Youngevity International, Inc. - Quarter Report: 2018 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X]
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2018
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[ ]
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission file number:
000-54900
YOUNGEVITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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90-0890517
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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2400 Boswell Road, Chula Vista, CA
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91914
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area
code: (619) 934-3980
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[X]
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Emerging growth company
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[X]
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If an emerging growth company indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [X]
As of November 13, 2018, the issuer
had 22,836,193 shares of its
Common Stock, par value $0.001 per share, issued and
outstanding.
YOUNGEVITY INTERNATIONAL, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
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Item
1.
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1
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1
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2
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3
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4
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5
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Item
2.
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29
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Item
3.
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39
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Item
4.
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39
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PART II. OTHER INFORMATION
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Item
1.
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40
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Item
1A.
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40
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Item
2.
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42
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Item
3.
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42
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Item
4.
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42
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Item
5.
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42
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Item
6.
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43
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44
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ITEM 1. FINANCIAL STATEMENTS
Youngevity
International, Inc. and Subsidiaries
Condensed Consolidated Balance
Sheets
(In thousands, except share amounts)
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As of
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September 30,
2018
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December 31,
2017
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(Unaudited)
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ASSETS
Current Assets
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Cash
and cash equivalents
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$2,298
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$673
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Accounts
receivable, trade
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6,137
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4,314
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Income
tax receivable
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140
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106
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Inventory
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23,778
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22,073
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Prepaid
expenses and other current assets
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5,023
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3,999
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Total
current assets
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37,376
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31,165
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Property
and equipment, net
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13,733
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13,707
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Deferred
tax assets
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149
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286
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Intangible
assets, net
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16,822
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20,908
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Goodwill
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6,323
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6,323
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Total
assets
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$74,403
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$72,389
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
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Accounts
payable
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$9,937
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$11,728
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Accrued
distributor compensation
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4,056
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4,277
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Accrued
expenses
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6,746
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5,437
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Deferred
revenues
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4,516
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3,386
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Line
of credit
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2,500
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3,808
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Other
current liabilities
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2,309
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1,144
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Capital
lease payable, current portion
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1,137
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983
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Notes
payable, current portion
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139
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176
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Convertible
notes payable, current portion
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6,860
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2,828
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Warrant
derivative liability
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8,537
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3,365
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Contingent
acquisition debt, current portion
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702
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587
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Total
current liabilities
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47,439
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37,719
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Capital
lease payable, net of current portion
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839
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694
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Notes
payable, net of current portion
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4,281
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4,372
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Convertible
notes payable, net of current portion
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-
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8,336
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Contingent
acquisition debt, net of current portion
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10,116
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13,817
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Commitments and contingencies (Note 1)
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Convertible
Preferred Stock, Series C $0.001 par
value, 700,000 shares
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authorized at September 30, 2018 and zero
at December 31, 2017; 354,704
shares
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issued
and outstanding at September 30, 2018 and zero at December 31,
2017. $3.4 million liquidation preference at September 30,
2018
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2,309
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-
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Stockholders’ equity
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Preferred
Stock, $0.001 par value: 5,000,000 shares authorized
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Convertible
Preferred Stock, Series A - 161,135 shares issued and outstanding
at September 30, 2018 and December 31, 2017
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-
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-
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Convertible
Preferred Stock, Series B - 315,967 shares issued and outstanding
at September 30, 2018 and zero
at December 31, 2017. $3.0 million liquidation preference at
September 30, 2018
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-
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-
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Common
Stock, $0.001 par value: 50,000,000 shares authorized; 21,956,869
and 19,723,285 shares issued and outstanding at September 30, 2018
and December 31, 2017, respectively
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22
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20
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Additional
paid-in capital
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184,369
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171,405
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Accumulated
deficit
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(175,025)
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(163,693)
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Accumulated
other comprehensive income (loss)
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53
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(281)
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Total
stockholders’ equity
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9,419
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7,451
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Total liabilities and
stockholders’ equity
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$74,403
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$72,389
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See accompanying notes to condensed consolidated financial
statements.
Youngevity International,
Inc. and
Subsidiaries
Unaudited Condensed Consolidated
Statements of Operations
(In thousands, except share and per share amounts)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2018
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2017
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2018
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2017
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Revenues
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$39,082
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$44,395
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$126,331
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$124,655
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Cost
of revenues
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15,370
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18,631
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52,225
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52,923
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Gross
profit
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23,712
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25,764
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74,106
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71,732
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Operating
expenses
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Distributor
compensation
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15,076
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17,391
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47,141
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49,496
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Sales
and marketing
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3,962
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4,074
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10,537
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10,650
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General
and administrative
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3,880
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6,116
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14,957
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16,479
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Loss
on impairment of intangible assets
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2,200
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-
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2,200
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-
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Total
operating expenses
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25,118
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27,581
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74,835
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76,625
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Operating
loss
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(1,406)
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(1,817)
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(729)
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(4,893)
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Interest
expense, net
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(1,407)
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(1,752)
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(4,668)
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(4,207)
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Change
in fair value of warrant derivative liability
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(5,538)
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1,519
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(4,634)
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788
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Extinguishment
loss on debt
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-
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(308)
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(1,082)
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(308)
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Total
other expense
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(6,945)
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(541)
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(10,384)
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(3,727)
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Loss
before income taxes
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(8,351)
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(2,358)
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(11,113)
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(8,620)
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Income
tax provision (benefit)
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59
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(1,290)
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219
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(2,763)
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Net
loss
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$(8,410)
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$(1,068)
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$(11,332)
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$(5,857)
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Preferred
stock dividends
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(92)
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(3)
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(137)
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(9)
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Accretion
of discount from beneficial conversion feature on preferred
stock
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(1,386)
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-
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(1,386)
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-
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Net
loss attributable to common stockholders
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$(9,888)
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$(1,071)
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$(12,855)
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$(5,866)
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Net
loss per share, basic
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$(0.46)
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$(0.05)
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$(0.61)
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$(0.30)
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Net
loss per share, diluted
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$(0.46)
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$(0.05)
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$(0.61)
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$(0.30)
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Weighted
average shares outstanding, basic
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21,686,085
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19,678,577
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20,986,151
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19,655,312
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Weighted
average shares outstanding, diluted
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21,686,085
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19,678,577
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20,986,151
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19,655,312
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See accompanying notes to condensed consolidated financial
statements.
Youngevity
International, Inc. and
Subsidiaries
Unaudited Condensed Consolidated
Statements of Comprehensive Loss
(In thousands)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2018
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2017
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2018
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2017
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Net
loss
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$(8,410)
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$(1,068)
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$(11,332)
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$(5,857)
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Foreign
currency translation
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105
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(16)
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334
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(2)
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Total
other comprehensive income (loss)
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105
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(16)
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334
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(2)
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Comprehensive
loss
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$(8,305)
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$(1,084)
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$(10,998)
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$(5,859)
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See accompanying notes to condensed consolidated financial
statements.
Youngevity International, Inc. and
Subsidiaries
Unaudited Condensed Consolidated
Statements of Cash
Flows
(In thousands)
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Nine Months Ended
September 30,
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2018
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2017
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Cash Flows from Operating Activities:
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Net
loss
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$(11,332)
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$(5,857)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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3,781
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3,230
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Stock-based
compensation expense
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922
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471
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Amortization
of debt discounts and issuance costs
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1,158
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1,252
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Amortization
of prepaid advisory fees
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249
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42
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Stock
issuance for services
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-
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200
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Stock
issuance related to debt financing
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-
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106
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Fair
value of warrant issuance
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-
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341
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Change
in fair value of warrant derivative liability
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4,634
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(788)
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Expenses
allocated in profit sharing agreement
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-
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(195)
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Change
in fair value of contingent acquisition debt
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(4,076)
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(1,020)
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Extinguishment
loss on debt
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1,082
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308
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Changes
in inventory reserve
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(765)
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-
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Loss
on impairment of intangible assets
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2,200
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-
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Deferred
taxes
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137
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(2,846)
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Changes
in operating assets and liabilities, net of effect from business
combinations:
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Accounts
receivable
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(1,823)
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(1,452)
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Inventory
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(940)
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440
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Prepaid
expenses and other current assets
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(263)
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(282)
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Accounts
payable
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(1,642)
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2,143
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Accrued
distributor compensation
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(221)
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515
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Deferred
revenues
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1,130
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129
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Accrued
expenses and other liabilities
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1,071
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1,480
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Income
taxes receivable
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(34)
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-
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Net Cash Used in Operating Activities
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(4,732)
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(1,783)
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Cash Flows from Investing Activities:
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Acquisitions,
net of cash acquired
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(50)
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(175)
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Purchases
of property and equipment
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(252)
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(690)
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Net Cash Used in Investing Activities
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(302)
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(865)
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Cash Flows from Financing Activities:
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Proceeds
from issuance of Series B convertible preferred stock, net of
offering costs
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3,289
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-
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Proceeds
from issuance of Series C convertible preferred stock, net of
offering costs
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3,197
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-
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Proceeds
from private placement of common stock, net of offering
costs
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985
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-
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Proceeds
from issuance of convertible notes, net of offering
costs
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-
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2,720
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Proceeds
from the exercise of stock options and warrants, net
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3
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28
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Proceeds
from factoring company
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-
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1,723
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Proceeds
from short-term notes payable
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1,907
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-
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Payments
net of proceeds on line of credit
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(1,308)
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-
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Payments
of notes payable
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(732)
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(159)
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Payments
of contingent acquisition debt
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(137)
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(440)
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Payments
of capital leases
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(840)
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(718)
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Dividends
paid on preferred stock
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(39)
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-
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Net Cash Provided by Financing Activities
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6,325
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3,154
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Foreign Currency Effect on Cash
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334
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(2)
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Net
increase in cash and cash equivalents
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1,625
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504
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Cash and Cash Equivalents, Beginning of Period
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673
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869
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Cash and Cash Equivalents, End of Period
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$2,298
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$1,373
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Supplemental Disclosures of Cash Flow Information
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Cash paid during the period for:
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Interest
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$3,517
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$2,773
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Income
taxes
|
$33
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$31
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Supplemental Disclosures of Noncash Investing and Financing
Activities
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Purchases
of property and equipment funded by capital leases
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$1,113
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$398
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Acquisitions
of net assets in exchange for contingent debt, net of purchase
price adjustments (see Note 4)
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$527
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$5,920
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Stock
issued for services (see Note 9)
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$1,010
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$150
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Fair
value of the bifurcated embedded conversion option recorded as a
derivative liability
|
$-
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$330
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Fair
value of warrants issued in connection with financing recorded as a
derivative liability
|
$-
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$2,334
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Conversion
of 2017 Notes to common stock (see Note 6)
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$7,254
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$-
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Dividends
declared but not paid at end of period (see Note 9)
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$89
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$-
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Change
in warrant derivative liability to equity classification, Warrant
Modification (see Note 7)
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$284
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$-
|
See accompanying notes to condensed consolidated financial
statements.
Youngevity
International, Inc. and
Subsidiaries
Notes to Unaudited Condensed
Consolidated Financial Statements
Note 1. Basis of Presentation and Description of Business and
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the
“SEC”) for interim financial information. Accordingly,
certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to
such rules and regulations.
Youngevity International, Inc. (the “Company”)
consolidates all wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The statements presented as of September 30, 2018 and for the three
and nine months ended September 30, 2018 and 2017 are unaudited. In
the opinion of management, these financial statements reflect all
normal recurring and other adjustments necessary for a fair
presentation, and to make the financial statements not misleading.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
included in the Company’s Form 10-K for the year ended
December 31, 2017, filed with the SEC on March 30, 2018. The
results for interim periods are not necessarily indicative of the
results for the entire year.
Nature of Business
The Company, founded in 1996, develops and distributes health and
nutrition related products through its global independent direct
selling network, also known as multi-level marketing, and sells
coffee products to commercial customers. The Company
operates in two business segments, its direct selling segment where
products are offered through a global distribution network of
preferred customers and distributors and its commercial coffee
segment where products are sold directly to
businesses.
The Company operates through the following wholly-owned domestic
subsidiaries: AL Global Corporation, which operates its direct
selling networks, CLR Roasters, LLC (“CLR”), its
commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC,
Youngevity Global LLC and the wholly-owned foreign subsidiaries:
Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles
Plantation Family Group S.A. (“Siles”), located in
Nicaragua, Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd.,
Youngevity Russia, LLC, Youngevity Colombia S.A.S, Youngevity
International Singapore Pte. Ltd., Mialisia Canada, Inc. and Legacy
for Life Limited (Hong Kong). The Company also operates through the
BellaVita Group LLC, with operations in Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Japan. The Company also operates subsidiary branches of
Youngevity Global LLC in the Philippines and
Taiwan.
Segment Information
The Company has two reportable segments: direct selling and
commercial coffee. The direct selling segment develops and
distributes health and wellness products through its global
independent direct selling network also known as multi-level
marketing. The commercial coffee segment is a coffee roasting and
distribution company specializing in gourmet coffee. The
determination that the Company has two reportable segments is based
upon the guidance set forth in Accounting Standards Codification
(“ASC”) Topic 280, “Segment
Reporting.” During the
three months ended September 30, 2018, the Company derived
approximately 88% of its revenue from its direct selling segment
and approximately 12% of its revenue from its commercial coffee
segment. During the three months ended September 30, 2017,
the Company derived approximately 85% of its revenue from its
direct selling segment and approximately 15% of its revenue from
its commercial coffee segment. During the nine months ended
September 30, 2018, the Company derived approximately 84% of its
revenue from its direct selling segment and approximately 16% of
its revenue from its commercial coffee segment. During the nine months ended September 30, 2017,
the Company derived approximately 86% of its revenue from its
direct selling segment and approximately 14% of its revenue from
its commercial coffee segment.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have
been prepared and presented on a basis assuming the Company will
continue as a going concern. The Company has sustained significant
net losses during the nine months ended September 30, 2018 of
$11,332,000 and $5,857,000 for
the nine months ended September 30, 2017. Net cash used in
operating activities was $4,732,000 for the nine months ended
September 30, 2018 compared to net cash used in operating
activities of $1,783,000 for the nine months ended September 30,
2017. The Company does not currently believe that its existing cash
resources are sufficient to meet the Company’s anticipated
needs over the next twelve months from the date hereof. Based on
its current cash levels and its current rate of cash requirements,
the Company will need to raise additional capital and/or will need
to further reduce its expenses from current levels. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern.
The
Company anticipates revenues to continue to grow and it intends to
make necessary cost reductions related to international operations
that are not performing and reduce non-essential
expenses.
The
Company also believes with the recent increase in the
Company’s trading volume of its common stock and increase in
stock price, it should be able to raise additional funds through
equity financings and/or debt restructuring.
Between
August 31, 2018 and September 28, 2018, the Company entered into
Securities Purchase Agreements (the “Purchase
Agreements”) with five (5) investors with whom the Company
had a substantial pre-existing relationship (the
“Investors”) pursuant to which the Company sold, in a
private placement, (the “August 2018 Private
Placement”) an aggregate of 210,527 shares of common stock
and received gross proceeds
of $1,000,003. The net proceeds to the
Company from the August 2018 Private Placement were $985,000 after deducting advisory fees,
closing and issuance costs.
Between August 17, 2018 and September 28, 2018, the Company entered
into Securities Purchase Agreements (the “Preferred Purchase
Agreements”) with 11 investors, pursuant to which the Company
sold in a private placement (the “Preferred Offering”)
an aggregate of 354,704 shares of Series C convertible preferred
stock and received gross
proceeds of $3,369,729. The net
proceeds to the Company from the Preferred Offering
were approximately $3,197,000 after
deducting commissions, closing and issuance
costs.
On March 30, 2018, the Company completed its best efforts offering
of Series B Convertible Preferred Stock (“Series B
Offering”), pursuant to which the Company sold 381,173 shares
of Series B Convertible Preferred Stock at an offering price of
$9.50 per share and received gross proceeds of $3,621,143.
The net proceeds to the Company from
the Series B Offering were $3,289,861 after deducting commissions,
closing and issuance costs.
Depending
on market conditions, there can be no assurance that additional
capital will be available when needed or that, if available, it
will be obtained on terms favorable to the Company or to its
stockholders.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect the
Company’s ability to operate as a going concern. The
financial statements do not include any adjustments that might be
necessary from the outcome of this uncertainty.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense for each reporting period. Estimates are
used in accounting for, among other things, allowances for doubtful
accounts, deferred taxes and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under the
Company’s stock-based compensation plan, fair value of assets
and liabilities acquired in business combinations, capital leases,
asset impairments, estimates of future cash flows used to evaluate
impairments, useful lives of property, equipment and intangible
assets, value of contingent acquisition debt, inventory
obsolescence, and sales returns.
Actual results may differ from previously estimated amounts and
such differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected
prospectively in the period they occur.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
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 bears 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%. 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, Mr. 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, Mr. Briskie, personally entered into a Guaranty of
Validity representing the Company’s financials so long as the
indebtedness is owing to Crestmark, maintaining certain covenants
and guarantees.
The Company’s outstanding line of credit liability related to
the Agreement was approximately $2,500,000 and $3,808,000 as of
September 30, 2018 and December 31, 2017,
respectively.
Short-term Notes Payable
On July 18, 2018, the Company entered into lending agreements (the
“Lending Agreements”) with three separate entities and
received loans in the total amount of $2,000,000 to be paid back
over an eight-month period on a monthly basis. Payments are
comprised of principal and accrued interest with an effective
interest rate between 29% and 35%. The
Company’s outstanding balance related to the Lending
Agreements is approximately $1,303,000 as of September 30, 2018 and
is included in other current liabilities on the Company’s
balance sheet as of September 30, 2018.
Related Party Transactions
Richard Renton
Richard Renton is a member of the Board of Directors and owns and
operates WVNP, Inc., a supplier of certain inventory items sold by
the Company. The Company made purchases of approximately $34,000
and $61,000 from WVNP Inc., for the three months ended September
30, 2018 and 2017, respectively, and $151,000 and $142,000 for the
nine months ended September 30, 2018 and 2017, respectively. In
addition, Mr. Renton is a distributor of the Company and earns
commissions on product sales.
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board directors and owns a
note (the “2014 Note”) issued in the Company’s
private placement consummated in 2014 (the “2014 Private
Placement”) in the principal amount of $75,000 convertible
into 10,714 shares of common stock and a warrant (the “2014
Warrant”) issued in the 2014 Private Placement exercisable
for 14,673 shares of common stock. Mr. Sallwasser acquired in the
2017 Private Placement a 2017 Note in the principal amount of
$37,615 convertible into 8,177 shares of common stock and a warrant
(the “2017 Warrant”) issued, in the 2017 Private
Placement, exercisable for 5,719 shares of common stock. Mr.
Sallwasser also acquired in the 2017 Private Placement in exchange
for the “2015 Note” he owned, acquired in the
Company’s private placement consummated in 2015 (the
“2015 Private Placement”), a 2017 Note in the principal
amount of $5,000 convertible into 1,087 shares of common stock and
a 2017 Warrant exercisable for 543 shares of common stock. He also
owns 58,129 shares of common stock and an option to purchase 5,000
shares of common stock that are immediately exercisable. On March
30, 2018, the Company completed its Series B Offering, and in
accordance with the terms of the 2017 Notes, Mr. Sallwasser’s
2017 Notes converted to 9,264 shares of the Company’s common
stock.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company
The Company’s coffee segment, CLR, is associated with
Hernandez, Hernandez, Export Y Company (“H&H”), a
Nicaragua company, through sourcing arrangements to procure
Nicaraguan green coffee beans and in March 2014 as part of the
Siles acquisition, CLR engaged the owners of H&H as employees
to manage Siles. The Company made purchases of approximately
$1,896,000 and $3,533,000 from this supplier for the three months
ended September 30, 2018 and 2017, respectively and $8,969,000 and
$8,707,000 for the nine months ended September 30, 2018 and 2017,
respectively.
In addition, CLR sold approximately $117,000 and $2,387,000 for the
three months ended September 30, 2018 and 2017, respectively and
$3,419,000 and $3,934,000 for the nine months ended September 30,
2018 and 2017, respectively, of green coffee beans to H&H
Coffee Group Export, a Florida based company which is affiliated
with H&H.
H&H
Coffee Group Export also participated
in the Company’s Series B Offering and purchased 126,316
shares of Series B Convertible Preferred Stock at $9.50 per share
for an aggregate investment of $1,200,000. As of September 30,
2018, the Series B Convertible Preferred Stock held by
H&H Coffee Group Export remains
outstanding.
Revenue Recognition
The Company recognizes revenue from product sales when the
following four criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred, or services have been
rendered, the selling price is fixed or determinable, and
collectability is reasonably assured. The Company ships the
majority of its direct selling segment products directly to the
distributors primarily via UPS, USPS or FedEx and receives
substantially all payments for these sales in the form of credit
card transactions. The Company regularly monitors its use of credit
card or merchant services to ensure that its financial risk related
to credit quality and credit concentrations is actively managed.
Revenue is recognized upon passage of title and risk of loss to
customers when product is shipped from the fulfillment facility.
The Company ships the majority of its coffee segment products via
common carrier and invoices its customer for the products. Revenue
is recognized when the title and risk of loss is passed to the
customer under the terms of the shipping arrangement, typically,
FOB shipping point.
The Company also charges fees to become a distributor, and earn a
position in the network genealogy, which are recognized as revenue
in the period received. The Company’s distributors are
required to pay a one-time enrollment fee and receive a welcome kit
specific to that country or region that consists of forms, policy
and procedures, selling aids, access to the Company’s
distributor website and a genealogy position with no down line
distributors.
Sales revenue and a reserve for estimated returns are recorded net
of sales tax.
Deferred Revenues and Costs
As of September 30, 2018, and December 31, 2017, the balance in
deferred revenues was approximately $4,516,000 and $3,386,000,
respectively. Deferred revenue related to the Company’s
direct selling segment is attributable to the Heritage Makers
product line and also for future Company convention and distributor
events. In addition, the Company recognizes deferred revenue from
the commercial coffee segment.
Deferred revenue related to Heritage Makers was approximately
$2,356,000 and $1,882,000, as of September 30, 2018, and December
31, 2017, respectively. The deferred revenue represents Heritage
Maker’s obligation for points purchased by customers that
have not yet been redeemed for product. Cash received for points
sold is recorded as deferred revenue. Revenue is recognized when
customers redeem the points and the product is
shipped.
Deferred costs relate to Heritage Makers prepaid commissions that
are recognized in expense at the time the related revenue is
recognized. As of September 30,
2018, and December 31, 2017, the balance in deferred costs was
approximately $447,000 and $433,000, respectively, and is included
in prepaid expenses and current assets.
Deferred revenue related to CLR as of September 30, 2018 and
December 31, 2017 was approximately $2,015,000 and $1,291,000,
respectively, and represents deposits on customer orders that have
not yet been completed and shipped.
Deferred revenue related to pre-enrollment in upcoming conventions
and distributor events of approximately $145,000 and $213,000,
as of September 30, 2018 and December 31, 2017, respectively,
relate primarily to the Company’s 2018 events. The Company
does not recognize this revenue until the event
occurs.
Plantation Costs
The Company’s commercial coffee segment includes the results
of Siles, which is a 500-acre coffee plantation and a
dry-processing facility located on 26 acres located in Matagalpa,
Nicaragua. Siles is a wholly-owned subsidiary of CLR, and the
results of CLR include the depreciation and amortization of
capitalized costs, development and maintenance and harvesting costs
of Siles. In accordance with GAAP plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when the coffee is sold. Deferred
harvest costs accumulate throughout the year and are expensed over
the remainder of the year as the coffee is sold. The difference
between actual harvest costs incurred and the amount of harvest
costs recognized as expense is recorded as either an increase or
decrease in deferred harvest costs, which is reported as an asset
and included with prepaid expenses and other current assets in the
condensed consolidated balance sheets. Once the harvest is
complete, the harvest costs are then recognized as
inventory.
During the Company’s second quarter ended June 30, 2018 the
Company completed its 2018 harvest and recognized $439,000 in
inventory costs.
The 2019 harvest is expected to be completed during the
Company’s second quarter of 2019.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance
with ASC Topic 718, “Compensation – Stock
Compensation,” which
establishes accounting for equity instruments exchanged for
employee services. Under such provisions, stock-based compensation
cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense, under the
straight-line method, over the vesting period of the equity
grant.
The Company accounts for equity instruments issued to non-employees
in accordance with authoritative guidance for equity-based payments
to non-employees. Stock options issued to non-employees are
accounted for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Income Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, “Income Taxes,” under the asset and
liability method which includes the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial
statements. Under this approach, deferred taxes are recorded for
the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable
for the current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
statement and tax basis of assets and liabilities and are adjusted
for changes in tax rates and tax laws when changes are enacted. The
effects of future changes in income tax laws or rates are not
anticipated.
Income taxes for the interim periods are computed using the
effective tax rates estimated to be applicable for the full fiscal
year, as adjusted for any discrete taxable events that occur during
the period.
The Company files income tax returns in the United States
(“U.S.”) on a federal basis and in many U.S. state and
foreign jurisdictions. Certain tax years remain open to examination
by the major taxing jurisdictions to which the Company is
subject.
Commitments and Contingencies
The Company is from time to time, the subject of claims and suits
arising out of matters related to the Company’s business. The
Company is party to litigation at the present time and may become
party to litigation in the future. In general, litigation claims
can be expensive, and time consuming to bring or defend against and
could result in settlements or damages that could significantly
affect financial results. It is not possible to predict the final
resolution of the current litigation to which the Company is party
to, and the impact of certain of these matters on the
Company’s business, results of operations, and financial
condition could be material. Regardless of the outcome, litigation
has adversely impacted the Company’s business because of
defense costs, diversion of management resources and other
factors.
Recently Issued Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2018-02, Income Statement - Reporting
Comprehensive Income (Topic
220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive
Income. The amendments in this
ASU allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from
the Tax Cuts and Jobs Act (H.R.1) (the, “Act”).
Consequently, the amendments eliminate the stranded tax effects
resulting from the Act and will improve the usefulness of
information reported to financial statement users. However, because
the amendments only relate to the reclassification of the income
tax effects of the Act, the underlying guidance that requires that
the effect of a change in tax laws or rates be included in income
from continuing operations is not affected. The amendments in this
ASU also require certain disclosures about stranded tax effects.
This ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. The adoption of
this standard is not expected to have a material impact on the
Company’s condensed consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock
Compensation (Topic 718), which
clarifies when changes to the terms or conditions of a share-based
payment award must be accounted for as modifications. ASU 2017-09
will reduce diversity in practice and result in fewer changes to
the terms of an award being accounted for as modifications. Under
ASU 2017-09, an entity will not apply modification accounting to a
share-based payment award if the award’s fair value, vesting
conditions and classification as an equity or liability instrument
are the same immediately before and after the change. ASU 2017-09
will be applied prospectively to awards modified on or after the
adoption date. This ASU is effective for annual periods, and
interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted. The adoption of this standard did not have a
material impact on the Company’s condensed consolidated
financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share
(Topic 260): Distinguishing Liabilities
from Equity (Topic 480):
Derivatives and
Hedging (Topic 815): I.
Accounting for
Certain Financial Instruments with Down Round Features
and II. Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception. Part I of this update addresses public
entities that issue warrants, convertible debt or convertible
preferred stock that contain down round features. Part II of
this update recharacterizes the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content
in the Codification, to a scope exception. Those amendments do not
have an accounting effect. This ASU is effective for fiscal years
beginning after December 15, 2018, and interim periods within
fiscal years beginning after December 15, 2019. Early adoption is
permitted. The Company is expected to adopt the standard no later
than January 1, 2019. The Company is currently assessing the impact
that the new standard will have on its condensed consolidated
financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash
Receipts and Cash Payments, to
improve financial reporting in regard to how certain transactions
are classified in the statement of cash flows. The ASU requires
that (1) debt extinguishment costs be classified as cash outflows
for financing activities and provides additional classification
guidance for the statement of cash flows, (2) the classification of
cash receipts and payments that have aspects of more than one class
of cash flows to be determined by applying specific guidance under
generally accepted accounting principles, and (3) each separately
identifiable source or use within the cash receipts and payments be
classified on the basis of their nature in financing, investing or
operating activities. The ASU is effective for fiscal years
beginning after December 15, 2018, including interim periods
beginning after December 15, 2019. The Company has
assessed the adoption of this ASU and it is not expected to have a
material impact on the Company’s condensed consolidated
financial statements.
In March 2016, the FASB issued ASU
2016-09, Compensation–Stock
Compensation (Topic
718): Improvements to Employee
Share-Based Payment Accounting. The ASU includes various provisions to simplify
the accounting for share-based payments with the goal of reducing
the cost and complexity of accounting for share-based payments. The
amendments may significantly impact net income, earnings per share
and the statement of cash flows as well as present implementation
and administration challenges for companies with significant
share-based payment activities. ASU 2016-09 was effective for the
Company beginning January 1, 2018. The adoption of this standard
did not have a material impact on the Company’s condensed
consolidated financial
statements.
In
January 2017, the FASB issued
ASU 2017-04, Intangibles
— Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. This ASU simplifies the test for goodwill
impairment by removing Step 2 from the goodwill impairment test.
Companies will now perform the goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount, recognizing an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value
not to exceed the total amount of goodwill allocated to that
reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. The ASU is effective for
goodwill impairment tests in fiscal years beginning after December
15, 2019 for public companies, with early adoption permitted for
goodwill impairment tests performed after January 1, 2017.
The adoption of this standard is not
expected to have a material impact on the Company’s condensed
consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842). The standard requires lessees to
recognize lease assets and lease liabilities on the balance sheet
and requires expanded disclosures about leasing arrangements. ASU
2016-02 is effective for the Company beginning January 1, 2019. The
Company is currently assessing the impact that the new standard
will have on its condensed consolidated financial statements, which
will consist primarily of a balance sheet gross up of the
Company’s operating
leases.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers
(Topic 606). The new revenue recognition standard provides a
five-step analysis of contracts to determine when and how revenue
is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. In August 2015, the FASB deferred the effective
date of ASU 2014-09 for all entities by one year to annual
reporting periods beginning after December 15, 2018. The FASB has
issued several updates subsequently including implementation
guidance on principal versus agent considerations, on how an entity
should account for licensing arrangements with customers, and to
improve guidance on assessing collectability, presentation of sales
taxes, noncash consideration, and contract modifications and
completed contracts at transition. The amendments in this series of
updates shall be applied either retrospectively to each period
presented or as a cumulative-effect adjustment as of the date of
adoption. Early adoption is permitted. The Company continues to
assess the impact of this ASU, and related subsequent updates, will
have on its condensed consolidated financial statements. As of
September 30, 2018, the Company is in the process of reviewing the
guidance to identify how this ASU will apply to the Company's
revenue reporting process in 2019. The final impact of this ASU on
the Company's condensed consolidated financial statements will not
be known until the assessment is complete. The Company will update
disclosures in future periods as the analysis is
completed.
Note 2. Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
computed by dividing net loss attributable to common stockholders
by the sum of the weighted-average number of common shares
outstanding during the period and the weighted-average number of
dilutive common share equivalents outstanding during the period,
using the treasury stock method. Dilutive common share equivalents
are comprised of stock options, restricted stock, warrants,
convertible preferred stock and common stock associated with the
Company's convertible notes based on the average stock price for
each period using the treasury stock method. Potentially dilutive
shares are excluded from the computation of diluted net loss per
share when their effect is anti-dilutive. In periods where a net
loss is presented, all potentially dilutive securities are
anti-dilutive and are excluded from the computation of diluted net
loss per share.
Potentially dilutive securities were 8,053,426 for the three and
nine months ended September 30, 2018. Potentially dilutive
securities were 7,506,283 for
the three and nine months ended September 30,
2017.
Note
3. Inventory and
Cost of Revenues
Inventory is stated at the lower of cost or net realizable value
net of the valuation allowance. Cost is determined using the
first-in, first-out method. The Company records an inventory
reserve for estimated excess and obsolete inventory based upon
historical turnover, market conditions and assumptions about future
demand for its products. When applicable, expiration dates of
certain inventory items with a definite life are taken into
consideration.
Inventories consist of the following (in thousands):
|
|
As of
|
|
|
|
September 30,
2018
|
December 31,
2017
|
|
Finished
goods
|
$11,366
|
$10,994
|
|
Raw
materials
|
14,241
|
12,143
|
|
|
25,607
|
23,137
|
|
Reserve
for excess and obsolete
|
(1,829)
|
(1,064)
|
|
Inventory,
net
|
$23,778
|
$22,073
|
Cost of revenues includes the cost of inventory, shipping and
handling costs, royalties associated with certain products,
transaction banking costs, warehouse labor costs and depreciation
on certain assets.
Note 4. Acquisitions and Business Combinations
The Company accounts for business combinations under the
acquisition method and allocates the total purchase price for
acquired businesses to the tangible and identified intangible
assets acquired and liabilities assumed, based on their estimated
fair values. When a business combination includes the exchange of
the Company’s common stock, the value of the common stock is
determined using the closing market price as of the date such
shares were tendered to the selling parties. The fair values
assigned to tangible and identified intangible assets acquired and
liabilities assumed are based on management or third-party
estimates and assumptions that utilize established valuation
techniques appropriate for the Company’s industry and each
acquired business. Goodwill is recorded as the excess, if any, of
the aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identifiable 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.
During the nine months ended September 30, 2018, the Company
entered into two acquisitions, which are detailed below. The
acquisitions were conducted in an effort to expand the
Company’s distributor network within the direct selling
segment, enhance and expand its product portfolio, and diversify
its product mix. As a result of the Company’s business
combinations, the Company’s distributors and customers will
have access to the acquired company’s products and acquired
company’s distributors and clients will gain access to
products offered by the Company.
As such, the major purpose for all of the business combinations was
to increase revenue and profitability. The acquisitions were
structured as asset purchases which resulted in the recognition of
certain intangible assets.
During the nine months ended September 30, 2018 the Company
adjusted the preliminary purchase price for one of its 2017
acquisitions and two 2018 acquisitions which, resulted in an
adjustment to the related intangibles and contingent debt in the
amount of $1,933,000. In addition, during the nine months ended
September 30, 2018 the Company removed the contingent debt
associated with the Nature’s Pearl Corporation acquisition
from 2016 due to a breach of the asset purchase agreement by
Nature's Pearl and amended certain terms of the existing agreement.
As a result, the Company is no longer obligated under the related
asset purchase agreement to make payments. The Company recorded a
reduction to the acquisition debt for Nature’s Pearl
Corporation in the amount of approximately $1,246,000 with a
corresponding credit to general and administrative expense in the
Statement of Operations.
2018 Acquisitions
Doctor’s Wellness Solutions Global LP
(ViaViente)
On
March 1, 2018, the Company
acquired certain assets of Doctor’s Wellness Solutions Global
LP (“ViaViente”).
ViaViente is the distributor of The ViaViente Miracle, a
highly-concentrated, energizing whole fruit puree blend that is
rich in Anti-Oxidants and naturally-occurring vitamins and
minerals.
The Company is obligated to make monthly payments based on a
percentage of the ViaViente
distributor revenue derived from sales of the Company’s
products and a percentage of royalty revenue derived from sales of
ViaViente’s products until the earlier of the date that is
five (5) years from the closing date or such time as the Company
has paid to ViaViente aggregate cash payments of the ViaViente
distributor revenue and royalty revenue equal to the maximum
aggregate purchase price of $3,000,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,375,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the current quarter, the
Company reviewed the initial valuation of $1,375,000 and reduced it
by $778,000 based on information that existed as of the acquisition
date but was not known to the Company at that time. The contingent
liability was also reduced by $778,000.
The revenue impact from the ViaViente acquisition, included in the condensed
consolidated statements of operations for the three and nine months
ended September 30, 2018 was approximately $362,000 and $1,053,000,
respectively.
The pro-forma effect assuming the business combination with
ViaViente discussed above had occurred
at the beginning of the year is not presented as the information
was not available.
Nature Direct
On
February 12, 2018, the Company
acquired certain assets and 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.
The Company is obligated to make monthly payments based on a
percentage of the Nature Direct distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of the Nature Direct products until the earlier of the date that is
twelve (12) years from the closing date or such time as the Company
has paid to Nature Direct aggregate cash payments of the Nature
Direct distributor revenue and royalty
revenue equal to the maximum aggregate purchase price of
$2,600,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,085,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred. The Company received approximately
$90,000 of inventories from Nature Direct and has agreed to pay for
the inventory and assumed liabilities of $50,000. This payment is
applied to the maximum aggregate purchase price.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the current quarter, the
Company reviewed the initial valuation of $1,085,000 and reduced it
by $526,000 based on information that existed as of the acquisition
date but was not known to the Company at that time. The contingent
liability was also reduced by $526,000.
The revenue impact from the Nature Direct acquisition, included in the condensed
consolidated statements of operations for the three and nine months
ended September 30, 2018 was approximately $307,000 and $962,000,
respectively.
The pro-forma effect assuming the business combination with
Nature Direct discussed above had
occurred at the beginning of the year is not presented as the
information was not available.
2017 Acquisition of BeautiControl (impairment of intangible
assets)
On
December 13, 2017, the Company entered into an agreement with
BeautiControl whereby the Company acquired certain assets of the
BeautiControl cosmetic company. BeautiControl was a direct sales
company specializing in cosmetics and skincare
products.
The contingent consideration’s estimated fair value at the
date of acquisition was $2,625,000. The purchase price allocation
was as follows (in thousands):
|
Distributor
organization
|
$1,275
|
|
Customer-related
intangible
|
765
|
|
Trademarks
and trade name
|
585
|
|
Total
purchase price
|
$2,625
|
In determining the fair value of the assets acquired and the
purchase price, initially it was based on a number of products to
be made available to the Company through collaboration with the
seller, and ensuring active participation by BeautiControl’s
distributor organization. Delays in the Company’s ability to
access many key products have substantially reduced the potential
to deliver the revenues initially anticipated. As a result of this, when the Company re-assessed
the contingent liability as of September 30, 2018 the Company
recorded an adjustment to reduce the contingent liability by
approximately $2,200,000 and a corresponding reduction to the
contingent liability revaluation expense included in general and
administrative expense. The
Company also determined that the underlying intangible assets were
impaired and recorded an adjustment to reduce the intangible assets
of approximately $2,200,000 resulting in a corresponding loss on
impairment on the Company’s condensed statements of
operations for the three and nine months ended September 30, 2018,
which reduced the corresponding intangible assets to the
following:
|
Distributor
organization
|
$197
|
|
Customer-related
intangible
|
127
|
|
Trademarks
and trade name
|
101
|
|
Total
|
$425
|
Note 5. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of distributor organizations,
trademarks and tradenames, customer relationships and internally
developed software. The Company's acquired intangible
assets, which are subject to amortization over their estimated
useful lives, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
intangible asset may not be recoverable. An impairment loss is
recognized when the carrying amount of an intangible asset exceeds
its fair value.
Intangible assets consist of the following (in
thousands):
|
|
September 30, 2018
|
December 31, 2017
|
||||
|
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|
Distributor
organizations
|
$15,050
|
$9,394
|
$5,656
|
$16,204
|
$8,363
|
$7,841
|
|
Trademarks
and trade names
|
7,553
|
1,669
|
5,884
|
7,779
|
1,229
|
6,550
|
|
Customer
relationships
|
10,673
|
5,578
|
5,095
|
10,966
|
4,711
|
6,255
|
|
Internally
developed software
|
720
|
533
|
187
|
720
|
458
|
262
|
|
Intangible
assets
|
$33,996
|
$17,174
|
$16,822
|
$35,669
|
$14,761
|
$20,908
|
Amortization expense related to intangible assets was approximately
$724,000 and $712,000 for the three months ended September 30, 2018
and 2017, respectively. Amortization expense related to intangible
assets was approximately $2,416,000 and $2,047,000 for the nine
months ended September 30, 2018 and 2017,
respectively.
Trade names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. As of September 30, 2018 and
December 31, 2017, approximately $1,649,000 in trademarks from
business combinations have been identified as having indefinite
lives.
During
the three months ended September 30, 2018, the Company also determined that the underlying
intangible assets associated with its BeautiControl acquisition
were impaired and recorded a loss on impairment of intangible
assets of approximately $2,200,000 (see Note 4,
above).
Goodwill
Goodwill is recorded as the excess, if any, of the aggregate fair
value of consideration exchanged for an acquired business over the
fair value (measured as of the acquisition date) of total net
tangible and identified intangible assets acquired. In accordance
with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic
350, “Intangibles —
Goodwill and Other”, goodwill and other intangible assets with
indefinite lives are not amortized but are tested for impairment on
an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. The Company conducts annual reviews for goodwill and
indefinite-lived intangible assets in the fourth quarter or
whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully
recoverable.
The Company first assesses qualitative factors to determine whether
it is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. The testing is generally performed at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company has determined that its reporting units for goodwill
impairment testing are the Company’s reportable segments. As
such, the Company analyzes its goodwill balances separately for the
commercial coffee reporting unit and the direct selling reporting
unit. The goodwill balance as of September 30, 2018 and December
31, 2017 was $6,323,000. There were no triggering events indicating
impairment of goodwill or intangible assets during the three and
nine months ended September 30, 2018 and 2017, other than discussed
above and in Note 4 above.
Goodwill consists of the following (in thousands):
|
|
September 30,
2018
|
December 31,
2017
|
|
Goodwill,
commercial coffee
|
$3,314
|
$3,314
|
|
Goodwill,
direct selling
|
3,009
|
3,009
|
|
Total
goodwill
|
$6,323
|
$6,323
|
Note 6. Convertible Notes Payable
Total convertible notes payable as of September 30, 2018 and
December 31, 2017, net of debt discount outstanding consisted of
the amount set forth in the following table (in
thousands):
|
|
September 30,
2018
|
December 31,
2017
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$4,750
|
$4,750
|
|
Debt
discounts
|
(873)
|
(1,659)
|
|
Carrying
value of 2014 Notes
|
3,877
|
3,091
|
|
|
|
|
|
8%
Convertible Notes due October and November 2018 (2015 Notes),
principal
|
3,000
|
3,000
|
|
Debt
discounts
|
(17)
|
(172)
|
|
Carrying
value of 2015 Notes
|
2,983
|
2,828
|
|
|
|
|
|
8%
Convertible Notes due July and August 2020 (2017 Notes),
principal
|
-
|
7,254
|
|
Fair
value of bifurcated embedded conversion option of 2017
Notes
|
-
|
200
|
|
Debt
discounts
|
-
|
(2,209)
|
|
Carrying
value of 2017 Notes
|
-
|
5,245
|
|
Total
carrying value of convertible notes payable
|
$6,860
|
$11,164
|
July 2014 Private Placement
Between July 31, 2014 and September 10, 2014 the Company entered
into Note Purchase Agreements related to the 2014 Private Placement
with seven accredited investors pursuant to which the Company
raised aggregate gross proceeds of $4,750,000 and sold units
consisting of five (5) year senior secured convertible Notes in the
aggregate principal amount of $4,750,000 that are convertible into
678,568 shares of common stock, at a conversion price of $7.00 per
share, and warrants to purchase 929,346 shares of common stock at
an exercise price of $4.60 per share. The 2014 Notes bear interest
at a rate of eight percent (8%) per annum and interest is paid
quarterly in arrears with all principal and unpaid interest due
between July and September 2019. As of September 30, 2018 and
December 31, 2017 the principal amount of $4,750,000 remains
outstanding.
The Company has the right to prepay the 2014 Notes at any time
after the one-year anniversary date of the issuance of the 2014
Notes at a rate equal to 110% of the then outstanding principal
balance and any unpaid accrued interest. The notes are secured by
Company pledged assets and rank senior to all debt of the Company
other than certain senior debt that has been previously identified
as senior to the convertible notes debt. Additionally, Stephan Wallach, the Company’s
Chief Executive Officer, has also personally guaranteed the
repayment of the 2014 Notes, subject to the terms of a Guaranty
Agreement executed by him with the investors. In
addition, Mr. Wallach has agreed not to sell, transfer or pledge
1.5 million shares of the common stock that he owns so long as his
personal guaranty is in effect.
The Company recorded debt discounts of $4,750,000 related to the
beneficial conversion feature of $1,053,000 and $3,697,000 related
to the detachable warrants. The beneficial conversion feature
discount and the detachable warrants discount are amortized to
interest expense over the life of the 2014 Notes. As of September
30, 2018 and December 31, 2017, the remaining balance of the debt
discounts is approximately $793,000 and $1,504,000, respectively.
The quarterly amortization of the debt discounts is approximately
$237,000 and is recorded as interest expense.
With respect to the aggregate offering, the Company paid $490,000
in expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the 2014 Notes.
As of September 30, 2018 and December 31, 2017 the remaining
balance of the issuance costs is approximately $80,000 and
$155,000, respectively. The quarterly amortization of the issuance
costs is approximately $25,000 and is recorded as interest
expense.
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the condensed
consolidated balance sheets.
November 2015 Private Placement
Between October 13, 2015 and November 25, 2015, the Company entered
into Note Purchase Agreements related to the 2015 Private Placement
with three (3) accredited investors pursuant to which the Company
raised cash proceeds of $3,187,500 in the offering and converted
$4,000,000 of debt from the Company’s private placement
consummated in January 2015 to this offering in consideration of
the sale of aggregate units consisting of three-year senior secured
convertible notes in the aggregate principal amount of $7,187,500,
convertible into 1,026,784 shares of common stock, at a conversion
price of $7.00 per share, subject to adjustment as provided
therein; and five-year warrants (the “2015 Warrants”)
exercisable to purchase 479,166 shares of the Company’s
common stock at a price per share of $9.00. The 2015 Notes bear
interest at a rate of eight percent (8%) per annum and interest is
paid quarterly in arrears with all principal and unpaid interest
due at maturity on October 12, 2018. See Note 11,
below.
In connection with the 2017 Private Placement, three (3) investors
from the 2015 Private Placement, converted their 2015 Notes
in the aggregate amount of $4,200,349 including principal
and accrued interest thereon into 2017 Notes for an equal principal
amount in the 2017 Private Placement. The remaining principal
balance in the 2015 Note of $3,000,000 remains outstanding as of
September 30, 2018. The Company accounted for the conversion
of the 2015 Notes as an extinguishment in accordance with ASC
470-20 and ASC 470-50 as such the related debt discounts and
issuance costs were adjusted appropriately.
The Company recorded debt discounts associated with the 2015 Notes
of $309,000 related to the beneficial conversion feature of $15,000
and $294,000 related to the detachable warrants. The beneficial
conversion feature discount and the detachable warrants discount
are amortized to interest expense over the life of the 2015 Notes.
As of September 30, 2018 and December 31, 2017 the remaining
balances of the debt discounts is approximately $3,000 and $36,000
respectively. The quarterly amortization of the remaining debt
discount is approximately $11,000 and is recorded as interest
expense.
With respect to the aggregate offering, the Company paid $786,000
in expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the 2015 Notes.
As of September 30, 2018 and December 31, 2017, the remaining
balance of the issuance cost is approximately $8,000 and $92,000,
respectively. The quarterly amortization of the remaining issuance
costs is approximately $28,000 and is recorded as interest
expense.
In addition, the Company issued warrants to the placement agent in
connection with the 2015 Notes which were valued at approximately
$384,000. As of September 30, 2018 and December 31, 2017, the
remaining balance of the warrant issuance cost is approximately
$6,000 and $45,000, respectively. The quarterly amortization of the
remaining warrant issuance costs is approximately $13,000 and is
recorded as interest expense.
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the condensed
consolidated balance sheets.
July 2017 Private Placement
Between July and August 2017, the Company entered into Note
Purchase Agreements with
accredited investors in the 2017 Private Placement pursuant to
which the Company raised gross cash proceeds of $3,054,000 in the
offering and converted $4,200,349 of debt from the 2015 Notes,
including principal and accrued interest to the 2017 Private
Placement for an aggregate principal
amount of $7,254,349. The Company's use of the proceeds from
the 2017 Private Placement was for working capital
purposes.
The 2017 Notes automatically convert to common stock prior to the
maturity date, as a result of the Company completing a common
stock, preferred stock or other equity-linked securities with
aggregate gross proceeds of no less than $3,000,000 for the purpose
of raising capital.
On March 30, 2018, the Company completed the Series B Offering,
pursuant to which the Company sold 381,173 shares of Series B
Convertible Preferred Stock and received gross proceeds of
$3,621,143, which triggered the automatic conversion of the 2017
Notes to common stock. The 2017 Notes consisted of three-year
senior secured convertible notes in the aggregate principal amount
of $7,254,349, which converted into 1,577,033 shares of common
stock, at a conversion price of $4.60 per share, and three-year
warrants exercisable to purchase 970,581 shares of the
Company’s common stock at a price per share of $5.56 (the
“2017 Warrants”). The 2017 Warrants were not impacted
by the automatic conversion of the 2017 Notes.
The
2017 Notes maturity date was July 28, 2020 and bore interest at a
rate of eight percent (8%) per annum. The Company had the right to
prepay the 2017 Notes at any time after the one-year anniversary
date of the issuance of the 2017 Notes at a rate equal to 110% of
the then outstanding principal balance and accrued interest. The
2017 Notes provided for full ratchet price protection on the
conversion price for a period of nine months after their issuance
and subject to adjustments. For twelve (12) months following the
closing, the investors in the 2017 Private Placement had the right
to participate in any future equity financings, subject to certain
conditions.
The
Company accounted for the automatic conversion of the 2017 Notes as
an extinguishment in accordance with ASC 470-20 and ASC 470-50, and
as such the related debt discounts, issuance costs and bifurcated
embedded conversion feature were adjusted as part of accounting for
the conversion. The Company recorded a
non-cash extinguishment loss on debt of $1,082,000 during the nine
months ended September 30, 2018 as a result of the conversion of
the 2017 Notes. 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 were based on the stock price on the date of
the conversion.
The
Company paid a placement fee of $321,248, issued the placement
agent three-year warrants to purchase 179,131 shares of the
Company’s common stock at an exercise price of $5.56 per
share, and issued the placement agent 22,680 shares of the
Company’s common stock.
The
Company recorded debt discounts associated with the 2017 Notes of
$330,000 related to the bifurcated embedded conversion feature. The
embedded conversion feature was being amortized to interest expense
over the term of the 2017 Notes. During the nine months ended
September 30, 2018 the Company recorded $28,000 of amortization
related to the debt discount cost.
Upon issuance of the 2017 Notes, the Company recognized issuance
costs of approximately $1,601,000, resulting from the allocated
portion of offering proceeds to the separable warrant liabilities.
The issuance costs were being amortized to interest expense over
the term of the 2017 Notes. During the nine months ended
September 30, 2018 the Company recorded $136,000 of amortization
related to the warrant issuance cost.
With respect to the aggregate offering, the Company paid $634,000
in issuance costs. The issuance costs were being amortized to
interest expense over the term of the 2017 Notes. During the
nine months ended September 30, 2018 the Company recorded $53,000 of amortization
related to the issuance costs.
Note 7. Derivative Liability
The Company recognizes and measures the warrants and the
embedded conversion features issued in conjunction with the
Company’s August 2018, July 2017, November 2015 and July 2014
Private Placements in accordance with ASC Topic 815,
Derivatives and
Hedging. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both
(i) indexed to the entity’s own stock and
(ii) classified in the stockholders’ equity section of
the entity’s balance sheet. The Company determined
that certain warrants and embedded conversion features issued in
the Company’s private placements are ineligible for equity
classification due to anti-dilution provisions set forth
therein.
Derivative liabilities are recorded at their estimated fair value
(see Note 8, below) at the issuance date and are revalued at each
subsequent reporting date. The Company will continue to revalue the
derivative liability on each subsequent balance sheet date until
the securities to which the derivative liabilities relate are
exercised or expire.
Various factors are considered in the pricing models the Company
uses to value the derivative liabilities, including its current
stock price, the remaining life, the volatility of its stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on working capital, liquidity or
business operations.
Warrants
In August and September of 2018, the
Company issued 421,051 three-year warrants to investors in the
August 2018 Private Placement. The exercise price of the warrants
is protected against down-round financing throughout the term of
the warrant. Pursuant to ASC Topic 815, the fair value of the
warrants of approximately $822,000 was recorded as a derivative
liability on the issuance dates. The estimated fair
values of the warrants were computed at issuance using a Monte
Carlo pricing model, with the
following assumptions: stock price volatility range of 61.42% -
65.79%, risk-free rate 2.70% - 2.88%, annual dividend yield 0% and
expected life 3.0 years.
The estimated fair value of the outstanding warrant liabilities was
$8,537,000 and $3,365,000 as of September 30, 2018 and
December 31, 2017, respectively.
In
January 2018, the Company approved an amendment (the “Warrant
Amendment”) to its warrant agreements issued to the placement
agent, pursuant to which warrants were issued to purchase 179,131
shares of the Company’s common stock as compensation
associated with the Company’s July 2017 Private Placement
(see Note 6, above.) The Warrant Amendment amended the transfer
provisions of the warrants and removed the down-round price
protection provision. As a result of this change in terms, the
Company considered the guidance of ASC 815-40-35-8 in regard to the
appropriate treatment related to the modification of these warrants
that were initially classified as derivative liabilities. In
accordance with the guidance, the warrants should now be classified
as equity instruments.
The
Company determined that the liability associated with the warrants
should be remeasured and adjusted to fair value on the date of the
modification with the offset to be recorded through earnings and
then the fair value of the warrants should be reclassified to
equity. The Company recorded the
change in the fair value of the July 2017 warrants as of the date
of modification to earnings. The fair value of the modified
warrants as of the date of modification, in the amount of $284,000
was reclassified from warrant derivative liability to additional
paid in capital as a result of the change in classification of the
warrants. The Company did not reverse any previous gains or losses
associated with the warrant derivative liability during the
period that the warrant was classified as a liability.
Increases
or decreases in the fair value of the derivative liability are
included as a component of total other expense in the accompanying
condensed consolidated statements of operations for the respective
period. The changes to the derivative liability for warrants
resulted in an increase of $5,538,000 and a decrease of $1,519,000
for the three months ended September 30, 2018 and 2017,
respectively. The changes to the derivative liability for warrants
resulted in an increase of $4,634,000 and a decrease of $788,000
for the nine months ended September 30, 2018 and 2017,
respectively.
The
estimated fair value of the warrants was computed as of September
30, 2018 and December 31, 2017 using a Monte Carlo pricing model,
with the following assumptions:
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
||
|
Stock price volatility
|
|
|
65.77% -76.69%
|
|
|
|
61.06%
|
|
|
Risk-free interest rates
|
|
|
2.51% - 2.88%
|
|
|
|
1.96%
|
|
|
Annual dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Expected life
|
|
0.83-3.00 years
|
|
|
1.58-2.78 years
|
|
||
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Embedded Conversion Derivatives
Upon issuance of the 2017 Notes, the Company recorded an embedded
conversion option which was classified as a derivative of
$330,000.
The estimated fair value of the embedded conversion option was
$200,000 as of December 31, 2017 and was a component of Convertible
Notes Payable, net on the Company’s balance sheet using the
following assumptions; stock price $4.13, conversion price $4.60,
stock price volatility 60.98%-61.31%, risk-free rate 1.9%, and
expected life 2.57-2.63.
On
March 30, 2018, the Company completed the Series B Offering and
raised in excess of $3,000,000 of gross proceeds which triggered an
automatic conversion of the 2017 Notes to common stock. As a
result, the related embedded conversion option was extinguished
with the 2017 Notes (see Note 6, above). The Company did not
revalue the embedded conversion liability associated with the 2017
Notes as of March 30, 2018 as the change in the fair value was
insignificant.
Note 8. Fair Value of Financial
Instruments
Fair value measurements are performed in accordance with the
guidance provided by ASC Topic 820, “Fair Value Measurements
and Disclosures.” ASC
Topic 820 defines fair value as the price that would be received
from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Where available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where
observable prices or parameters are not available, valuation models
are applied.
ASC Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 – Quoted prices in active markets for identical
assets or liabilities that an entity has the ability to
access.
Level 2 – Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data.
Level 3 – Unobservable inputs that are supportable by little
or no market activity and that are significant to the fair value of
the asset or liability.
The carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, capital lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s
long-term notes payable approximates its fair value based on
interest rates available to the Company for similar debt
instruments and similar remaining maturities.
The estimated fair value of the contingent consideration related to
the Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
In connection with the Company’s Private Placements, the
Company issued warrants to purchase shares of its common stock and
recorded embedded conversion features which are accounted for as
derivative liabilities (see Note 6 and 7 above.) The estimated fair
value of the derivatives is recorded using significant unobservable
measures and other fair value inputs and is therefore classified as
a Level 3 financial instrument.
The following table details the fair value measurement within the
fair value hierarchy of the Company’s financial instruments,
which includes the Level 3 liabilities (in thousands):
|
|
Fair Value at September 30, 2018
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$702
|
$-
|
$-
|
$702
|
|
Contingent
acquisition debt, less current portion
|
10,116
|
-
|
-
|
10,116
|
|
Warrant
derivative liability
|
8,537
|
-
|
-
|
8,537
|
|
Total
liabilities
|
$19,355
|
$-
|
$-
|
$19,355
|
|
|
Fair Value at December 31, 2017
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$587
|
$-
|
$-
|
$587
|
|
Contingent
acquisition debt, less current portion
|
13,817
|
-
|
-
|
13,817
|
|
Warrant
derivative liability
|
3,365
|
-
|
-
|
3,365
|
|
Embedded
conversion option derivative
|
200
|
-
|
-
|
200
|
|
Total
liabilities
|
$17,969
|
$-
|
$-
|
$17,969
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
2018, 2017, 2015 and 2014 Private Placements measured at fair value
using Level 3 inputs (in thousands):
|
|
Warrant Derivative Liability
|
|
Balance
at December 31, 2017
|
$3,365
|
|
Issuance
|
822
|
|
Adjustments
to estimated fair value
|
4,634
|
|
Adjustment
related to the modification of warrants (Note 7)
|
(284)
|
|
Balance
at September 30, 2018
|
$8,537
|
The following table reflects the activity for the Company’s
embedded conversion feature derivative liability associated with
the Company’s 2017 Private Placement Notes measured at fair
value using Level 3 inputs (in thousands):
|
|
Embedded Conversion Feature Derivative Liability
|
|
Balance
at December 31, 2017
|
$200
|
|
Issuance
|
-
|
|
Adjustment
related to the conversion of the 2017 Notes
|
(200)
|
|
Balance
at September 30, 2018
|
$-
|
The following table reflects the activity for the Company’s
contingent acquisition liabilities measured at fair value using
Level 3 inputs (in thousands):
|
|
Contingent Consideration
|
|
Balance
at December 31, 2017
|
$14,404
|
|
Level
3 liabilities acquired
|
2,460
|
|
Level
3 liabilities settled
|
(137)
|
|
Adjustments
to liabilities included in earnings
|
(4,076)
|
|
Adjustment
to purchase price
|
(1,833)
|
|
Balance
at September 30, 2018
|
$10,818
|
The fair value of the contingent acquisition liabilities is
evaluated each reporting period using projected revenues, discount
rates, and projected timing of revenues. Projected contingent
payment amounts are discounted back to the current period using a
discount rate. Projected revenues are based on the Company’s
most recent internal operational budgets and long-range strategic
plans. In some cases, there is no maximum amount of contingent
consideration that can be earned by the sellers. Increases in
projected revenues will result in higher fair value measurements.
Increases in discount rates and the time to payment will result in
lower fair value measurements. Increases (decreases) in any of
those inputs in isolation may result in a significantly lower
(higher) fair value measurement. During the three and nine months
ended September 30, 2018 the net adjustment to the fair value of
the contingent acquisition debt was a decrease of $2,618,000 and
$4,076,000, respectively, and is included in adjustments to
liabilities in the table above. During the nine months ended
September 30, 2018 the Company recorded a decrease of $1,246,000 as
a result of the removal of the contingent debt associated with its
Nature’s Pearl Corporation acquisition from 2016 whereby the
Company was no longer obligated under the related asset purchase
agreement to make payments (see Note 4, above).
During
the three and nine months ended September 30, 2017 the net
adjustment to the fair value of the contingent acquisition debt was
a decrease of $340,000 and a decrease of $1,020,000,
respectively.
Note 9. Stockholders’ Equity
The Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated
“Common Stock” and “Preferred
Stock”.
The
total number of shares of stock which the Company has authority to
issue is 50,000,000 shares of common stock, par value $0.001 per
share and 5,000,000 shares of preferred stock, par value $0.001 per
share, of which 161,135 shares have been designated as Series A
convertible preferred stock (“Series A Convertible
Preferred”), 1,052,631 has been designated as Series B
convertible preferred stock (“Series B Convertible
Preferred”), and 700,000 has been designated as Series C
convertible preferred stock (“Series C Convertible
Preferred”).
Common Stock
As of September 30, 2018, and December 31, 2017 there were
21,956,869 and 19,723,285 shares of common stock outstanding,
respectively. The holders of the common stock are entitled
to one vote for each share held at all meetings of stockholders
(and written actions in lieu of meetings).
Convertible Preferred Stock
Series A Convertible Preferred Stock
The Company has 161,135 shares of Series A Convertible Preferred
Stock outstanding as of September 30, 2018, and December 31, 2017
and accrued dividends of approximately $133,000 and $124,000,
respectively. The holders of the Series A Convertible Preferred
Stock are entitled to receive a cumulative dividend at a rate of
8.0% per year, payable annually either in cash or shares of the
Company's common stock at the Company's election. Each
share of Series A Convertible Preferred is convertible into common
stock at a conversion rate of .10. The holders of Series A
Convertible Preferred are entitled to receive payments upon
liquidation, dissolution or winding up of the Company before any
amount is paid to the holders of common stock. The holders of
Series A Convertible Preferred have no voting rights, except as
required by law.
Series B Convertible Preferred Stock
On March 30, 2018, the Company completed the Series B Offering,
pursuant to which the Company sold 381,173 shares of Series B
Convertible Preferred Stock at an offering price of $9.50 per share
and received gross proceeds in aggregate of $3,621,143. The net
proceeds to the Company from the Series B Offering were $3,289,861
after deducting commissions, closing and issuance
costs.
The Company has 315,967 shares of Series B Convertible Preferred
Stock outstanding as of September 30, 2018, and zero at December
31, 2017. During the nine months ended September 30, 2018, the
Company received notice of conversion for 65,206 shares of Series B
Convertible Preferred Stock which converted to 130,412 shares of
common stock.
The shares of Series B Convertible Preferred Stock issued in the
Series B Offering were sold pursuant to the Company’s
Registration Statement, which was declared effective on February
13, 2018. Upon the receipt of the proceeds of the Series B
Offering, the 2017 Notes in the principal amount of $7,254,349
automatically converted into 1,577,033 shares of common stock
(see Note 6, above.)
Upon liquidation, dissolution or winding up of the Company, each
holder of Series B Preferred Stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series B Preferred Stock held by the holders of
Series B Preferred Stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of Common Stock, the Series A Preferred
Stock, or any other class or series of stock ranking junior to the
Series B Preferred Stock.
Pursuant to the Certificate of Designation, the Company has agreed
to pay cumulative dividends on the Series B Convertible Preferred
Stock from the date of original issue at a rate of 5.0% per
annum payable quarterly in
arrears on or about the last day of March, June, September and
December of each year, beginning June 30, 2018. The Series B
Convertible Preferred Stock ranks senior to the Company’s
outstanding Series A Convertible Preferred Stock and the common
stock with respect to dividend rights and rights upon liquidation,
dissolution or winding up. Holders of the Series B Convertible
Preferred Stock have no voting rights. Each share of Series B
Convertible Preferred Stock is initially convertible at any time,
in whole or in part, at the option of the holders, at an initial
conversion price of $4.75 per share, into two (2) shares of common
stock and automatically converts into two (2) shares of common
stock on its two-year anniversary of issuance.
Series C Convertible Preferred Stock
Between August 17, 2018 and September 28, 2018, the Company closed
the first and second tranche of its Series C Offering, pursuant to
which the Company sold 354,704 shares of Series C Convertible
Preferred Stock at an offering price of $9.50 per share and
agreed to issue two-year warrants (the “Preferred
Warrants”) to purchase up to 709,408 shares of the
Company’s common stock at an exercise price of $4.75 per
share to Series C Preferred holders that voluntary convert their
shares of Series C Preferred to the Company’s common stock
within two-years from the issuance date. The shares of Series C Convertible Preferred Stock
issued in the Series C Offering were sold pursuant to the
Company’s Registration Statement, which was filed with the
SEC on October 17, 2018.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series C Preferred Stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series C Preferred Stock held by the holders of
Series C Preferred Stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of Common Stock, the Series A Preferred
Stock, the Series B Preferred Stock or any other class or series of
stock ranking junior to the Series C Preferred Stock.
Pursuant to the Certificate of Designation, the Company has agreed
to pay cumulative dividends on the Series C Convertible Preferred
Stock from the date of original issue at a rate of 6.0% 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. The Series C
Convertible Preferred Stock ranks senior to the Company’s
outstanding Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and the common stock with respect to
dividend rights and rights upon liquidation, dissolution or winding
up. Holders of the Series C Convertible Preferred Stock have no
voting rights. Each share of Series C Convertible Preferred Stock
is initially convertible at any time, in whole or in part, at the
option of the holders, at an initial conversion price of $4.75 per
share, into two (2) shares of common stock and automatically
converts into two (2) shares of common stock on its two-year
anniversary of issuance.
-21-
The
Company received gross proceeds in aggregate of $3,369,729. The net
proceeds to the Company from the Series C Offering were
approximately $3,197,000 after deducting commissions, closing and
issuance costs.
The
contingent obligation to issue warrants is considered an
outstanding equity-linked financial instrument and was therefore
recognized as equity classified warrants, initially measured at
relative fair value of approximately $945,000, resulting in an
initial discount to the carrying value of the Series C Preferred
Stock.
The
Series C Preferred Stock is automatically redeemable at a price
equal to its original purchase price plus all accrued but unpaid
dividends in the event the average of the daily volume weighted
average price of the Company’s common stock for the 30 days
preceding the two-year anniversary date of issuance is less than
$6.00 per share. As redemption is outside of the
Company’s control, the Series C Preferred Stock is classified
in temporary equity. The discount to the Series C Preferred Stock
liquidation preference is not being accreted as a deemed dividend,
as it is not currently probable that the Series C Preferred Stock
will become redeemable.
Due to
the reduction of allocated proceeds to the contingently issuable
common stock warrants and Series C Preferred Stock, the effective
conversion price of the Series C Preferred Stock was less than the
Company’s common stock price on each commitment date,
resulting in an aggregate beneficial conversion feature of
approximately $1,386,000, which reduced the carrying value of the
Series C Preferred Stock. Since the conversion option of the Series
C Preferred Stock was immediately exercisable, the beneficial
conversion feature was immediately accreted as a deemed dividend,
resulting in an increase in the carrying value of the C Preferred
Stock of approximately $1,386,000.
As of
September 30, 2018, there have been no conversions of Series C
Preferred and no warrants have been issued. As of September 30, 2018, the 354,704 shares of
Series C Convertible Preferred Stock remain outstanding.
Distributions to Preferred Stockholders
The
following table presents cash dividends declared by the
Company’s board of directors during the three and nine months
ended September 30, 2018.
|
Declaration Date
|
Record Date
|
Payment Date
|
Cash
Dividend Per Preferred Share
|
|
Series B Preferred
Stock:
|
|
|
|
|
June 20,
2018
|
June 27,
2018
|
July 2,
2018
|
$0.12
|
|
June 20,
2018
|
September 26,
2018
|
October 2,
2018
|
$0.12
|
Amendments to Certificate of Incorporation or Bylaws
On
August 16, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series C Convertible Preferred
Stock with the Secretary of State of the State of Delaware. On
September 28, 2018 the Company filed a Certificate of Designation
of Powers, Preferences and Rights of Series C Convertible Preferred
Stock with the Secretary of State of the State of Delaware
increasing the number of authorized shares of Series C Convertible
Preferred Stock from the original authorized issuance of 315,790 to
700,000.
On
March 2, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series B Convertible Preferred
Stock with the Secretary of State of the State of Delaware (the
“Certificate of Designation”). On March 14, 2018, the
Company filed a Certificate of Correction to the Certificate of
Designation to correct two typographical errors in the Certificate
of Designation (the “Certificate of
Correction”).
Private Placement – Securities Purchase
Agreement
Between August 31, 2018 and September 28, 2018, the Company entered
into Securities Purchase Agreements (the “Purchase
Agreements”) with 5 investors with whom the Company had a
substantial pre-existing relationship (the “Investors”)
pursuant to which the Company sold in the August 2018 Private
Placement an aggregate of 210,527 shares of common stock at an
offering price of $4.75 per share and the Investors agreed to
purchase an aggregate of 210,527 shares of common stock at an
offering price of $4.75 per share on or before the date (the
“Second Closing Date”) that is three days from the
effectiveness of the registration statement filed by the Company
with the Securities Exchange Commission relating to the Offering
(the “Registration Statement”), which Registration
Statement was filed by the Company on October 17, 2018. Pursuant to
the Purchase Agreements, the Company issued the Investors an
aggregate of 75,000 additional shares of common stock as an
advisory fee and issued Investors Warrants (the “Investor
Warrants”) to purchase an aggregate of 421,051 shares of
common stock (at an exercise price of $4.75 per share, of which
210,527 are exercisable upon issuance and the remaining 210,527
shares are exercisable any time after the Second Closing Date).
The net proceeds to the Company from
the August 2018 Private Placement were $985,000 after deducting advisory fees,
closing and issuance costs. The
Investor Warrants are ineligible for equity classification due to
anti-dilution provisions contained therein (see Note 7,
above).
The
Purchase Agreement requires the Company to issue the Investor
additional shares of the Company’s common stock in the event
that the average of the 15 lowest closing prices for the
Company’s common stock during the period beginning on August
31, 2018 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. The additional common
shares to be issued are calculated as the difference between the
common stock that would have been issued using the average price of
such lowest 15 closing prices during the Subsequent Pricing Period
less shares of common stock already issued pursuant to the August
2018 Private Placement. Notwithstanding the foregoing, in no event
may the aggregate number of shares issued by the Company, including
shares of common stock issued, shares of common stock underlying
the warrants, the shares of common stock issued as advisory shares
and True-up Shares exceed 2.9% of the Company’s issued and
outstanding common stock as of August 31, 2018 for each $1,000,000
invested in the Company.
The
True-up Share feature is considered to be embedded in the specific
common shares purchased by each Investor, by way of the Purchase
Agreement. As the economic characteristics and risks of the True-up
Share feature are clearly and closely related to the common stock
host contract, the True-up Share feature was not separately
recognized in the private placement transaction.
The
gross proceeds from each closing of the August 2018 Private
Placement were first allocated to the Investor Warrants, with an
aggregate initial fair value of approximately $822,000, with the
residual amount allocated to the common stock issued in the
offering, including the common stock issued to each Investor as an
advisory fee.
Pursuant
to the terms of the Registration Rights Agreement, the Company
agreed to file a registration statement with the Securities and
Exchange Commission to register the shares of common stock and the
shares to be issued as True-up Shares and the shares of common
stock issuable upon exercise of the Investor Warrants, which
registration statement was filed with the Securities and Exchange
Commission on October 17, 2018.
On May
18, 2018, the Company filed a shelf registration statement on Form
S-3 with the SEC to register shares of the Company’s common
stock for sale, giving the Company the opportunity to raise funding
when considered appropriate at prices and on terms to be determined
at the time of any such offerings. On May 29, 2018, the SEC
declared this registration statement effective.
Advisory Agreements
ProActive Capital Resources Group, LLC
On
September 1, 2015, the Company entered into an agreement with
ProActive
Capital Resources
Group, LLC (“PCG”), pursuant to which PCG agreed
to provide investor relations services for six (6) months in
exchange for fees paid in cash of $6,000 per month and 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to the September 1, 2015 initial agreement, the agreement was
extended through August 2018 under six-month incremental service
agreements under the same terms with the monthly cash payment
remaining at $6,000 per month and 5,000 shares of restricted common
stock for every six (6) months of service performed.
As of September 30, 2018, the Company has issued 30,000
shares of restricted common stock in
connection with this agreement. During the three months ended
September 30, 2018 and 2017, the Company recorded expense
of approximately $7,000 and $14,000, respectively, and $31,000 and
$42,000, during the nine months ended September 30, 2018 and 2017
in connection with amortization of the stock
issuance.
Ignition Capital, LLC
On
April 1, 2018, the Company entered into an agreement with
Ignition Capital, LLC
(“Ignition”), pursuant to which Ignition agreed to
provide investor relations services for a period of twenty-one (21)
months in exchange for 50,000 shares of restricted common stock
which were issued in advance of the service
period. The fair value of the
shares issued is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the agreement. During the
three and nine months ended September 30, 2018, the
Company recorded expense of approximately $29,000 and $59,000,
respectively in connection with amortization of the stock issuance.
The stock issuance expense associated with the amortization of
advisory fees is recorded as stock compensation expense and is
included in general and administrative expense on the
Company’s consolidated statements of operations for the three
and nine months ended September 30, 2018.
Greentree Financial Group, Inc.
On March 27, 2018, the Company entered into an agreement with
Greentree Financial Group,
Inc. (“Greentree”), pursuant to which Greentree
agreed to provide investor relations services for a period of
twenty-one (21) months in exchange for 75,000 shares of restricted
common stock which were issued in advance of the service
period. The fair value of the
shares issued is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the agreement. During the
three and nine months ended September 30, 2018, the
Company recorded expense of approximately $44,000 and $88,000,
respectively, in connection with amortization of the stock
issuance. The stock issuance expense associated with the
amortization of advisory fees is recorded as stock compensation
expense and is included in general and administrative expense on
the Company’s consolidated statements of operations for the
three and nine months ended September 30,
2018.
Capital Market Solutions, LLC.
On July
1, 2018, the Company entered into an agreement with Capital Market Solutions, LLC.
(“Capital Market”), pursuant to which Capital Market
agreed to provide investor relations services for a period of
eighteen (18) months in exchange for 100,000 shares of restricted
common stock which were issued in advance of the service
period. In addition, the Company agreed to pay in cash a base
fee of $300,000, payable as follows; $50,000 paid in August 2018,
and the remaining balance shall be paid monthly in the amount of
$25,000 through January 1, 2019. The
fair value of the shares issued is recorded as prepaid advisory
fees and is included in prepaid expenses and other current assets
on the Company’s condensed consolidated balance sheets and is
amortized on a pro-rata basis over the term of the
agreement. During the three and nine months ended September
30, 2018, the Company recorded expense of approximately
$70,000, in connection with amortization of the stock issuance.
During the three and nine months ended September 30, 2018, the
Company recorded expense of approximately $75,000, in
connection with the base fee. The stock issuance expense associated
with the amortization of advisory fees is recorded as stock
compensation expense and is included in general and administrative
expense on the Company’s consolidated statements of
operations for the three and nine months ended September 30,
2018.
Repurchase of Common Stock
On December 11, 2012, the Company 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 September 30, 2018 at a weighted-average cost of
$5.30. There were no repurchases during the nine months ended
September 30, 2018. The remaining number of shares authorized for
repurchase under the plan as of September 30, 2018 is
553,406.
Warrants
As of September 30, 2018, warrants to purchase 3,169,234 shares
of the Company's common stock at prices ranging from
$2.00 to $10.00 were outstanding. As of September 30, 2018,
2,958,708 warrants are exercisable and expire at various dates
through February 2023 and have a weighted average remaining term of
approximately 1.60 years and are included in the table below as of
September 30, 2018.
Warrant
Modification Agreements
In
January 2018, the Company approved an amendment (the “Warrant
Amendment”) to its warrant agreements issued to the placement
agent, pursuant to which warrants were issued to purchase 179,131
shares of the Company’s common stock as compensation
associated with the Company’s July 2017 Private Placement
(see Note 6, above.) The Warrant Amendment amended the transfer
provisions of the warrants and removed the down-round price
protection provision. As a result of this change in terms, the
Company considered the guidance of ASC 815-40-35-8 in regard to the
appropriate treatment related to the modification of these warrants
that were initially classified as derivative liabilities. In
accordance with the guidance, the warrants should now be classified
as equity instruments (see Note 7, above.)
Warrants – Preferred Stock Offering
During the nine months ended September 30, 2018, the Company issued
the selling agent in connection with the Series B Offering 38,117
warrants as compensation, exercisable at $5.70 per share and expire
in February 2023. The Company determined that the warrants should
be classified as equity instruments and used the Black-Scholes
option-pricing model (“Black-Scholes”) to estimate the
fair value of the warrants issued to the selling agent of $75,000
as of the issuance date March 30, 2018. The warrants remain
outstanding as of September 30, 2018.
Warrants – August 2018 Private Placement
During the three months ended September 30, 2018, the Company
issued the investors warrants to purchase an aggregate of
421,051 shares of common stock (at an exercise price of $4.75 per
share, of which 210,525 were exercisable upon issuance and the
remaining 210,526 shares are exercisable any time after the Second
Closing Date) The Company determined
that the warrants should be classified as derivative liabilities
and used the Monte-Carlo option-pricing model to estimate the fair
value of the warrants issued to the investors of $822,000 as of the
issuance dates. The warrants remain outstanding as of September 30,
2018.
Warrants Activity
A summary of the warrant activity for the nine months ended
September 30, 2018 is presented in the following
table:
|
|
Number of
Warrants
|
|
Balance
at December 31, 2017
|
2,710,066
|
|
Issued
|
459,168
|
|
Expired
/ cancelled
|
-
|
|
Exercised
|
-
|
|
Balance
at September 30, 2018
|
3,169,234
|
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
4,000,000 shares of common stock.
The purpose of the Plan is to promote the long-term growth and
profitability of the Company by (i) providing key people and
consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
Plan allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At September 30, 2018, the Company had
1,063,373 shares of common stock available for issuance under the
Plan.
A summary of the Plan stock option activity for the nine months
ended September 30, 2018 is presented in the following
table:
|
|
Number of
Shares
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Contract Life (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding
December 31, 2017
|
1,584,523
|
$4.76
|
6.16
|
$126
|
|
Issued
|
894,295
|
4.02
|
|
|
|
Canceled
/ expired
|
(59,379)
|
5.75
|
|
|
|
Exercised
|
(612)
|
5.19
|
|
-
|
|
Outstanding
September 30, 2018
|
2,418,827
|
$4.46
|
7.14
|
$5,484
|
|
Exercisable
September 30, 2018
|
1,021,648
|
$4.51
|
4.53
|
$2,270
|
The weighted-average fair value per share of the granted options
for the nine months ended September 30, 2018 and 2017 was
approximately $2.39 and $3.05, respectively.
Stock-based compensation expense included in the condensed
consolidated statements of operations was $373,000 and a credit of
$46,000 for the three months ended September 30, 2018 and 2017,
respectively, and $618,000 and $440,000 for the nine months ended
September 30, 2018 and 2017, respectively.
As of September 30, 2018, there was approximately $3,062,000 of
total unrecognized compensation expense related to unvested stock
options granted under the Plan. The expense is expected to be
recognized over a weighted-average period of 2.31
years.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
Restricted Stock Units
On August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock units. Full vesting occurs on the
sixth-year anniversary of the grant date, with 10% vesting on the
third-year, 15% on the fourth-year, 50% on the fifth-year and 25%
on the sixth-year anniversary of the vesting commencement
date.
The fair value of each restricted stock unit issued to employees is
based on the closing stock price on the grant date of $4.53 and
restricted stock units issued to consultants are revalued as they
vest and is recognized as stock-based compensation expense over the
vesting term of the award.
|
|
Number of
Shares
|
|
Balance
at December 31, 2017
|
500,000
|
|
Issued
|
-
|
|
Canceled
|
(12,500)
|
|
Balance
at September 30, 2018
|
487,500
|
Stock-based compensation expense for restricted stock units
included in the condensed consolidated statements of operations was
$97,000 and $32,000 for the three months ended September 30, 2018
and 2017, respectively, and $304,000 and $32,000 for the nine
months ended September 30, 2018 and 2017,
respectively.
As of September 30, 2018, total unrecognized stock-based
compensation expense related to restricted stock units to employees
and consultants was approximately $1,909,000, which will be
recognized over a weighted average period of 4.86
years.
Note 10. Segment and Geographical
Information
The
Company is a leading omni-direct lifestyle company offering a
hybrid of the direct selling business model that also offers
e-commerce and the power of social selling. Youngevity offers
products from top selling retail categories: health/nutrition,
home/family, food/beverage (including coffee), spa/beauty,
apparel/jewelry, as well as innovative services. The Company
operates in two segments: the direct
selling segment where products are offered through a global
distribution network of preferred customers and distributors and
the commercial coffee segment where roasted and green coffee bean
products are sold directly to businesses.
The Company’s segments reflect the manner in which the
business is managed and how the Company allocates resources and
assesses performance. The Company’s chief operating decision
maker is the Chief Executive Officer. The Company’s chief
operating decision maker evaluates segment performance primarily
based on revenue and segment operating income. The principal
measures and factors the Company considered in determining the
number of reportable segments were revenue, gross margin
percentage, sales channel, customer type and competitive risks. In
addition, each reporting segment has similar products and
customers, similar methods of marketing and distribution and a
similar regulatory environment.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
Three months ended
|
Nine months ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Revenues
|
|
|
|
|
|
Direct
selling
|
$34,280
|
$37,954
|
$106,437
|
$106,734
|
|
Commercial
coffee
|
4,802
|
6,441
|
19,894
|
17,921
|
|
Total
revenues
|
$39,082
|
$44,395
|
$126,331
|
$124,655
|
|
Gross
profit
|
|
|
|
|
|
Direct
selling
|
$23,622
|
$25,472
|
$73,444
|
$71,522
|
|
Commercial
coffee
|
90
|
292
|
662
|
210
|
|
Total
gross profit
|
$23,712
|
$25,764
|
$74,106
|
$71,732
|
|
Operating
income (loss)
|
|
|
|
|
|
Direct
selling
|
$(487)
|
$(1,233)
|
$1,670
|
$(2,392)
|
|
Commercial
coffee
|
(919)
|
(584)
|
(2,399)
|
(2,501)
|
|
Total
operating loss
|
$(1,406)
|
$(1,817)
|
$(729)
|
$(4,893)
|
|
Net
(loss) income
|
|
|
|
|
|
Direct
selling
|
$(2,788)
|
$(1,311)
|
$(2,656)
|
$(2,958)
|
|
Commercial
coffee
|
(5,622)
|
243
|
(8,676)
|
(2,899)
|
|
Total
net loss
|
$(8,410)
|
$(1,068)
|
$(11,332)
|
$(5,857)
|
|
Capital
expenditures
|
|
|
|
|
|
Direct
selling
|
$132
|
$223
|
$247
|
$697
|
|
Commercial
coffee
|
414
|
110
|
1,144
|
391
|
|
Total
capital expenditures
|
$546
|
$333
|
$1,391
|
$1,088
|
|
|
As of
|
|
|
|
September 30,
2018
|
December 31,
2017
|
|
Total
assets
|
|
|
|
Direct selling
|
$41,796
|
$44,082
|
|
Commercial coffee
|
32,607
|
28,307
|
|
Total assets
|
$74,403
|
$72,389
|
Total tangible assets, net located outside the United States were
approximately $5.2 million as of September 30, 2018 and December
31, 2017.
The Company conducts its operations primarily in the United States.
For the three months ended September 30, 2018 and 2017
approximately 14% and 12%, respectively, of the Company’s
sales were derived from sales outside the United States. For the
nine months ended September 30, 2018 and 2017 approximately 14% and
11%, respectively, of the Company’s sales were derived from
sales outside the United States.
The following table displays revenues attributable to the
geographic location of the customer (in thousands):
|
|
Three months ended
|
Nine months ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Revenues
|
|
|
|
|
|
United
States
|
$33,600
|
$39,013
|
$108,973
|
$111,524
|
|
International
|
5,482
|
5,382
|
17,358
|
13,131
|
|
Total
revenues
|
$39,082
|
$44,395
|
$126,331
|
$124,655
|
Note 11. Subsequent Events
On
October 23, 2018, the Company entered into an agreement with Mr.
Carl Grover to exchange (the “Debt Exchange”), subject
to stockholder approval, all amounts owed under a 2014 Note held by
him in the principal amount of $4,000,000 which matures on July 30,
2019, for 747,664 shares of the Company’s 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. A FINRA broker dealer, acted as the
Company’s advisor in connection with the Debt Exchange. Upon
a closing of the Debt Exchange, the Company has agreed to issue to
the broker dealer 30,000 shares of common stock, a four-year
warrant to purchase 80,000 shares of common stock at an exercise
price of $5.35 per share and a four-year warrant to purchase 70,000
shares of common stock at an exercise price of $4.75 per share. By
a written consent dated October 29, 2018, the holders of a majority
of the Company’s issued and outstanding common stock, Stephan
Wallach and Michelle Wallach, approved the issuance of the
foregoing securities.
On
October 19, 2018, Carl Grover, an investor in the Company’s
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 on
October 12, 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 5, 2018, the Company closed the final tranche of the August
2018 Private Placement and entered into Purchase Agreements with
seven (7) investors with whom the Company had a substantial
pre-existing relationship (the “Investors”) pursuant to
which the Company sold an aggregate of 104,738 shares of common
stock at an offering price of $4.75 per share and the Investors
agreed to purchase an aggregate of 104,738 shares of common stock
at an offering price of $4.75 per share on or before the date (the
“Second Closing Date”) that is three days from the
effectiveness of the registration statement filed by the Company
with the Securities Exchange Commission relating to the Offering
(the “Registration Statement”), which Registration
Statement was filed by the Company on October 17, 2018. In
addition, the Company issued 209,475 three-year warrants
exercisable at $4.75 of which 104,738 are immediately exercisable
and the remaining 104,738 are exercisable after the Second Closing
Date. The Company received gross proceeds of $497,505.
On
October 4, 2018, the Company closed the final tranche of the Series
C Preferred Stock Offering and entered into the Purchase Agreement
with 24 accredited investors pursuant to which the Company sold
342,659 shares of Series C Preferred Stock, initially convertible
into 685,318 shares of the Company’s common stock, at an
offering price of $9.50 per share. Pursuant to the Purchase
Agreement, the Company has agreed to issue 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 within two
years from the
issuance date of the Series C Preferred Stock. The Company received
gross proceeds of $3,255,260.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking
statements. The words “expects,”
“anticipates,” “believes,”
“intends,” “plans” and similar expressions
identify forward-looking statements. In addition, any statements
which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements.
We undertake no obligation to publicly disclose any revisions to
these forward-looking statements to reflect events or circumstances
occurring subsequent to filing this Form 10-Q with the Securities
and Exchange Commission. These forward-looking statements are
subject to risks and uncertainties, including, without limitation,
those risks and uncertainties discussed in Part I, Item 1A,
“Risk Factors” and in Part II, Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our annual report on
Form 10-K filed with the Securities and Exchange Commission on
March 30, 2018 and herein as reported under Part II Other
Information, Item 1A. Risk Factors. In addition, new risks emerge
from time to time and it is not possible for management to predict
all such risk factors or to assess the impact of such risk factors
on our business. Accordingly, our future results may differ
materially from historical results or from those discussed or
implied by these forward-looking statements. Given these risks and
uncertainties, the reader should not place undue reliance on these
forward-looking statements.
In the following text, the terms “we,”
“our,” and “us” may refer, as the context
requires, to Youngevity International, Inc. or collectively to
Youngevity International, Inc. and its subsidiaries.
Overview
We operate in two segments: the direct selling segment where
products are offered through a global distribution network of
preferred customers and distributors and the commercial coffee
segment where products are sold directly to
businesses.
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 FXTM 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 5,500 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 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
three months ended September 30, 2018 and 2017 approximately 14%
and 12%, respectively, of our sales were derived from sales outside
the United States. For the nine months ended September 30, 2018 and
2017 approximately 14% and 11%, respectively, of our sales 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
2017.
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 Events
At our August 2018 Convention held in San Diego, California, we
announced our new Hemp FXTM hemp-derived cannabinoid product
line. We are currently selling five products in this product
line, all of which contain a proprietary hemp-derived cannabinoid
oil as well as herbs, minerals and antioxidants 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.
On July 25, 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. Revenue for this contract covers the period 2019
through 2023 with first shipments expected to begin in January of
2019.
New Acquisitions During the nine months ended September 30,
2018
Pursuant
to an agreement dated March 1, 2018, we acquired certain assets of
ViaViente. ViaViente is the distributor of The ViaViente Miracle, a
highly-concentrated, energizing whole fruit puree blend that is
rich in Anti-Oxidants and naturally-occurring vitamins and
minerals. The maximum consideration
payable by us is $3,000,000, subject to adjustments. We agreed to
make monthly payments based on a percentage of ViaViente
distributor revenue and royalty revenue until the earlier of the
date that is five (5) years from the closing date or such time as
we have paid ViaViente aggregate cash payments of ViaViente
distributor revenue and royalty revenue equal to the maximum
aggregate purchase price. The final purchase price allocation
has not been determined as of the filing of this report. See
Note 4 to the condensed consolidated financial
statements.
Pursuant
to an agreement dated 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.
The maximum consideration payable by
us is $2,600,000, subject to adjustments. We agreed to make monthly
payments based on a percentage of Nature Direct distributor revenue
and royalty revenue until the earlier of the date that is twelve
(12) years from the closing date or such time as we have paid
Nature Direct aggregate cash payments of Nature Direct distributor
revenue and royalty revenue equal to the maximum aggregate purchase
price. The final purchase price allocation has not been
determined as of the filing of this report. See Note 4 to the
condensed consolidated financial statements.
Overview of Significant Financing Events
Common Stock Private Placement
Between August 31, 2018 and September 28, 2018, we entered into
Securities Purchase Agreements (the “Purchase
Agreements”) with 5 investors with whom the Company had a
substantial pre-existing relationship (the “Investors”)
pursuant to which the Company sold in a private placement (the
“2018 Private Placement”) an aggregate of 210,527
shares of common stock at an offering price of $4.75 per share and
the Investors agreed to purchase an aggregate of 210,527 shares of
common stock at an offering price of $4.75 per share on or before
the date (the “Second Closing Date”) that is three days
from the effectiveness of the registration statement filed by the
Company with the Securities Exchange Commission relating to the
Offering (the “Registration Statement”), which
Registration Statement was filed by the Company on October 17,
2018. Pursuant to the Purchase Agreements, the Company issued the
Investors an aggregate of 75,000 additional shares of common stock
as an advisory fee and issued Investors Warrants (the
“Investor Warrants”) to purchase an aggregate of
421,051 shares of common stock (at an exercise price of $4.75 per
share, of which 210,527 are exercisable upon issuance and the
remaining 210,527 shares are exercisable any time after the Second
Closing Date). The Company received gross proceeds of $1,000,003. The net proceeds to the Company from
the August 2018 Private Placement were $985,000 after deducting advisory fees,
closing and issuance costs.
On
October 5, 2018, we closed the final tranche of the August 2018
Private Placement and entered into Purchase Agreements with seven
(7) investors with whom we had a substantial pre-existing
relationship (the “Investors”) pursuant to which we
sold an aggregate of 104,738 shares of common stock at an offering
price of $4.75 per share. In addition, we issued 209,475 three-year
warrants exercisable at $4.75 of which 104,738 are immediately
exercisable and the remaining 104,738 are exercisable after the
Second Closing Date. We received gross proceeds of $497,505.
Preferred Offerings
Series C convertible preferred stock
Between August 17, 2018 and September 28, 2018, we entered into a
Securities Purchase Agreements (the “Preferred Purchase
Agreements”) with 11 investors, pursuant to which we sold in
a private placement (the “Preferred Offering”) an
aggregate of 354,704 shares of Series C convertible preferred
stock, par value $.001 (the Series C Preferred”) and agreed
to issue warrants (the “Preferred Warrants”) to
purchase up to 709,408 shares of our common stock at an exercise
price of $4.75 per share to Series C Preferred holders that
voluntarily convert their shares of Series C Preferred to the
Company’s common stock prior to their two-year anniversary of
issuance. As of September 30, 2018, there have been no conversions
of Series C Preferred and no warrants have been issued.
We received gross proceeds of $3,369,729. The net proceeds to us from
the Preferred Offering were
approximately $3,197,000 after deducting commissions, closing and
issuance costs.
On
October 4, 2018, we closed the final tranche of the Series C
Preferred Stock Offering and entered into the Purchase Agreement
with 24 accredited investors pursuant to which we sold 342,659
shares of Series C Preferred Stock, initially convertible into
685,318 shares of the Company’s common stock, at an offering
price of $9.50 per share. We received gross proceeds of $3,255,260.
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, subject to stockholder approval, all amounts owed under a
2014 Note held by him in the principal amount of $4,000,000 which
matures on July 30, 2019, for 747,664 shares of the Company’s
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. A FINRA broker dealer, acted as
our advisor in connection with the Debt Exchange. Upon a closing of
the Debt Exchange, we have agreed to issue to the broker dealer
30,000 shares of common stock, a four-year warrant to purchase
80,000 shares of common stock at an exercise price of $5.35 per
share and a four-year warrant to purchase 70,000 shares of common
stock at an exercise price of $4.75 per share. By a written consent
dated October 29, 2018, the holders of a majority of our issued and
outstanding common stock, Stephan Wallach and Michelle Wallach,
approved the issuance of the foregoing
securities.
Results of Operations
The
comparative financials discussed below show the condensed
consolidated financial statements as of and for the three and nine
months ended September 30, 2018 and 2017.
Three months ended September 30, 2018 compared to three months
ended September 30, 2017
Revenues
For the
three months ended September 30, 2018, our revenues decreased 12.0%
to $39,082,000 as compared to $44,395,000 for the three months
ended September 30, 2017. During the three months ended
September 30, 2018, we derived approximately 88% of our revenue
from our direct selling sales and approximately 12% of our revenue
from our commercial coffee sales. For the three months ended
September 30, 2018, direct selling segment revenues decreased
by $3,674,000 or 9.7% to $34,280,000 as compared to $37,954,000 for
the three months ended September 30, 2017. This decrease was
primarily attributed to a decrease of $4,622,000 in revenues from
existing business, offset by revenues from new acquisitions of
$948,000. We attribute the decrease from existing business
primarily to a general weakness in North America direct selling
business and supply chain challenges that predominantly negatively
impacted revenues in the international markets. In addition, the
Company changed its promotion strategy whereby it has significantly
reduced promotions that impacted top line revenues through
discounting while maintaining commission levels. The promotion in
the current quarter targeted products with higher gross margins and
utilized incentives that had less costly impact on profitability.
For the three months ended September 30, 2018, commercial coffee
segment revenues decreased by $1,639,000 or 25.4% to $4,802,000 as
compared to $6,441,000 for the three months ended September 30,
2017. This decrease was primarily attributed to a decrease of
$2,458,000 in green coffee sales, offset by an increase of $819,000
in roasted coffee sales. The decrease in green coffee sales was
primarily due to our domestic financing company no longer willing
to fund the green coffee business, which caused a temporary
disruption in sales.
The following table summarizes our revenue in thousands by
segment:
|
|
For the three months
ended September 30,
|
Percentage
|
|
|
Segment
Revenues
|
2018
|
2017
|
change
|
|
Direct
selling
|
$34,280
|
$37,954
|
(9.7)%
|
|
As a % of Revenue
|
88%
|
85%
|
3.0%
|
|
Commercial
coffee
|
4,802
|
6,441
|
(25.4)%
|
|
As a % of Revenue
|
12%
|
15%
|
(3.0)%
|
|
Total
Revenues
|
$39,082
|
$44,395
|
(12.0)%
|
Cost of Revenues
For the three months ended September 30, 2018, overall cost of
revenues decreased approximately 17.5% to $15,370,000 as compared
to $18,631,000 for the three months ended September 30, 2017. The
direct selling segment cost of revenues decreased 14.6% to
$10,658,000 when compared to the same period last year, primarily
as a result of the lower revenues and decreases in shipping costs,
royalty expense and product mix. The commercial coffee segment cost
of revenues decreased 23.4% to 4,712,000 when compared to the same
period last year. This was primarily attributable to the decrease
in cost of sales of green coffee due to lower revenues in the green
coffee business, offset by a slight increase in costs in the
roasted coffee business.
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 three months ended September 30, 2018, gross profit
decreased approximately 8.0% to $23,712,000 as compared to
$25,764,000 for the three months ended September 30, 2017. Overall
gross profit as a percentage of revenues increased to 60.7%,
compared to 58.0% in the same period last year.
Gross profit in the direct selling segment decreased by 7.3% to
$23,622,000 from $25,472,000 in the prior period primarily as a
result of the decrease in revenues, and the decrease in shipping
costs and royalties expense discussed above. Gross profit as a
percentage of revenues in the direct selling segment increased to
68.9% for the three months ended September 30, 2018, compared to
67.1% in 2017, 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 to
$90,000 compared to $292,000 in the prior period. The decrease in
gross profit in the commercial coffee segment was primarily due to
lower green coffee revenues. Gross profit as a percentage of
revenues in the commercial coffee segment decreased to 1.9% for the
three months ended September 30, 2018, compared to 4.5% 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 three months
ended September 30,
|
Percentage
|
|
|
Segment
Gross Profit
|
2018
|
2017
|
change
|
|
Direct
selling
|
$23,622
|
$25,472
|
(7.3)%
|
|
Gross Profit % of Revenues
|
68.9%
|
67.1%
|
1.8%
|
|
Commercial
coffee
|
90
|
292
|
(69.2)%
|
|
Gross Profit % of Revenues
|
1.9%
|
4.5%
|
(2.6)%
|
|
Total
|
$23,712
|
$25,764
|
(8.0)%
|
|
Gross Profit % of Revenues
|
60.7%
|
58.0%
|
2.7%
|
Operating Expenses
For the three months ended September 30, 2018, our operating
expenses decreased 8.9% to $25,118,000 as compared to $27,581,000
for the three months ended September 30, 2017.
For the three months ended September 30, 2018, the distributor
compensation paid to our independent distributors in the direct
selling segment decreased 13.3% to $15,076,000 from $17,391,000 for
the three months ended September 30, 2017. This decrease was
primarily due to the lower revenues. Distributor compensation as a
percentage of direct selling revenues decreased to 44.0% for the
three months ended September 30, 2018 as compared to 45.8% for the
three months ended September 30, 2017. This was primarily
attributable to the price increases reflected in revenues, which
did not impact commissionable base revenues.
For the three months ended September 30, 2018, the sales and
marketing expense decreased 2.7% to $3,962,000 from $4,074,000 for
the three months ended September 30, 2017. In the direct selling
segment, sales and marketing costs decreased by 3.6% to $3,747,000
in the current quarter from $3,887,000 for the same period last
year. This was primarily due to lower compensation costs and lower
convention costs in the current quarter compared to the same
quarter last year. In the commercial coffee segment, sales and
marketing costs increased by $28,000 to $215,000 in the current
quarter from $187,000 for the same period last year, primarily due
to increased compensation costs.
For the three months ended September
30, 2018, the general and administrative expense decreased 36.6% to
$3,880,000 from $6,116,000 for the three months ended September 30,
2017 primarily due to a benefit of $2,618,000 from the
contingent liability revaluation for the three months ended
September 30, 2018 compared to a benefit of $340,000 for the three
months ended September 30, 2017. This benefit included a $2,200,000
adjustment to our contingent liability related to our acquisition
of BeautiControl (see Note 4, to the condensed consolidated
financial statements). Other changes include lower legal expense,
IT related costs and workers compensation expense also decreased
for the three months ended September 30, 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
Russia, Mexico, Taiwan, Colombia and New
Zealand.
For the three months ended September 30, 2018, we recorded a loss
on impairment of intangible assets related to our acquisition of
BeautiControl whereby the
underlying intangible assets were impaired and recorded a loss on
impairment of intangible assets of approximately $2,200,000 (see
Note 4, to the condensed consolidated financial
statements).
Operating Loss
For the three months ended September 30, 2018, operating loss
decreased $411,000 to an operating loss of $1,406,000 as compared
to an operating loss of $1,817,000 for the three months ended
September 30, 2017. This was primarily due to the decrease in
operating expenses discussed above, offset by the loss on
impairment of intangible assets and a reduction in gross
profit.
Total Other Expense
For the three months ended September 30, 2018, total other expense
increased to $6,945,000 as compared to $541,000 for the three
months ended September 30, 2017. Total other expense includes net
interest expense and the change in the fair value of derivative
liabilities.
Net interest expense decreased by $345,000 for the three months
ended September 30, 2018 to $1,407,000 compared to $1,752,000 for
the three months ended September 30, 2017. Interest expense
includes the imputed interest portion of the payments related to
contingent acquisition debt of $493,000, interest payments to
investors associated with our Private Placement transactions of
$155,000 and interest paid for other operating debt of $441,000.
Non-cash interest primarily related to amortization costs of
$314,000 and $4,000 of other non-cash interest.
Change in fair value of derivative liabilities increased by
$7,057,000 for the three months ended September 30, 2018 to a
$5,538,000 expense compared to a benefit of $1,519,000 for the
three months ended September 30, 2017, as a result of the increase 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 and may vary significantly from period to period (see
Notes 7 & 8, to the condensed 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. We have determined through consideration of all positive
and negative evidences that the deferred tax assets are not more
likely than not to 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 $272,400 in AMT
refundable credits, and we expect that $136,200 will be refunded in
2018. As such, we do not have a valuation allowance relating to the
refundable AMT credit carryforward. We have recognized income tax
expense of $59,000, which is
our estimated federal, state and foreign income tax adjustment for
the three months ended September 30, 2018 to reflect the proper
estimated tax provision year-to-date.
Net Loss
For the three months ended September 30, 2018, we reported a net
loss of $8,410,000 as compared to net loss of $1,068,000 for the
three months ended September 30, 2017. The increase in net loss was
a result of the increases in other expense discussed above and the
decrease in gross profit, off-set by a decrease in operating
expense. In addition, we recorded an income tax expense of $59,000
in the current quarter compared to an income tax benefit of
$1,290,000 for the same period in the prior year.
Nine months ended September 30, 2018 compared to nine months ended
September 30, 2017
Revenues
For the nine months ended September 30, 2018, our revenues
increased 1.3% to $126,331,000 as compared to $124,655,000 for the
nine months ended September 30, 2017. During the nine months
ended September 30, 2018, we derived approximately 84% of our
revenue from our direct selling sales and approximately 16% of our
revenue from our commercial coffee sales. For the nine months
ended September 30, 2018, direct selling segment revenues
decreased by $297,000 or 0.3% to $106,437,000 as compared to
$106,734,000 for the nine months ended September 30, 2017. This
decrease was primarily attributed to a decrease of $6,889,000 in
revenues from existing business, offset by revenues from new
acquisitions of $6,592,000. We attribute the decrease from existing
business primarily to a general weakness in North America direct
selling business and supply chain challenges that predominantly
negatively impacted revenues in the international markets. In
addition, the Company changed its promotion strategy whereby it has
significantly reduced promotions that impacted top line revenues
through discounting while maintaining commission levels. The
promotion in the current quarter targeted products with higher
gross margins and utilized incentives that had less costly impact
on profitability. For the nine months ended September 30, 2018,
commercial coffee segment revenues increased by $1,973,000 or 11.0%
to $19,894,000 as compared to $17,921,000 for the nine months ended
September 30, 2017. This increase was primarily attributed to
increased revenues from our roasted coffee business and green
coffee business.
The following table summarizes our revenue in thousands by
segment:
|
|
For the nine months
ended September 30,
|
Percentage
|
|
|
Segment
Revenues
|
2018
|
2017
|
change
|
|
Direct
selling
|
$106,437
|
$106,734
|
(0.3)%
|
|
As a % of Revenue
|
84%
|
86%
|
(2.0)%
|
|
Commercial
coffee
|
19,894
|
17,921
|
11.0%
|
|
As a % of Revenue
|
16%
|
14%
|
2.0%
|
|
Total
Revenues
|
$126,331
|
$124,655
|
1.3%
|
Cost of Revenues
For
the nine months ended September 30, 2018, overall cost of revenues
decreased by $698,000 or approximately 1.3% to $52,225,000 as
compared to $52,923,000 for the nine months ended September 30,
2017. The direct selling segment cost of revenues decreased by
$2,219,000 or 6.3% to $32,993,000 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 and
compensation expense offset by increase in inventory reserve. The
commercial coffee segment cost of revenues increased by $1,521,000
or 8.6% when compared to the same period last year. This was
primarily attributable to the increases in revenues related to the
green coffee and roasted coffee business, additional costs related
to green coffee procurement and increased inventory reserve,
depreciation and wages 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 nine months ended September 30, 2018, gross profit
increased approximately 3.3% to $74,106,000 as compared to
$71,732,000 for the nine months ended September 30, 2017. Overall
gross profit as a percentage of revenues increased to 58.7%,
compared to 57.5% in the same period last year.
Gross profit in the direct selling segment increased by 2.7% to
$73,444,000 from $71,522,000 in the prior period primarily as a
result of the slight increase in revenues and the lower cost of
sales discussed above. Gross profit as a percentage of revenues in
the direct selling segment increased by 2.0% to 69.0%
for the nine months ended September
30, 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 increased to
$662,000 compared to $210,000 in the prior period. The increase in
gross profit in the commercial coffee segment was primarily due to
improved green coffee margins on larger volume sales. Gross profit
as a percentage of revenues in the commercial coffee segment
increased by 2.1% to 3.3% for the nine months ended September 30,
2018, compared to 1.2% 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 nine months
ended September 30,
|
Percentage
|
|
|
Segment
Gross Profit
|
2018
|
2017
|
change
|
|
Direct
selling
|
$73,444
|
$71,522
|
2.7%
|
|
Gross Profit % of Revenues
|
69.0%
|
67.0%
|
2.0%
|
|
Commercial
coffee
|
662
|
210
|
215.2%
|
|
Gross Profit % of Revenues
|
3.3%
|
1.2%
|
2.1%
|
|
Total
|
$74,106
|
$71,732
|
3.3%
|
|
Gross Profit % of Revenues
|
58.7%
|
57.5%
|
1.2%
|
Operating Expenses
For
the nine months ended September 30, 2018, our operating expenses
decreased 2.3% to $74,835,000 as compared to $76,625,000 for the
nine months ended September 30, 2017.
For the nine months ended September 30, 2018, the distributor
compensation paid to our independent distributors in the direct
selling segment decreased 4.8% to $47,141,000 from $49,496,000 for
the nine months ended September 30, 2017. Distributor compensation
as a percentage of direct selling revenues decreased to 44.3% for
the nine months ended September 30, 2018 as compared to 46.4% for
the nine months ended September 30, 2017. This decrease was
primarily attributable to the price increases reflected in
revenues, which did not impact commissionable base
revenues.
For the nine months ended September 30, 2018, the sales and
marketing expense decreased by $113,000 to $10,537,000 from
$10,650,000 for the nine months ended September 30, 2017. In the
direct selling segment, sales and marketing costs decreased by 3.0%
to $9,888,000 for the nine months ended September 30, 2018 compared
to $10,191,000 for the same period last year. This was primarily
due to reduction in distributor events and convention costs for the
nine months ended September 30, 2018 as compared to the same period
last year. In the commercial coffee segment, sales and marketing
costs increased by $190,000 to $649,000 for the nine months ended
September 30, 2018 compared to $459,000 for the same period last
year, primarily due to increased advertising and promotion costs
and compensation expense.
For the nine months ended September
30, 2018, the general and administrative expense decreased 9.2% to
$14,957,000 from $16,479,000 for the nine months ended September
30, 2017 primarily due to a benefit of $4,076,000 from the
contingent liability revaluation for the nine months ended
September 30, 2018 compared to a benefit of $1,020,000 for the nine
months ended September 30, 2017. The revaluation in the current
year included a $2,200,000 adjustment to our contingent liability
in the current quarter related to our acquisition of BeautiControl
and a $1,246,000 benefit in the second quarter of the current year
as a result of eliminating the contingent liability related to an
acquisition due to breach of the asset purchase agreement by the
seller. Legal expense, IT related costs and workers compensation
expense also decreased for the nine months ended September 30,
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 Russia, Mexico, Taiwan, Colombia and New
Zealand.
For
the nine months ended September 30, 2018, we recorded a loss on
impairment of intangible assets related to our acquisition of
BeautiControl and recorded a loss on impairment of intangible
assets of approximately $2,200,000 (see Note 4, to the condensed
consolidated financial statements).
Operating Loss
For the nine months ended September 30, 2018, operating loss
decreased by $4,164,000 to an operating loss of $729,000 as
compared to an operating loss of $4,893,000 for the nine months
ended September 30, 2017. This was primarily due to the increase in
gross profit of $2,374,000 and a decrease in operating expenses of
$1,790,000 discussed above.
Total Other Expense
For the nine months ended September 30, 2018, total other expense
increased by $6,657,000 to $10,384,000 as compared to $3,727,000
for the nine months ended September 30, 2017. Total other expense
includes net interest expense and the change in the fair value of
derivative liabilities.
Net interest expense increased by $461,000 for the nine months
ended September 30, 2018 to $4,668,000 compared to $4,207,000 for
the nine months ended September 30, 2017. Interest expense includes
the imputed interest portion of the payments related to contingent
acquisition debt of $1,681,000, interest payments to investors
associated with our Private Placement transactions of $661,000 and
interest paid for other operating debt of $1,176,000. Non-cash
interest primarily related to amortization costs of $1,158,000 and
$15,000 of other non-cash interest, offset by interest income of
$25,000.
Change in fair value of derivative liabilities increased by
$5,422,000 for the nine months ended September 30, 2018 to a
$4,634,000 expense compared to a benefit of $788,000 for the nine
months ended September 30, 2017, as a result of the increase 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 7 & 8, to the condensed consolidated financial
statements).
We recorded a non-cash extinguishment loss on debt of $1,082,000
for the nine months ended September 30, 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 condensed 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. We have determined through consideration of all positive
and negative evidences that the deferred tax assets are not more
likely than not to 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 $272,400 in AMT
refundable credits, and we expect that $136,200 will be refunded in
2018. As such, we do not have a valuation allowance relating to the
refundable AMT credit carryforward. We have recognized an income
tax expense of $219,000 which is our estimated federal, state and foreign
income tax expense for the nine months ended September 30, 2018.
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 nine months ended September 30, 2018, we reported a net
loss of $11,332,000 as compared to net loss of $5,857,000 for the
nine months ended September 30, 2017. The primary reason for the
increase in net loss when compared to the prior period was due to
the increase in other expense discussed above, offset by increases
in gross profit and decreases in operating expense. In addition, we
recorded an income tax expense of $219,000 for the nine months
ended September 30, 2018 as compared to an income tax benefit of
$2,763,000 for the same period last year.
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 and the
change in the fair value of the derivatives or "Adjusted
EBITDA," increased to $2,670,000 for the three months ended
September 30, 2018 compared to a negative $359,000 in 2017 and
increased to $6,393,000 for the nine months ended September 30,
2018 compared to a negative $851,000 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 and the change
in the fair value of the warrant derivative, as each of those
elements are calculated in accordance with
GAAP. Adjusted EBITDA should not be construed as a
substitute for net income (loss) (as determined in accordance with
GAAP) for the purpose of analyzing our operating performance or
financial position, as Adjusted EBITDA is not defined by
GAAP.
A reconciliation of our adjusted EBITDA to net loss for the
three and nine months ended September 30, 2018 and 2017 is included
in the table below (in thousands):
|
|
Three months ended
|
Nine months ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
Net
loss
|
$(8,410)
|
$(1,068)
|
$(11,332)
|
$(5,857)
|
|
Add/Subtract:
|
|
|
|
|
|
Interest,
net
|
1,407
|
1,752
|
4,668
|
4,207
|
|
Income taxes
(benefit) provision
|
59
|
(1,290)
|
219
|
(2,763)
|
|
Depreciation
|
463
|
419
|
1,365
|
1,183
|
|
Amortization
|
724
|
712
|
2,416
|
2,047
|
|
EBITDA
|
(5,757)
|
525
|
(2,664)
|
(1,183)
|
|
Add/Subtract:
|
|
|
|
|
|
Stock based
compensation - stock awards and warrant issuance
|
470
|
327
|
922
|
812
|
|
Stock based
compensation - stock awards for advisory services
|
219
|
-
|
219
|
-
|
|
Loss on impairment
of intangible assets
|
2,200
|
-
|
2,200
|
-
|
|
Loss on
extinguishment of debt
|
-
|
308
|
1,082
|
308
|
|
Change in the fair
value of warrant derivative
|
5,538
|
(1,519)
|
4,634
|
(788)
|
|
Adjusted
EBITDA
|
$2,670
|
$(359)
|
$6,393
|
$(851)
|
Liquidity and Capital Resources
Sources of Liquidity
At September 30, 2018 we had cash and cash equivalents of
approximately $2,298,000 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
nine months ended September 30, 2018 was $4,732,000
as compared to net cash used in operating activities of
$1,783,000 for the nine months ended September 30, 2017. Net cash
used in operating activities consisted of a net loss of
$11,332,000 and $2,722,000 in changes in operating assets and
liabilities offset by net non-cash operating activity of
$9,322,000.
Net non-cash operating expenses included $3,781,000 in depreciation
and amortization, $922,000 in stock-based compensation expense,
$4,634,000 in change in fair value of derivative liability,
$2,200,000 related to the loss on impairment of intangible assets,
$1,158,000 related to the amortization of debt discounts and
issuance costs associated with our Private Placements, $249,000
prepaid advisory fees, $1,082,000 extinguishment loss on debt and
$137,000 in deferred tax assets, offset by $4,076,000 related to
the change in the fair value of contingent acquisition debt and
$765,000 related to increases in inventory reserves.
Changes in operating assets and liabilities were attributable to
decreases in working capital, primarily related changes in accounts
receivable of $1,823,000, inventory of $940,000, prepaid expenses
and other current assets of $263,000, changes in accounts payable
of $1,642,000, accrued distributor compensation of $221,000 and
changes in the income tax receivable of $34,000. Increases in
working capital primarily related to changes in deferred revenues
of $1,130,000 and accrued expenses and other liabilities of
$1,071,000.
Cash used in investing activities. Net cash used in investing activities for
the nine months ended September 30, 2018 was $302,000 as compared
to net cash used in investing activities of $865,000 for the nine
months ended September 30, 2017. Net cash used in investing
activities consisted of purchases of property and equipment,
leasehold improvements and cash expenditures related to business
acquisitions.
Cash provided by financing activities. Net cash provided by financing activities was
$6,325,000 for the nine months ended September 30, 2018 as compared
to net cash provided by financing activities of $3,154,000 for the
nine months ended September 30, 2017.
Net cash provided by financing activities consisted of the net
proceeds of $3,289,000 related to the Preferred Series B offering,
$3,197,000 related to the Preferred Series C offering, $985,000
related to the private placement stock offering, $1,907,000 from
short-term debt, $3,000 from the exercise of stock options, offset
by net payments related to the line of credit of $1,308,000,
$732,000 in payments of notes payable,
$137,000 in payments related to contingent acquisition debt,
$840,000 in payments related to capital lease financing obligations
and $39,000 in payments of dividends.
Future Liquidity Needs
The accompanying condensed consolidated financial statements have
been prepared and presented on a basis assuming we will continue as
a going concern. Net cash used in operating activities was
$4,732,000 for the nine months ended September 30, 2018 compared to
net cash used in operating activities of $1,783,000 for the nine
months ended September 30, 2017. 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.
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 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. Revenue for this contract covers the period 2019
through 2023 with first shipments expected to begin in January of
2019.
On July 18, 2018, we entered into lending agreements (the
“Lending Agreements”) with three separate entities and
received loans in the total amount of $2,000,000 million to be paid
back by us with periodic payments, including accrued
interest, over an 8-month
period. The outstanding
balance related to the Lending Agreement is approximately
$1,303,000 as of September 30, 2018 and is included in other
current liabilities on our balance sheet as of September 30,
2018.
We
believe with the recent increase in our common stock trading volume
and increase in stock price, that we should be able 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 September 30,
2018.
Contractual Obligations
There were no material changes from those disclosed in our most
recent annual report.
Critical Accounting Policies
The unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America, which require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the unaudited condensed
consolidated financial statements and revenues and expenses during
the periods reported. Actual results could differ from those
estimates. Information with respect to our critical accounting
policies which we believe could have the most significant effect on
our reported results and require subjective or complex judgments by
management is contained in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, of
our Annual Report on Form 10-K for the year ended December 31,
2017.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 1 to the
accompanying condensed consolidated financial statements of this
Quarterly Report on Form 10-Q.
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 3 of
Part I.
ITEM 4. Controls
and Procedures
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(a)
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Evaluation of Disclosure Controls and Procedures
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Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of
September 30, 2018, the end of the quarterly fiscal period covered
by this quarterly report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2018, such disclosure controls and procedures were
effective in ensuring that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange
Act of 1934, as amended, is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and (ii) accumulated
and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required
disclosure.
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(b)
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Changes in Internal Control Over Financial Reporting
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There were no changes in our internal controls over financial
reporting that occurred during our third quarter of fiscal year
2018 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
We are from time to time, the subject of claims and suits arising
out of matters related to our business. 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 1A. RISK
FACTORS
Any investment in our common stock involves a high degree of risk.
Investors should carefully consider the risks described in our
Annual Report on Form 10-K as filed with the SEC on March 30, 2018,
and all of the information contained in our public filings before
deciding whether to purchase our common stock. The following
information and updates should be read in conjunction with the
information disclosed in Part 1, Item 1A,
“Risk Factors,” contained in our Annual Report on Form
10-K as filed with the SEC on March 30, 2018. Except as set forth
below, there have been no material revisions to the “Risk
Factors” as set forth in our Annual Report on Form 10-K as
filed with the SEC on March 30, 2018.
There is substantial risk about our ability to continue as a going
concern, which may hinder our ability to obtain future
financing.
The accompanying condensed consolidated financial statements as of
September 30, 2018 have been prepared and presented on a basis
assuming we will continue as a going concern. We have sustained
significant net losses during the nine months ended September 30,
2018 of $11,332,000 and $5,857,000 for the nine months ended
September 30, 2017. Net cash used in operating activities was
$4,732,000 for the nine months ended September 30, 2018 compared to
net cash used in operating activities of $1,783,000 for the nine
months ended September 30, 2017. We do not currently believe 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 as of September 30, 2018, our current rate
of cash requirements, we will need to raise additional capital
and/or will need to 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 reduce our expenses.
The sale of additional common shares
and advisory shares to the investors in our 2018 Private Placement, the exercise of the
warrants issued with the 2018 Private Placement and warrants issued
in connection with the conversion of the Series C Preferred Stock
and the conversion of the Series C Preferred shares may cause
dilution. The sale of the shares acquired by the investors, or the
perception that such sales may occur, could cause the price of our
common stock to fall.
In
August, September and October 2018, we entered into the Purchase
Agreements with the investors in our August 2018 Private Placement,
pursuant to which the investors, have committed to purchase an
aggregate of 630,526 common shares and an aggregate of 150,000
advisory shares. In addition, each Purchase Agreement provides that
in the event that the average of the 15 lowest closing prices for
our common stock during the period beginning on date of execution
of such Purchase Agreement and ending on the date 90 days from the
effective date of the registration statement that includes this
prospectus is less than $4.75 per share, we will be required to
issue additional common shares to the investors. The additional
common shares and advisory shares that are to be sold pursuant to
the Purchase Agreements in the future will be sold, commencing
after the SEC has declared effective the registration statement
that includes this prospectus.
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. In the event the
average of the daily volume-weighted average price of the common
stock for the 30 days preceding the two-year anniversary date of
issuance is $6.00 or higher each Series C Preferred Shares
automatically converts initially into two (2) shares of common
stock. 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 conversion of the Series C Preferred
shares 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.
The investors in our recent private placement and our
Series C
Preferred Stock offering may pay less than the then-prevailing
market price for our Common Stock.
The
common shares to be issued to the investors in our August 2018
Private Placement pursuant to the Purchase Agreements will be
purchased at $4.75, which may be less than the prevailing prices.
The warrants to be issued to the holders of the Series C Preferred
Shares that convert their shares of Series C Preferred Shares prior
to the two-year anniversary of their issuance will be issued for no
additional consideration. If the price of the common stock is more
than the price of the common shares, the exercise price of the
August 2018 Private Placement warrants or the Preferred Stock
Warrants or the conversion price of the Series C Preferred shares,
the investors have a financial incentive to sell the shares
immediately upon receiving the shares to realize the profit equal
to the difference between the discounted price and the market
price. If the investors sell the shares, the price of our common
stock could decrease.
The issuance of shares of the Series C Common Shares upon
conversion of the Series C Preferred Shares would reduce the
relative voting power of holders of our Common Stock, would dilute
the ownership of such holders and may adversely affect the market
price of our Common Stock.
The
Series C Preferred shares have no voting rights, but each Series C
Preferred share is currently convertible into two Series C Common
shares. Conversion of the Series C Preferred Stock to Series C
Common Shares would dilute the ownership interest of existing
holders of our common stock, and any sales in the public market of
the common stock issuable upon conversion of the Series C Preferred
Stock could adversely affect prevailing market prices of our Common
stock. Sales by such holders of a substantial number of shares of
our common stock in the public market, or the perception that such
sales might occur, could have a material adverse effect on the
price of our common stock.
The holders of Series C Preferred Shares have rights, preferences
and privileges that are not held by, and are preferential to, the
rights of our holders of Common Stock.
Upon
our liquidation, dissolution or winding up, the holders of the
Series C Preferred shares are entitled to receive dividends and
payments upon our liquidation or winding up prior to any amounts
paid to our holders of Series A Preferred Stock or Common stock and
pari passu with the holders
of our Series B Preferred Stock. These provisions may make it more
costly for a potential acquirer to engage in a business combination
transaction with us. Provisions that have the effect of
discouraging, delaying or preventing a change in control could
limit the opportunity for our stockholders to receive a premium for
their shares of our common stock and could also affect the price
that some investors are willing to pay for our common stock. This
will reduce the remaining amount of our assets, if any, available
to distribute to holders of our common stock.
In
addition, the holders of the Series C Preferred Shares also have
certain redemption and conversion rights.
Our
obligations to the holders of Series C Preferred Shares could limit
our ability to obtain additional financing or increase our
borrowing costs, which could have an adverse effect on our
financial condition. These preferential rights could also result in
divergent interests between the holders of shares of the Series C
Preferred Shares and holders of our common stock.
The redemption right of the holders of the Series C Preferred
Shares may result in the use of our cash for purposes other than
growing our business.
The
terms of the Series C Preferred Shares provide the holders with the
right to require us to redeem the stock at a price equal to its
original purchase price plus all accrued but unpaid dividends in
the event the average of the daily volume weighted average price of
the common stock for the 30 days preceding the two-year anniversary
date of issuance is less than $6.00. This feature may have the
effect of depleting our cash.
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 sales of our
hemp-derived products are in compliance with all applicable
regulations since all of our products that contain hemp, contain
less than 0.3% THC content and are sold only in states in the
United States that have not prohibited the sale of hemp 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
federal Agricultural Act of 2014, along with the corresponding
Consolidated Appropriations Act of 2016 provisions (as extended by
resolution into 2018), provide for the cultivation of industrial
hemp for purposes of research as part of agricultural pilot
programs adopted by individual states. The uncertainty of
conflicting interpretations of these legislative authorities, as
they relate to the federal Controlled Substance Act’s
provisions relating to the cultivation of “marijuana,”
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. If federal or state regulatory authorities
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, such as
our products that contain less than 0.3% THC content, 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 (the “ FDA ”),
Federal Trade Commission (the “ FTC ”) and their
state-level equivalents, also possess broad authority to enforce
the provisions of federal and state law, respectively, applicable
to consumer products and safeguards as such relate to foods,
dietary supplements and cosmetics, including powers to issue a
public warning or notice of violation letter to a Company,
publicize information about illegal products, detain products
intended for import or export (in conjunction with U.S. Customs and
Border Protection) or otherwise deemed illegal, request a recall of
illegal products from the market, and request the Department of
Justice, or the state-level equivalent, to initiate a seizure
action, an injunction action, or a criminal prosecution in the U.S.
or respective state courts. The initiation of any regulatory action
towards industrial hemp or hemp derivatives by the FDA, 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 the Company, its business and its
results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
All sales of unregistered securities during the three months ended
September 30, 2018 have been previously reported except for the
sales of unregistered securities set forth below.
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 for a period of
eighteen (18) months in exchange for 100,000 shares of restricted
common stock which were issued in advance of the service
period. During the three months ended September 30, 2018, we issued 100,000 shares of
restricted common stock in connection
with this agreement. The
issuance of the stock was exempt from the registration provisions
of the Securities Act under the exemption provided for by Section
4(a)(2) thereof for transactions not involving public
offerings.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
None
ITEM 4. MINE SAFETY
DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The following exhibits are filed as part of this
Report:
EXHIBIT INDEX
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Exhibit No.
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Exhibit
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Certificate
of Designation of Powers, Preferences and Rights of Series C
Convertible Preferred Stock (Incorporated by reference to the Form
8-K filed with the Securities and Exchange Commission on August 21,
2018 (File No. 000-54900)
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|
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Certificate
of Increase to the Certificate of Designation of Powers,
Preferences and Rights of Series C Convertible Preferred Stock
(Incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on October 4, 2018 (File No.
000-54900)
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Form of
Warrant (Incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on August 21, 2018 (File No.
000-54900)
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Form of
Warrant Agreement (Incorporated by reference to the Form 8-K filed
with the Securities and Exchange Commission on September 7, 2018
(File No. 000-54900)
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|
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Form of
Warrant Agreement with Carl Grover (Incorporated by reference to
the Form 8-K filed with the Securities and Exchange Commission on
October 29, 2018 (File No. 000-54900)
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Form of
$5.35 Warrant Agreement with Ascendant Alternative Strategies,
LLC(Incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on October 29, 2018 (File No.
000-54900)
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|
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Form of
$4.75 Warrant Agreement with Ascendant Alternative Strategies,
LLC(Incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on October 29, 2018 (File No.
000-54900)
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|
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Form of
Securities Purchase Agreement between Youngevity International,
Inc. and Investor (Incorporated by reference to the Form 8-K filed
with the Securities and Exchange Commission on August 21, 2018
(File No. 000-54900)
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|
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Form of
Registration Rights Agreement between Youngevity International,
Inc. and Investor (Incorporated by reference to the Form 8-K filed
with the Securities and Exchange Commission on August 21, 2018
(File No. 000-54900)
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Placement
Agent Agreement, dated July 31, 2018, between Youngevity
International, Inc. and Corinthian Partners, LLC (Incorporated by
reference to the Form 8-K filed with the Securities and Exchange
Commission on August 21, 2018 (File No. 000-54900)
|
|
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Form of
Securities Purchase Agreement by and between Youngevity
International, Inc and the purchasers named therein (Incorporated
by reference to the Form 8-K filed with the Securities and Exchange
Commission on September 7, 2018 (File No. 000-54900)
|
|
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Form of
Registration Rights Agreement by and between Youngevity
International, Inc and the purchasers named therein (Incorporated
by reference to the Form 8-K filed with the Securities and Exchange
Commission on September 7, 2018 (File No. 000-54900)
|
|
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Exchange
Agreement, dated October 23 2018, between Youngevity International,
Inc. and Carl Grover (Incorporated by reference to the Form 8-K
filed with the Securities and Exchange Commission on October 29,
2018 (File No. 000-54900)
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Advisory
Agreement, dated October 23, 2018, between Youngevity
International, Inc. and Ascendant Alternative Strategies, LLC
(Incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on October 29, 2018 (File No.
000-54900)
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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|
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Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document
|
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101.SCH
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XBRL Taxonomy Extension Schema Document
|
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
|
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XBRL Taxonomy Extension Definition Linkbase Document
|
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101.LAB
|
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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*Filed
herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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YOUNGEVITY INTERNATIONAL INC.
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(Registrant)
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Date: November 13, 2018
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/s/ Stephan Wallach
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Stephan Wallach
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Chief Executive Officer
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(Principal Executive Officer)
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Date: November 13, 2018
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/s/ David Briskie
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David Briskie
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Chief Financial Officer
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(Principal Financial Officer)
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