Youngevity International, Inc. - Quarter Report: 2018 June (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 June 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 and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[X] No [ ]
Indicate
by check mark 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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(Do not check if a smaller reporting company)
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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 August 10, 2018, the issuer had 21,561,217
shares of its Common Stock, par
value $0.001 per share, issued and
outstanding.
YOUNGEVITY INTERNATIONAL,
INC.
TABLE OF CONTENTS
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40
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PART
I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Youngevity International, Inc. and Subsidiaries
(In thousands, except share amounts)
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As of
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June 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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$700
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$673
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Accounts
receivable, trade
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6,754
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4,314
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Income
tax receivable
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196
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106
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Inventory
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22,867
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22,073
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Prepaid
expenses and other current assets
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5,031
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3,999
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Total
current assets
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35,548
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31,165
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Property
and equipment, net
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13,650
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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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21,093
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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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$76,763
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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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$10,444
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$11,728
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Accrued
distributor compensation
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4,263
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4,277
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Accrued
expenses
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7,722
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5,437
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Deferred
revenues
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4,888
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3,386
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Line
of credit
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2,914
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3,808
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Other
current liabilities
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862
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1,144
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Capital
lease payable, current portion
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1,191
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983
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Notes
payable, current portion
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146
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176
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Convertible
notes payable, current portion
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2,931
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2,828
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Warrant
derivative liability
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2,177
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3,365
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Contingent
acquisition debt, current portion
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582
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587
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Total
current liabilities
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38,120
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37,719
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Capital
lease payable, net of current portion
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629
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694
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Notes
payable, net of current portion
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4,308
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4,372
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Convertible
notes payable, net of current portion
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3,615
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8,336
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Contingent
acquisition debt, net of current portion
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14,261
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13,817
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Total
liabilities
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60,933
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64,938
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Commitments and contingencies (Note 1)
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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 June 30, 2018 and December 31, 2017
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-
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-
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Convertible
Preferred Stock, Series B - 328,541 shares issued and outstanding
at June 30, 2018 and zero at December 31, 2017
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-
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Common
Stock, $0.001 par value: 50,000,000 shares authorized; 21,536,019
and 19,723,285 shares issued and outstanding at June 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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182,475
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171,405
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Accumulated
deficit
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(166,615)
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(163,693)
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Accumulated
other comprehensive loss
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(52)
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(281)
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Total
stockholders’ equity
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15,830
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7,451
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Total Liabilities and
Stockholders’ Equity
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$76,763
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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
June 30,
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Six Months Ended
June 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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$44,255
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$41,527
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$87,249
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$80,260
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Cost
of revenues
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18,873
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17,425
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36,855
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34,292
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Gross
profit
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25,382
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24,102
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50,394
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45,968
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Operating
expenses
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Distributor
compensation
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16,487
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16,686
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32,065
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32,105
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Sales
and marketing
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3,076
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2,901
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6,575
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6,576
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General
and administrative
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5,166
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5,191
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11,077
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10,363
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Total
operating expenses
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24,729
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24,778
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49,717
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49,044
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Operating
income (loss)
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653
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(676)
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677
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(3,076)
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Interest
expense, net
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(1,549)
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(1,258)
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(3,261)
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(2,455)
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Change
in fair value of warrant derivative liability
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192
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(1,341)
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904
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(731)
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Extinguishment
loss on debt
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-
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-
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(1,082)
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-
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Total
other expense
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(1,357)
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(2,599)
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(3,439)
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(3,186)
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Loss
before income taxes
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(704)
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(3,275)
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(2,762)
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(6,262)
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Income
tax (benefit) provision
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(90)
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(545)
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160
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(1,473)
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Net
loss
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(614)
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(2,730)
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(2,922)
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(4,789)
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Preferred
stock dividends
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(42)
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(3)
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(45)
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(6)
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Net
loss attributable to common stockholders
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$(656)
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$(2,733)
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$(2,967)
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$(4,795)
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Net
loss per share, basic
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$(0.03)
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$(0.14)
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$(0.14)
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$(0.24)
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Net
loss per share, diluted
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$(0.03)
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$(0.14)
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$(0.14)
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$(0.24)
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Weighted
average shares outstanding, basic
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21,506,833
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19,651,705
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20,630,383
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19,643,486
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Weighted
average shares outstanding, diluted
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21,506,833
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19,651,705
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20,630,383
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19,643,486
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See accompanying notes to condensed consolidated financial
statements.
Youngevity International, Inc.
and Subsidiaries
Unaudited Condensed Consolidated
Statements of Comprehensive Loss
(In thousands)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2018
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2017
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2018
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2017
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Net
loss
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$(614)
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$(2,730)
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$(2,922)
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$(4,789)
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Foreign
currency translation
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28
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(67)
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229
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(14)
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Total
other comprehensive income (loss)
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28
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(67)
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229
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(14)
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Comprehensive
loss
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$(586)
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$(2,797)
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$(2,693)
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$(4,803)
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See accompanying notes to condensed consolidated financial
statements.
Youngevity International,
Inc. and Subsidiaries
Unaudited Condensed Consolidated
Statements of Cash Flows
(In thousands)
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Six Months Ended
June 30,
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2018
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2017
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Cash Flows from Operating Activities:
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Net
loss
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$(2,922)
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$(4,789)
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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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2,594
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2,099
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Stock-based
compensation expense
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452
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485
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Amortization
of debt discounts and issuance costs
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844
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771
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Amortization
of prepaid advisory fees
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98
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28
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Change
in fair value of warrant derivative liability
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(904)
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731
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Expenses
allocated in profit sharing agreement
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-
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(420)
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Change
in fair value of contingent acquisition debt
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(1,459)
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(680)
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Extinguishment
loss on debt
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1,082
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-
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Changes
in inventory reserve
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(700)
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-
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Deferred
taxes
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137
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-
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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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(2,440)
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(1,437)
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Inventory
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(94)
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818
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Prepaid
expenses and other current assets
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(585)
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299
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Accounts
payable
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(1,135)
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1,319
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Accrued
distributor compensation
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(14)
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669
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Deferred
revenues
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1,502
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(22)
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Accrued
expenses and other liabilities
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1,958
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1,426
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Income
taxes receivable
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(90)
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(1,473)
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Net Cash Used in Operating Activities
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(1,676)
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(176)
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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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(160)
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(499)
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Net Cash Used in Investing Activities
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(210)
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(674)
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Cash Flows from Financing Activities:
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Proceeds
from issuance of convertible preferred stock, net of offering
costs
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3,289
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-
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Proceeds
from the exercise of stock options
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3
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21
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Proceeds
from factoring company
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-
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1,652
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Payments
net of proceeds on line of credit
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(894)
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-
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Payments
of notes payable
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(94)
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(104)
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Payments
of contingent acquisition debt
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(78)
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(204)
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Payments
of capital leases
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(542)
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(495)
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Net Cash Provided by Financing Activities
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1,684
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870
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Foreign Currency Effect on Cash
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229
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14
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Net
increase in cash and cash equivalents
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27
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34
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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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$700
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$903
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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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$2,427
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$1,730
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Income
taxes
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$30
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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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$680
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$256
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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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$1,877
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$2,670
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Stock
issued for services (see Note 9)
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$545
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$150
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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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$39
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$-
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Change
in warrant derivative liability to equity classification, Warrant
Modification (see Note 7)
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$284
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$-
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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
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 June 30, 2018 and for the three and
six months ended June 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 June 30, 2018, the Company derived approximately
83% its revenue from its direct selling segment and approximately
17% of its revenue from its commercial coffee selling
segment. During the three months ended June 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 selling segment. During the six months ended June
30, 2018, the Company derived approximately 83% of its revenue from
its direct selling segment and approximately 17% of its revenue
from its commercial coffee selling segment. During the six months ended June 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 selling 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 six
months ended June 30, 2018 of $2,922,000 and $4,789,000
for the six months ended June 30,
2017. Net cash used in operating activities was $1,676,000 for the
six months ended June 30, 2018 compared to net cash used in
operating activities of $176,000 for the six months ended June 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 is also considering multiple alternatives including, but
not limited to, additional equity financings and debt
financings.
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.
The shares of Series B Convertible Preferred Stock issued in the
Company’s 2018 best efforts offering of the Series B Offering
were sold pursuant to the Company’s Registration Statement,
which was declared effective on February 13, 2018. The notes (the
“2017 Notes”) issued by the Company in its private
placement that was consummated in 2017 (the “2017 Private
Placement”) provided that they automatically convert into
shares of the Company’s common stock upon receipt of proceeds
of at least $3,000,000 in subsequent offerings. 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.
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. Effective
May 1, 2016, CLR entered into a third amendment to the Factoring
Agreement. Under the terms of the third amendment, all new
receivables assigned to Crestmark were “Client Risk
Receivables” and no further credit approvals were required to
be provided by Crestmark. Additionally, the third amendment
expanded the factoring facility to include advanced borrowings
against eligible inventory up to 50% of landed cost of finished
goods inventory that meet certain criteria, not to exceed the
lesser of $1,000,000 or 85% of the value of the accounts
receivables already advanced with a maximum overall borrowing of
$3,000,000. Interest accrued on the outstanding balance and a
factoring commission was charged for each invoice factored which
was calculated as the greater of $5.00 or 0.75% to 0.875% of the
gross invoice amount and was recorded as interest expense. In
addition, the Company and the Company’s CEO, Mr. Wallach,
entered into a Guaranty and Security Agreement with Crestmark
guaranteeing payments in the event that CLR were to default. The
third amendment was effective until February 1,
2019.
On November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark which amended
and restated the original Factoring Agreement dated February 12,
2010 with Crestmark and subsequent agreement amendments thereto.
CLR is provided with a line of credit related to accounts
receivables resulting from sales of certain products 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 expenses
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 $2,914,000 and $3,808,000 as of
June 30, 2018 and December 31, 2017, respectively.
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 $63,000
and $59,000 from WVNP Inc., for the three months ended June 30,
2018 and 2017, respectively, and $117,000 and $81,000 for the six
months ended June 30, 2018 and 2017, respectively. In addition, Mr.
Renton is a distributor of the Company and does earn 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 a note (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
$3,339,000 and $2,788,000 from this supplier for the three months
ended June 30, 2018 and 2017, respectively and $7,073,000 and
$5,174,000 for the six months ended June 30, 2018 and 2017,
respectively.
In addition, CLR sold approximately $859,000 and $1,056,000 for the
three months ended June 30, 2018 and 2017, respectively and
$3,302,000 and $1,547,000 for the six months ended June 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.
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 June 30, 2018, and December 31, 2017, the balance in deferred
revenues was approximately $4,888,000 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
$2,261,000 and $1,882,000, as of June 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 June 30,
2018, and December 31, 2017, the balance in deferred costs was
approximately $455,000 and $433,000, respectively, and is included
in prepaid expenses and current assets.
Deferred revenue related to CLR as of June 30, 2018 and December
31, 2017 was approximately $2,391,000 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 $236,000 and $213,000,
as of June 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 three months ended June 30, 2018 the Company completed
its 2018 harvest and recognized $439,000 in inventory
costs.
Deferred
cost associated with the 2019 harvest was $100,000 as of June 30,
2018 and deferred cost associated with the 2018 harvest was
$400,000 as of December 31, 2017.
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
Update allow a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects
resulting from the Tax Cuts and Jobs Act (H.R.1) (the Act).
Consequently, the amendments eliminate the stranded tax effects
resulting from the Act and will improve the usefulness of
information reported to financial statement users. However, because
the amendments only relate to the reclassification of the income
tax effects of the Act, the underlying guidance that requires that
the effect of a change in tax laws or rates be included in income
from continuing operations is not affected. The amendments in this
Update also require certain disclosures about stranded tax effects.
This ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. The 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, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is
permitted. The Company does not expect this new guidance to have a
material impact on its 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 is effective for fiscal
years beginning after December 15, 2017, including interim periods
within those fiscal years. 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 in this update
are effective for goodwill impairment tests in fiscal years
beginning after December 15, 2021, with early adoption permitted
for goodwill impairment tests performed after January 1, 2017.
The 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. The
Company is expected to adopt the standard no later than January 1,
2020. 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 June
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 6,560,761 for the three and six months
ended June 30, 2018. Potentially dilutive securities were
5,282,208
for the three and six months ended June 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
|
|
|
|
June 30,
2018
|
December 31,
2017
|
|
Finished
goods
|
$11,438
|
$10,994
|
|
Raw
materials
|
13,193
|
12,143
|
|
|
24,631
|
23,137
|
|
Reserve
for excess and obsolete
|
(1,764)
|
(1,064)
|
|
Inventory,
net
|
$22,867
|
$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 six months ended June 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, 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 six months ended June 30, 2018 the Company adjusted the
purchase price for a 2017 acquisition which resulted in an
adjustment to the related intangibles and contingent debt in the
amount of $583,000. In addition, during the three months ended June
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 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. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation is as follows (in
thousands):
|
Intangibles
|
$1,375
|
|
Total
purchase price
|
$1,375
|
The preliminary fair value of intangible assets acquired, which
consisted of customer relationships, distributor organization and
trademarks and tradenames was determined through the use of a
discounted cash flow methodology are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The Company expects to finalize the valuations within one (1) year
from the acquisition date.
The revenue impact from the ViaViente acquisition, included in the condensed
consolidated statements of operations for the three and six months
ended June 30, 2018 was approximately $512,000 and $691,000,
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, 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. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation is as follows (in
thousands):
|
Intangibles
|
$1,085
|
|
Inventory
|
90
|
|
Assumed
liabilities
|
50
|
|
Payment
for inventory
|
(90)
|
|
Total
purchase price
|
$1,135
|
The preliminary fair value of intangible assets acquired, which
consisted of customer relationships, distributor organization and
trademarks and tradenames was determined through the use of a
discounted cash flow methodology are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The Company expects to finalize the valuations within one (1) year
from the acquisition date.
The revenue impact from the Nature Direct acquisition, included in the condensed
consolidated statements of operations for the three and six months
ended June 30, 2018 was approximately $384,000 and $655,000,
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.
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):
|
|
June 30, 2018
|
December 31, 2017
|
||||
|
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|
Distributor
organizations
|
$16,793
|
$9,057
|
$7,736
|
$16,204
|
$8,363
|
$7,841
|
|
Trademarks
and trade names
|
8,324
|
1,525
|
6,799
|
7,779
|
1,229
|
6,550
|
|
Customer
relationships
|
11,706
|
5,360
|
6,346
|
10,966
|
4,711
|
6,255
|
|
Internally
developed software
|
720
|
508
|
212
|
720
|
458
|
262
|
|
Intangible
assets
|
$37,543
|
$16,450
|
$21,093
|
$35,669
|
$14,761
|
$20,908
|
Amortization expense related to intangible assets was approximately
$857,000 and $690,000 for the three months ended June 30, 2018 and
2017, respectively. Amortization expense related to intangible
assets was approximately $1,692,000 and $1,335,000 for the six
months ended June 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 June 30, 2018 and December 31,
2017, approximately $1,649,000 in trademarks from business
combinations have been identified as having indefinite
lives.
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 June 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
six months ended June 30, 2018 and 2017.
Goodwill consists of the following (in thousands):
|
|
June 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 June 30, 2018 and December
31, 2017, net of debt discount outstanding consisted of the amount
set forth in the following table (in thousands):
|
|
June 30,
2018
|
December 31,
2017
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$4,750
|
$4,750
|
|
Debt
discounts
|
(1,135)
|
(1,659)
|
|
Carrying
value of 2014 Notes
|
3,615
|
3,091
|
|
|
|
|
|
8%
Convertible Notes due October and November 2018 (2015 Notes),
principal
|
3,000
|
3,000
|
|
Debt
discounts
|
(69)
|
(172)
|
|
Carrying
value of 2015 Notes
|
2,931
|
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
|
$6,546
|
$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 June 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 June 30,
2018 and December 31, 2017, the remaining balance of the debt
discounts is approximately $1,030,000 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 June 30, 2018 and December 31, 2017 the remaining balance of
the issuance costs is approximately $105,000 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.
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
June 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 at issuance debt discounts associated with the
2015 Notes of $309,000 related to the beneficial conversion feature
of $15,000 and $294,000 related to the detachable warrants. The
beneficial conversion feature discount and the detachable warrants
discount are amortized to interest expense over the life of the
2015 Notes. As of June 30, 2018 and December 31, 2017 the remaining
balances of the debt discounts is approximately $14,000 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 June 30, 2018 and December 31, 2017, the remaining balance of
the issuance cost is approximately $36,000 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 June 30, 2018 and December 31, 2017, the remaining
balance of the warrant issuance cost is approximately $19,000 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 six months ended June 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 at issuance 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 six months ended June 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 six months ended June
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
six months ended June 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 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
The estimated fair value of the outstanding warrant liabilities was
$2,177,000 and $3,365,000 as of June 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 a decrease of $192,000 and an increase of $1,341,000
for the three months ended June 30, 2018 and 2017, respectively.
The changes to the derivative liability for warrants resulted in a
decrease of $904,000 and an increase of $731,000 for the six months
ended June 30, 2018 and 2017, respectively.
The estimated fair value of the warrants was computed as of June
30, 2018 and December 31, 2017 using the Monte Carlo option pricing
model, using the following assumptions:
|
|
June 30,
2018
|
December 31,
2017
|
|
Stock
price volatility
|
61.59%
|
61.06%
|
|
Risk-free
interest rates
|
2.55%
|
1.96%
|
|
Annual
dividend yield
|
0%
|
0%
|
|
Expected
life
|
1.08-2.29
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 June 30, 2018
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$582
|
$-
|
$-
|
$582
|
|
Contingent
acquisition debt, less current portion
|
14,261
|
-
|
-
|
14,261
|
|
Warrant
derivative liability
|
2,177
|
-
|
-
|
2,177
|
|
Total
liabilities
|
$17,020
|
$-
|
$-
|
$17,020
|
|
|
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
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
|
-
|
|
Adjustments
to estimated fair value
|
(904)
|
|
Adjustment
related to the modification of warrants (Note 7)
|
(284)
|
|
Balance
at June 30, 2018
|
$2,177
|
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 June 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
|
(78)
|
|
Adjustments
to liabilities included in earnings
|
(1,459)
|
|
Adjustment
to purchase price allocation
|
(484)
|
|
Balance
at June 30, 2018
|
$14,843
|
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 six months ended June 30, 2018
the net adjustment to the fair value of the contingent acquisition
debt was a decrease of $1,246,000 and $1,459,000, respectively. The
decrease of $1,246,000 was 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 six months ended June 30, 2017 the net
adjustment to the change in the fair value of contingent
acquisition debt was a decrease of $680,000.
Note 9. Stockholders’ Equity
The Company’s Articles of Incorporation, as amended,
authorize the issuance of two classes of stock to be designated
“Common Stock” and “Preferred
Stock”.
The
total number of shares of stock which the Company has authority to
issue is 50,000,000 shares of common stock, par value $.001 per
share and 5,000,000 shares of preferred stock, par value $.001 per
share, of which 161,135 shares have been designated as Series A
convertible preferred stock (“Series A Convertible
Preferred”) and 1,052,631 has been designated as Series B
convertible preferred stock (“Series B Convertible
Preferred”).
Common Stock
As of June 30, 2018, and December 31, 2017 there were 21,536,019
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 June 30, 2018, and December 31, 2017 and
accrued dividends of approximately $130,000 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 328,541 shares of Series B Convertible Preferred Stock
outstanding as of June 30, 2018, and zero at December 31, 2017.
During the three months ended June 30, 2018, the Company received
notice of conversion for 52,632 shares of Series B Convertible
Preferred Stock which converted to 105,264 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.)
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 limited voting rights. Each share of Series B
Convertible Preferred Stock is initially convertible at any time,
in whole or in part, at the option of the holders, at an initial
conversion price of $4.75 per share, into two (2) shares of common
stock and automatically converts into two (2) shares of common
stock on its two-year anniversary of issuance.
Distributions to Preferred Stockholders
On June 20, 2018 the Company’s board of directors declared a
quarterly cash dividend of $0.12 per share for the Series B Convertible Preferred Stock shareholders
as of the record date of June 27, 2018 which was paid on July 2,
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.)
Amendments to Articles of Incorporation or Bylaws
On
March 2, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series B Convertible Preferred
Stock with the Secretary of State of the State of Delaware (the
“Certificate of Designation”). On March 14, 2018, the
Company filed a Certificate of Correction to the Certificate of
Designation to correct two typographical errors in the Certificate
of Designation (the “Certificate of
Correction”).
Repurchase of Common Stock
On December 11, 2012, the Company has 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 June 30, 2018 at a weighted-average cost of $5.30.
There were no repurchases during the six months ended June 30,
2018. The remaining number of shares authorized for repurchase
under the plan as of June 30, 2018 is 553,406.
Advisory Agreements
On
September 1, 2015, the Company entered into an agreement with
ProActive
Capital Resources
Group, LLC (“PCG”), pursuant to which PCG agreed
to provide investor relations services for six (6) months in
exchange for fees paid in cash of $6,000 per month and 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to the September 1, 2015 initial agreement, the agreement has been
extended through August 2018 under six-month 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 June 30, 2018, the Company has issued 20,000 shares of
restricted common stock in connection
with this agreement and accrued for the estimated per share value
on each subsequent six (6) month periods based on the price of
Company’s common stock at each respective date. As of June
30, 2018, the Company has accrued for 10,000 shares of restricted
stock that have not been issued. The fair value of the shares to be
issued are recorded as prepaid advisory fees and are included in
prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the respective periods. During
the three months ended June 30, 2018 and 2017, the
Company recorded expense of approximately $11,000 and $14,000,
respectively, and $24,000 and $28,000, during the six months ended
June 30, 2018 and 2017 in connection with amortization of the stock
issuance.
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 and
were issued in advance of the service period. The fair value of the shares issued is recorded as
prepaid advisory fees and are 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 respective periods. During the three and six months
ended June 30, 2018, the Company recorded expense of
approximately $30,000 in connection with amortization of the stock
issuance.
On
April 1, 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 and were issued in advance of the service
period. The fair value of the
shares issued is recorded as prepaid advisory fees and are 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 respective periods. During
the three and six months ended June 30, 2018, the
Company recorded expense of approximately $44,000 in
connection with amortization of the stock
issuance.
Warrants
As of June 30, 2018, warrants to purchase 2,748,183 shares
of the Company's common stock at prices ranging from
$2.00 to $10.00 were outstanding. All warrants are exercisable as
of June 30, 2018 and expire at various dates through February 2023
and have a weighted average remaining term of approximately 1.65
years and are included in the table below as of June 30,
2018.
Warrants – Preferred Stock Offering
During
the six months ended June 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 June 30, 2018.
Warrants Activity
A summary of the warrant activity for the six months ended June 30,
2018 is presented in the following table:
|
|
Number of
Warrants
|
|
Balance
at December 31, 2017
|
2,710,066
|
|
Issued
|
38,117
|
|
Expired
/ cancelled
|
-
|
|
Exercised
|
-
|
|
Balance
at June 30, 2018
|
2,748,183
|
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 June 30, 2018, the Company had 1,885,034
shares of common stock available for issuance under the
Plan.
A summary of the Plan stock option activity for the six months
ended June 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
|
-
|
-
|
|
|
|
Canceled
/ expired
|
(39,342)
|
5.25
|
|
|
|
Exercised
|
(437)
|
5.40
|
|
-
|
|
Outstanding
June 30, 2018
|
1,544,744
|
$4.74
|
5.75
|
$125
|
|
Exercisable
June 30, 2018
|
1,010,899
|
$4.57
|
4.53
|
$87
|
The weighted-average fair value per share of the granted options
for the six months ended June 30, 2017 was approximately $3.08.
There were no options granted during the six months ended June 30,
2018.
Stock-based compensation expense included in the condensed
consolidated statements of operations was $123,000 and $358,000 for
the three months ended June 30, 2018 and 2017, respectively, and
$245,000 and $485,000 for the six months ended June 30, 2018 and
2017, respectively.
As of June 30, 2018, there was approximately $1,298,000 of total
unrecognized compensation expense related to unvested stock options
granted under the Plan. The expense is expected to be recognized
over a weighted-average period of 3.04 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 June 30, 2018
|
487,500
|
Stock-based compensation expense included in the condensed
consolidated statements of operations was $92,000 and $207,000 for
the three and six months ended June 30, 2018, respectively. The
Company did not have restricted stock units as of the six months
ended June 30, 2017.
As of June 30, 2018, total unrecognized stock-based compensation
expense related to restricted stock units to employees and
consultants was approximately $1,896,000, which will be recognized
over a weighted average period of 5.11 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. Assembling a
virtual Main Street of products and services under one corporate
entity, Youngevity offers products from top selling retail
categories: health/nutrition, home/family, food/beverage (including
coffee), spa/beauty, apparel/jewelry, as well as innovative
services. The Company operates in
two segments: the direct selling segment where products are offered
through a global distribution network of preferred customers and
distributors and the commercial coffee segment where roasted and
green coffee bean products are sold directly to
businesses.
The Company’s segments reflect the manner in which the
business is managed and how the Company allocates resources and
assesses performance. The Company’s chief operating decision
maker is the Chief Executive Officer. The Company’s chief
operating decision maker evaluates segment performance primarily
based on revenue and segment operating income. The principal
measures and factors the Company considered in determining the
number of reportable segments were revenue, gross margin
percentage, sales channel, customer type and competitive risks. In
addition, each reporting segment has similar products and
customers, similar methods of marketing and distribution and a
similar regulatory environment.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
Three
months ended
|
Six
months ended
|
||
|
|
June
30,
|
June
30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Revenues
|
|
|
|
|
|
Direct
selling
|
$36,846
|
$35,538
|
$72,157
|
$68,780
|
|
Commercial
coffee
|
7,409
|
5,989
|
15,092
|
11,480
|
|
Total
revenues
|
$44,255
|
$41,527
|
$87,249
|
$80,260
|
|
Gross
profit
|
|
|
|
|
|
Direct
selling
|
$25,087
|
$24,195
|
$49,822
|
$46,050
|
|
Commercial
coffee
|
295
|
(93)
|
572
|
(82)
|
|
Total
gross profit
|
$25,382
|
$24,102
|
$50,394
|
$45,968
|
|
Operating
income (loss)
|
|
|
|
|
|
Direct
selling
|
$1,376
|
$595
|
$2,157
|
$(1,159)
|
|
Commercial
coffee
|
(723)
|
(1,271)
|
(1,480)
|
(1,917)
|
|
Total
operating income (loss)
|
$653
|
$(676)
|
$677
|
$(3,076)
|
|
Net
(loss) income
|
|
|
|
|
|
Direct
selling
|
$723
|
$(135)
|
$132
|
$(1,647)
|
|
Commercial
coffee
|
(1,337)
|
(2,595)
|
(3,054)
|
(3,142)
|
|
Total
net loss
|
$(614)
|
$(2,730)
|
$(2,922)
|
$(4,789)
|
|
Capital
expenditures
|
|
|
|
|
|
Direct
selling
|
$28
|
$346
|
$115
|
$474
|
|
Commercial
coffee
|
51
|
101
|
730
|
281
|
|
Total
capital expenditures
|
$79
|
$447
|
$845
|
$755
|
|
|
As of
|
|
|
|
June 30,
2018
|
December 31,
2017
|
|
Total
assets
|
|
|
|
Direct selling
|
$44,926
|
$44,082
|
|
Commercial coffee
|
31,837
|
28,307
|
|
Total assets
|
$76,763
|
$72,389
|
Total tangible assets, net located outside the United States were
approximately $5.3 million as of June 30, 2018 and December 31,
2017.
The Company conducts its operations primarily in the United States.
For the three months ended June 30, 2018 and 2017 approximately 14%
and 10%, respectively, of the Company’s sales were derived
from sales outside the United States. For the six months ended June
30, 2018 and 2017 approximately 14% and 10%, 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
|
Six
months ended
|
||
|
|
June
30,
|
June
30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Revenues
|
|
|
|
|
|
United
States
|
$37,980
|
$37,378
|
$75,373
|
$72,212
|
|
International
|
6,275
|
4,149
|
11,876
|
8,048
|
|
Total
revenues
|
$44,255
|
$41,527
|
$87,249
|
$80,260
|
Note 11. Subsequent Events
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 24, 2018, the Company’s board of directors (the
“Board”) awarded to David Briskie, the Company’s
President and Chief Financial Officer, options to purchase 250,000
shares of the Company’s common stock. In addition, the Board
awarded to certain members of senior management and consultants
397,500 shares of the Company’s common stock. The options are
exercisable for a period of ten years from the grant date, vest pro
rata on a monthly basis for 36 months and have an exercise price of
$3.92 per share.
On July 23, 2018,
the Company’s Board awarded to
each non-employee member of the Board options to purchase 61,655
shares of the Company’s common stock, which options are
exercisable for a period of ten years from the grant date, vest on
July 23, 2019 (the one-year anniversary of the grant date) and have
an exercise price of $4.29 per share.
On July 18, 2018, the Company entered
into lending agreements with three separate entities and received
loans in the total amount of $2 million to be paid back by the
Company with periodic payments, including accrued interest,
over an 8-month
period.
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 products
on a global basis and offer a wide range of products through an
international direct selling network of independent distributors.
Our multiple independent selling forces sell a variety of products
through friend-to-friend marketing and social
networking.
We also engage in the commercial sale of coffee. We own a
traditional coffee roasting business, CLR, that sells roasted and
unroasted coffee and produces coffee under its own Café La
Rica brand, Josie’s Java House brand and Javalution brands.
CLR produces coffee under a variety of private labels through major
national sales outlets and major customers including cruise lines
and office coffee service operators. During fiscal 2014 CLR
acquired the Siles Plantation Family Group, a coffee plantation and
dry-processing facility located in Matagalpa, Nicaragua, an ideal
coffee growing region that is historically known for high quality
coffee production. The dry-processing facility is approximately 26
acres and the plantation is approximately 500 acres and produces
100 percent Arabica coffee beans that are shade grown, Rainforest
Alliance Certified™ and Fair Trade Certified™. The
plantation, dry-processing facility and existing U.S. based coffee
roaster facilities allows CLR to control the coffee production
process from field to cup.
We
conduct our operations primarily in the United States. For the
three months ended June 30, 2018 and 2017 approximately 14% and
10%, respectively, of our sales were derived from sales outside the
United States. For the six months ended June 30, 2018 and 2017
approximately 14% and 10%, respectively, of our sales were derived
from sales outside the United States.
Recent
Events
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 with three
separate entities and received loans in the total amount of $2
million to be paid back with periodic payments, including
accrued interest, over an 8-month
period.
New Acquisitions During the six months ended June 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 will make
monthly payments based on a percentage of ViaViente distributor
revenue and royalty revenue until the earlier of the date that is
five (5) years from the closing date or such time as 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 will make monthly
payments based on a percentage of Nature Direct distributor revenue
and royalty revenue until the earlier of the date that is twelve
(12) years from the closing date or such time as 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 Events
Series B Convertible Preferred Stock Offering
On
February 14, 2018, we commenced our offering (the “Series B
Offering”) to sell up to $10 million of our Series B
Convertible Preferred Stock on a best efforts basis without any minimum offering amount. On March 30,
2018, we completed the Series B Offering, pursuant to which we sold
381,173 shares of Series B Convertible Preferred Stock at an
offering price of $9.50 per share and we received gross proceeds in
aggregate of $3,621,143. The
net proceeds from the Series B Offering were $3,289,861 after
deducting commissions, closing and issuance costs. Upon the receipt
of the proceeds of the Series B Offering, the notes (the
“2017 Notes”) issued in our private placement that was
consummated in 2017 (the “2017 Private Placement”) in
the principal amount of $7,254,349 automatically converted into
1,577,033 shares of common stock.
The
Series B Convertible Preferred Stock pays cumulative dividends from the date of
original issue at a rate of 5.0% per annum payable quarterly in arrears on or about the last
day of March, June, September and December of each year, beginning
June 30, 2018. On June 26, 2018 we announced the first preferred
stock dividend to be paid on July 2, 2018 in a quarterly payment of
$0.12 to holders of record of the Series B Convertible Preferred
Stock as of the close of business on June 27,
2018.
The Series B Convertible Preferred Stock ranks senior to our
outstanding Series A Convertible Preferred Stock and our common
stock par value $0.001 with respect to dividend rights and rights
upon liquidation, dissolution or winding up. Each holder of Series
B Convertible Preferred Stock received a credit towards our
merchandise equal to ten percent (10%) of the amount of their
investment up to a maximum credit of $1,000. Holders of the Series
B Convertible Preferred Stock have limited voting rights. Each
share of Series B Convertible Preferred Stock is initially
convertible at any time, in whole or in part, at the option of the
holders, at an initial conversion price of $4.75 per share, into
two shares of common stock and automatically converts into two
shares of common stock on its two-year anniversary of issuance. The
offering price of the Series B Convertible Preferred Stock was
$9.50 per share. The shares of Series B Convertible Preferred Stock
issued in the Series B Offering were sold pursuant to our
Registration Statement, which was declared effective on February
13, 2018.
Results of Operations
The
comparative financials discussed below show the condensed
consolidated financial statements as of and for the three and six
months ended June 30, 2018 and 2017.
Three months ended June 30, 2018 compared to three months ended
June 30, 2017
Revenues
For the
three months ended June 30, 2018, our revenues increased 6.6% to
$44,255,000 as compared $41,527,000 for the three months ended June
30, 2017. During the three months ended June 30, 2018, we
derived approximately 83% of our revenue from our direct selling
sales and approximately 17% of our revenue from our commercial
coffee sales. For the three months ended June 30,
2018, direct selling segment revenues increased by $1,308,000
or 3.7% to $36,846,000 as compared to $35,538,000 for the three
months ended June 30, 2017. This increase was primarily attributed
to revenues from new acquisitions of $2,783,000, offset by a
decrease of $1,475,000 in revenues from existing business. Direct
selling revenues were also affected by price increases on certain
products that went into effect on January 1, 2018. For the three
months ended June 30, 2018, commercial coffee segment revenues
increased by $1,420,000 or 23.7% to $7,409,000 as compared to
$5,989,000 for the three months ended June 30, 2017. This increase
was primarily attributed to increased revenues of $1,168,000 from
our green coffee business.
The following table summarizes our revenue in thousands by
segment:
|
|
For the three months
ended June 30,
|
Percentage
|
|
|
Segment
Revenues
|
2018
|
2017
|
change
|
|
Direct
selling
|
$36,846
|
$35,538
|
3.7%
|
|
As a % of Revenue
|
83%
|
86%
|
(3.0)%
|
|
Commercial
coffee
|
7,409
|
5,989
|
23.7%
|
|
As a % of Revenue
|
17%
|
14%
|
3.0%
|
|
Total
Revenues
|
$44,255
|
$41,527
|
6.6%
|
Cost of Revenues
For the three months ended June 30, 2018, overall cost of revenues
increased approximately 8.3% to $18,873,000 as compared to
$17,425,000 for the three months ended June 30, 2017. The direct
selling segment cost of revenues increased 3.7% to $11,759,000 when
compared to the same period last year, primarily as a result of an
increase in reserve for obsolete inventory, offset by a slight
reduction in shipping costs and royalty expense. The commercial
coffee segment cost of revenues increased 17.0% to 7,114,000 when
compared to the same period last year. This was primarily
attributable to the increase in revenues related to the green
coffee business and the roaster business and an increase in
depreciation expense.
Cost of revenues includes the cost of inventory including green
coffee, shipping and handling costs incurred in connection with
shipments to customers, direct labor and benefits costs, royalties
associated with certain products, transaction merchant fees and
depreciation on certain assets.
Gross Profit
For the three months ended June 30, 2018, gross profit increased
approximately 5.3% to $25,382,000 as compared to $24,102,000 for
the three months ended June 30, 2017. Overall gross profit as a
percentage of revenues decreased to 57.4%, compared to 58.0% in the
same period last year.
Gross profit in the direct selling segment increased by 3.7% to
$25,087,000 from $24,195,000 in the prior period primarily as a
result of the increase in revenues, offset by the increase in cost
of sales discussed above. Gross profit as a percentage of revenues
in the direct selling segment remained at 68.1% for the three
months ended June 30, 2018 and 2017.
Gross profit in the commercial coffee segment increased to
$295,000 compared to a loss of $93,000 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 5.6% to 4.0% for the three months ended
June 30, 2018, compared to a negative 1.6% 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 June 30,
|
Percentage
|
|
|
Segment
Gross Profit
|
2018
|
2017
|
change
|
|
Direct
selling
|
$25,087
|
$24,195
|
3.7%
|
|
Gross Profit % of Revenues
|
68.1%
|
68.1%
|
0.0%
|
|
Commercial
coffee
|
295
|
(93)
|
417.2%
|
|
Gross Profit % of Revenues
|
4.0%
|
(1.6)%
|
5.6%
|
|
Total
|
$25,382
|
$24,102
|
5.3%
|
|
Gross Profit % of Revenues
|
57.4%
|
58.0%
|
(0.6)%
|
Operating Expenses
For the three months ended June 30, 2018, our operating expenses
decreased 0.2% to $24,729,000 as compared to $24,778,000 for the
three months ended June 30, 2017.
For the three months ended June 30, 2018, the distributor
compensation paid to our independent distributors in the direct
selling segment decreased 1.2% to $16,487,000 from $16,686,000 for
the three months ended June 30, 2017. This decrease was primarily
attributable to the price increases reflected in revenues, which
did not impact commissionable base revenues. Distributor
compensation as a percentage of direct selling revenues decreased
to 44.7% for the three months ended June 30, 2018 as compared to
47.0% for the three months ended June 30, 2017.
For the three months ended June 30, 2018, the sales and marketing
expense increased 6.0% to $3,076,000 from $2,901,000 for the three
months ended June 30, 2017. In the direct selling segment, sales
and marketing costs increased by 5.1% to $2,849,000 in the current
quarter from $2,710,000 for the same period last year. This was
primarily due to the Asia convention that was held in Malaysia. In
the commercial coffee segment, sales and marketing costs increased
by $36,000 to $227,000 in the current quarter from $191,000 for the
same period last year, primarily due to increased advertising and
promotion costs.
For the three months ended June 30, 2018, the general and
administrative expense decreased 0.5% to $5,166,000 from $5,191,000
for the three months ended June 30, 2017 primarily due to contingent liability revaluation
that resulted in a benefit of $1,246,000 for the three months ended
June 30, 2018 compared to a benefit of $680,000 for the
three months ended June 30, 2017. The revaluation in the current
quarter was as a result of eliminating the contingent liability
related to an acquisition due to breach of the asset purchase
agreement by the seller. This decrease was offset by increases in information technology (IT)
consulting costs, amortization costs, investor relations, salaries
and other related costs, legal fees and accounting
costs.
Operating Income (Loss)
For the three months ended June 30, 2018, operating income
increased by $1,329,000 to $653,000 as compared to an operating
loss of $676,000 for the three months ended June 30, 2017. This was
primarily due to the increase in gross profit of $1,280,000 and the
decrease in operating expenses of $49,000 discussed
above.
Total Other Expense
For the three months ended June 30, 2018, total other expense
decreased by $1,242,000 to $1,357,000 as compared to $2,599,000 for
the three months ended June 30, 2017. Total other expense includes
net interest expense and the change in the fair value of derivative
liabilities.
Net interest expense increased by $291,000 for the three months
ended June 30, 2018 to $1,549,000 compared to $1,258,000 for the
three months ended June 30, 2017. Interest expense includes the
imputed interest portion of the payments related to contingent
acquisition debt of $605,000, interest payments to investors
associated with our Private Placement transactions of $208,000 and
interest paid for other operating debt of $423,000. Non-cash
interest primarily related to amortization costs of $314,000 and
$6,000 of other non-cash interest, offset by interest income of
$7,000.
Change in fair value of derivative liabilities decreased by
$1,533,000 for the three months ended June 30, 2018 to a $192,000
benefit compared to $1,341,000 expense for the three months ended
June 30, 2017. 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 an income tax benefit of $90,000, which is our estimated federal, state and foreign
income tax adjustment for the three months ended June 30, 2018 to
reflect the proper estimated tax provision
year-to-date.
Net Loss
For
the three months ended June 30, 2018, we reported a net loss of
$614,000 as compared to net loss of $2,730,000 for the three months
ended June 30, 2017. The primary reason for the decrease in net
loss when compared to the prior period was due to a net loss before
income taxes of $704,000 in the current period compared to net loss
before income taxes of $3,275,000 for the same period in the prior
year and an income tax benefit of $90,000 in the current quarter
compared to income tax benefit of $545,000 for the same period in
the prior year. The decrease in net loss before income taxes was a
result of the decreases in other expense and operating expense and
an increase in gross profit.
Six months ended June 30, 2018 compared to six months ended June
30, 2017
Revenues
For the
six months ended June 30, 2018, our revenues increased 8.7% to
$87,249,000 as compared to $80,260,000 for the six months ended
June 30, 2017. During the six months ended June 30, 2018, we
derived approximately 83% of our revenue from our direct selling
sales and approximately 17% of our revenue from our commercial
coffee sales. For the six months ended June 30,
2018, direct selling segment revenues increased by $3,377,000
or 4.9% to $72,157,000 as compared to $68,780,000 for the six
months ended June 30, 2017. This increase was primarily attributed
to revenues from new acquisitions of $5,645,000, offset by a
decrease of $2,268,000 in revenues from existing business. Direct
selling revenues were also affected by price increases on certain
products that went into effect on January 1, 2018. For the six
months ended June 30, 2018, commercial coffee segment revenues
increased by $3,612,000 or 31.5% to $15,092,000 as compared to
$11,480,000 for the six months ended June 30, 2017. This increase
was primarily attributed to increased revenues from our green
coffee business.
The following table summarizes our revenue in thousands by
segment:
|
|
For the six months
ended June 30,
|
Percentage
|
|
|
Segment
Revenues
|
2018
|
2017
|
change
|
|
Direct
selling
|
$72,157
|
$68,780
|
4.9%
|
|
As a % of Revenue
|
83%
|
86%
|
(3.0)%
|
|
Commercial
coffee
|
15,092
|
11,480
|
31.5%
|
|
As a % of Revenue
|
17%
|
14%
|
3.0%
|
|
Total
Revenues
|
$87,249
|
$80,260
|
8.7%
|
Cost of Revenues
For the six months ended June 30, 2018, overall cost of revenues
increased approximately 7.5% to $36,855,000 as compared to
$34,292,000 for the six months ended June 30, 2017. The direct
selling segment cost of revenues decreased 1.7% when compared to
the same period last year, primarily as a result of lower product
costs as compared to product cost in the same period last year,
offset by an increase in reserve for obsolete inventory. The
decrease in cost of sales was also attributable to lower shipping
costs, royalties and wages during the six months ended June 30,
2018. The commercial coffee segment cost of revenues increased
25.6% when compared to the same period last year. This was
primarily attributable to increases in revenues related to the
green coffee business and additional costs related to green coffee
procurement costs and depreciation expense.
Cost of revenues includes the cost of inventory including green
coffee, shipping and handling costs incurred in connection with
shipments to customers, direct labor and benefits costs, royalties
associated with certain products, transaction merchant fees and
depreciation on certain assets.
Gross Profit
For the six months ended June 30, 2018, gross profit increased
approximately 9.6% to $50,394,000 as compared to $45,968,000 for
the six months ended June 30, 2017. Overall gross profit as a
percentage of revenues increased to 57.8%, compared to 57.3% in the
same period last year.
Gross
profit in the direct selling segment increased by 8.2% to
$49,822,000 from $46,050,000 in the prior period primarily as a
result of the 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 approximately 2.0% to 69.0% for
the six months ended June 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
$572,000 compared to a loss of $82,000 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 4.5% to 3.8% for the six months ended
June 30, 2018, compared to a negative 0.7% 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 six months
ended June 30,
|
Percentage
|
|
|
Segment
Gross Profit
|
2018
|
2017
|
change
|
|
Direct
selling
|
$49,822
|
$46,050
|
8.2%
|
|
Gross Profit % of Revenues
|
69.0%
|
67.0%
|
2.0%
|
|
Commercial
coffee
|
572
|
(82)
|
797.6%
|
|
Gross Profit % of Revenues
|
3.8%
|
(0.7)%
|
4.5%
|
|
Total
|
$50,394
|
$45,968
|
9.6%
|
|
Gross Profit % of Revenues
|
57.8%
|
57.3%
|
0.5%
|
Operating Expenses
For the six months ended June 30, 2018, our operating expenses
increased 1.4% to $49,717,000 as compared to $49,044,000 for the
six months ended June 30, 2017.
For the six months ended June 30, 2018, the distributor
compensation paid to our independent distributors in the direct
selling segment decreased 0.1% to $32,065,000 from $32,105,000 for
the six months ended June 30, 2017. This decrease was primarily
attributable to the price increases reflected in revenues, which
did not impact commissionable base revenues. Distributor
compensation as a percentage of direct selling revenues decreased
to 44.4% for the six months ended June 30, 2018 as compared to
46.7% for the six months ended June 30, 2017.
For the six months ended June 30, 2018, the sales and marketing
expense decreased by $1,000 to $6,575,000 from $6,576,000 for the
six months ended June 30, 2017. In the direct selling segment,
sales and marketing costs decreased by 2.6% to $6,141,000 for the
six months ended June 30, 2018 compared to $6,303,000 for the same
period last year. This was primarily due to reduction in
distributor events in the first quarter of 2018 as compared to the
six months ended June 30, 2017, partially offset by Asia convention
cost held in Malaysia during the second quarter of 2018 and
increased compensation expense. In the commercial coffee segment,
sales and marketing costs increased by $161,000 to $434,000 for the
six months ended June 30, 2018 compared to $273,000 for the same
period last year, primarily due to increased advertising and
promotion costs and compensation expense.
For the six months ended June 30, 2018, the general and
administrative expense increased 6.9% to $11,077,000 from
$10,363,000 for the six months ended June 30, 2017. The
increase in general and administrative expense was also due to
increases in cost related to Russia, Mexico and Taiwan and New
Zealand, depreciation and amortization costs, investor relations,
salaries and other related costs, legal fees and accounting costs.
Increases in general and administrative expense was offset
primarily due to contingent liability revaluation that resulted in
a benefit of $1,459,000 for the six months ended June 30, 2018
compared to a benefit of $680,000 for the six months ended June 30,
2017. The revaluation in the current year was primarily a result of
eliminating the contingent liability related to an acquisition due
to breach of the asset purchase agreement by the
seller.
Operating Income (Loss)
For the six months ended June 30, 2018, operating income (loss)
increased $3,753,000 to operating income of $677,000 as compared to
an operating loss of $3,076,000 for the six months ended June 30,
2017. This was primarily due to the increase in gross profit of
$4,426,000, offset by a slight increase in operating expenses of
$673,000 discussed above.
Total Other Expense
For the six months ended June 30, 2018, total other expense
increased by $253,000 to $3,439,000 as compared to $3,186,000 for
the six months ended June 30, 2017. Total other expense includes
net interest expense, the change in the fair value of derivative
liabilities and extinguishment loss on debt.
Net interest expense increased by $806,000 for the six months ended
June 30, 2018 to $3,261,000 compared to $2,455,000 for the six
months ended June 30, 2017. Interest expense includes the imputed
interest portion of the payments related to contingent acquisition
debt of $1,188,000, interest payments to investors associated with
our Private Placement transactions of $504,000 and interest paid
for other operating debt of $735,000. Non-cash interest primarily
related to amortization costs of $844,000 and $15,000 of other
non-cash interest, offset by interest income of
$25,000.
Change in fair value of derivative liabilities was a benefit of
$904,000 for the six months ended June 30, 2018, compared to
$731,000 expense for the six months ended June 30,
2017. 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).
We recorded a non-cash extinguishment loss on debt of $1,082,000
for the six months ended June 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 were
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
$160,000 which is our
estimated federal, state and foreign income tax expense for the six
months ended June 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 six months ended June 30, 2018, we reported a net loss of
$2,922,000 as compared to net loss of $4,789,000 for the six months
ended June 30, 2017. The primary reason for the decrease in net
loss when compared to the prior period was due to a net loss before
income taxes of $2,762,000 in the current period compared to net
loss before income taxes of $6,262,000 for the same period in the
prior year and income tax expense of $160,000 in the current year
compared to income tax benefit of $1,473,000 for the same period in
the prior year. The decrease in net loss before income taxes was a
result of the increase in gross profit offset by increases in other
expense and operating expense,
Adjusted EBITDA
EBITDA (earnings before interest, income taxes, depreciation and
amortization) as adjusted to remove the effect of stock-based
compensation expense and the non-cash loss on extinguishment of debt and the
change in the fair value of the derivatives or "Adjusted
EBITDA," increased to $2,203,000 for the three months ended
June 30, 2018 compared to $745,000 in 2017 and increased to
$3,723,000 for the six months ended June 30, 2018 compared to a
negative $492,000 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 and the 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 six months ended June 30, 2018 and 2017 is included in
the table below (in thousands):
|
|
Three months
ended
|
Six
months ended
|
||
|
|
June
30,
|
June
30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
Net
loss
|
$(614)
|
$(2,730)
|
$(2,922)
|
$(4,789)
|
|
Add/Subtract:
|
|
|
|
|
|
Interest,
net
|
1,549
|
1,258
|
3,261
|
2,455
|
|
Income taxes
(benefit) provision
|
(90)
|
(545)
|
160
|
(1,473)
|
|
Depreciation
|
470
|
373
|
902
|
764
|
|
Amortization
|
865
|
690
|
1,692
|
1,335
|
|
EBITDA
|
2,180
|
(954)
|
3,093
|
(1,708)
|
|
Add/Subtract:
|
|
|
|
|
|
Stock based
compensation
|
215
|
358
|
452
|
485
|
|
Loss on
extinguishment of debt
|
-
|
-
|
1,082
|
-
|
|
Change in the fair
value of warrant derivative
|
(192)
|
1,341
|
(904)
|
731
|
|
Adjusted
EBITDA
|
$2,203
|
$745
|
$3,723
|
$(492)
|
Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2018 we had cash and cash equivalents of approximately
$700,000 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 six months ended June
30, 2018 was $1,676,000 as compared to net cash used in
operating activities of $176,000 for the six months ended June 30,
2017. Net cash used in operating activities consisted of a net loss
of $2,922,000 and $898,000 in changes in
operating assets and liabilities offset by net non-cash operating
activity of $ 2,144,000.
Net non-cash operating expenses included $2,594,000 in depreciation
and amortization, $452,000 in stock-based compensation expense,
$844,000 related to the amortization of debt discounts and issuance
costs associated with our Private Placements, $98,000 prepaid
advisory fees, $1,082,000 extinguishment loss on debt and $137,000
in deferred tax assets, offset by $904,000 related to the change in
fair value of warrant derivative liability, $1,459,000 related to
the change in the fair value of contingent acquisition debt and
$700,000 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 $2,440,000, inventory of $94,000, prepaid expenses
and other current assets of $585,000, changes in accounts payable
of $1,135,000, accrued distributor compensation of $14,000 and
changes in the income tax receivable of $90,000. Increases in
working capital primarily related to changes in deferred revenues
of $1,502,000, accrued expenses and other liabilities of
$1,958,000.
Cash used in investing activities. Net cash used in investing activities for
the six months ended June 30, 2018 was $210,000 as compared to net
cash used in investing activities of $674,000 for the six months
ended June 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
$1,684,000 for the six months ended June 30, 2018 as compared to
net cash provided by financing activities of $870,000 for the six
months ended June 30, 2017.
Net cash provided by financing activities consisted of the net
proceeds of $3,289,000 related to the Series B Offering, $3,000
from the exercise of stock options, offset by net payments related
to the line of credit of $894,000, $94,000 in payments of notes payable, $78,000 in
payments related to contingent acquisition debt and $542,000 in
payments related to capital lease financing
obligations.
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. We have sustained significant net losses during
the six months ended June 30, 2018 of $2,922,000. Net cash used in
operating activities was $1,676,000 for the six months ended June
30, 2018 compared to net cash used in operating activities of
$176,000 for the six months ended June 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 do not currently have any commitments from any third
parties to provide us with capital. These factors raise substantial
doubt about our ability to continue as a going
concern.
We
increased our Crestmark line of credit during the fourth quarter of
2017 and raised additional capital through our Series B Offering
that closed March 30, 2018; however, despite such actions, we do
not believe that 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 with three
separate entities and received loans in the total amount of $2
million to be paid back with periodic payments, including
accrued interest, over an 8-month
period.
We
anticipate revenues to continue to grow and we intend to make
necessary cost reductions related to our international operations
that are not performing and reduce non-essential
expenses.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect our
ability to operate as a going concern. 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 June 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As a Smaller Reporting Company as defined by Rule 12b-2 of the
Exchange Act and in Item 10(f)(1) of Regulation S-K, we are
electing scaled disclosure reporting obligations and therefore are
not required to provide the information requested by this Item 3 of
Part I.
ITEM 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
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
June 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
June 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.
(b)
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial
reporting that occurred during our second 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
June 30, 2018 have been prepared and presented on a basis assuming
we will continue as a going concern. The Company has sustained
significant net losses during the six months ended June 30, 2018 of
$2,922,000 and $4,789,000 for the six months ended June 30, 2017.
Net cash used in operating activities was $1,676,000 for the six
months ended June 30, 2018 compared to net cash used in operating
activities of $176,000 for the six months ended June 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 our current
cash levels as of June 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
All sales of unregistered securities during the six months ended
June 30, 2018 have been previously reported except for the sales of
unregistered securities set forth below.
On
April 1, 2018, we 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, of
which were issued in advance of the service period. During the
three months ended June 30,
2018, we issued 50,000 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.
On
April 1, 2018, we 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, of
which were issued in advance of the service period. During the
three months ended June 30, 2018,
we issued 75,000 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 Designations for Series B Convertible Preferred Stock
(Incorporated by reference to the Company’s Form 8-K, File
No. 001-38116, filed with the Securities and Exchange Commission on
March 8, 2018).
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Certificate
of Correction to Certificate of Designation of Powers, Preferences
and Rights of Series B Convertible Preferred Stock (Incorporated by
reference to the Company’s Form 8-K, File No. 001-38116,
filed with the Securities and Exchange Commission on March 16,
2018).
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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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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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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: August 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: August 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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