured by its green coffee inventory under a Security Agreement, dated December 13, 2018 (the “Security Agreement”), with Mr. Grover and CLR’s subsidiary, Siles Family Plantation Group S.A. (“Siles”), as guarantor, and Siles executed a separate Guaranty Agreement (“Guaranty”). In addition, Stephan Wallach and Michelle Wallach, pledged 1,500,000 shares of our common stock held by them to secure the Credit Note under a Security Agreement, dated December 13, 2018 with Mr. Grover. The Credit Agreement requires us to make quarterly installments of interest. The $5,000,000 is payable in December 2020.

 

In connection with our preparation of our financial statements, we identified material weaknesses in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting could harm us.

  

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). During the preparation of our financial statements for the year ended December 31, 2018, we identified material weaknesses in our internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected and corrected, on a timely basis. 

 

The material weakness we identified was that during the fourth quarter of the year ended December 31, 2018 our commercial coffee segment did not have proper processes and controls in place to require sufficient documentation of significant agreements and arrangements with respect to certain operations in Nicaragua. We plan to update our current policies and implement procedures and controls over the documentation of significant agreements and arrangements with respect to certain operations in Nicaragua. There can be no assurances that additional material weaknesses in addition to the material weakness recently discovered will not occur in the future.

  

If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

Our 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 and new lines of business. 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. and we further expanded our Nicaragua operations by entering into a construction agreement with our Siles Plantation Family Group operators to transfer a 45-acre tract of land in Matagalpa and an agreement to build a second mill to accommodate CLR’s 2019 green coffee contract commitments. Our estimates of capital, personnel and equipment required for our newly acquired businesses are based on the historical experience of management and businesses they are familiar with. 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 fair value of the contingent acquisition debt, which requires re-measurement each reporting period, is based on our estimates of future sales and therefore is difficult to accurately predict. Profits could be adversely impacted in future periods if adjustment of the fair value of the contingent acquisition debt is required.

 

We may have difficulty managing our future growth.

 

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

 

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

 

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

  

 

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

 

A significant portion of our revenue during the years ended December 31, 2018 and 2017, approximately 41%, 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. Any economic downturn could result in customers having less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices, among other things.

 

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.

 

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, 2018 approximately 14% of our sales were derived from sales outside the United States. For the year ended December 31, 2017 approximately 12% 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. We anticipate increasing our operations in Nicaragua and recently further expanded our Nicaragua operations by entering into a construction agreement with our Siles Plantation Family Group operators to purchase a 45-acre tract of land in Matagalpa and an agreement to build a second mill to accommodate CLR’s up-and-coming 2019 green coffee contract commitments. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to the risks associated with international operations, including:

 

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

 

Currency exchange rate fluctuations could reduce our overall profits.

 

For the year ended December 31, 2018, approximately 14% of our sales were derived from sales outside the United States. For the year ended December 31, 2017 approximately 12% 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:

 

 

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

 

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

 

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

 

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

 

Our manufacturers are subject to certain risks.

 

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

 

 

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

 

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

 

RISKS RELATED TO OUR COMMERCIAL COFFEE BUSINESS

 

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

 

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

 

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

 

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

 

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

 

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

 

All of our coffee is sourced, directly or indirectly, from outside the United States, and primarily from Nicaragua. For the year ended December 31, 2018, approximately 52% of our coffee segment revenue was derived from the sale of green coffee, all of which was procured in Nicaragua. During the year ended December 31, 2018, all of our green coffee was procured from one vendor from producers in Nicaragua. We are dependent on this vendor to supply green coffee to us in a timely and efficient manner. As we continue to increase our green coffee revenue and as our green coffee represents a larger portion of our coffee segment revenue, our dependency upon our vendor and Nicaraguan producers is expected to increase. We have also increased our operations in Nicaragua and recently further expanded our Nicaragua operations by entering into a construction agreement with our Nicaraguan Partner to transfer a 45-acre tract of land in Matagalpa and an agreement to build a second mill to accommodate CLR’s 2019 green coffee contract commitments.  If our fulfillment network does not operate properly or if a vendor fails to deliver on its commitments, whether due to financial difficulties or other reasons, we could experience delivery delays or an inability to meet required commitments which could adversely affect our gross margins, expenses and results of operations.

 

Our estimates of revenue derived from the sale of green coffee have been based upon revenue recognition policies that if changed could result in decreased revenue recognition.

 

During the year ended December 31, 2018, all of the revenue derived from our sale of green coffee was recognized on a gross basis without giving effect to deductions for expenses directly attributed to the procurement and processing of such green coffee.  Our coffee commitments could result in us being required to recognize revenue related to our relationship with H&H in Nicaragua and H&H Export, in Florida on a net basis as opposed to a gross basis, which could result in a substantial decrease in revenue despite having no impact on our net income/loss.

 

A significant portion of our coffee segment revenue and purchases has been generated from sales to two customers and one supplier.

 

The termination of our relationship with either H&H Export or Rothfos Corporation would adversely affect our business. For the years ended December 31, 2018 and 2017, our commercial coffee segment had two customers, H&H Export and Rothfos Corporation that individually comprised more than 10% of our commercial coffee segment revenue and in the aggregate approximated 52% of total revenue of our commercial coffee segment.

 

For the years ended December 31, 2018 and 2017, we sold approximately $3,938,000 and $6,349,000 of green coffee beans to H&H Export, respectively. 

 

In addition, for the years ended December 31, 2018 and 2017, we made purchases of approximately $9,891,000 and $10,394,000 from H&H Export that individually comprised more than 10% of our total commercial coffee segment purchases and in the aggregate approximated 45% and 72% of total coffee segment purchases, respectively.

 

 

RISKS RELATED TO OUR COMMERCIAL HEMP BUSINESS

 

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

 

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

 

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

 

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

 

RISKS ASSOCIATED WITH INVESTING IN OUR COMPANY AND OUR SECURITIES

 

The issuance of additional common shares to the investors in our 2018 Private Placement, exercise of the warrants issued with the 2018 Private Placement and warrants issued in connection with the conversion of the Series C Preferred Stock, as well as the exercise of the earn out warrants to be issued to the Representing Party may cause dilution.

 

In August, September and October 2018, we entered into the Purchase Agreements with nine accredited investors in our August 2018 Private Placement, that provides that in the event that the average of the 15 lowest closing prices of our common stock falls below $4.75 per share, during the period beginning on the date of execution of such Purchase Agreement and ending on the date 90 days from the effective date of the registration statement, we will be required to issue additional common shares to the investors.

 

 

 

In August, September and October 2018, we entered into the Series C Preferred Stock Purchase Agreement with 54 accredited investors pursuant to which we sold 697,363 Series C Preferred shares initially convertible into 1,394,726 shares of our common stock and agreed to issue warrants to purchase up to 1,394,726 shares of our common stock upon conversion of the Series C Preferred shares prior to the two-year anniversary of their issuance. During December 2018 all the Series C Preferred shares were converted to common stock and the warrants were issued.

 

In February 2019, we entered into the Asset and Equity Purchase Agreement (“AEPA”) with Khrysos Industries, Inc., which provides that subject to approval of the holders of at least a majority of the issued and outstanding shares of our Common Stock and the approval of The Nasdaq Stock Market, we will issue to the Representing Party warrants to purchase up to a maximum of 3,000,000 shares of our Common Stock (collectively, the “Contingent Consideration Warrants.)

 

The issuance of additional shares of our common stock pursuant to the terms of the Purchase Agreements, exercise of the warrants from the August 2018 Private Placement and the warrants from the Series C offering and the exercise of the Contingent Consideration Warrants may cause dilution. Depending on market liquidity at the time, sales of the shares may cause the trading price of our common stock to fall.

 

On March 13, 2019, we determined that three of the investors in our August 2018 Private Placement became eligible to receive additional shares of our common stock as it was referred to in their respective Purchase Agreement as True-up Shares and noted above. Total number of additional shares issued to those three investors is 44,599 shares of restricted shares of our common stock, par value $0.001. In addition, the exercise price of the warrants issued at their respective closings is reset pursuant to the terms of the warrants to exercise prices ranging from $4.06 to $4.44 from the exercise price at issuance of $4.75.

 

There is no public market for our Series A Convertible Preferred Stock or, 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.

 

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.

 

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

 

Through their voting power, each of Stephan Wallach, our Chief Executive Officer and Chairman, and Michelle Wallach, our Chief Operating Officer and Director has the ability to significantly influence the election of our directors and to control all other matters requiring the approval of our stockholders. Stephan Wallach and Michelle Wallach, his wife, together beneficially own approximately 49.7% of our total equity securities (assuming exercise of the options to purchase common stock held by Stephan Wallach and Michelle Wallach) as of April 5, 2019. As our Chief Executive Officer, Stephan Wallach has the ability to control our business affairs.

 

For the years ended December 31, 2018 and 2017 we reported under an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

As of December 31, 2018, we are no longer an emerging growth company under the Jumpstart Our Business Startups Act enacted in April 2012 (“JOBS ACT”). However, for the years ended December 31, 2018 and 2017 we were an emerging growth company up until December 31, 2018.

 

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

 

Under the JOBS ACT, a company is deemed an emerging growth company until the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that 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. 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.

 

 

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

 

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

 

 

 

 

 

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

 

Our financial statements may not be comparable to companies that comply with public company effective dates.

 

For the year ended December 31, 2017, 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 for the year ended December 31, 2017 may not be comparable to companies that comply with public company effective dates. However, our financial statements for the year ended December 31, 2018 as presented in this annual report are in compliance with the 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, Series 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.

 

 

A majority of our directors are not "independent" and several of our directors and officers have other business interests.

 

Until February 2019, we qualified as a "controlled company" for listing purposes on the NASDAQ Capital Market because Stephan Wallach and Michelle Wallach held in excess of 50.0% of our voting securities. Stephan Wallach and Michelle Wallach, his wife, together beneficially own approximately 49.7% of our total equity securities (assuming exercise of the options to purchase common stock held by Stephan Wallach and Michelle Wallach) as of March 26, 2019. As a controlled company, we qualified 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. Since ceasing to be a controlled company we have one year in which to comply with the requirement that a majority of our directors be “independent” under the NASDAQ Capital Market independence standards. A majority of our directors are not currently "independent" under the NASDAQ Capital Market. 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:

 

 

  

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.

 

The shares of common stock offered under Sales Agreement with The Benchmark Company, LLC (“Benchmark”), may be sold in “at the market” offerings, and investors who buy shares at different times will likely pay different prices.

 

Investors who purchase shares that are sold under our Sales Agreement with Benchmark at different times will likely pay different prices, and so may experience different outcomes in their investment results. We will have discretion, subject to market demand, to vary the timing, prices, and numbers of shares sold, and there is no minimum or maximum sales price. Shareholders may experience declines in the value of their shares as a result of share sales made at prices lower than the prices they paid.

 

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 Stephan 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, 2018, the balance on the long-term mortgage was $3,217,000 and the balance on the promissory note was zero.

  

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, 2018 and 2017 we incurred lease expense of approximately $467,000 and $442,000, respectively.

 

KII owns a laboratory testing facility located in Clermont, Florida that provides us with capabilities in regard to formulation, quality control, and testing standards with CBD products. In addition, KII owns a production shop in Mascotte, Florida. In February 2019, KII purchased a 45-acre tract of land in Groveland, Florida, in central Florida, which we intend to build a R&D facility, greenhouse and allocate a portion for farming.

 

 

 

Below is a summary of our facilities by location:

 

Location	Approximate Square Footage of Facilities	Land in Acres	Own/Lease	Approximate Rent Expense $
Facilities for our Direct Selling Segment
Chula Vista, CA, United States	59,000	-	Own	$-
Boise, ID, United States	1,248	-	Lease	$8,000
Fort Lauderdale, FL, United States	2,380	-	Lease	$69,000
Tempe, AZ, United States	3,096	-	Lease	$17,000
Provo, UT, United States	7,156	-	Lease	$118,000
Auckland, New Zealand	3,570	-	Lease	$102,000
Moscow, Russia	1,669	-	Lease	$89,000
Singapore, Singapore	3,222	-	Lease	$206,000
Guadalajara, Mexico	6,830	-	Lease	$62,000
Manila, Philippines	4,473	-	Lease	$74,000
Bogota, Colombia	2,153	-	Lease	$56,000
Lai Chi Kok Kin, Hong Kong	1,296	-	Lease	$53,000
Taipei, Taiwan	3,955	-	Lease	$92,000
Jakarta, Indonesia	1,884	-	Lease	$16,000
Kuala Lumpur, Malaysia	3,945	-	Lease	$32,000
Chiba Chiba, Japan	98	-	Lease	$14,000

Facilities for our Commercial Coffee Segment:
Miami, FL, United States	50,110	-	Lease	$467,000
Matagalpa, Nicaragua	60,505	500	Own (1)	$-
Matagalpa, Nicaragua	-	45	Own	$-
Facilities for our Commercial Hemp Segment:
Clermont, FL	2,000	-	Own	$-
Mascotte, FL	14,000	-	Own	$-
Groveland, FL	-	45	Own	$-

 

(1)  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, our common stock has been traded on the NASDAQ Capital Market under the symbol “YGYI.” From June 2013 until June 20, 2017, our common stock was 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 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.

 

The last reported sale price of our common stock on the NASDAQ Capital Market on April 12, 2019, was $5.45 per share.

 

Holders

 

As of the close of business on April 12, 2019, there were 561 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 $0.001 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.

 

Series C Convertible Preferred Stock

 

On September 28, 2018 our Board of Directors designated 700,000 shares as Series C Convertible Preferred Stock, par value $0.001 per share (“Series C Convertible Preferred”).

 

 

The Series C Convertible Preferred Stock paid cumulative dividends from the date of issuance at a rate of 6% per annum payable quarterly in arrears on or about the last day of March, June, September and December of each year beginning September 30, 2018. As of December 31, 2018, all Series C Convertible Preferred Stock has been converted to common stock and all unpaid dividends paid through that date.

 

Sales of Unregistered Securities

All sales of our common stock that were not registered under the Securities Act have been previously disclosed in our filings with the Securities and Exchange Commission except for the sales of unregistered securities set forth below during the three months ended December 31, 2018;

 

On July 1, 2018, we entered into an agreement with Capital Market Solutions, LLC. (“Capital Market”), pursuant to which Capital Market agreed to provide investor relations services. Subsequent to the initial agreement, we extended the July 1, 2018 agreement for an additional 24 months through December 31, 2021 and issued Capital Market 100,000 shares of restricted common stock in accordance with the agreement on November 1, 2018.

 

On December 13, 2018, we engaged Ascendant Alternative Strategies, LLC, a FINRA broker dealer, to act as our advisor in connection with a debt exchange transaction (the “Debt Exchange”). Upon the closing of the Debt Exchange, we issued to Ascendant Alternative Strategies, LLC, (or its designees) 30,000 shares of common stock in accordance with an advisory agreement.

 

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, 2018 at a weighted-average cost of $5.30. There were no repurchases during the years ended December 31, 2018 and 2017. The remaining number of shares authorized for repurchase under the plan as of December 31, 2018 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 and restricted stock units to acquire common stock have been granted and are currently outstanding.

 

As of December 31, 2018, the number of stock options and restricted stock units 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 plan approved by stockholders	2,881,879	$4.45	1,077,297
Equity compensation plan not approved by stockholders	-	$-	-
Total	2,881,879	$4.45	1,077,297

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 (as adjusted for the 1-for-20 reverse stock split, which was effective on June 7, 2017).

 

 

 

 

On January 9, 2019, our Board of Directors granted to David Briskie an option to purchase 541,471 shares of our common stock. The stock option granted to Mr. Briskie has an exercise price of $5.56 per share, which is the closing price of the common stock on the date of the grant (January 9, 2019), vested upon issuance and expires ten (10) years from the date of the grant, unless terminated earlier. The stock option was granted pursuant to the Plan.

 

On January 9, 2019, our Board of Directors also granted to each non-executive member of our Board of Directors an option to purchase 50,000 shares of our common stock. The stock options granted have an exercise price of $5.56 per share, which is the closing price of the common stock on the date of the grant (January 9, 2019), vest upon issuance and expire ten (10) years from the date of the grant, unless terminated earlier. The stock options were granted pursuant to the Plan.

 

In addition, on January 9, 2019, our Board of Directors approved an amendment (the “Amendment”) to the Plan to increase the number of shares available for issuance thereunder from 4,000,000 shares of common stock to 9,000,000 shares of common stock. The Amendment was also approved on January 9, 2019 by the stockholders holding a majority of our outstanding voting securities and become effective on the 21st day following the mailing of a definitive information statement to our stockholders regarding the Amendment (the “Approval Date”).

 

On January 9, 2019, our Board of Directors also agreed effective as of the Approval Date, to award an option to Stephan Wallach to purchase 500,000 shares of our common stock, an option to Michelle Wallach to purchase 500,000 shares of our common stock and an option to David Briskie to purchase 458,529 shares of our common stock, each having an exercise price equal to the fair market value of the common stock on the Approval Date, vesting upon grant date and expiring ten (10) years thereafter.

 

On January 10, 2019, our Board of Directors received approval of our stockholder to further amend our Plan to increase the number of shares of our common stock that may be delivered pursuant to awards granted during the life of the Plan from 4,000,000 to 9,000,000 shares authorized. shares authorized. 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 6. Selected Financial Data

 

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

 

 

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

 

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

 

Overview 

 

During the years ended December 31, 2018 and 2017, we operated 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, 2018, we derived approximately 85% of our revenue from direct sales and approximately 15% of our revenue from our commercial coffee sales. 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. During 2019, we expanded our operations into a third segment, our commercial hemp segment, which includes field-to-finish hemp-CBD oil, isolate, and distillate market with our acquisition of the assets of Khrysos Global, Inc., a Delaware corporation located in Florida, that develops and sells equipment and related services to clients which enable them to extract CBD oils from hemp stock.

 

In the direct selling segment, we sell health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products, other service-based products on a global basis and more recently our Hemp FX™ hemp-derived cannabinoid product line and offer a wide range of products through an international direct selling network. Our direct sales are made through our network, which is a web-based global network of customers and distributors. Our independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. We consider our company to be an e-commerce company whereby personal interaction is provided to customers by our independent sales network. Initially, our focus was solely on the sale of products in the health, beauty and home care market through our marketing network; however, we have since expanded our selling efforts to include a variety of other products in other markets. Our direct selling segment offers more than 5,600 products to support a healthy lifestyle.

 

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.

 

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. CLR acquired the Siles Plantation Family Group (“Siles”) in 2014, a coffee plantation and dry-processing facility located in Matagalpa, Nicaragua, an ideal coffee growing region that is historically known for high quality coffee production. The dry-processing facility is approximately 26 acres and the plantation is approximately 500 acres and produces 100 percent Arabica coffee beans that are shade grown, Rainforest Alliance Certified™ and Fair Trade Certified™. The plantation, dry-processing facility and existing U.S. based coffee roaster facilities allows CLR to control the coffee production process from field to cup.

 

We conduct our operations primarily in the United States. For the years ended December 31, 2018 and 2017 approximately 14% and 12%, respectively, of our revenues were derived from sales outside the United States.

 

 

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 World Federation of Direct Selling Association (“WFDSA”) reported in its “2017 Global Sales by Product Category” that the fastest growing product was Wellness followed by Cosmetics & Personal Care, representing 66% of retail sales. Top product categories that 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 Direct Selling Association (“DSA”), 18.6 million people were involved in direct selling in 2017, a decrease of 1.8% compared to 2016. Estimated direct retail sales for 2017 was reported by the DSA’s 2018 Growth & Outlook Report to be $34.9 billion compared to $35.54 billion in 2016.

 

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 2018 “Coffee: World Markets and Trade” report for 2018/2019 that world coffee production is forecasted to be 11.4 million bags higher than the previous year at a record of 171.2 million bags, and that global consumption is forecasted at a record of 163.2 million bags. The report further indicated that for 2019, Central America and Mexico are forecasted to contribute 20.3 million bags of coffee beans and more than 45% of the exports are destined to the European Union and approximately 33% to the United States. The United States imports the second-largest amount of coffee beans worldwide and is forecasted at 27 million bags in 2019. In addition, in the USDA’s June 2017 report, it was anticipated that world exports of green coffee would remain steady totaling 111 million bags in 2018.

 

Recent Significant Financing Events

 

Convertible Debt Offering

 

On February 15, 2019 and on March 10, 2019, we closed the first and second tranches of our 2019 January Private Placement debt offering, pursuant to which we offered for sale notes in the principal amount of minimum of $100,000 and a maximum of notes in the principal amount $10,000,000 (the “2019 Note” or “2019 Notes”), with each investor receiving 2,000 shares of common stock for each $100,000 invested. We entered into subscription agreements with thirteen (13) accredited investors that had a substantial pre-existing relationship with us pursuant to which we received aggregate gross proceeds of $2,440,000 and issued 2019 Notes in the aggregate principal amount of $2,440,000 and an aggregate of 48,800 shares of common stock. The placement agent will receive up to 50,000 shares of common stock in the offering. Each 2019 Note matures 24 months after issuance, bears interest at a rate of six percent (6%) per annum, is issued at a 5% original issue discount and the outstanding principal is convertible into shares of common stock at any time after the 180th day anniversary of the issuance of the 2019 Note, at a conversion price of $10 per share (subject to adjustment for stock splits, stock dividends and reclassification of the common stock).

 

Note Payable

 

On March 18, 2019, we entered into a two-year Secured Promissory Note (the “March 2019 Note” or “March 2019 Notes”) with two (2) accredited investors that we had a substantial pre-existing relationship with to which we raised cash proceeds of $2,000,000. In consideration of the March 2019 Notes, we issued 20,000 shares of common stock par value $0.001 for each $1,000,000 invested as well as for each $1,000,000 invested five-year warrants to purchase 20,000 shares common stock at a price per share of $6.00. The March 2019 Notes pay interest at a rate of eight percent (8%) per annum and interest is paid quarterly in arrears with all principal and unpaid interest due at maturity on March 18, 2021.

 

Series C Convertible Preferred Stock Offering

 

Between August 17, 2018 and October 4, 2018, we raised aggregate net proceeds of approximately $3,043,000, after giving effect to approximately $345,000 of commissions paid to the placement agent and approximately $3,000 of other closing fees, when we closed our best efforts offering (the “Series C Offering”) of Series C convertible preferred stock, par value $0.001 per share (the “Series C Preferred Stock”), and issued to 54 accredited investors an aggregate of 697,363 shares of Series C Preferred Stock, initially convertible into 1,394,726 shares of our common stock, par value $0.001 per share at an offering price of $9.50 per share and a two-year warrant to purchase shares of common stock at an exercise price of $4.75 (the “Warrant”) to each investor that voluntarily converts their Series C Preferred Stock to common stock. The Warrant contains certain anti-dilution provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization of the Company. During December 2018 all the investors converted their Series C Preferred Stock to common stock and we issued 1,394,726 warrants in accordance with the Purchase Agreement and we issued 116,867 warrants to the placement agent in accordance with the Placement Agent Agreement.

 

We entered into a Placement Agent Agreement with Corinthian Partners, LLC, dated July 31, 2018 pursuant to which we paid the placement agent, subject to certain exclusions, a fee of 5.0% of the gross proceeds of the Offering and a non-accountable expense allowance of 2.0% of the gross proceeds. In addition, we agreed to issue to the placement agent, warrants equal to ten percent (10%) of any warrants issued to investors that the placement agent represented pursuant to the Offering, if and when any such warrants are issued to the investors.

 

 

Private Placement - Securities Purchase Agreement - common stock Offering

 

Between August 31, 2018 and October 5, 2018, we raised net proceeds in the aggregate of approximately $2,962,000 from our private placement common stock offering (the “August 2018 Private Placement”) pursuant to which we sold to nine (9) investors with whom we had a substantial pre-existing relationship (the “Investors”) an aggregate of 630,526 shares of common stock at an offering price of $4.75 per share. In addition, we issued the Investors an aggregate of 150,000 additional shares of common stock as an advisory fee.

 

Pursuant to the purchase agreement that we entered into with the investors in the August 2018 Private Placement, we issued the Investors Warrants to purchase an aggregate of 630,526 shares of common stock (at an exercise price of $4.75 per share, all of which are exercisable.

 

Each purchase agreement provides that in the event that the average of the 15 lowest closing prices for our common stock (the average of such lowest closing prices being herein referred to, the “True-up Price”)  during the period beginning on the execution date of such Purchase Agreement (the “Effective Date”) and ending on the date 90 days from the effective date of the Registration Statement (the “Subsequent Pricing Period”) is less than $4.75 per share, then we will issue the Investors additional shares of its common stock (the “True-up Shares”) within three days from the expiration of the Subsequent Pricing Period, according to the following formula: X= [Purchase Price Paid- (A*B)]/B, where:

 

X= number of True-up Shares to be issued

A= the number of purchased shares acquired by Investor

B= the True-up Price

 

Notwithstanding the foregoing, in no event may the aggregate number of shares under such purchase agreement, including shares of common stock purchased, shares of common stock underlying the Warrant, the shares of common stock issued as advisory shares and True-up Shares exceed 2.9% of our issued and outstanding common stock as of the effective date for each $1,000,000 invested.

 

On March 13, 2019, we determined that three of the investors in our August 2018 Private Placement became eligible to receive additional shares of our common stock as it was referred to in their respective purchase agreement as True-up Shares and noted above. Total number of additional shares issued to those three investors is 44,599 shares of restricted shares of our common stock, par value $0.001. In addition, the exercise price of the warrants issued at their respective closings is reset pursuant to the terms of the warrants to exercise prices ranging from $4.06 to $4.44 from the exercise price at issuance of $4.75. (See Note 9, to the consolidated financial statements.)

 

Notes Payable

 

On December 13, 2018, CLR, entered into a Credit Agreement with Carl Grover (the “Credit Agreement”) pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in exchange issued to him a $5,000,000 credit note (“Credit Note”) secured by its green coffee inventory under a Security Agreement, dated December 13, 2018 (the “Security Agreement”), with Mr. Grover and CLR’s wholly-owned subsidiary, Siles, as guarantor, and Siles executed a separate Guaranty Agreement (“Guaranty”). We issued to Mr. Grover a four-year warrant to purchase 250,000 shares of our common stock, exercisable at $6.82 per share, and a four-year warrant to purchase 250,000 shares of our common stock, exercisable at $7.82 per share, pursuant to a Warrant Purchase Agreement, dated December 13, 2018, with Mr. Grover.

 

 

Note Conversion and Exchange

 

Effective October 19, 2018, Carl Grover, an investor in our 2014 and 2015 Private Placements, exercised his right to convert all amounts owed under the note issued to him in the 2015 Private Placement in the principal amount of $3,000,000 which matured in October 2018, into 428,571 shares of common stock (at a conversion rate of $7.00 per share), in accordance with its stated terms.

 

On October 23, 2018, we entered into an agreement with Mr. Grover to exchange (the “Debt Exchange”), subject to stockholder approval which was received on December 6, 2018, all amounts owed under the 2014 Note held by him in the principal amount of $4,000,000 which matures on July 30, 2019, for 747,664 shares of our common stock, at a conversion price of $5.35 per share and a four-year warrant to purchase 631,579 shares of common stock at an exercise price of $4.75 per share. Upon the closing we issued Ascendant (or its designees), which acted as our advisor in connection with a Debt Exchange transaction, 30,000 shares of common stock in accordance with an advisory agreement and four-year warrants to purchase 80,000 shares of common stock at an exercise price of $5.35 per share and four-year warrants to purchase 70,000 shares of common stock at an exercise price of $4.75 per share.

 

Recent Operational Events

 

Hemp FX™

 

At our August 2018 Convention held in San Diego, California, we announced our new Hemp FX™ hemp-derived cannabinoid product line. We are currently selling five products in this product line, all of which contain a proprietary hemp-derived CBD as well as herbs, minerals and anti-oxidants and each of which contains less than 0.3% THC. The products are manufactured domestically and sold by our distributors in the 46 states that have not prohibited sales of hemp-derived products. See the risk factor “New legislation or regulations which impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products could harm our business, results of operations, financial condition and prospects” for a discussion regarding certain risks specific to these products.

 

We further expanded our hemp-CBD operations when we acquired the assets of Khrysos Global, Inc., (“Khrysos”) a Florida corporation that develops and sells equipment and related services to clients which enable them to extract CBD oils from hemp stock on February 15, 2019. The consideration payable for the assets and the equity of INXL and INXH is an aggregate of $16,000,000, to be paid as set forth under the terms of the Asset and Equity Purchase Agreement (the “AEPA”) and allocated between the Sellers and Leigh Dundore (“LD”) and Dwayne Dundore (the Representing Party”) in such manner as they determine in their discretion. At closing, we issued to KGI, LD and the Representing Party an aggregate of 1,794,972 shares of our common stock which had a deemed value of $14,000,000 for the purposes of the AEPA and $500,000 in cash. Thereafter, KGI, LD and the Representing Party are to receive an aggregate of: $500,000 in cash thirty (30) days following the date of closing; $250,000 in cash ninety (90) days following the date of closing; $250,000 in cash one hundred and eighty (180) days following the Date of closing; $250,000 in cash two hundred and seventy (270) days following the date of closing; and $250,000 in cash one (1) year following the date of closing. In addition, we agreed to issue to Representing Party, subject to the approval of the holders of at least a majority of the issued and outstanding shares of our common stock and the approval of The Nasdaq Stock Market:

 

(i) a six-year warrant to purchase an aggregate 500,000 shares of common stock at an exercise price of $10 per share exercisable upon the generation by the business of $25,000,000 in cumulative revenue during any of the years ended December 31, 2019, 2020, 2021, 2022, 2023 or 2024;

 

(ii) a six-year warrant to purchase 500,000 shares of common stock at an exercise price of $10 per share exercisable upon the generation by the business of $75,000,000 in cumulative revenue during any of the years ended December 31, 2019, 2020, 2021, 2022, 2023 or 2024; and

 

 

(iii) a six-year warrant to purchase 500,000 shares of common stock at an exercise price of $10 per share exercisable upon the generation by the business of $150,000,000 in cumulative revenue during any of the years ended December 31, 2019, 2020, 2021, 2022, 2023 or 2024;

 

(iv) a six-year warrant to purchase an aggregate 500,000 shares of common stock at an exercise price of $10 per share exercisable upon the generation by the business of $10,000,000 in cumulative net income before taxes during any of the years ended December 31, 2019, 2020, 2021, 2022, 2023 or 2024;

 

(v) a six-year warrant to purchase 500,000 shares of common stock at an exercise price of $10 per share exercisable upon the generation by the business of $30,000,000 in cumulative net income before taxes during any of the years ended December 31, 2019, 2020, 2021, 2022, 2023 or 2024; and

 

(vi) a six-year warrant to purchase 500,000 shares of common stock at an exercise price of $10 per share exercisable upon the generation by the business of $60,000,000 in cumulative net income before taxes during any of the years ended December 31, 2019, 2020, 2021, 2022, 2023 or 2024.

On April 1, 2019, we announced that Khrysos executed a one-year $11,000,000 supply and processing agreement to produce 99% pure CDB Isolate. Shipping under the agreement is expected to begin this month and continue in equal amounts through March of 2020.

CLR Coffee Contract

 

On July 31, 2018, CLR entered into a 5-year contract for the sale and processing of over 41 million pounds of green coffee on an annual basis. This contract covers the period 2019 through 2023.

 

New Acquisitions During the Years Ended 2018 and 2017

 

Effective 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. (See Note 2 to the consolidated financial statements.)

 

Effective February 12, 2018, we acquired certain assets and certain liabilities of Nature Direct. Nature Direct, is a manufacturer and distributor of essential-oil based nontoxic cleaning and care products for personal, home and professional use. (See Note 2 to the consolidated financial statements.)

 

Effective December 13, 2017, we acquired certain assets of BeautiControl cosmetic company. BeautiControl is a direct sales company specializing in cosmetics and skincare products. (See Note 2 to the consolidated financial statements.)

 

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. (See Note 2 to the consolidated financial statements.)

 

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. (See Note 2 to the consolidated financial statements.)

 

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. (See Note 2 to the consolidated financial statements.)

 

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

 

As of December 31, 2018, we are no longer an emerging growth company under the JOBS ACT. However, we were an emerging growth company during 2018 and 2017 up until December 31, 2018. For the year ended December 31, 2017 we elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that 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 for the year ended December 31, 2017 may not be comparable to companies that comply with public company effective dates. However, our financial statements for the year ended December 31, 2018 as presented in this annual report are in compliance with the public company effective dates.

 

Revenue Recognition

 

We recognize revenue from product sales when the following five steps are completed: i) Identify the contract with the customer; ii) Identify the performance obligations in the contract; iii) Determine the transaction price; iv) Allocate the transaction price to the performance obligations in the contract; and v) Recognize revenue when (or as) each performance obligation is satisfied (see Note 3, to the consolidated financial statements.)

 

We ship the majority of our direct selling segment products directly to the distributors primarily via UPS, USPS or FedEx and receives substantially all payments for these sales in the form of credit card transactions. We regularly monitor our use of credit card or merchant services to ensure that its financial risk related to credit quality and credit concentrations is actively managed. Revenue is recognized upon passage of title and risk of loss to customers when product is shipped from the fulfillment facility. We ship the majority of our 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

 

During the years ended December 31, 2018 and 2017, we operated 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,
	2018	2017
Revenues
Direct selling	$138,855	$142,450
As a % of Revenue	85%	86%
Commercial coffee	23,590	23,246
As a % of Revenue	15%	14%
Total revenues	$162,445	$165,696

 

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 Siles, 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, organic, 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. For the year ended December 31, 2018, approximately 52% of our coffee segment revenue was derived from the sale of green coffee, all of which was procured in Nicaragua. We anticipate that sales of our green coffee will increase during the years ending December 31, 2019 through 2023 due to the revenue we anticipate generating from the 5-year contract that we entered into in July 2018 for the sale and processing of over 41 million pounds of green coffee on an annual basis.

 

 

We conduct our operations primarily in the United States. For the years ended December 31, 2018 and 2017 approximately 14% and 12%, 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, 2018 and 2017.

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

Revenues

 

For the year ended December 31, 2018, our revenues decreased approximately $3,251,000 or 2.0% to $162,445,000 as compared $165,696,000 for the year ended December 31, 2017. During the year ended December 31, 2018, we derived approximately 85% of our revenue from our direct sales and approximately 15% of our revenue from our commercial coffee sales. Direct selling segment revenues decreased by approximately $3,595,000 or 2.5% to $138,855,000 as compared to $142,450,000 for the year ended December 31, 2017. This decrease was primarily attributed to a decrease of approximately $11,002,000 in revenues from existing business, offset by revenues from new acquisitions of approximately $7,457,000. We attribute the decrease from existing business primarily to a general decline in net sales in North America in the direct selling business as well as a decline in new distributors. The Company also changed its promotion strategy by targeting products with higher gross margins and utilized incentives that had less costly impact on profitability. For the year ended December 31, 2018, commercial coffee segment revenues increased by approximately $344,000 or 1.5% to $23,590,000 as compared to $23,246,000 for the year ended December 31, 2017. This increase was primarily attributed to an increase of approximately $1,048,000 in revenues from our roasted coffee business, offset by a decrease of approximately $704,000 in green coffee business.

 

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

 

	For the years ended December 31,
Segment Revenues	2018	2017	Percentage change
Direct selling	$138,855	$142,450	(2.5)%
As a % of Revenue	85%	86%	(1.0)%
Commercial coffee	23,590	23,246	1.5%
As a % of Revenue	15%	14%	1.0%
Total	$162,445	$165,696	(2.0)%

 

Cost of Revenues

 

For the year ended December 31, 2018, overall cost of revenues decreased approximately 3.9% to $67,413,000 as compared to $70,131,000 for the year ended December 31, 2017. The direct selling segment cost of revenues decreased by $3,126,000 or 6.6% to $43,945,000 when compared to the same period last year, primarily as a result of the lower revenues, lower cost of product due to product mix, lower royalties, shipping costs, credit card processing fees and compensation expense offset by an increase in the inventory reserve. The commercial coffee segment cost of revenues increased by $408,000 or 1.8% when compared to the same period last year. This was primarily attributable to the increase in revenues related to the roasted coffee business and additional costs related to the roasted coffee business, depreciation, wages expense and inventory reserve expense, offset by reduction in green coffee 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, 2018, gross profit decreased approximately 0.6% to approximately $95,032,000 as compared to approximately $95,565,000 for the year ended December 31, 2017. Overall gross profit as a percentage of revenues increased to approximately 58.5%, compared to approximately 57.7% in the same period last year.

 

Gross profit in the direct selling segment decreased by 0.5% to $94,910,000 from $95,379,000 in the prior period primarily as a result of the lower revenues in the current year offset by the 6.6% decrease in cost of sales discussed above. Gross profit as a percentage of revenues in the direct selling segment increased by approximately 1.4% to 68.4% for the year ended December 31, 2018, compared to 67.0% in the same period last year. This increase was primarily due to the price increases on certain products that went into effect on January 1, 2018 and changes to our product sales mix.

 

Gross profit in the commercial coffee segment decreased by 34.4% to $122,000 compared to $186,000 in the prior period. The decrease in gross profit in the commercial coffee segment was primarily due to additional costs related to the roasted coffee business and inventory reserve expense. Gross profit as a percentage of revenues in the commercial coffee segment decreased by 0.3% to 0.5% for the year ended December 31, 2018, compared to 0.8% 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	2018	2017	change
Direct selling	$94,910	$95,379	(0.5)%
Gross Profit % of Revenues	68.4%	67.0%	1.4%
Commercial coffee	122	186	(34.4)%
Gross Profit % of Revenues	0.5%	0.8%	(0.3)%
Total	$95,032	$95,565	(0.6)%
Gross Profit % of Revenues	58.5%	57.7%	0.8%

 

Operating Expenses

 

For the year ended December 31, 2018, our operating expenses decreased approximately $3,778,000 or 3.7% to $97,669,000 as compared to $101,447,000 for the year ended December 31, 2017.

 

For the year ended December 31, 2018, the distributor compensation paid to our independent distributors in the direct selling segment decreased 7.2% to $61,087,000 from $65,856,000 for the year ended December 31, 2017. Distributor compensation as a percentage of direct selling revenues decreased to 44.0% for the year ended December 31, 2018 as compared to 46.2% for the year ended December 31, 2017. This decrease was primarily attributable to the price increases reflected in 2018 revenues, which did not impact commissionable base revenues.

 

For the year ended December 31, 2018, the sales and marketing expense decreased by $310,000 to $13,398,000 from $13,708,000 for the year ended December 31, 2017. In the direct selling segment, sales and marketing costs decreased by 4.7% to $12,460,000 for the year ended December 31, 2018 compared to $13,076,000 for the same period last year. This was primarily due to reduction in compensation expense, distributor events and convention costs for the year ended December 31, 2018 as compared to the same period last year. In the commercial coffee segment, sales and marketing costs increased by $306,000 to $938,000 for the year ended December 31, 2018 compared to $632,000 for the same period last year, primarily due to increased advertising and promotion costs and compensation expense.

 

For the year ended December 31, 2018, the general and administrative expense decreased 8.6% to $20,009,000 from $21,883,000 for the year ended December 31, 2017. In the direct selling segment, general and administrative expense decreased 13.3% to $16,454,000 for the year ended December 31, 2018, compared to $18,973,000 for the same period last year. This was primarily due to a benefit of $6,600,000 from the contingent liability revaluation for the year ended December 31, 2018 compared to a benefit of $1,664,000 for the year ended December 31, 2017. The revaluation in the current year included a $2,520,000 adjustment to our contingent liability during the year ended December 31, 2018 related to our acquisition of BeautiControl and a $1,246,000 benefit during the year ended December 31, 2018 as a result of eliminating the contingent liability related to our acquisition of Nature’s Pearl due to breach of the asset purchase agreement by the seller. Legal expense, IT related costs and consulting costs also decreased for the year ended December 31, 2018. These decreases in general and administrative expense were offset by increases in depreciation and amortization costs, investor relations, stock-based compensation, accounting costs and increases in costs related to operations in Mexico, Russia, New Zealand, Taiwan and Colombia. In the commercial coffee segment, general and administration costs increased by $645,000 to $3,555,000 for the year ended December 31, 2018 compared to $2,910,000 for the same period last year, primarily due to increased repairs and maintenance costs, investor relations, bad debt expense and compensation expense offset by a decrease in amortization cost.

 

 

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

 

Operating Loss

 

For the year ended December 31, 2018, operating loss decreased by $3,245,000 to an operating loss of $2,637,000 as compared to an operating loss of $5,882,000 for the year ended December 31, 2017. This was primarily due to the decrease in operating expenses of $3,778,000 offset by the decrease in gross profit of $533,000 discussed above. For the year ended December 31, 2018, the direct selling segment had an operating income of $1,733,000 and the commercial coffee segment had an operating loss of $4,370,000.

 

Total Other Expense

 

For the year ended December 31, 2018, total other expense increased by $12,949,000 to $17,017,000 as compared to $4,068,000 for the year ended December 31, 2017. Total other expense includes net interest expense loss on induced debt conversion, extinguishment loss on debt, and the change in the fair value of derivative liabilities.

 

Net interest expense increased by $799,000 for the year ended December 31, 2018 to $6,584,000 compared to $5,785,000 for the year ended December 31, 2017. Interest expense includes the imputed interest portion of the payments related to contingent acquisition debt of $2,175,000, interest payments to investors associated with our Private Placement transactions of $696,000, $511,000 related to our short-term note, $621,000 related to our Crestmark agreement and interest paid for other operating debt of $620,000. Non-cash interest primarily related to amortization costs of $1,975,000 and $18,000 of other non-cash interest, offset by interest income of $33,000.

 

We recorded a non-cash loss on induced debt conversion for the year ended December 31, 2018 as a result of one of the investors in our July 2014 Private Placement that held a $4,000,000 2014 Note which matures on July 30, 2019, exchanged their 2014 Note for 747,664 shares of common stock on October 23, 2018. We concluded that the 2014 Note should be recognized as a debt modification for an induced conversion of convertible debt and we recognized all remaining unamortized discounts of approximately $679,000 immediately subsequent to October 23, 2018 as interest expense and recorded a Loss on the debt exchange in the amount of $4,706,000 with the corresponding entry through equity. (See Note 6, to the consolidated financial statements.)

 

Change in fair value of derivative liabilities increased by $6,670,000 for the year ended December 31, 2018 to a $4,645,000 expense compared to a benefit of $2,025,000 for the year ended December 31, 2017, as a result of the change in our stock price when compared to the prior period. Various factors are considered in the pricing models we use to value the warrants including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk-free interest rate. Future changes in these factors may have a significant impact on the computed fair value of derivative liabilities. As such, we expect future changes in the fair value of the warrants that may vary significantly from period to period. (See Notes 8 & 9, to the consolidated financial statements.)

 

We recorded a non-cash extinguishment loss on debt of $1,082,000 for the year ended December 31, 2018 as a result of the triggering of the automatic conversion of the 2017 Notes associated with our July 2017 Private Placement to common stock. This loss represents the difference between the carrying value of the 2017 Notes and embedded conversion feature and the fair value of the shares that were issued. The fair value of the shares issued was based on the stock price on the date of the conversion. (See Note 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, 2018, we have evaluated the realizability of the deferred tax asset, based upon achieved and estimated future results and through consideration of all positive and negative evidences and have determined that it is more likely than not that the deferred tax assets will not be realized. A valuation allowance remains on the U.S., state and foreign tax attributes that are likely to expire before realization. We have approximately $146,000 in AMT refundable credits, and we expect that $146,000 will be refunded in 2019. As such, we do not have a valuation allowance relating to the refundable AMT credit carryforward. We have recognized an income tax expense of approximately $416,000 which is our estimated federal, state and foreign income tax expense for the year ended December 31, 2018. Income tax provision for the year ended December 31, 2018 was $416,000 as compared to $2,727,000 for the year ended December 31, 2017. The income tax provision in the fourth quarter ended December 31, 2017 included an increase of $3,550,000 in the deferred tax valuation allowance. The difference between the effective tax rate and the federal statutory rate of 21% is due to the permanent differences, change in valuation allowance, state taxes (net of federal benefit), and foreign tax rate differential.

 

Net Loss

 

For the year ended December 31, 2018, the Company reported a net loss of approximately $20,070,000 as compared to net loss of $12,677,000 for the year ended December 31, 2017. The primary reason for the increase in net loss when compared to the prior period was due to the non-cash increase in fair value of derivative liabilities by $6,670,000 discussed above, the non-cash loss on induced debt conversion from the conversion of convertible note of $4,706,000, increase of $774,000 in non-cash loss on extinguishment of debt and the increase of $799,000 in interest expense, offset by the decrease of $3,245,000 in operating loss and the decrease of $2,311,000 in income tax expense.

 

Adjusted EBITDA

 

EBITDA (earnings before interest, income taxes, depreciation and amortization) as adjusted to remove the effect of stock-based compensation expense and the non-cash loss on impairment of intangible assets, non-cash loss on extinguishment of debt, change in the fair value of the derivatives and non-cash loss on induced debt conversion or "Adjusted EBITDA," increased to $7,013,000 for the year ended December 31, 2018 compared to negative $549,000 in 2017.

 

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, non-cash loss on impairment of intangibles, non-cash loss on extinguishment of debt, change in the fair value of the warrant derivative, and non-cash loss on induced debt conversion, 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, 2018 and 2017 is included in the table below (in thousands):

 

	Years Ended
	December 31,
	2018	2017
Net loss	$(20,070)	$(12,677)
Add/Subtract:
Interest, net	6,584	5,785
Income tax provision	416	2,727
Depreciation	1,819	1,556
Amortization	2,879	2,782
EBITDA	(8,372)	173
Add/Subtract:
Stock based compensation – stock awards and warrant issuance	1,453	654
Stock based compensation – stock awards for advisory services	324	-
Fair value of warrants	-	341
Loss on impairment of intangible assets	3,175	-
Loss on extinguishment of debt	1,082	308
Change in the fair value of warrant derivatives	4,645	(2,025)
Loss on induced debt conversion	4,706	-
Adjusted EBITDA	$7,013	$(549)

 

Liquidity and Capital Resources

 

Sources of Liquidity  

 

At December 31, 2018 we had cash and cash equivalents of approximately $2,879,000 as compared to cash and cash equivalents of $673,000 as of December 31, 2017.

 

Cash Flows 

 

Cash used in operating activities. Net cash used in operating activities for the year ended December 31, 2018 was $12,352,000 as compared to net cash used in operating activities of $2,773,000 for the year ended December 31, 2017. Net cash used in operating activities consisted of a net loss of approximately $20,070,000 and $9,434,000 in changes in operating assets and liabilities, offset by net non-cash operating activity of $17,152,000.

 

Net non-cash operating expenses included $4,698,000 in depreciation and amortization, $1,453,000 in stock-based compensation expense, $393,000 stock issuance costs for services, $4,645,000 in change in fair value of derivative liability, $4,706,000 loss on induced debt conversion of convertible notes, $3,175,000 related to the loss on impairment of intangible assets, $2,033,000 related to the amortization of debt discounts and issuance costs associated with our Private Placements, $1,204,000 related to increases in inventory reserves, $225,000 related to increase in allowance for uncollectible trade receivable, $1,082,000 extinguishment loss on debt and $138,000 in deferred tax assets, offset by $6,600,000 related to the change in the fair value of contingent acquisition debt.

 

Changes in operating assets and liabilities were attributable to increases in inventory of $907,000, accrued expenses and other liabilities of $1,534,000, and advances of $5,000,000, and decreases in accounts payable of $3,250,000, accrued distributor compensation of $988,000, deferred revenue of $1,074,000, prepaid expenses and other current assets of $158,000, accounts receivable of $61,000, and income tax receivable of $32,000.

 

Cash used in investing activities. Net cash used in investing activities for the year ended December 31, 2018 was $1,387,000 as compared to net cash used in investing activities of $982,000 for the year ended December 31, 2017. Net cash used in investing activities consisted of purchases of property and equipment, leasehold improvements, new construction on a coffee mill, and cash expenditures related to business acquisitions. 

 

Cash provided by financing activities. Net cash provided by financing activities was $15,709,000 for the year ended December 31, 2018 as compared to net cash provided by financing activities of $3,622,000 for the year ended December 31, 2017.

 

 

Net cash provided by financing activities consisted of aggregate net proceeds of $3,289,000 related to the Preferred Series B offering, $6,236,000 related to the Preferred Series C offering, $2,962,000 related to the private placement common stock offering, $4,825,000 related to a newly issued notes payable, $1,907,000, net of loan fees, from short-term debt, $1,241,000 from the exercise of stock options and warrants, offset by net payments related to the line of credit of $1,552,000, payments of short-term debt of $1,461,000, $164,000 in payments of notes payable, $165,000 in payments related to contingent acquisition debt, $1,282,000 in payments related to capital lease financing obligations and $127,000 in payments of dividends.

 

Contractual Obligations - Payments Due by Period

 

The following table summarizes our expected contractual obligations and commitments subsequent to December 31, 2018 (in thousands):

  

(*) The Convertible Notes Payable includes the principal balances associated with our 2014 Private Placement.

(**) See Note 13 to the consolidated financial statements – Subsequent Events

(***) Assumed mortgages related to our February 2019 acquisition of Khrysos Global Inc. See Note 13 to the consolidated financial statements – Subsequent Events

 

“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 our commercial coffee segment. Each individual contract requires us 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 we have 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, of which notes in the principal amount of $750,000 remain outstanding and 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. In December 2018, $4,000,000 of the principal notes was converted in an exchange agreement (see Note 6, to the to the consolidated financial statements.)

 

Notes Payable, includes our 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 with an initial interest rate of 5.75%. The interest rate is the prime rate plus 2.50%. As of December 31, 2018, the interest rate was 8%. The lender will adjust the interest rate on the first calendar day of each change period. As of December 31, 2018, the promissory note was paid off in full and the balance on the long-term mortgage was approximately $3,217,000 which is included in notes payable.

 

 

On December 13, 2018, CLR, entered into a Credit Agreement with Carl Grover (the “Credit Agreement”) pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in exchange issued to him a $5,000,000 credit note (“Credit Note”) secured by its green coffee inventory under a Security Agreement, dated December 13, 2018 (the “Security Agreement”), with Mr. Grover and CLR’s subsidiary, Siles Family Plantation Group S.A. (“Siles”), as guarantor, and Siles executed a separate Guaranty Agreement (“Guaranty”). In addition, Stephan Wallach and Michelle Wallach, pledged 1,500,000 shares of our common stock held by them to secure the Credit Note under a Security Agreement, dated December 13, 2018 with Mr. Grover. The Credit Agreement bears interest at a rate of eight percent (8%) per annum and paid quarterly in arrears with all principal and unpaid interest due December 2020. The remaining outstanding principal balance of the Credit Agreement is $5,000,000 as of December 31, 2018 which is included in notes payable remains outstanding. (See Note 5, to the consolidated financial statements.)

 

 “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.

 

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 CLR products. 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 that 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 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, plus (iii) the lesser of $250,000 or eligible inventory or 75% of certain specific inventory identified within the Agreement.

 

The Agreement contains certain financial and nonfinancial covenants with which the Company must comply to maintain its borrowing availability and avoid penalties.

 

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 is a rate equal to the prime rate plus 2.50% with a floor of 6.75%. As of December 31, 2018, the interest rate was 8.0%. In addition, other fees are incurred for the maintenance of the loan in accordance with the Agreement. Other fees may be incurred in the event the minimum loan balance of $2,000,000 is not maintained. The Agreement is effective until November 16, 2020.

 

The Company and the Company’s CEO, Stephan Wallach, have entered into a Corporate Guaranty and Personal Guaranty, respectively, with Crestmark guaranteeing payments in the event that the Company’s commercial coffee segment CLR were to default. In addition, the Company’s President and Chief Financial Officer, David Briskie, personally entered into a Guaranty of Validity representing the Company’s financial statements so long as the indebtedness is owing to Crestmark, maintaining certain covenants and guarantees.

 

The Company’s outstanding line of credit liability related to the Agreement was approximately $2,256,000 and $3,808,000 as of December 31, 2018 and 2017, respectively.

 

 

Future Liquidity Needs

 

The accompanying consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern. As of December 31, 2018, we had a significant accumulated deficit and we have experienced significant losses and incurred negative cash flows for the last few years. Net cash used in operating activities was $12,352,000 for the year ended December 31, 2018 compared to net cash used in operating activities of approximately $2,773,000 for the year ended December 31, 2017. Our cash and cash equivalents totaled $2,879,000 as of December 31, 2018. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof. Based on our current cash levels and our current rate of cash requirements, we will need to raise additional capital and/or will need to further reduce our expenses from current levels. Historically, we have financed our operations primarily through revenue generated from sales of our products and the public and private sales of our securities and we expect to continue to seek to obtain required capital in a similar manner. We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy. Additionally, we may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. If we are unable to obtain additional capital (which is not assured at this time), our long-term business plan may not be met, and we may not be able to fulfill our debt obligations.

 

We increased our Crestmark line of credit during the fourth quarter of 2017 and raised additional capital through our Preferred Series B offering that closed March 30, 2018 and Preferred Series C offering and private placement common stock offerings that closed in October of 2018; however, despite such actions, we do not believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof. 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.

  

On July 18, 2018, we entered into lending agreements (the “Lending Agreements”) with three separate entities and received loans in the total amount of $1,907,000, net of loan fees to be paid back by us with periodic payments, including accrued interest, over an 8-month period. The outstanding balance related to the Lending Agreements is approximately $504,000 as of December 31, 2018 and is included in other current liabilities on our balance sheet as of December 31, 2018.

 

On July 31, 2018, CLR entered into a 5-year contract for the sale and processing of over 41 million pounds of green coffee on an annual basis. The contract covers the period 2019 through 2023.

 

On December 13, 2018, CLR, entered into a Credit Agreement with Carl Grover (the “Credit Agreement”) pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in exchange issued to him a $5,000,000 credit note (“Credit Note”) secured by its green coffee inventory under a Security Agreement, dated December 13, 2018 (the “Security Agreement”), with Mr. Grover and CLR’s subsidiary, Siles Family Plantation Group S.A. (“Siles”), as guarantor, and Siles executed a separate Guaranty Agreement (“Guaranty”). In addition, Stephan Wallach and Michelle Wallach, pledged 1,500,000 shares of our common stock held by them to secure the Credit Note under a Security Agreement, dated December 13, 2018 with Mr. Grover. The Credit Agreement bears interest at a rate of eight percent (8%) per annum and paid quarterly in arrears with all principal and unpaid interest due December 2020. The remaining outstanding principal balance of the Credit Agreement is $5,000,000 as of December 31, 2018 which is included in notes payable remains outstanding.

 

On January 7, 2019, we entered into an At-the-Market Offering Agreement (the “ATM Agreement”) with The Benchmark Company, LLC (“Benchmark”), as sales agent, pursuant to which we may sell from time to time, at our option, shares of our common stock, par value $0.001 per share, through Benchmark, as sales agent (the “Sales Agent”), for the sale of up to $60,000,000 of shares of our common stock.

 

 

On February 15, 2019 and March 10, 2019, we closed our first and second tranches of our 2019 January Private Placement debt offering, respectively, pursuant to which we offered for sale a minimum of notes in the principal amount of $100,000 and a maximum of notes in the principal amount $10,000,000 (the “Notes”), with each investor receiving 2,000 shares of common stock for each $100,000 invested. We entered into subscription agreements with 13 accredited investors that we had a substantial pre-existing relationship with pursuant to which we received total gross proceeds in the aggregate of $2,440,000 and issued Notes in the aggregate principal amount of $2,440,000 and an aggregate of 48,800 shares of common stock. The placement agent will receive up to 50,000 shares of common stock in the offering. Each Note matures 24 months after issuance, bears interest at a rate of 6% per annum, is issued at a 5% original issue discount and the outstanding principal is convertible into shares of common stock at any time after the 180th day anniversary of the issuance of the Note, at a conversion price of $10 per share (subject to adjustment for stock splits, stock dividends and reclassification of the common stock.)

 

On February 7, 2019, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with one accredited investor that we had a substantial pre-existing relationship with to which we sold 250,000 shares of our common stock, par value $0.001 per share, at an offering price of $7.00 per share. Pursuant to the Purchase Agreement, we also issued to the investor a three-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. The proceeds were $1,750,000, consulting fees for arranging the Purchase Agreement include the issuance of 5,000 shares of restricted shares of our common stock, par value $0.001 per share, and 100,000 3-year warrants priced at $10.00. No cash commissions were paid.

 

On March 18, 2019, we entered into a two-year Secured Promissory Note (the “Note or Notes”) with two accredited investors that we had a substantial pre-existing relationship with and from whom we raised cash proceeds in the aggregate of $2,000,000. In consideration of the Notes, we issued 20,000 shares of our common stock par value $0.001 for each $1,000,000 invested as well as for each $1,000,000 invested five-year warrants to purchase 20,000 shares of our common stock at a price per share of $6.00. The Notes pay interest at a rate of eight percent (8%) per annum and interest is paid quarterly in arrears with all principal and unpaid interest due at maturity on March 18, 2021.

 

We believe our legal fees related to litigation will decrease in the future from the levels spent in 2018 and 2017. We also expect costs related to distributor events will decrease in 2019 from costs in 2018 and 2017. 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. Additionally, we believe with the recent increase in our common stock trading volume and increase in stock price, that we should be able to continue to raise additional funds through equity financings and/or debt restructuring.

 

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. There can be no assurance that any cost reductions implemented will correct our going concern issue. 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, 2018 and 2017.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

 

Item 8.  Consolidated Financial Statements

 

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm	F-1
Financial Statements:
Consolidated Balance Sheets - December 31, 2018 and 2017	F-2
Consolidated Statements of Operations - Years ended December 31, 2018 and 2017	F-3
Consolidated Statements of Comprehensive Loss - Years ended December 31, 2018 and 2017	F-4
Consolidated Statements of Stockholders' Equity - Years ended December 31, 2018 and 2017	F-5
Consolidated Statements of Cash Flows - Years ended December 31, 2018 and 2017	F-6
Notes to Consolidated Financial Statements	F-7

 

 

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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 3 to the financial statements, the Company changed its method of accounting for revenue from contracts with customers as a result of the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, effective January 1, 2018, under the modified retrospective method.

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 has recurring losses 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

April 15, 2019

 

 

Youngevity International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
	As of December 31,
	2018	2017
ASSETS
Current Assets
Cash and cash equivalents	$2,879	$673
Accounts receivable, trade	4,028	4,314
Income tax receivable	74	106
Inventory	21,776	22,073
Advance (Note 1)	5,000	-
Prepaid expenses and other current assets	5,263	3,999
Total current assets	39,020	31,165
Property and equipment, net	15,105	13,707
Deferred tax assets	148	286
Intangible assets, net	15,377	20,908
Goodwill	6,323	6,323
Total assets	$75,973	$72,389
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$8,478	$11,728
Accrued distributor compensation	3,289	4,277
Accrued expenses	6,582	5,437
Deferred revenues	2,312	3,386
Line of credit	2,256	3,808
Other current liabilities	1,912	1,144
Capital lease payable, current portion	1,168	983
Notes payable, current portion (Note 5)	141	176
Convertible notes payable, current portion (Note 6)	647	2,828
Warrant derivative liability	9,216	3,365
Contingent acquisition debt, current portion	795	587
Total current liabilities	36,796	37,719
Capital lease payable, net of current portion	1,107	694
Notes payable, net of current portion (Note 5)	7,629	4,372
Convertible notes payable, net of current portion (Note 6)	-	8,336
Contingent acquisition debt, net of current portion	7,466	13,817
Total liabilities	52,998	64,938
Commitments and contingencies (Note 10)
Convertible Preferred Stock, Series C –zero shares issued and outstanding at December 31, 2018 and 2017.	-	-
Stockholders’ Equity
Preferred Stock, $0.001 par value: 5,000,000 shares authorized Convertible Preferred Stock, Series A - 161,135 shares issued and outstanding at December 31, 2018 and 2017.	-	-
Convertible Preferred Stock, Series B – 129,437 and zero shares issued and outstanding at December 31, 2018 and 2017, respectively. $1.2 million liquidation preference at December 31, 2018.	-	-
Common stock, $0.001 par value: 50,000,000 shares authorized; 25,760,708 and 19,723,285 shares issued and outstanding at December 31, 2018 and 2017, respectively.	26	20
Additional paid-in capital	206,757	171,405
Accumulated deficit	(183,763)	(163,693)
Accumulated other comprehensive loss	(45)	(281)
Total stockholders’ equity	22,975	7,451
Total liabilities and stockholders’ equity	$75,973	$72,389