UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
 
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from______________________ to____________________________
 
Commission file number 000-54900
 
  YOUNGEVITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
90-0890517
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2400 Boswell Road,
 
91914
Chula Vista, CA
 
(Zip Code)
(Address of principal executive offices)
 
 
 
(619) 934-3980
(Registrant’s telephone number, including area code)
 
 
 
 
  Securities registered pursuant to Section 12(b) of the Act:
 
Name of each exchange on which registered
None
 
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
 
Common stock $0.001 par value
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]  No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ]  No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [  ]
 

 
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]  No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [X]
 
 
(Do not check if a
smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Act). Yes [  ]  No [X]
 
The aggregate market value of all of the Common Stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant’s recently completed second quarter, was approximately $31,618,639 based upon the closing stock price reported on the OTCQX Market on June 30, 2016 on that date.
 
The number of shares of registrant's Common Stock outstanding on March 17, 2017 was 392,704,557.
 
Documents incorporated by reference: None.
 
 
 
 
 
YOUNGEVITY INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2016
 
PART I
 
 
 
 
 
5
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28
 
 
 
PART II
 
 
 
 
 
29
31
32
41
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PART III
 
 
 
 
 
76
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PART IV
 
 
 
 
 
86
FORM 10-K SUMMARY
87
 
 
 
88
 
 
 
YOUNGEVITY INTERNATIONAL, INC.
Annual Report (Form 10-K)
For Year Ended December 31, 2016
 
PART I
 
Item 1. B usiness
 
Special Note Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. The forward-looking statements are contained principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report. In some cases you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements.
 
You should refer to Item 1A. “Risk Factors.” section of this Annual Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.
 
Unless the context requires otherwise, references to “we,” “us,” “our,” and “Youngevity,” refer to Youngevity International, Inc. and its subsidiaries.
 
Item 1. Business
 
We are a leading omni-direct lifestyle company offering a hybrid of the direct selling business model that also offers e-commerce and the power of social selling. Assembling a virtual Main Street of products and services under one corporate entity, Youngevity offers products from the six top selling retail categories: health/nutrition, home/family, food/beverage (including coffee), spa/beauty, apparel/jewelry, as well as innovative services. 
 
We operate in two segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors and the commercial coffee segment where products are sold directly to businesses. During the year ended December 31, 2016, we derived approximately 89% of our revenue from our direct sales and approximately 11% of our revenue from our commercial coffee sales, respectively.  
 
Direct Selling Segment - In the direct selling segment we sell health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products and other service based products on a global basis and offer a wide range of products through an international direct selling network. Our direct sales are made through our network, which is a web-based global network of customers and distributors.  Our multiple independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. We consider our company to be an e-commerce company whereby personal interaction is provided to customers by our independent sales network. Initially, our focus was solely on the sale of products in the health, beauty and home care market through our marketing network; however, we have since expanded our selling efforts to include a variety of other products in other markets. Our direct selling segment offers more than 5,000 products to support a healthy lifestyle including:
 
●
Nutritional supplements
●
Gourmet coffee
●
Weight management
●
Skincare and cosmetics
●
Health and wellness
●
Packaged foods
●
Lifestyle products (spa, bath, home and garden)
●
Pet care
●
Digital products including scrap and memory books
●
Telecare health services
●
Apparel and fashion accessories
●
Business lending
 
Since 2010 we have expanded our operations through a series of acquisitions of the assets of other direct selling companies including their product lines and sales forces, we have substantially expanded our distributor base by merging the companies that we have acquired under our web-based independent distributor network, as well as providing our distributors with additional new products to add to their product offerings.
 
 
 
 
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Set forth below is information regarding each of our 2016 and 2015 acquisitions.
 
Legacy for Life, LLC
 
Effective September 1, 2016, we acquired certain assets of Legacy for Life, LLC, an Oklahoma based direct sales company and acquired the equity of two wholly owned subsidiaries of Legacy for Life, LLC. Legacy for Life Taiwan and Legacy for Life Limited (Hong Kong) collectively referred to as (“Legacy for Life”). Legacy for Life is a science based direct seller of i26, a product made from the IgY Max formula or hyperimmune whole dried egg, which is the key ingredient in Legacy for Life products. Additionally, we entered into an Ingredient Supply Agreement to market i26 worldwide. The contingent consideration’s estimated fair value at the date of acquisition was $825,000. In addition we agreed to pay $221,000 over a stated term in accordance with the agreement for the net assets of the Taiwan and Hong Kong entities and certain inventories from Legacy for Life.
 
Nature’s Pearl Corporation
 
Effective September 1, 2016, we acquired certain assets of Nature’s Pearl Corporation, (“Nature’s Pearl”) a direct sales company that produces nutritional supplements and skin and personal care products using the muscadine grape grown in the southeastern region of the United States that are deemed to be rich in antioxidants. The contingent consideration’s estimated fair value at the date of acquisition was $1,475,000. We paid $200,000 for the purchase of certain inventories, which has been applied against and reduced the maximum aggregate purchase price.
 
Renew Interest, LLC (SOZO Global, Inc.)
 
On July 29, 2016, we acquired certain assets of Renew Interest, LLC (“Renew”) formerly owned by SOZO Global, Inc. (“SOZO”), a direct sales company that offers nutritional supplements, skin and personal care products, weight loss products and coffee products. The SOZO brand of products contains CoffeeBerry a fruit extract known for its high level of antioxidant properties. The contingent consideration’s estimated fair value at the date of acquisition was $465,000. We agreed to pay $300,000 for the purchase of certain inventories and assumed liabilities over a stated term in accordance with the agreement, which has been applied against and reduced the maximum aggregate purchase price. We also received additional inventories on a consignment basis.
 
South Hill Designs Inc.
 
On January 20, 2016, we acquired certain assets of South Hill Designs Inc., (“South Hill”) a direct sales and proprietary jewelry company that specializes in customized lockets and charms. The purchase price allocation of the intangible assets acquired for South Hill was $839,000 as of December 31, 2016 . Additionally, we entered into an Exclusive, Licensing and Source Agreement with two of the founders of South Hill for services and the use of certain intellectual property.
 
Paws Group, LLC
 
Effective July 1, 2015, we acquired certain assets of Paws Group, LLC, (“PAWS”) a direct sales company for pet lovers that offers an exclusive pet boutique carrying treats for dogs and cats as well as grooming and bath products.  The purchase price consisted of a maximum aggregate purchase price of $150,000. We paid approximately $61,000 for the purchase of certain inventories, which has been applied against and reduced the maximum aggregate purchase price.
 
Mialisia & Co., LLC
 
On June 1, 2015, we acquired certain assets of Mialisia & Co., LLC, (“Mialisia”) a direct sales jewelry company that specializes in interchangeable jewelry. As a result of this business combination, our distributors and customers obtained access to the unique line of Mialisia’s patent-pending “VersaStyle™” jewelry and the Mialisia distributors and customers obtained access to products offered by us. The purchase price consisted of a maximum aggregate purchase price of $1,900,000. We paid approximately $119,000 for the purchase of certain inventories, which has been applied against and reduced the maximum aggregate purchase price.
 
JD Premium LLC
 
On March 4, 2015, we acquired certain assets of JD Premium, LLC (“JD Premium”) a dietary supplement company. As a result of this business combination, our distributors and customers obtained access to JD Premium’s unique line of products and JD Premium’s distributors and clients obtained access to products offered by us. The purchase price consisted of a maximum aggregate purchase price of $500,000. We paid $50,000 for the purchase of certain inventories, which has been applied against and reduced the maximum aggregate purchase price.
 
Sta-Natural, LLC
 
On February 23, 2015, we acquired certain assets and assumed certain liabilities of Sta-Natural, LLC, (“Sta-Natural”) a dietary supplement company and provider of vitamins, minerals and supplements for families and their pets. As a result of this business combination, our distributors and customers obtained access to Sta-Natural’s unique line of products and Sta-Natural’s distributors and clients obtained access to products offered by us. The purchase price consisted of a maximum aggregate purchase price of $500,000. We paid $25,000 for the purchase of certain inventories, which has been applied against and reduced the maximum aggregate purchase price.
 
 
 
 
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Set forth below is information regarding each of our other acquisitions during 2013 and 2014.
 
On October 1, 2014, we acquired certain assets and assumed certain liabilities of Restart Your Life, LLC, a dietary supplement company and provider of immune system support products and therapeutic skin lotions. In May 2014, we acquired certain assets and certain liabilities of Beyond Organics, LLC, a vertically integrated organic food and beverage company marketing its organic products through a network of independent sales distributors. In April 2014, we acquired certain assets and certain liabilities of Good Herbs, Inc., a traditional herbal company with pure, unaltered, chemical-free natural herbal supplements marketing its organic products through a network of independent sales distributors.  
 
In November of 2013, we acquired certain assets and certain liabilities of Biometics International, Inc., a developer and distributor of a line of liquid supplements marketed through a network of independent sales distributors. In October 2013, we acquired certain assets and liabilities of GoFoods Global, LLC, a developer and distributor of a complete line of packaged foods including breads and desserts, soups and entrees. In August 2013, we acquired certain assets and certain liabilities of Heritage Markers, LLC, a developer and distributor of a line of digital products including scrap books, memory books and greeting cards marketed through a network of independent sales distributors and the product line is sold through an e-commerce platform. In July 2012, we acquired certain assets of Livinity, Inc., a developer and distributor of nutritional products through a network of distributors. In April 2012, we acquired certain assets of GLIE, LLC, a developer and distributor of nutritional supplements, including vitamins and mineral supplements.  
  
Coffee Segment - We engage in the commercial sale of one of our products, our coffee through our subsidiary CLR Roasters, LLC (“CLR”) and its subsidiary.  We own a traditional coffee roasting business that produces coffee under its own Café La Rica brand, Josie’s Java House Brand and Javalution brands. CLR produces a variety of private labels through major national sales outlets and to major customers including cruise lines and office coffee service operators, as well as through our distributor network.  Our coffee manufacturing division, CLR, was established in 2001 and is a wholly-owned subsidiary. CLR produces and markets a unique line of coffees with health benefits under the JavaFit® brand which is sold directly to consumers.
 
Our CLR Miami Roasting facility is 50,000 square foot and is SQF Level 2 certified, which is a stringent food safety auditing process that verifies the coffee bean processing plant and distribution facility is in compliance with Certified HACCP (Hazard Analysis, Critical Control Points) food safety plans.
 
In March 2014, we expanded our coffee segment and started our new green coffee business with CLR’s acquisition of Siles Plantation Family Group, which is now a wholly-owned subsidiary of CLR located in Matagalpa, Nicaragua. Siles Plantation Family Group includes “La Pita,” a dry-processing facility on approximately 26 acres of land and “El Paraiso,” a coffee plantation consisting of approximately 500 acres of land and thousands of coffee plants which produces 100 percent Arabica coffee beans that are shade grown, Organic, Rainforest Alliance Certified™ and Fair Trade Certified™.
 
The plantation and dry-processing facility allows CLR to control the coffee production process from field to cup. The dry-processing plant allows CLR to produce and sell green coffee to major coffee suppliers in the United States and around the world. CLR has engaged a husband and wife team to operate the Siles Plantation Family Group by way of an operating agreement. The agreement provides for the sharing of profits and losses generated by the Siles Plantation Family Group after certain conditions are met. CLR has made substantial improvements to the land and facilities since 2014. The 2017 harvest season started in November 2016 and will continue through April of 2017.
 
Products
 
Direct Selling Segment - Youngevity®
 
We offer more than 5,000 products to support a healthy lifestyle. All of these products, which are sold through our direct selling network, can be categorized into six verticals. (Health & Nutrition, Home & Family, Food & Beverage, Spa & Beauty, Apparel & Jewelry, and Services.)
 
Our flagship Health & Nutrition products include our Healthy Body Start Pak™, which includes Beyond Tangy Tangerine® (a multivitamin/mineral/amino acid supplement), Ultimate EFA Plus™ (an essential fatty acid supplement), and Beyond Osteo-fx™ (a bone and joint health supplement). This product category is continually evaluated and updated where and when necessary.  New products are introduced to take advantage of new opportunities that may become available based on scientific research and or marketing trends.  Beyond Tangy Tangerine® 2.0 was added to the line to offer a second flavor and a non-GMO option to our number one selling product. The Healthy Body Start Pak™ comes in a variety of options and Paks to target specific health concerns or goals.
 
Our Food & Beverage includes nutrient-rich energy drinks, healthy probiotic chocolates, and organic gourmet coffee. Our Be The Change Coffee is grown and processed at our very own green coffee plantation in the Nicaraguan rainforest. Our flagship Weight Management program is marketed as the Healthy Body Challenge, a program that involves three phases: detoxification, transformation and the healthy lifestyle phase. Each phase includes recommended products. During the transformation phase, we recommend the Ketogenic 30-Day Burst, consisting of the Slender FX™ Keto products to support fat loss. Our Spa & Beauty products include Youngevity® Mineral Makeup™, Botanical Spa and Essential Oils. Our Home and Garden products include our For Tails Only™ line of pet products, Hydrowash™, an environmentally safe cleaner, and Bloomin Minerals™, a line of plant and soil revitalizers.
 
 
 
 
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Our acquisition of Heritage Makers in August of 2013 allowed customers and distributors to create and publish a number of products utilizing their personal photos.  Soon after, we introduced Our Memories For Life, a scrapbooking and memory keeping line of products, and Anthology DIY by Lisa Bearnson, a creative new approach to start-to-finish DIY projects. Heritage Makers account provides ongoing access to Studio, a user friendly, online program, where a person can make one-of-a-kind keepsakes, storybooks, photo gifts and more, using Heritage Makers rich library of digital art and product templates. Products available include Storybooks, Digital Scrapbooking, Cards, and Photo Gifts. The full offering can be viewed at www.heritagemakers.com . Information contained on our websites are not incorporated by reference, and do not form any part of, this Annual Report on Form 10-K. We have included the website address as a factual reference and do not intend it to be an active link to the website.
 
In 2014 we introduced our MK Collaboration line of fashion and jewelry accessories to complement our nutritional and makeup products and with the acquisition of Mialisia in 2015 and the licensing agreement we entered into with South Hill Designs which was effective January 13, 2016 (a proprietary jewelry company that sells customized lockets and charms), we have further expanded our jewelry line that our distributors have access to offering more variety and appealing to a broader consumer base.
 
Coffee Segment - CLR
 
On July 11, 2011, our AL Global Corporation, a privately held California corporation (“AL Global”), merged with and into a wholly-owned subsidiary of Javalution Coffee Company, a publicly traded Florida corporation (“Javalution”). After the merger, Javalution reincorporated in Delaware and changed its name to AL International, Inc. On July 23, 2013 AL International, Inc. changed its name to Youngevity International, Inc.
 
In connection with this merger, CLR, which had been a wholly-owned subsidiary of Javalution prior to the merger, continued to be a wholly-owned subsidiary of the Company.  CLR operates a traditional coffee roasting business, and through the merger we were provided access to additional distributors, as well as added the JavaFit® product line to our network of direct marketers. Javalution, through its JavaFit Brand, develops products in the relatively new category of fortified coffee.  JavaFit fortified coffee is a blend of roasted ground coffee and various nutrients and supplements.
 
Our JavaFit line of coffee is only sold through our direct selling network. CLR produces coffee under its own brands, as well as under a variety of private labels through major national retailers, various office coffee and convenience store distributors, to wellness and retirement centers, to a number of cruise lines and cruise line distributors, and direct to the consumer through sales of the JavaFit Brand to our direct selling division.
 
In addition, CLR produces coffee under several company owned brands including: Café La Rica, Café Alma, Josie’s Java House, Javalution Urban Grind, Javalution Daily Grind, and Javalution Royal Roast.  These brands are sold to various internet and traditional brick and mortar retailers including Wal-Mart, Winn-Dixie, Jetro, American Grocers, Publix, Home Goods, Marshalls and TJ Maxx.
 
During 2015 CLR invested in the K-Cup® coffee equipment and capabilities and began the production of the K-Cup® line of single-serve coffee products. In addition, we registered our own Y-Cup® trademark for Youngevity identification to expand the business brand name.
 
CLR’s green coffee business provides for the sale of green coffee beans to other roasters and distributors, primarily from the distribution of coffee beans from Nicaragua.
 
Our CLR products offered include:
 
●
100% Colombian Premium Blend;
●
Italian Espresso;
●
House Blend;
●
Decaffeinated Coffee;
●
Dark Roast;
●
Half-caff 50/50 blend Espresso;
●
Donut Shop;
●
Green Coffee Beans;
●
Flavored Coffees;
●
Organic Coffees; and
●
Espresso;
●
Select Water Decaffeinated.
 
Distribution
 
Direct Selling Segment - We presently sell products domestically in 50 states and internationally, with operations in the U.S. and currently eight international distribution centers.  For the year ended December 31, 2016 approximately 9% of our sales were derived from sales outside the U.S.  We primarily sell our products to the ultimate consumer through the direct selling channel. Our distributors are required to pay a one-time enrollment fee and receive a welcome kit specific to that country region that consists of forms, policy and procedures, selling aids, and access to our distributor website, prior to commencing services for us as a distributor. Distributors are independent contractors and not our employees. Distributors earn a profit by purchasing products directly from us at a discount from a published brochure price and selling them to their customers, the ultimate consumer of our products. We generally have no arrangements with end users of our products beyond the distributors, except as described below.
 
 
 
 
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A distributor contacts customers directly, selling primarily through our online or printed brochures, which highlight new products and special promotions for each of our sales campaigns.  In this sense, the distributor, together with the brochure, is the “store” through which our products are sold. A brochure introducing new sales campaigns is frequently produced and our websites and social networking activity take place on a continuous basis.  Generally, distributors and customer’s forward orders using the internet, mail, telephone, or fax and payments are processed via credit card or other acceptable forms of payment at the time an order is placed.  Orders are processed and the products are assembled primarily at our distribution center in Chula Vista, California and delivered to distributors, distribution centers and customers through a variety of local, national and international delivery companies.
 
We employ certain web enabled systems to increase distributor support, which allows distributors to run their business more efficiently and also allows us to improve our order-processing accuracy.  In many countries, distributors can utilize the internet to manage their business electronically, including order submission, order tracking, payment and two-way communications. In addition, distributors can further build their own business through personalized web pages provided by us, enabling them to sell a complete line of our products online. Self-paced online training is also available in certain markets, as well as up-to-the-minute news, about us.
 
In the U.S. and selected other markets, we also market our products through the following consumer websites, below is a list of some of our websites:
 
●   www.youngevity.com
●   www.clrroasters.com
●   www.ygyi.com
●   www.cafelarica.com
●   www.youngofficial.com
●   www.javalution.com
●   www.heritagemakers.com
●   www.mialisia.com
●   www.mkcollab.com
●   www.mybeyondorganic.com
 
Information contained on our websites are not incorporated by reference into, and do not form any part of, this Annual Report on Form 10-K. We have included the website address as a factual reference and do not intend it to be an active link to the website.
 
Introducing new distributors and the training of the new distributors are the primary responsibilities of key independent distributors supported by our marketing home office staff. The independent distributors are independent contractors compensated exclusively based on total sales of products achieved by their down-line distributors and customers. Although the independent distributors are not paid a fee for recruiting introducing additional distributors, they have the incentive to recruit onboard additional distributors to increase their opportunities for increasing their total product sales and related sales commissions. Acquisitions of other direct selling businesses and personal contacts, including recommendations from current distributors, and local market advertising constitute the primary means of obtaining new distributors and customers. Distributors also have the opportunity to earn bonuses based on the net sales of products made by distributors they have recruited introduced and trained in addition to discounts earned on their own sales of our products. This program can be unlimited based on the level achieved in accordance with the compensation plan that can change from time to time at our discretion. The primary responsibilities of sales leaders are the prospecting, appointing, training and development of their down-line distributors and customers while maintaining a certain level of their own sales.
 
Coffee Segment –  Our coffee segment is operated by CLR.  The segment operates a coffee roasting plant and distribution facility located in Miami, Florida.  The 50,000 square foot plant contains two commercial grade roasters and four commercial grade grinders capable of roasting 10 million pounds of coffee annually.  The plant contains a variety of packaging equipment capable of producing two ounce fractional packs, vacuum sealed brick packaging for espresso, various bag packaging configurations ranging from eight ounces up to a five pound bag package, as well as Super Sack packaging that holds bulk coffee up to 1,100 pounds. The coffee segment’s single-serve K-Cup filling equipment is capable of producing 35 million K-Cups annually of our own brands and private label orders.
 
The versatility of the plant supports a diverse customer base.  The coffee segment is a large supplier to the hospitality market with a great focus on serving the cruise line industry.  A major revenue producing area is the private label market where the company produces coffee for various retailer owned private brands.  The segment supplies coffee and equipment to retirement communities, services the office coffee service segment, and markets through distributors to the convenient store market; CLR also markets its own brands of coffee to various retailers.  Our Company owned brands that are currently on retail shelves includes Café La Rica and the Josie’s Java House of brands.
  
The coffee segment also includes our green coffee business. CLR sources green coffee from Nicaragua in Central America and sells procured coffee to other coffee distributors. With the addition of the Nicaragua plantation and dry-processing facility we have further expanded our coffee segment with the ability to process green coffee not only for our own use but also provide this service to other coffee growers.
 
Seasonality and Back Orders
 
Our business in both the direct selling and coffee segment can experience weaker sales during the summer months; however, based on recent experience, seasonality has not been material to our operating results.  We have not experienced significant back orders.
 
 
 
 
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Promotion and Marketing
 
Direct Selling Segment -  Sales promotion and sales development activities are directed at assisting distributors through sales aids such as brochures, product samples, demonstration product videos and live training sessions. In order to support the efforts of distributors to reach new customers, specially designed sales aids, promotional pieces, customer flyers, radio and print advertising are used. In addition, we seek to motivate our distributors through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with our independent distributors are conducted by our home office staff . The meetings are designed to keep distributors abreast of product line changes, explain sales techniques and provide recognition for sales performance.
 
A number of merchandising techniques are used, including the introduction of new products, the use of combination offers, the use of trial sizes and samples, and the promotion of products packaged as gift items. In general, for each sales campaign, a distinctive brochure or flyer is published, in which new products are introduced and selected items are offered as special promotions or are given particular prominence in the brochure. A key current priority for our merchandising is to continue the use of pricing and promotional models to enable a deeper, fact-based understanding of the role and impact of pricing within our product portfolio.
 
Coffee Segment – Sales promotion and sales development primarily take place via the CLR in-house team. CLR works diligently to be sure that CLR is invited to participate in the request for proposal (“RFP”) process that comes up each year on major coffee contracts.  CLR's in-house sales team consists of five people that devote the majority of their time to obtaining new business.  CLR has established a direct store distribution (“DSD”) route that it utilizes to market, promote and ship its Café La Rica and Josie’s Java House brands.  Various promotion strategies and advertisements in retail circulars are utilized to support the brands being marketed through DSD.
 
Suppliers
 
We purchase our inventory from multiple third-party suppliers at competitive prices.  For the year ended December 31, 2016 we made purchases from three vendors that individually comprised more than 10% of total purchases and in aggregate approximated 54% of total purchases for the two segments. 
 
Direct Selling Segment - We purchase raw materials from numerous domestic and international suppliers. Other than the coffee products produced through CLR, all of our products are manufactured by independent suppliers. To achieve certain economies of scale, best pricing and uniform quality, we rely primarily on a few principal suppliers, namely: Global Health Labs, Inc., Pacific Nutritional, Inc. and Nutritional Engineering, Inc.
 
Sufficient raw materials were available during the year ended December 31, 2016 and we believe they will continue to be. We monitor the financial condition of certain suppliers, their ability to supply our needs, and the market conditions for these raw materials. We believe we will be able to negotiate similar market terms with alternative suppliers if needed.
 
Coffee Segment - We currently source green coffee from Nicaragua.  We utilize a combination of outside   brokers and direct relationships with farms for our supply of green coffee. Outside brokers provide the largest supply of our green coffee. For large contracts, CLR works to negotiate a price lock with its suppliers to protect CLR and its customers from price fluctuations that take place in the commodities market.
 
We produce green coffee from CLR’s own plantation it acquired in Nicaragua in 2014. We do not believe that CLR is substantially dependent upon nor exposed to any significant concentration risk related to purchases from any single vendor, given the availability of alternative sources from which we may purchase inventory.   The supply and price of coffee are subject to high volatility. Supply and price of all coffee grades are affected by multiple factors, such as weather, pest damage, politics, competitive pressures, the relative value of the United States currency and economics in the producing countries.
 
Intellectual Property
 
We have developed and we use registered trademarks in our business, particularly relating to our corporate and product names. We own several trademarks that are registered with the U.S. Patent and Trademark Office and we also own trademarks in Canada, Australia, New Zealand, Singapore, Mexico, and Russia. Registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered trademark in connection with a similar product in the same channels of trade by any third-party in the respective country of registration, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs.
 
We also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of protection that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of our brands and the effective marketing of our products. We intend to maintain and keep current all of our trademark registrations and to pay all applicable renewal fees as they become due. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete, and if for any reason we were unable to maintain our trademarks, our sales of the related products bearing such trademarks could be materially and negatively affected. See “Risk Factors”.
 
 
 
 
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We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. Most of our products are not protected by patents and therefore such agreements are often our only form of protection.  Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. Our proprietary product formulations are generally considered trade secrets, but are not otherwise protected under intellectual property laws.
 
We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
 
Industry Overview
 
We are engaged in two industries, the direct selling industry and the sale of coffee industry.
 
Direct Selling Industry
 
Direct selling is a business distribution model that allows a company to market its products directly to consumers by means of independent contractors and relationship referrals.  Independent, unsalaried salespeople, referred to as distributors, represent us and are awarded a commission based upon the volume of product sold through each of their independent business operations.
  
According to the World Federation of Direct Selling Association 2016 annual report, the United States is the world’s largest direct selling market, representing 20% worldwide based on 2015 statistical data. Driving industry growth is the increase in the number of people involved in direct selling, on global level over 103 million people are direct sellers as reported in 2015, an increase of 4.4% from 99 million people in 2014.
 
In the United States retail sales for the direct selling channel increased 4.8% to $36.1 billion in 2015 from $34.7 billion in 2014. Compounded annual growth rate from 2012-2015 was 4.5%. And on a global level retail sales for the direct selling channel increased 7.7% to $183.7 billion in 2015 from $170.6 billion in 2014. Compounded annual growth rate from 2012-2015 was 7.2%.
 
The Direct Selling Association (“DSA”) reported in its 2015 Overview sales by major product group in the United States that the fastest growing product was Wellness followed by Services & Other, the two categories alone representing $19 billion in sales in 2015. Top product categories continue to gain market share: home and family care/durables, personal care, jewelry, clothing, leisure/educations. Wellness products include weight-loss products and dietary supplements. Source: 2016 Growth & Outlook Report: U.S. Selling in 2015.
 
Coffee Selling Industry
 
According to IBIS World industry March 2016 reports 51121c. “Coffee Production and Demand in the U.S.”, during the past five years, the coffee production industry fared well, exhibiting revenue growth due to increases in input commodity prices that were passed on to customers. Moreover, in the next five years, the industry is expected to benefit from consumer demand for premium-coffee products. As the world price of coffee is expected to grow, coffee producers are expected to benefit from less volatile input commodity prices, compared with the previous period. As a result, we anticipate that coffee producers will be able to efficiently reflect input commodity pricing in their coffee prices. The strong demand projection comes at a time of squeezed global coffee supplies, which pushed prices to multiyear highs last year following a historic drought in Brazil, the world’s largest grower.
 
Competition
 
Direct Selling Segment – The diet fitness and health food industries, as well as the food and drink industries in general, are highly competitive, rapidly evolving and subject to constant change.  The number of competitors in the overall diet, fitness, health food, and nutraceutical industries is virtually endless.  We believe that existing industry competitors are likely to continue to expand their product offerings. Moreover, because there are few, if any, substantial barriers to entry, we expect that new competitors are likely to enter the “functional foods” and nutraceutical markets and attempt to market “functional food” or nutraceutical coffee products similar to our products, which would result in greater competition.  We cannot be certain that we will be able to compete successfully in this extremely competitive market.
 
We face competition from competing products in each of our lines of business, in both the domestic and international markets. Worldwide, we compete against products sold to consumers by other direct selling and direct sales companies and through the Internet, and against products sold through the mass market and prestige retail channels. We also face increasing competition in our developing and emerging markets.
 
 
 
 
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Within the direct selling channel, we compete on a regional and often country-by-country basis, with our direct selling competitors. There are also a number of direct selling companies that sell product lines similar to ours, some of which also have worldwide operations and compete with us globally. We compete against large and well-known companies that manufacture and sell broad product lines through various types of retail establishments such as General Foods and Nestle. In addition, we compete against many other companies that manufacture and sell in narrower product lines sold through retail establishments. This industry is highly competitive, and some of our principal competitors in the industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We have many competitors in the highly competitive energy drink, skin care and cosmetic, coffee, pet line and pharmacy card industries globally, including retail establishments, principally department stores, and specialty retailers, and direct-mail companies specializing in these products. Our largest direct sales competitors are Herbalife, Amway, USANA and NuSkin.  In the energy drink market we compete with companies such as Red Bull, Gatorade and Rock Star.  Our beauty, skin care and cosmetic products compete with Avon and Bare Essentials.  From time to time, we need to reduce the prices for some of our products to respond to competitive and customer pressures or to maintain our position in the marketplace. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer.
 
We are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing distributors. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors. There can be no assurance that our programs for recruiting and retaining distributors will be successful. The pool of individuals who may be interested in network marketing is limited in each market and it is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe we offer an attractive opportunity for distributors, there can be no assurance that other network marketing companies will not be able to recruit our existing distributors or deplete the pool of potential distributors in a given market.
 
Coffee Segment – With respect to our coffee products, we compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices. Consumers’ willingness to purchase our products will depend upon our ability to maintain consumer confidence that our products are of a higher quality and provide greater value than less expensive alternatives. If the difference in quality between our brands and private label products narrows, or if there is a perception of such a narrowing, then consumers may choose not to buy our products at prices that are profitable for us. If we do not succeed in effectively differentiating ourselves from our competitors in specialty coffee, including by developing and maintaining our brands, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of specialty coffee, and accordingly our profitability, may be materially adversely affected.
 
Government Regulations
 
The processing, formulation, manufacturing, packaging, labeling, advertising, and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the FTC, the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. These activities are also regulated by various state, local, and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent or delay the introduction or require the reformulation, of our products, which could result in lost revenues and increased costs to us. For instance, the FDA regulates, among other things, the composition, safety, labeling, and marketing of dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use). The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish to market, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of a dietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a “health claim.” Any of these actions could prevent us from marketing particular dietary supplement products or making certain claims or statements of nutritional support for them. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any additional products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to liability, substantial costs, and reduced growth prospects. With respect to FTC matters, if the FTC has reason to believe the law is being violated (e.g. failure to possess adequate substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, divestiture of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action against us by the FTC could materially and adversely affect our ability to successfully market our products.
 
Additional or more stringent regulations of dietary supplements and other products have been considered from time to time. These developments could require reformulation of some products to meet new standards, recalls or discontinuance of some products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of some products, additional or different labeling, additional scientific substantiation, adverse event reporting, or other new requirements. Any of these developments could increase our costs significantly. For example, the Dietary Supplement and Nonprescription Drug Consumer Protection Act (§3546), which was passed by Congress in December 2006, impose significant regulatory requirements on dietary supplements including reporting of “serious adverse events” to FDA and recordkeeping requirements. This legislation could raise our costs and negatively impact our business. In June 2007, the FDA adopted final regulations on GMPs in manufacturing, packaging, or holding dietary ingredients and dietary supplements, which apply to the products we manufacture and sell.
 
 
 
 
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These regulations require dietary supplements to be prepared, packaged, and held in compliance with certain rules. These regulations could raise our costs and negatively impact our business. Additionally, our third-party suppliers or vendors may not be able to comply with these rules without incurring substantial expenses. If our third-party suppliers or vendors are not able to timely comply with these new rules, we may experience increased cost or delays in obtaining certain raw materials and third-party products. Also, the FDA has announced that it plans to publish guidance governing the notification of new dietary ingredients. Although FDA guidance is not mandatory, it is a strong indication of the FDA’s current views on the topic discussed in the guidance, including its position on enforcement.
 
In addition, there are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies. Laws or regulations have been or may be adopted with respect to the Internet relating to:
  
●
liability for information retrieved from or transmitted over the Internet;
●
online content regulation;
●
commercial e-mail;
●
visitor privacy; and
●
taxation and quality of products and services.
 
Moreover, the applicability to the Internet of existing laws governing issues such as:
 
●
intellectual property ownership and infringement;
●
consumer protection;
●
obscenity;
●
defamation;
●
employment and labor;
●
the protection of minors;
●
health information; and
●
personal privacy and the use of personally identifiable information.
 
This area is uncertain and developing. Any new legislation or regulation or the application or interpretation of existing laws may have an adverse effect on our business. Even if our activities are not restricted by any new legislation, the cost of compliance may become burdensome, especially as different jurisdictions adopt different approaches to regulation.
 
We are also subject to laws and regulations, both in the U.S. and internationally, that are directed at ensuring that product sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization are based on the sale of products rather than on investment in the sponsoring company. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, which compensate participants for recruiting additional participants irrespective of product sales, use high pressure recruiting methods and or do not involve legitimate products. Complying with these rules and regulations can be difficult and requires the devotion of significant resources on our part.
 
Management Information, Internet and Telecommunication Systems
 
The ability to efficiently manage distribution, compensation, inventory control, and communication functions through the use of sophisticated and dependable information processing systems is critical to our success.
 
We continue to upgrade systems and introduce new technologies to facilitate our continued growth and support of independent distributor activities. These systems include: (1) an internal network server that manages user accounts, print and file sharing, firewall management, and wide area network connectivity; (2) a leading brand database server to manage sensitive transactional data, corporate accounting and sales information; (3) a centralized host computer supporting our customized order processing, fulfillment, and independent distributor management software; (4) a standardized telecommunication switch and system; (5) a hosted independent distributor website system designed specifically for network marketing and direct selling companies; and (6) procedures to perform daily and weekly backups with both onsite and offsite storage of backups.
 
Our technology systems provide key financial and operating data for management, timely and accurate product ordering, commission payment processing, inventory management and detailed independent distributor records. Additionally, these systems deliver real-time business management, reporting and communications tools to assist in retaining and developing our sales leaders and independent distributors. We intend to continue to invest in our technology systems in order to strengthen our operating platform.
 
Product Returns
 
Our return policy in the direct selling segment provides that customers and distributors may return to us any products purchased within 30 days of their initial order for a full refund. Product damaged during shipment is replaced. Product returns as a percentage of our net sales have been approximately 2% of our monthly net sales over the last two years. Commercial coffee segment sales are only returnable if defective.
 
 
 
 
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Employees
 
As of March 17, 2017, we had 362 employees worldwide.  We believe that our current personnel are capable of meeting our operating requirements in the near term.  We expect that as our business grows we may hire additional personnel to handle the increased demands on our operations and to handle some of the services that are currently being outsourced, such as brand management and sales efforts.
 
Our Corporate History
 
Youngevity International, Inc., formerly AL International, Inc., founded in 1996, operates through the following domestic wholly-owned subsidiaries: AL Global Corporation, which operates our direct selling networks, CLR Roasters, LLC (“CLR”), our commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC, Youngevity Global LLC and the wholly-owned foreign subsidiaries Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles Plantation Family Group S.A. located in Nicaragua, Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd., Youngevity Russia LLC, Youngevity Colombia S.A.S., Youngevity International Singapore Pte. Ltd., Mialisia Canada, Inc., and Legacy for Life Limited (Hong Kong).
 
The Company also operates subsidiary branches of Youngevity Global LLC in the Republic of the Philippines, Taiwan Province the People’s Republic of China.
 
On July 11, 2011, AL Global Corporation, a privately held California corporation (“AL Global”), merged with and into a wholly-owned subsidiary of Javalution Coffee Company, a publicly traded Florida corporation (“Javalution”). After the merger, Javalution reincorporated in Delaware and changed its name to AL International, Inc. In connection with this merger, CLR, which had been a wholly-owned subsidiary of Javalution prior to the merger, continued to be a wholly-owned subsidiary of the Company.  CLR operates a traditional coffee roasting business, and through the merger we were provided access to additional distributors, as well as added the JavaFit® product line to our network of direct marketers.
 
Effective July 23, 2013, we changed our name from AL International, Inc. to Youngevity International, Inc.
 
On February 23, 2017, our Board of Directors and holders of in excess of a majority of our voting stock approved an amendment to our Certificate of Incorporation to effectuate: (i) a reverse stock split (the “Reverse Split”) of the issued and outstanding shares of common stock at a ratio to be determined in the discretion of our board of directors within a range of one share of common stock for every fifteen (15) to twenty-five (25) shares of common stock; (ii) a decrease in the number of shares of (a) common stock authorized from 600,000,000 to 50,000,000 and (b) preferred stock authorized from 100,000,000 to 5,000,000 (the “Decrease”); concurrently with the Reverse Split; and an amendment to our 2012 Stock Option Plan (the “Plan”) to increase the number of shares of common stock available for grant and to expand the types of awards available for grant (the “Plan Amendments ”).
 
Emerging Growth Company
 
We are an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012. We shall continue to be deemed an emerging growth company until the earliest of:
 
(a) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more;
(b) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement;
(c) the date on which we have issued more than $1 billion in non-convertible debt, during the previous 3-year period, issued; or.
(d) the date on which we are deemed to be a large accelerated filer.
   
As an emerging growth company we will be subject to reduced public company reporting requirements and are exempt from Section 404(b) of Sarbanes Oxley. Section 404(a) requires issuers to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. Section 404(b) requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.
 
As an emerging growth company we are also exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934 which require the shareholder approval, on an advisory basis, of executive compensation and golden parachutes.
 
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
 
Our Corporate Headquarters
 
Our corporate headquarters are located at 2400 Boswell Road, Chula Vista, California 91914. This is also the location of our operations and distribution center . The facility consists of a 59,000 square foot Class A single use building that is comprised 40% of office space and the balance is used for distribution.
 
Available Information
 
Our common stock is traded on the OTCQX Marketplace, operated by the OTC Markets Group, under the symbol “YGYI”.
 
Additional information about our company is contained at our website, http://www.youngevity.com. Information contained on our website is not incorporated by reference into, and does not form any part of, this Annual Report on Form 10-K. We have included our website address as a factual reference and do not intend it to be an active link to our website. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. The following Corporate Governance documents are also posted on our website: Code of Business Conduct and Ethics and the Charters for the Audit Committee and Compensation Committee Our phone number is (619)934-3980 and our facsimile number is (619)934-5009.
 
 
 
 
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R ISK FACTORS
 
Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. You should carefully consider the risks described below and, the other information in the documents incorporated by reference herein when evaluating our company and our business. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline and investors could lose all or a part of the money paid to buy our common stock.
 
RISKS RELATING TO OUR BUSINESS
 
Because we have recently acquired several businesses and significantly increased our investment in our green coffee business, it is difficult to predict to what extent we will be able to maintain or improve our current level of revenues and profitability.
 
No assurances can be given as to the amount of future revenue or profits that we may generate. Until recently, our business was comprised primarily of the direct sales of Youngevity® health products. In the last four years, we completed 21 business acquisitions of companies in the direct selling line of business, substantially increasing our Youngevity health and wellness product lines. It is too early to predict whether consumers will accept, and continue to use on a regular basis, the products we added from these new acquisitions since we have had limited recent operating history as a combined entity. In addition, we continue to expand our coffee business product line with the single-serve K-Cup® manufacturing capabilities and our investment in the green coffee business. It is too early to predict the results of these investments. In addition, since each acquisition involves the addition of new distributors and new products, it is difficult to assess whether initial product sales of any new product acquired will be maintained, and if sales by new distributors will be maintained.
 
Our business is difficult to evaluate because we have recently expanded our product offering and customer base.
 
We have recently expanded our operations, engaging in the sale of new products through new distributors. There is a risk that we will be unable to successfully integrate the newly acquired businesses with our current management and structure. Although we are based in California, several of the businesses we acquired are based in other places such as Utah and Florida, making the integration of our newly acquired businesses difficult. In addition, our dry-processing plant and coffee plantation is located overseas in the country of Nicaragua. Our estimates of capital, personnel and equipment required for our newly acquired businesses are based on the historical experience of management and businesses they are familiar with. Our management has limited direct experience in operating a business of our current size as well as one that is publicly traded.
 
Our ability to generate profit will be impacted by payments we are required to make under the terms of our acquisition agreements, the extent of which is uncertain.
 
Since many of our acquisition agreements are based on future consideration, we could be obligated to make payments that exceed expectations. Many of our acquisition agreements require us to make future payments to the sellers based upon a percentage of sales of products. The carrying value of the contingent acquisition debt, which requires re-measurement each reporting period, is based on our estimates of future sales and therefore is difficult to accurately predict. Profits could be adversely impacted in future periods if adjustment of the carrying value of the contingent acquisition debt is required.
 
We may have difficulty managing our future growth.
 
Since we initiated our network marketing sales channel in fiscal 1997, our business has grown significantly. This growth has placed substantial strain on our management, operational, financial and other resources. If we are able to continue to expand our operations, we may experience periods of rapid growth, including increased resource requirements. Any such growth could place increased strain on our management, operational, financial and other resources, and we may need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations. In addition, the financing for any of future acquisitions could dilute the interests of our stockholders; resulting in an increase in our indebtedness or both. Future acquisitions may entail numerous risks, including:
 
●
difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses
and disruption to our direct selling channel;
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diversion of management's attention from our core business;
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adverse effects on existing business relationships with suppliers and customers; and
●
risks of entering markets in which we have limited or no prior experience.
 
Our failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition, and operating results. In addition, there can be no assurance that we will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms.
   
 
 
 
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The failure to comply with the terms of our outstanding Notes could result in a default under the terms of the notes and, if uncured, it could potentially result in action against the pledged assets of CLR.
 
We have issued $7,187,500 of convertible notes (the “November 2015 Notes) to investors in November 2015 (the “November 2015 Offering”) that are secured by certain of our assets and those of CLR other than its inventory and accounts receivable. We have also issued an additional $4,750,000 in principal amount of notes (the “September 2014 Notes”) in September 2014 Offering (the “September 2014 Offering”) secured by CLR’s pledge of  the Nicaragua green coffee beans acquired with the proceeds, the contract rights under a letter of intent and all proceeds of the foregoing (which lien is junior to CLR’s factoring agreement and equipment lease but senior to all of its other obligations), Stephan Wallach, our Chief Executive Officer, has also personally guaranteed the repayment of the notes, and has agreed not to sell, transfer or pledge 30 million shares of our common stock that he owns so long as his personal guaranty is in effect. The November 2015 Notes mature in 2018, and the September 2014 Notes mature in 2019 and require us, among other things, to maintain the security interest given by CLR for the notes, make quarterly installments of interest, reserve a sufficient number of our shares of common stock for conversion requests and honor any conversion requests made by the investors to convert their notes into shares of our common stock. If we fail to comply with the terms of the notes, the note holders could declare a default under the notes and if the default were to remain uncured, as secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against CLR assets or our assets would likely have a serious disruptive effect on our coffee and direct selling operations.
 
We generate a substantial portion of our revenue from the sale of The Beyond Tangy Tangerine line, Osteo-fx line and, Ultimate EFA line of products. A decrease in sales of these products could seriously harm our business.
 
A significant portion of our revenue during the year ended December 31, 2016, approximately 50%, was derived from sales of our Beyond Tangy Tangerine line, Osteo-fx line and Ultimate EFA line of products. Any disruption in the supply of the raw materials used for these problems, any negative press associated with these products or manufacture and sale of competitive products, could have a material adverse effect on our business.
 
Our business is subject to strict government regulations.
 
The processing, formulation, manufacturing, packaging, labeling, advertising, and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the FTC, the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. These activities are also regulated by various state, local, and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent or delay the introduction, or require the reformulation, of our products, which could result in lost revenues and increased costs to us. For instance, the FDA regulates, among other things, the composition, safety, labeling, and marketing of dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use). The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish to market, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of a dietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a “health claim.”
 
Any of these actions could prevent us from marketing particular dietary supplement products or making certain claims or statements of nutritional support for them. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any additional products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to liability, substantial costs, and reduced growth prospects. With respect to FTC matters, if the FTC has reason to believe the law is being violated (e.g. failure to possess adequate substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, and divestiture of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action against us by the FTC could materially and adversely affect our ability to successfully market our products.
 
Additional or more stringent regulations of dietary supplements and other products have been considered from time to time. These developments could require reformulation of some products to meet new standards, recalls or discontinuance of some products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of some products, additional or different labeling, additional scientific substantiation, adverse event reporting, or other new requirements. Any of these developments could increase our costs significantly. For example, the Dietary Supplement and Nonprescription Drug Consumer Protection Act (S.3546), which was passed by Congress in December 2006, imposes significant regulatory requirements on dietary supplements including reporting of “serious adverse events” to FDA and recordkeeping requirements. This legislation could raise our costs and negatively impact our business. In June 2007, the FDA adopted final regulations on GMPs in manufacturing, packaging, or holding dietary ingredients and dietary supplements, which apply to the products we manufacture and sell. These regulations require dietary supplements to be prepared, packaged, and held in compliance with certain rules. These regulations could raise our costs and negatively impact our business. Additionally, our third-party suppliers or vendors may not be able to comply with these rules without incurring substantial expenses. If our third-party suppliers or vendors are not able to timely comply with these new rules, we may experience increased cost or delays in obtaining certain raw materials and third-party products. Also, the FDA has announced that it plans to publish guidance governing the notification of new dietary ingredients. Although FDA guidance is not mandatory, it is a strong indication of the FDA’s current views on the topic discussed in the guidance, including its position on enforcement.  
  
 
 
 
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Unfavorable publicity could materially hurt our business.
 
We are highly dependent upon consumers’ perceptions of the safety, quality, and efficacy of our products, as well as similar products distributed by other companies, including other direct selling companies. Future scientific research or publicity may not be favorable to our industry or any particular product. Because of our dependence upon consumer perceptions, adverse publicity associated with illness or other adverse effects resulting from the consumption of our product or any similar products distributed by other companies could have a material adverse impact on us. Such adverse publicity could arise even if the adverse effects associated with such products resulted from failure to consume such products as directed. Adverse publicity could also increase our product liability exposure, result in increased regulatory scrutiny and lead to the initiation of private lawsuits.
 
Product returns may adversely affect our business.
 
We are subject to regulation by a variety of regulatory authorities, including the Consumer Product Safety Commission and the Food and Drug Administration. The failure of our third party manufacturers to produce merchandise that adheres to our quality control standards could damage our reputation and brands and lead to customer litigation against us. If our manufacturers are unable or unwilling to recall products failing to meet our quality standards, we may be required to remove merchandise or issue voluntary or mandatory recalls of those products at a substantial cost to us. We may be unable to recover costs related to product recalls. We also may incur various expenses related to product recalls, including product warranty costs, sales returns, and product liability costs, which may have a material adverse impact on our results of operations. While we maintain a reserve for our product warranty costs based on certain estimates and our knowledge of current events and actions, our actual warranty costs may exceed our reserve, resulting in a need to increase our accruals for warranty costs in the future.
 
In addition, selling products for human consumption such as coffee and energy drinks involve a number of risks. We may need to recall some of our products if they become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our business results and the value of our brands. We also may incur significant liability if our products or operations violate applicable laws or regulations, or in the event our products cause injury, illness or death. In addition, we could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including consumer protection statutes of some states. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image.
 
Returns are part of our business. Our return rate since the inception of selling activities has been minimal. We replace returned products damaged during shipment wholly at our cost, which historically has been negligible. Future return rates or costs associated with returns may increase. In addition, to date, product expiration dates have not played any role in product returns; however, it is possible they will increase in the future.
 
A general economic downturn, a recession globally or in one or more of our geographic regions or sudden disruption in business conditions or other challenges may adversely affect our business and our access to liquidity and capital.
 
A downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions, or the current global macro-economic pressures, could adversely affect our business and our access to liquidity and capital. Recent global economic events over the past few years, including job losses, the tightening of credit markets and failures of financial institutions and other entities, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital resources, including our ability to issue commercial paper, raise additional capital and maintain credit lines and offshore cash balances. An adverse change in our credit ratings could result in an increase in our borrowing costs and have an adverse impact on our ability to access certain debt markets, including the commercial paper market.
 
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. We face continued economic challenges in fiscal 2017 because customers may continue to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices, among other things.
 
In addition, sudden disruptions in business conditions as a result of a terrorist attack similar to the events of September 11, 2001, including further attacks, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters, such as Hurricane Katrina, pandemic situations or large scale power outages can have a short or, sometimes, long-term impact on consumer spending.
 
 
 
 
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We face significant competition.
 
We face competition from competing products in each of our lines of business, in both the domestic and international markets. Worldwide, we compete against products sold to consumers by other direct selling and direct sales companies and through the Internet, and against products sold through the mass market and prestige retail channels. We also face increasing competition in our developing and emerging markets.
 
Within the direct selling channel, we compete on a regional and often country-by-country basis, with our direct selling competitors. There are also a number of direct selling companies that sell product lines similar to ours, some of which also have worldwide operations and compete with us globally. We compete against large and well-known companies that manufacture and sell broad product lines through various types of retail establishments. Our largest direct sales competitors are Herbalife, Amway, USANA Health Sciences and NuSkin Enterprises. In the energy drink market we compete with companies such as Red Bull, Gatorade and Rock Star. Our beauty, skin care and cosmetic products compete with Avon and Bare Escentuals. In addition, we compete against many other companies that manufacture and sell in narrower product lines sold through retail establishments. This industry is highly competitive and some of our principal competitors in the industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer.  From time to time, we need to reduce the prices for some of our products to respond to competitive and customer pressures or to maintain our position in the marketplace. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer.
 
If our advertising, promotional, merchandising, or other marketing strategies are not successful, if we are unable to deliver new products that represent technological breakthroughs, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, or if for other reasons our end customers perceive competitors' products as having greater appeal, then our sales and financial results may suffer.  
 
If we do not succeed in effectively differentiating ourselves from our competitors’ products, including by developing and maintaining our brands or our competitors adopt our strategies, then our competitive position may be weakened and our sales, and accordingly our profitability, may be materially adversely affected.
 
We are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing distributors. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors. There can be no assurance that our programs for recruiting and retaining distributors will be successful. The pool of individuals who may be interested in network marketing is limited in each market, and it is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe we offer an attractive opportunity for distributors, there can be no assurance that other network marketing companies will not be able to recruit our existing distributors or deplete the pool of potential distributors in a given market.
 
Our coffee segment also faces strong competition.  The coffee industry is highly competitive and coffee is widely distributed and readily available.  Our competition will seek to create advantages in many areas including better prices, more attractive packaging, stronger marketing, more efficient production processes, speed to market, and better quality verses value opportunities.  Many of our competitors have stronger brand recognition and will reduce prices to keep our brands out of the market.  Our competitors may have more automation built into their production lines allowing for more efficient production at lower costs. We compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices. Consumers’ willingness to purchase our products will depend upon our ability to maintain consumer confidence that our products are of a higher quality and provide greater value than less expensive alternatives. If the difference in quality between our brands and private label products narrows, or if there is a perception of such a narrowing, then consumers may choose not to buy our products at prices that are profitable for us.
 
Our success depends, in part, on the quality and safety of our products.
 
Our success depends, in part, on the quality and safety of our products, including the procedures we employ to detect the likelihood of hazard, manufacturing issues, and unforeseen product misuse. If our products are found to be, or are perceived to be, defective or unsafe, or if they otherwise fail to meet our distributors' or end customers' standards, our relationship with our distributors or end customers could suffer, we could need to recall some of our products, our reputation or the appeal of our brand could be diminished, and we could lose market share and or become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations, and financial condition.
 
 
 
 
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Our ability to anticipate and respond to market trends and changes in consumer preferences could affect our financial results.
 
Our continued success depends on our ability to anticipate, gauge, and react in a timely and effective manner to changes in consumer spending patterns and preferences. We must continually work to discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. While we devote considerable effort and resources to shape, analyze, and respond to consumer preferences, consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. If we are unable to anticipate and respond to trends in the market for beauty and related products and changing consumer demands, our financial results will suffer.
 
Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns. Failure to maintain proper inventory levels or increased product returns could result in a material adverse effect on our business, results of operations and financial condition.   
 
If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be negatively impacted.
 
Most of our products are not protected by patents. The labeling regulations governing our nutritional supplements require that the ingredients of such products be precisely and accurately indicated on product containers. Accordingly, patent protection for nutritional supplements often is impractical given the large number of manufacturers who produce nutritional supplements having many active ingredients in common. Additionally, the nutritional supplement industry is characterized by rapid change and frequent reformulations of products, as the body of scientific research and literature refines current understanding of the application and efficacy of certain substances and the interactions among various substances. In this respect, we maintain an active research and development program that is devoted to developing better, purer, and more effective formulations of our products. We protect our investment in research, as well as the techniques we use to improve the purity and effectiveness of our products, by relying on trade secret laws. Notwithstanding our efforts, there can be no assurance that our efforts to protect our trade secrets and trademarks will be successful. We intend to maintain and keep current all of our trademark registrations and to pay all applicable renewal fees as they become due. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete and if for any reason we were unable to maintain our trademarks, our sales of the related products bearing such trademarks could be materially and negatively affected. Nor can there be any assurance that third-parties will not assert claims against us for infringement of their intellectual proprietary rights. If an infringement claim is asserted, we may be required to obtain a license of such rights, pay royalties on a retrospective or prospective basis, or terminate our manufacturing and marketing of our infringing products. Litigation with respect to such matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, or operating results.
 
We consider our roasting methods essential to the flavor and richness of our coffee and, therefore, essential to our various brands. Because our roasting methods cannot be patented, we would be unable to prevent competitors from copying our roasting methods, if such methods became known. If our competitors copy our roasting methods, the value of our brands could be diminished and we could lose customers to our competitors. In addition, competitors could develop roasting methods that are more advanced than ours, which could also harm our competitive position.
 
We may become involved in the future in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.
 
We may be party to litigation at the present time or become party to litigation in the future. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results. However, it is not possible to predict the final resolution of any litigation to which we may be party to, and the impact of certain of these matters on our business, results of operations, and financial condition could be material.
 
Government reviews, inquiries, investigations, and actions could harm our business or reputation.
 
As we operate in various locations around the world, our operations in certain countries are subject to significant governmental scrutiny and may be harmed by the results of such scrutiny. The regulatory environment with regard to direct selling in emerging and developing markets where we do business is evolving and officials in such locations often exercise broad discretion in deciding how to interpret and apply applicable regulations. From time to time, we may receive formal and informal inquiries from various government regulatory authorities about our business and compliance with local laws and regulations. Any determination that our operations or activities or the activities of our distributors, are not in compliance with existing laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third party relationships, termination of necessary licenses and permits, or similar results, all of which could potentially harm our business and or reputation. Even if an inquiry does not result in these types of determinations, it potentially could create negative publicity which could harm our business and or reputation.
   
 
 
 
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The loss of key management personnel could adversely affect our business.  
 
Our founder, Dr. Joel Wallach, is a highly visible spokesman for our products and our business, and our message is based in large part on his vision and reputation, which helps distinguish us from our competitors. Any loss or limitation on Dr. Wallach as a lead spokesman for our mission, business, and products could have a material adverse effect upon our business, financial condition, or results of operations. In addition, our executive officers, including Stephan Wallach and David Briskie, are primarily responsible for our day-to-day operations, and we believe our success depends in part on our ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management team. We cannot guarantee continued service by our key executive officers. We do not maintain key man life insurance on any of our executive officers. The loss or limitation of the services of any of our executive officers or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, or results of operations.
 
The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, or the inability to obtain certain products from third-party suppliers or from our manufacturers, could have a material adverse effect on our business, financial condition, or results of operations.  
 
We contract with third-party manufacturers and suppliers for the production of some of our products, including most of our powdered drink mixes and nutrition bars, and certain of our personal care products. These third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by, or in conjunction with, our in-house product development team. There is a risk that any of our suppliers or manufacturers could discontinue manufacturing our products or selling their products to us. Although we believe that we could establish alternate sources for most of our products, any delay in locating and establishing relationships with other sources could result in product shortages or back orders for products, with a resulting loss of net sales. In certain situations, we may be required to alter our products or to substitute different products from another source. We have, in the past, discontinued or temporarily stopped sales of certain products that were manufactured by third parties while those products were on back order. There can be no assurance that suppliers will provide the raw materials or manufactured products that are needed by us in the quantities that we request or at the prices that we are willing to pay. Because we do not control the actual production of certain raw materials and products, we are also subject to delays caused by any interruption in the production of these materials, based on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by supplier employees, and natural disasters or other catastrophic events.
 
Shortages of raw materials may temporarily adversely affect our margins or our profitability related to the sale of those products.  
 
We may experience temporary shortages of the raw materials used in certain of our nutritional products. While we periodically experience price increases due to unexpected raw material shortages and other unanticipated events, this has historically not resulted in a material effect on our overall cost of goods sold. However, there is no assurance that our raw materials will not be significantly adversely affected in the future, causing our profitability to be reduced. A deterioration of our relationship with any of our suppliers, or problems experienced by these suppliers, could lead to inventory shortages. In such case, we may not be able to fulfill the demand of existing customers, supply new customers, or expand other channels of distribution. A raw material shortage could result in decreased revenue or could impair our ability to maintain or expand our business.
 
A failure of our information technology systems would harm our business.  
 
The global nature of our business and our seamless global compensation plan requires the development and implementation of robust and efficiently functioning information technology systems. Such systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters, telecommunication failures, and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although we have adopted and implemented a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting our business and the results of our operations. 
 
We are dependent upon access to external sources of capital to grow our business.
 
Our business strategy contemplates future access to debt and equity financing to fund the expansion of our business.  The inability to obtain sufficient capital to fund the expansion of our business could have a material adverse effect on us.
   
 
 
 
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Our business is subject to online security risks, including security breaches.
 
Our businesses involve the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. An increasing number of websites, including several large companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or our customers’ proprietary information, cause interruption in our operations, damage our computers or those of our customers, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.
 
Currently, a significant number of our customers authorize us to bill their credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Non-technical means, for example, actions by a suborned employee, can also result in a data breach.
 
Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged.
 
Our servers are also vulnerable to computer viruses, physical or electronic break-ins, “denial-of-service” type attacks and similar disruptions that could, in certain instances, make all or portions of our websites unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult as we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our users’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
  
Our web customers, as well as those of other prominent companies, may be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate passwords, credit card numbers, or other personal information or to introduce viruses or other malware programs to our customers’ computers. These emails appear to be legitimate emails sent by our company, but they may direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” remain a serious problem that may damage our brands, discourage use of our websites, and increase our costs.
 
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
 
For the year ended December 31, 2016 approximately 9% of our sales were derived from sales outside the United States. Our green coffee business in based in Nicaragua. We own one plantation and intend to purchase another in Nicaragua. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to the risks associated with international operations, including:
 
●
the possibility that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
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the lack of well-established or reliable legal systems in certain areas;
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the presence of high inflation in the economies of international markets;
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the possibility that a foreign government authority might impose legal, tax or other financial burdens on us or our coffee operations, or sales force, due, for example, to the structure of our operations in various markets;
●
the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
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the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
 
Currency exchange rate fluctuations could reduce our overall profits.
 
For the year ended December 31, 2016, approximately 9% of our sales were derived from sales outside the United States.  In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the U.S. dollar using either the spot rate or the weighted-average exchange rate. If the U.S. dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.
 
 
 
 
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Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.
 
As a multinational corporation, in several countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.
 
A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
 
Non-compliance with anti-corruption laws could harm our business.
 
Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the “FCPA”). Any allegations that we are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any determination that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties. Although we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are aware that one of our direct marketing competitors is under investigation in the United States for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse publicity or increased scrutiny of our industry, our business could be harmed.
 
RISKS RELATED TO OUR DIRECT SELLING BUSINESS
 
Independent distributor activities that violate laws could result in governmental actions against us and could otherwise harm our business.
 
Our independent distributors are independent contractors. They are not employees and they act independently of us. The network marketing industry is subject to governmental regulation. We implement strict policies and procedures to try to ensure that our independent distributors comply with laws. Any determination by the Federal Trade Commission or other governmental agency that we or our distributors are not in compliance with laws could potentially harm our business. Even if governmental actions do not result in rulings or orders against us, they could create negative publicity that could detrimentally affect our efforts to recruit or motivate independent distributors and attract customers.
 
Network marketing is heavily regulated and subject to government scrutiny and regulation, which adds to the expense of doing business and the possibility that changes in the law might adversely affect our ability to sell some of our products in certain markets.  
 
Network marketing systems, such as ours, are frequently subject to laws and regulations, both in the United States and internationally, that are directed at ensuring that product sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization are based on the sale of products rather than on investment in the sponsoring company. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, which compensate participants for recruiting additional participants irrespective of product sales, use high pressure recruiting methods and or do not involve legitimate products. Complying with these rules and regulations can be difficult and requires the devotion of significant resources on our part.  Regulatory authorities, in one or more of our present or future markets, could determine that our network marketing system does not comply with these laws and regulations or that it is prohibited. Failure to comply with these laws and regulations or such a prohibition could have a material adverse effect on our business, financial condition, or results of operations. Further, we may simply be prohibited from distributing products through a network-marketing channel in some countries, or we may be forced to alter our compensation plan.
  
We are also subject to the risk that new laws or regulations might be implemented or that current laws or regulations might change, which could require us to change or modify the way we conduct our business in certain markets. This could be particularly detrimental to us if we had to change or modify the way we conduct business in markets that represent a significant percentage of our net sales. For example, the FTC released a proposed New Business Opportunity Rule in April 2006. As initially drafted, the proposed rule would have required pre-sale disclosures for all business opportunities, which may have included network marketing compensation plans such as ours. However, in March 2008 the FTC issued a revised notice of proposed rulemaking, which indicates that the New Business Opportunity Rule as drafted will not apply to multi-level marketing companies.
 
 
 
 
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Our principal business segment is conducted worldwide in one channel, direct selling and therefore any negative perceptive of direct selling would greatly impact our sales.
 
Our principal business segment is conducted worldwide in the direct selling channel. Sales are made to the ultimate consumer principally through independent distributors and customers worldwide. There is a high rate of turnover among distributors, which is a common characteristic of the direct selling business. As a result, in order to maintain our business and grow our business in the future, we need to recruit, retain and service distributors on a continuing basis and continue to innovate the direct selling model. Consumer purchasing habits, including reducing purchases of products generally, or reducing purchases from distributors or buying products in channels other than in direct selling, such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material adverse effect on our business, financial condition and results of operations. If our competitors establish greater market share in the direct selling channel, our business, financial condition and operating results may be adversely affected. Furthermore, if any government bans or severely restricts our business method of direct selling, our business, financial condition and operating results may be adversely affected.
 
Our ability to attract and retain distributors and to sustain and enhance sales through our distributors can be affected by adverse publicity or negative public perception regarding our industry, our competition, or our business generally. Negative public perception may include negative publicity regarding the sales structure of significant, pure network marketing companies which has been the case recently with large network marketing companies, the quality or efficacy of nutritional supplement products or ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether those investigations involve us or our distributors or the business practices or products of our competitors or other network marketing companies.  Any adverse publicity may also adversely impact the market price of our stock and cause insecurity among our distributors. There can be no assurance that we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or results of operations.
 
As a network marketing company, we are dependent upon an independent sales force and we do not have direct control over the marketing of our products.  
 
We rely on non-employee, independent distributors to market and sell our products and to generate our sales. Distributors typically market and sell our products on a part-time basis and likely will engage in other business activities, some of which may compete with us. We have a large number of distributors and a relatively small corporate staff to implement our marketing programs and to provide motivational support to our distributors. We rely primarily upon our distributors to attract, train and motivate new distributors. Our sales are directly dependent upon the efforts of our distributors. Our ability to maintain and increase sales in the future will depend in large part upon our success in increasing the number of new distributors, retaining and motivating our existing distributors, and in improving the productivity of our distributors.
 
We can provide no assurances that the number of distributors will increase or remain constant or that their productivity will increase. Our distributors may terminate their services at any time, and, like most direct selling companies, we experience a high turnover among new distributors from year-to-year. We cannot accurately predict any fluctuation in the number and productivity of distributors because we primarily rely upon existing distributors to sponsor and train new distributors and to motivate new and existing distributors. Our operating results in other markets could also be adversely affected if we and our existing distributors do not generate sufficient interest in our business to successfully retain existing distributors and attract new distributors.
 
The loss of a significant Youngevity distributor could adversely affect our business.  
 
We rely on the successful efforts of our distributors that become leaders.  If these downline distributors in turn sponsor new distributors, additional business centers are created, with the new downline distributors becoming part of the original sponsoring distributor’s downline network. As a result of this network marketing system, distributors develop business relationships with other distributors. The loss of a key distributor or group of distributors, large turnover or decreases in the size of the key distributors force, seasonal or other decreases in purchase volume, sales volume reduction, the costs associated with training new distributors, and other related expenses may adversely affect our business, financial condition, or results of operations. Moreover, our ability to continue to attract and retain distributors can be affected by a number of factors, some of which are beyond our control, including:
 
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General business and economic conditions;
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Adverse publicity or negative misinformation about us or our products;
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Public perceptions about network marketing programs;
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High-visibility investigations or legal proceedings against network marketing companies by federal or state authorities or private citizens;
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Public perceptions about the value and efficacy of nutritional, personal care, or weight management products generally;
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Other competing network marketing organizations entering into the marketplace that may recruit our existing distributors or reduce the potential pool of new distributors; and
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Changes to our compensation plan required by law or implemented for business reasons that make attracting and retaining distributors more difficult.
 
There can be no assurance that we will be able to continue to attract and retain distributors in sufficient numbers to sustain future growth or to maintain our present growth levels, which could have a material adverse effect on our business, financial condition, or results of operations.
 
 
 
 
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Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.  
 
Some of our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Other products contain innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or sponsored only limited clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.
 
Our manufacturers are subject to certain risks.
 
We are dependent upon the uninterrupted and efficient operation of our manufacturers and suppliers of products. Those operations are subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or results of operations.
 
Challenges by private parties to the direct selling system could harm our business.
 
Direct selling companies have historically been subject to legal challenges regarding their method of operation or other elements of their business by private parties, including their own representatives, in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire in the future.
  
RISKS RELATED TO OUR COFFEE BUSINESS
 
Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high-quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results.
 
We purchase, roast, and sell high-quality whole bean arabica coffee beans and related coffee products. The price of coffee is subject to significant volatility. The high-quality arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the “C” price. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the “C” coffee commodity price do increase the price of high-quality arabica coffee and also impact our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore price, at which the base “C” coffee commodity price component will be fixed has not yet been established.
 
These are known as price-to-be-fixed contracts. We also enter into supply contracts whereby the quality, quantity, delivery period, and price are fixed.   The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels, and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices, increases in the cost of high-quality arabica coffee beans could have an adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of green coffee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our profitability.
 
Adverse public or medical opinions about the health effects of consuming our products, as well as reports of incidents involving food-borne illnesses, food tampering, or food contamination, whether or not accurate, could harm our business.
 
Some of our products contain caffeine and other active compounds, the health effects of which are the subject of public scrutiny, including the suggestion that excessive consumption of caffeine and other active compounds can lead to a variety of adverse health effects. In the United States, there is increasing consumer awareness of health risks, including obesity, due in part to increased publicity and attention from health organizations, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products, frequently including caffeine. An unfavorable report on the health effects of caffeine or other compounds present in our products, or negative publicity or litigation arising from certain health risks could significantly reduce the demand for our products.
 
 
 
 
-24-
 
 
Similarly, instances or reports, whether true or not, of food-borne illnesses, food tampering and food contamination, either during manufacturing, packaging or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick-service restaurant sectors and could affect us as well. Any report linking us to the use of food tampering or food contamination could damage our brand value, severely hurt sales of our products, and possibly lead to product liability claims, litigation (including class actions) or damages. If consumers become ill from food-borne illnesses, tampering or contamination, we could also be forced to temporarily stop selling our products and consequently could materially harm our business and results of operations.
 
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
 
We are controlled by one principal stockholder who is also our Chief Executive Officer and Chairman.
 
Through his voting power, Mr. Stephan Wallach, our Chief Executive Officer and Chairman, has the ability to elect a majority of our directors and to control all other matters requiring the approval of our stockholders, including the election of all of our directors. Mr. Wallach owns and beneficially owns approximately 71.5% of our total equity securities (assuming exercise of the options to purchase common stock held by Mr. Wallach and Michelle Wallach, his wife and Chief Operating Officer and Director). As our Chief Executive Officer, Mr. Wallach has the ability to control our business affairs.
 
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
 
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, not being required to comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, not being required to comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. 
 
We could remain an emerging growth company until the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.  We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile. Further, as a result of these scaled regulatory requirements, our disclosure may be more limited than that of other public companies and you may not have the same protections afforded to shareholders of such companies.
 
Our financial statements may not be comparable to companies that comply with public company effective dates.
 
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
 
Our stock has historically had a limited market.  If an active trading market for our common stock does develop, trading prices may be volatile.
 
In the event that an active trading market develops, the market price of our shares of common stock may be based on factors that may not be indicative of future market performance.  Consequently, the market price of our common stock may vary greatly. If an active market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
 
●
variations in our quarterly operating results;
 ●
announcements that our revenue or income/loss levels are below analysts’ expectations;
 ●
general economic slowdowns;
 ●
changes in market valuations of similar companies;
 ●
announcements by us or our competitors of significant contracts; or
 ●
acquisitions, strategic partnerships, joint ventures or capital commitments.
  
 
 
 
-25-
 
 
Because our shares are deemed “penny stocks,” an investor may have difficulty selling them in the secondary trading market.
 
The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price, as therein defined, of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  Additionally, if the equity security is not registered or authorized on a national securities exchange that makes certain reports available, the equity security may also constitute a “penny stock.” As our common stock comes within the definition of penny stock, these regulations require the delivery by the broker-dealer, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account.  In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock. The ability of broker-dealers to sell our common stock and the ability of shareholders to sell our common stock in the secondary market would be limited.  As a result, the market liquidity for our common stock would be severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.
 
We are subject to the reporting requirements of Federal Securities Laws, which can be expensive.
 
We are subject to the information and reporting requirements under the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports and other information with the SEC has and will continue to cause our expenses to be higher than they would be if we were a privately-held company.  
 
Sales by our shareholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.  
 
A large number of outstanding shares of our common stock are held by several of our principal shareholders. If any of these principal shareholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of our common stock to decline.
 
Our stock price has been volatile and subject to various market conditions.  
 
There can be no assurance that an active market in our stock will be sustained. The trading price of our common stock has been subject to wide fluctuations. The price of our common stock may fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action, conditions in the nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of our common stock would likely decline, perhaps substantially.
 
We may issue preferred stock with rights senior to the common stock, which we may issue in order to consummate a merger or other transaction necessary to raise capital.
 
Our certificate of incorporation authorizes the issuance of up to 100 million shares of preferred stock, par value $0.001 per share (the “Preferred Stock”) without shareholder approval and on terms established by our directors. We may issue shares of preferred stock in order to consummate a financing or other transaction, in lieu of the issuance of common stock.  The rights and preferences of any such class or series of preferred stock would be established by our board of directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of the common stock.
 
 
 
 
-26-
 
 
You should not rely on an investment in our common stock for the payment of cash dividends.
 
We intend to retain future profits, if any, to expand our business. We have never paid cash dividends on our stock and do not anticipate paying any cash dividends in the foreseeable future. You should not make an investment in our common stock if you require dividend income. Any return on investment in our common stock would only come from an increase in the market price of our stock, which is uncertain and unpredictable.
 
There is no public market for the notes or warrants to purchase shares of our common stock that were issued to investors in our Private Placements.
 
There is no established public trading market for the warrants that were issued in the September 2014 Offering and the November 2015 Offering and we do not expect a market to develop. In addition, we do not intend to apply to list the warrants on any national securities exchange or other nationally recognized trading system. Without an active market, the liquidity of the warrants will be limited.
 
Due to the speculative nature of warrants, there is no guarantee that it will ever be profitable for investors who received warrants in our private placements to exercise their warrants.
 
The warrants issued in the September 2014 Offering and the November 2015 Offering do not confer any rights of share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire our common stock at a fixed price for a limited period of time. Investors in the September 2014 Offering and the November 2015 Offering may exercise their right to acquire the shares of Common Stock underlying their warrants at any time after the date of issuance by paying the respective exercise price per share, prior to their expiration, after which date any unexercised warrants will expire and have no further value. There can be no assurance that the market price of the Common Stock will ever equal or exceed the exercise price of the warrants, and, consequently, whether it will ever be profitable for investors to exercise their warrants.
 
Item 1B. U nresolved Staff Comments 
 
None.
 
 
 
Item 2. P roperties
 
Operation Properties
 
Our corporate headquarters are located at 2400 Boswell, Road, Chula Vista, California 91914. This is also the location of Youngevity’s main operations and distribution center. The facility consists of a 59,000 square foot Class A single use building that is comprised 40% of office space and the balance is used for distribution.
 
Entity
 
Location
 
Approximate Square
Footage of Facilities

Land in Acres

Own/Lease
 
Approximate Rent
Expense $
Youngevity
 
Chula Vista, CA
 
             59,000
 
 -
 
Own (1)
 
  -
Youngevity
 
Alisio Viejo, CA
 
               3,288
 
 -
 
Lease
 
  89,000
CLR
 
Miami, FL
 
             50,110
 
 -
 
Lease (2)
 
  414,000
Siles Family Group
 
Matagalpa, Nicaragua
 
           200,000
 
500
 
Own (3)
 
-
Heritage Makers
 
Orem, UT
 
               9,300
 
 -
 
Lease
 
  121,000
Youngevity
 
Auckland, New Zealand
 
               3,570
 
 -
 
Lease (4)
 
  69,000
Youngevity
 
Moscow, Russia
 
               1,550
 
 -
 
Lease
 
  125,000
Youngevity
 
Singapore
 
               3,222
 
 -
 
Lease
 
  269,000
Youngevity
 
Guadalajara, Mexico
 
               1,500
 
 -
 
Lease
 
  23,000
Youngevity
 
Manila, Philippines
 
               4,473
 
 -
 
Lease
 
  6,000
Legacy for Life
 
Lai Chi Kok Kin, Hong Kong
 
               1,296
 
 -
 
Lease
 
  17,000
Legacy for Life
 
Taipei, Taiwan
 
               4,722
 
 -
 
Lease
 
  7,000
 
All the Youngevity facilities include office space, warehouse and distribution center.
 
(1)
Youngevity corporate headquarters. The building is owned by our subsidiary 2400 Boswell, LLC, a limited liability company that we acquired from the step parent of Mr. Wallach, our Chief Executive Officer. On March 15, 2013, we acquired 2400 Boswell, LLC for $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, payable in equal payments over five years and bears interest at 5.00%.  Additionally, we assumed a long-term mortgage of $3,625,000, payable over 25 years, interest rate of 5.75%. As of December 31, 2016 the balance on the long-term mortgage was $3,363,000 and the balance on the promissory note was $108,000.
(2)
CLR headquarters, coffee roaster, warehouse, and distribution center.
(3)
CLR Arabica coffee bean plantation and dry-processing facility and mill.
(4)
Includes distribution for Australia.
 
We believe that we have adequate space for our anticipated needs and that suitable additional space will be available at commercially reasonable prices as needed. As of December 31, 2016 we are considering other space needs for operations as our needs grow.
 
Item 3. L egal Proceedings
 
We are, from time to time, the subject of claims and suits arising out of matters occurring during the operation of our business. We are not presently party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
 
 
-28-
 
PART II
 
Item 5. M arket for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Since June 2013, our common stock has been traded on the QX tier of the OTC Market under the symbol "YGYI".  Previously, our common stock was quoted on the OTC Markets OTC Pink Market system under the symbol “JCOF”. On March 17, 2017, the closing price of our common stock on the OTCQX was $0.26. The range of high and low bid or sales prices for each of the quarters of the fiscal years ended December 31, 2016 and 2015 is presented below:
 
 
 
2016
 
 
2015
 
 
 
High
 
 
Low
 
 
High
 
 
Low
 
First Quarter
  $ 0.33  
  $ 0.22  
  $ 0.27  
  $ 0.22  
Second Quarter
  $ 0.32  
  $ 0.24  
  $ 0.41  
  $ 0.24  
Third Quarter
  $ 0.32  
  $ 0.23  
  $ 0.39  
  $ 0.23  
Fourth Quarter
  $ 0.32  
  $ 0.26  
  $ 0.35  
  $ 0.26  
 
Holders
 
As of the close of business on March 17, 2017, there were 518 holders of record of our common stock.  The number of holders of record is based on the actual number of holders registered on the books of our transfer agent and does not reflect holders of shares in "street name" or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.
 
Dividends
 
We did not pay any dividends in fiscal years ended 2016 or 2015.  We intend to retain future profits, if any, to expand its business. We do not anticipate paying any cash dividends in the foreseeable future. 
  
Sales of Unregistered Securities
 
We did not sell any unregistered shares of our common stock during the year ended December 31, 2016 in transactions that were not registered under the Securities Act, other than as previously disclosed in our filings with the Securities and Exchange Commission.
 
Repurchases of Equity Securities
 
On December 11, 2012, we authorized a share repurchase program to repurchase up to 15 million of our issued and outstanding common shares from time to time on the open market or via private transactions through block trades.  Under this program, we repurchased a total of 125,708 shares at a weighted-average cost of $0.28 per share in 2016 and 1,344,222 shares at a weighted-average cost of $0.31 per share in 2015.     
 
 
 
 
-29-
 
 
Share repurchases activity during the three months ended December 31, 2016 was as follows:
 
 
ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period ending December 31, 2016
 
Total Number
of Shares Purchased (*)
 
 
Average Price Paid per Share
 
 
Total Number of Shares Purchased as Part of Publicly 
Announced Plans or Programs
 
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
October 1 to October 31
    -  
    -  
    -  
    11,068,120  
November 1 to November 30
    -  
    -  
    -  
    11,068,120  
December 1 to December 31
    -  
    -  
    -  
    11,068,120  
Total
    -  
    -  
    -  
    11,068,120  
 
 (*)  On December 11, 2012, we authorized a share repurchase program to repurchase up to 15 million of our issued and outstanding common shares from time to time on the open market or via private transactions through block trades. The initial expiration date for the stock repurchase program was December 31, 2013. On October 7, 2013, the Board voted to extend the stock repurchase program until a date is set to revoke the program.
 
Equity Compensation Plan Information
 
The 2012 Stock Option Plan, or the Plan, is our only active equity incentive plan pursuant to which options to acquire common stock have been granted and are currently outstanding.
 
As of December 31, 2016, the number of stock options and restricted common stock outstanding under our equity compensation plans, the weighted average exercise price of outstanding options and restricted common stock and the number of securities remaining available for issuance were as follows:
 
Plan category
 
Number of
securities 
issued
under equity
compensation plan
 
 
Weighted-
average
exercise 
price of
outstanding options
 
 
Number of securities remaining available for
future issuance under equity compensation plans
 
Equity compensation plans approved by security holders
    -  
  $ -  
    -  
Equity compensation plans not approved by security holders
    33,230,000  
    0.24  
    6,300,825  
total
    33,230,000  
  $ 0.24  
    6,300,825  
 
On February 23, 2017, our board of directors received the approval of our stockholders, to amend the 2012 Stock Option Plan (the “Plan”) to increase the number of shares of common stock available for grant and to expand the types of awards available for grant under the Plan. The amendment of the Plan increases the number of shares of the Company’s common stock that may be delivered pursuant to awards granted during the life of the plan from 40,000,000 to 80,000,000 shares authorized. The Plan currently provides only for the grant of options; however the Plan amendments will allow for the grant of: (i) incentive stock options; (ii) nonqualified stock options; (iii) stock appreciation rights; (iv) restricted stock; and (v) other stock-based and cash-based awards to eligible individuals. The terms of the awards will be set forth in an award agreement, consistent with the terms of the Plan. No stock option is exercisable later than ten years after the date it is granted.
 
 
 
-30-
 
I tem 6. Selected Financial Data
 
The following table sets forth historical financial data and should be read in conjunction with the Company’s consolidated financial statements and related notes set forth in Item 8 below and previous filings. We have derived the selected historical financial data for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 from our audited financial statements and the related notes.
 
 
 
Year Ended December 31,
 
 
 
2016
 
 
2015
 
 
2014
 
 
2013
 
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues
  $ 162,667  
  $ 156,597  
  $ 134,043  
  $ 85,627  
  $ 75,004  
Cost of revenues
    64,530  
    63,628  
    57,718  
    34,326  
    31,179  
Gross profit
    98,137  
    92,969  
    76,325  
    51,301  
    43,825  
Distributor compensation
    67,148  
    63,276  
    52,646  
    32,985  
    30,526  
Selling and marketing, general and administrative expense
    28,474  
    24,287  
    20,310  
    13,964  
    13,580  
Operating income (loss)
    2,515  
    5,406  
    3,369  
    4,352  
    (281 )
Interest expense, net
    (4,474 )
    (4,491 )
    (2,356 )
    (1,249 )
    (90 )
Extinguishment loss on debt
    -  
    (1,198 )
    -  
    -  
    -  
Change in fair value of warrant derivative liability
    1,371  
    (39 )
    (15 )
    -  
    -  
Income (loss) before income taxes
    (3,103 )
    (322 )
    998  
    3,103  
    (368 )
Income tax (benefit) provision
    (190 )
    1,384  
    (4,371 )
    452  
    196  
Net income (loss)
  $ (398 )
  $ (1,706 )
  $ 5,369  
  $ 2,651  
  $ (564 )
 
       
       
       
       
       
Other Financial Data
       
       
       
       
       
Depreciation and amortization
  $ 3,862  
  $ 3,354  
  $ 2,686  
  $ 2,079  
  $ 1,905  
Stock based compensation
    395  
    455  
    534  
    848  
    629  
Change in fair value of warrant derivative liability
    (1,371 )
    39  
    15  
    -  
    -  
Extinguishment loss on debt 
    -  
    1,198  
    -  
    -  
    -  
Adjusted EBITDA (1)
    6,772  
    9,215  
    6,589  
    7,279  
    3,170  
 
       
       
       
       
       
Balance Sheet Data
       
       
       
       
       
Cash and cash equivalents
  $ 869  
  $ 3,875  
  $ 2,997  
  $ 4,320  
  $ 3,025  
Inventory
    21,492  
    17,977  
    11,783  
    5,973  
    4,675  
Total assets
    66,008  
    61,329  
    55,732  
    34,853  
    24,907  
Stockholders’ Equity
    18,998  
    18,881  
    18,589  
    11,499  
    9,879  
 
       
       
       
       
       
Weighted average shares outstanding, diluted
    392,641,735  
    392,075,608  
    389,795,108  
    391,953,473  
    387,392,118  
 
(1)   Adjusted EBITDA is a non-GAAP financial measure.  We calculate Adjusted EBITDA by taking net income, and adding back the expenses related to interest, taxes, depreciation, amortization, stock based compensation expense, change in the fair value of warrant derivative and non-cash impairment loss and debt extinguishment gain or loss, as each of those elements are calculated in accordance with GAAP.  Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.  Management believes that Adjusted EBITDA, when viewed with our results under GAAP, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.
 
 
 
 
 
-31-
 
I TEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward looking statements by using words such as “anticipate,” “believe,” “intends,” or similar expressions. Our actual results could differ materially from those anticipated expressed or implied by the forward-looking statements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of this Annual Report.
 
Overview
 
We operate in two segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors and the commercial coffee segment where products are sold directly to businesses. During the years ended December 31, 2016 and 2015, we derived approximately 89% of our revenue from direct sales and approximately 11% of our revenue from our commercial coffee sales, respectively.
 
In the direct selling segment we sell health and wellness products on a global basis and offer a wide range of products through an international direct selling network of independent distributors. Our multiple independent selling forces sell a variety of products through friend-to-friend marketing and social networking.  
 
We also engage in the commercial sale of coffee.  We own a traditional coffee roasting business, CLR that sells roasted and unroasted coffee and produces coffee under its own Café La Rica brand, Josie’s Java House brand and Javalution brands. CLR produces coffee under a variety of private labels through major national sales outlets and major customers including cruise lines and office coffee service operators. During fiscal 2014 CLR acquired the Siles Plantation Family Group, a coffee plantation and dry-processing facility located in Matagalpa, Nicaragua, an ideal coffee growing region that is historically known for high quality coffee production. The dry-processing facility is approximately 26 acres and the plantation is approximately 500 acres and produces 100 percent Arabica coffee beans that are shade grown, Rainforest Alliance Certified™ and Fair Trade Certified™. The plantation, dry-processing facility and existing U.S. based coffee roaster facilities allows CLR to control the coffee production process from field to cup.
 
During the year ended December 31, 2016, we derived approximately 91% of our revenues from sales within the United States.
 
Recent Events
 
New Acquisitions
 
Effective March 1, 2017, we acquired certain assets of Bellavita Group, LLC a direct sales company and producer of health and beauty products primarily in the Asian market and Ricolife, LLC a direct sales company and producer of teas with health benefits contained within its tea formulas.
 
2014 and 2015 Debt Offerings
 
On November 25, 2015, we closed the final round of the November 2015 Offering pursuant to which we raised cash proceeds of $3,187,500 and converted $4,000,000 of debt from a previous private placement. We issued to three (3) investors three (3) year senior secured November 2015 Notes in the aggregate principal amount of $7,187,500 convertible into 20,535,714 shares of Common Stock at a conversion price of $0.35 per share and warrants exercisable to purchase an aggregate of 9,583,333 shares of Common Stock from us at a price per share of $0.45. We also issued 3,011,904 warrants to the placement agent and its designees, of which 2,053,571 have an exercise price of $0.35 per share and 958,333 have an exercise price of $0.45 per share.
 
The November 2015 Notes bear interest at a rate of eight percent (8%) per annum.  We have the right to prepay the November 2015 Notes at any time after the one year anniversary date of the issuance of the November 2015 Notes at a rate equal to 110% of the then outstanding principal balance and accrued interest.  The November 2015 Notes rank senior to all of our debt other than certain debt owed to Wells Fargo Bank, Crestmark Bank, the investors in our prior private placements, a mortgage on property, and any refinancing’s thereof.  We and CLR, have provided collateral to secure the repayment of the November 2015 Notes and have pledged our assets (which liens are junior to CLR’s line of credit and equipment lease and junior to the rights of note holders in our prior financings but senior to all of their other obligations), all subject to the terms and conditions of a security agreement among us, CLR and the investors.  Stephan Wallach, our Chief Executive Officer, has also personally guaranteed the repayment of the November 2015 Notes, subject to the terms of a Guaranty executed by him with the investors. In addition, Mr. Wallach has agreed not to sell, transfer or pledge the 30 million shares of the Common Stock that are currently pledged as collateral to a previous financing so long as his personal guaranty is in effect.
 
 
The November 2015 Warrants contain cashless exercise provisions in the event a registration statement registering the Common Stock underlying the November 2015 Warrants has not been declared effective by the Securities and Exchange Commission by specified dates and customary anti-dilution protection and registration rights.  The November 2015 Warrants issued to investors expire sixty (60) months from the date of issuance and have an exercise price of $0.45 per share. The November 2015 Warrants issued to the placement agent and its designees are exercisable for 958,333 shares of Common Stock that expire in sixty (60) months from the date of issuance and, have an exercise price of $0.45 per share and 2,053,571 shares of Common Stock that expire in thirty-six (36) months from issuance and have an exercise price of $0.35 per share.
 
The offering proceeds were invested in our wholly owned subsidiary, CLR to fund working capital for its Nicaragua plantation and for the purchase of green coffee to accelerate the growth on its green coffee division. 
 
In connection with the November 2015 Offering, we also entered into the “Registration Rights Agreement” with the investors in the November 2015 Offering.  The Registration Rights Agreement requires that we file a registration statement (the “Initial Registration Statement”) with the Securities and Exchange Commission within sixty (60) days of the final closing date of the November 2015 Offering (the “Filing Date”) for the resale by the investors of all of the shares Common Stock underlying the November 2015 Notes and the November 2015 Warrants and all shares of Common Stock issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect thereto (the “Registrable Securities”).   Upon the occurrence of certain events (each an “Event”), we will be required to pay to the investors liquidated damages of 1.0% of their respective aggregate purchase price upon the date of the Event and then monthly thereafter until the Event is cured.  In no event may the aggregate amount of liquidated damages payable to each of the investors exceed in the aggregate 10% of the aggregate purchase price paid by such investor for the Registrable Securities. On February 12, 2016 we received notice from the SEC that our registration statement was effective.
 
In January 2015, we raised aggregate gross proceeds of $5,250,000 (the “January 2015 Offering”) when we entered into note purchase agreements with three (3) accredited investors pursuant to which we sold 52.5 units, each unit consisting of a one (1) year secured note (the “January 2015 Note”) in the aggregate principal amount of $100,000 and 30,000 shares of Common Stock.  We used the net offering proceeds from the January 2015 Offering for CLR to fund the purchase of Nicaragua green coffee to be sold under the terms of a letter of intent for sourcing and supply. The January 2015 Notes bear interest at a rate of eight percent (8%) per annum.  We have the right to prepay the January 2015 Notes at any time at a rate equal to 100% of the then outstanding principal balance and accrued interest.  The January 2015 Notes rank pari passu to all other notes of ours other than certain outstanding senior debt.  CLR has provided collateral to secure the repayment of the January 2015 Notes and has pledged the Nicaragua green coffee beans acquired with the proceeds, the contract rights under the letter of intent and all proceeds of the foregoing (which lien is junior to CLR’s line of credit and equipment lease but senior to all of its other obligations), all subject to the terms and conditions of a security agreement among us, CLR and the investors.  Stephan Wallach, our Chief Executive Officer, has also personally guaranteed the repayment of the January 2015 Notes, subject to the terms of a Guaranty executed by him with the investors.  In addition, Mr. Wallach has agreed not to sell, transfer or pledge 30 million shares of the Common Stock that he owns so long as his personal guaranty is in effect. One holder of a January 2015 Note in the principal amount of $5,000,000 was prepaid on October 26, 2015 through a cash payment from us to the investor of $1,000,000 and the remaining $4,000,000 owed was applied to the investor’s purchase of a $4,000,000 November 2015 Note in the November 2015 Offering and a November 2015 Warrant exercisable to purchase 5,333,333 shares of Common Stock. The remaining balance of the January 2015 Notes as December 31, 2015 was $250,000 and was paid in January 2016.
 
Between July 31, 2014 and September 10, 2014, we entered into Note Purchase Agreements (the "2014 Note" by way of completing a private placement offering (“2014 Private Offering”) with seven accredited investors pursuant to which the Company raised aggregate gross proceeds of $4,750,000 and sold units consisting of five (5) year senior secured convertible 2014 Notes in the aggregate principal amount of $4,750,000, that are convertible into 13,571,429 shares of our common stock, at a conversion price of $0.35 per share, and warrants to purchase 18,586,956 shares of common stock at an exercise price of $0.23 per share, subject to adjustment as provided therein. As of December 31, 2016 the principal amount of $4,750,000 remains outstanding. The outstanding 2014 Notes are secured by certain of our pledged assets, bear interest at a rate of eight percent (8%) per annum and paid quarterly in arrears with all principal and unpaid interest due between July and September 2019.
 
 
 
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Critical Accounting Policies and Estimates
 
Discussion and analysis of our financial condition and results of operations are based upon financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates; including those related to collection of receivables, inventory obsolescence, sales returns and non-monetary transactions such as stock and stock options issued for services, deferred taxes and related valuation allowances, fair value of assets and liabilities acquired in business combinations, asset impairments, useful lives of property, equipment and intangible assets and value of contingent acquisition debt. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
 
Emerging Growth Company
 
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
 
Revenue Recognition
 
We recognize revenue from product sales when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. We ship the majority of the direct selling segment products directly to the distributors and customers via UPS, USPS or FedEx and receive substantially all payments for these sales in the form of credit card transactions. We regularly monitor the use of credit card or merchant services to ensure that the financial risk related to credit quality and credit concentrations is actively managed. Revenue is recognized upon passage of title and risk of loss to customers when product is shipped from the fulfillment facility. We ship the majority of the coffee segment products via common carrier and invoice our customers for the products. Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point.
 
Sales revenue and a reserve for estimated returns are recorded net of sales tax when product is shipped.
 
Fair Value of Financial Instruments
 
Certain of our financial instruments including cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable, accrued liabilities and deferred revenue are carried at cost, which is considered to be representative of their respective fair values because of the short-term nature of these instruments. Our notes payable and derivative liability are carried at estimated fair value (see Note 7, to the consolidated financial statements.)
 
Derivative Financial Instruments
 
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency.
 
We review the terms of convertible debt and equity instruments we issue to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, we may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
 
Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value (see Note 6, to the consolidated financial statements.)
 
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.
 
 
 
 
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Inventory and Cost of Sales
 
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. We record an inventory reserve for estimated excess and obsolete inventory based upon historical turnover, market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items with a definite life are taken into consideration.
 
Business Combinations
 
We account for business combinations under the acquisition method and allocate the total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on their estimated fair values. When a business combination includes the exchange of our common stock, the value of the common stock is determined using the closing market price as of the date such shares were tendered to the selling parties. The fair values assigned to tangible and identified intangible assets acquired and liabilities assumed are based on management or third party estimates and assumptions that utilize established valuation techniques appropriate for our industry and each acquired business. Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. A liability for contingent consideration, if applicable, is recorded at fair value as of the acquisition date. In determining the fair value of such contingent consideration, management estimates the amount to be paid based on probable outcomes and expectations on financial performance of the related acquired business. The fair value of contingent consideration is reassessed quarterly, with any change in the estimated value charged to operations in the period of the change. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in actual or estimated revenue streams, discount periods, discount rates, and probabilities that contingencies will be met.
 
Long-Lived Assets
 
Long-lived assets, including property and equipment and definite lived intangible assets are carried at cost less accumulated amortization. Costs incurred to renew or extend the life of a long lived asset are reviewed for capitalization. All finite-lived intangible assets are amortized on a straight-line basis, which approximates the pattern in which the estimated economic benefits of the assets are realized, over their estimated useful lives. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
 
Goodwill
 
Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
 
Stock Based Compensation
 
We account for stock based compensation in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Board ("ASC") Topic 718, Compensation – Stock Compensation , which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the vesting period of the equity grant. We account for equity instruments issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
 
Income Taxes
 
We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial statement and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.
 
Results of Operations
 
The comparative financials discussed below show the consolidated financial statements of Youngevity International, Inc. as of and for the years ended December 31, 2016 and 2015.
 
 
 
 
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Year ended December 31, 2016 compared to year ended December 31, 2015
 
Revenues
 
For the year ended December 31, 2016, our revenue increased 3.9% to $162,667,000 as compared to $156,597,000 for the year ended December 31, 2015.  During the year ended December 31, 2016, we derived approximately 89% of our revenue from our direct sales and approximately 11% of our revenue from our commercial coffee sales. Direct selling segment revenues increased by $6,491,000 or 4.7% to $145,418,000 as compared to the year ended December 31, 2015. This increase was primarily attributed to additional revenues of $9,602,000 derived from the Company’s new acquisitions, offset by a decrease of $3,111,000 in revenues from existing business. For the year ended December 31, 2016, commercial coffee segment revenues decreased by $421,000 or 2.4% to $17,249,000 as compared to the year ended December 31, 2015. This decrease was primarily attributed to a decrease in our roaster business due to a strategic shift in the segment’s business model to focus more effort on Company owned brands and forego its lower margin bulk coffee processing business, partially offset by an increase in green coffee sales as a result of increases in green coffee prices.
 
The following table summarizes our revenue in thousands by segment:
 
 
 
For the years ended
December 31,
 
 
Percentage
Segment Revenues
 
2016
 
 
2015
 
 
change
 
Direct selling
  $ 145,418  
  $ 138,927  
    4.7 %
Commercial coffee
    17,249  
    17,670  
    (2.4) %
Total
  $ 162,667  
  $ 156,597  
    3.9 %
 
Cost of Revenues
 
For the year ended December 31, 2016, overall cost of revenues increased approximately 1.4% to $64,530,000 as compared to $63,628,000 for the year ended December 31, 2015. The direct selling segment cost of revenues increased 6.4% as a result of cost related to the increase in sales, an increase in product royalties and labor costs, partially offset by a decrease in shipping costs. For the year ended December 31, 2016, the cost of revenues of the commercial coffee segment decreased 10.8% when compared to the same period last year. This was attributable to decreases in sales related to the roaster business and lower green coffee costs as a result of the Company’s ability to procure green coffee at lower costs from its plantation and other suppliers in Nicaragua.
 
Cost of revenues includes the cost of inventory including green coffee, shipping and handling costs incurred in connection with shipments to customers, direct labor and benefits costs, royalties associated with certain products, transaction merchant fees and depreciation on certain assets.
 
Gross Profit
 
For the year ended December 31, 2016, gross profit increased approximately 5.6% to $98,137,000 as compared to $92,969,000 for the year ended December 31, 2015. Gross profit in the direct selling segment increased by 3.9% to $97,219,000 from $93,613,000 in the prior year as a result of the changes in revenues and costs discussed above. Gross profit as a percentage of revenues in the direct selling segment decreased by approximately 0.5% to 66.9% for the year ended December 31, 2016, compared with the same period last year. Gross profit in the commercial coffee segment increased to $918,000, compared to a loss of $644,000 in the prior year. The improvement in gross profit percentage in the commercial coffee segment was primarily due to improved margins in green coffee business as a result of more favorable pricing structure, the ability to procure coffee at lower costs from the Company’s plantation and other suppliers in Nicaragua, increased K-Cup® revenues in the current year, which carry higher margins and a strategic initiative to focus more on marketing CLR Roasters company-owned brands which yield higher gross margins and the decrease in the certain fixed costs associated with the setup of the K-Cup business when compared to 2015. Gross profit as a percentage of revenues in the commercial coffee segment increased by approximately 9.0% to 5.3% for the year ended December 31, 2016, compared with the same period last year. Overall gross profit as a percentage of revenues increased to 60.3%, compared to 59.4% in the prior year. Below is a table of gross profit percentages by segment:
 
 
For the years
ended December 31,      
 
Percentage 
 
Segment Gross Profit (Loss)
2016
2015
 
change
 
Direct selling
  $ 97,219  
  $ 93,613  
    3.9 %
  Gross Profit % of Revenues
    66.9 %
    67.4 %
    (0.5 )%
Commercial coffee
    918  
    (644 )
    243.5 %
  Gross Profit % of Revenues
    5.3 %
    (3.6 )%
    9.0 %
Total
  $ 98,137  
  $ 92,969  
    5.6 %
  Gross Profit % of Revenues
    60.3 %
    59.4 %
    0.9 %
 
Operating Expenses
 
For the year ended December 31, 2016, our operating expenses increased approximately 9.2% to $95,622,000 as compared to $87,563,000 for the year ended December 31, 2015. Included in operating expense is distributor compensation paid to our independent distributors in the direct selling segment. For the year ended December 31, 2016, distributor compensation increased 6.1% to $67,148,000 from $63,276,000 for the year ended December 31, 2015. This increase was primarily attributable to the increase in revenues. Distributor compensation as a percentage of direct selling revenues increased to 46.2% for the year ended December 31, 2016 as compared to 45.5% for the year ended December 31, 2015. This increase was primarily attributable to added incentive payouts and higher level achievements by distributors.
 
 
 
 
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For the year ended December 31, 2016, the sales and marketing expense increased 26.8% to $10,413,000 from $8,212,000 for the year ended December 31, 2015 primarily due to increases in marketing and customer service staff direct labor and benefits costs, product marketing costs, convention costs and distributor events costs.
 
For the year ended December 31, 2016, the general and administrative expense increased 12.4% to $18,061,000 from $16,075,000 for the year ended December 31, 2015 primarily due to increases in costs related to the international expansion, employee labor and benefits costs, consulting fees, amortization costs, computer and internet related costs, travel costs, offset primarily by a decrease in non-cash expense of $253,000 as compared to last year related to warrant modification expense recognized during the year ended December 31, 2015. In addition, the contingent liability revaluation resulted in a benefit of $1,462,000 for the year ended December 31, 2016 compared to a benefit of $446,000 for the year ended December 31, 2015.
 
Operating Income
 
For the year ended December 31, 2016, operating income decreased approximately 53.5% to $2,515,000 as compared to $5,406,000 for the year ended December 31, 2015. This was primarily due to the increase in sales and marketing costs discussed above. Operating income as a percentage of revenues decreased to 1.5%, for the year ended December 31, 2016 compared to 3.5% for the year ended December 31, 2015.
 
Total Other Expense
 
For the year ended December 31, 2016, total other expense decreased by $2,625,000 to $3,103,000 as compared to $5,728,000 for the year ended December 31, 2015. Total other expense is primarily net interest expense of $4,474,000 and the change in the fair value of warrant derivative of $1,371,000.
 
Net interest expense decreased by $17,000 for the year ended December 31, 2016 to $4,474,000 as compared to $4,491,000 in 2015. Interest expense includes interest payments related to acquisitions and other operating debt, interest payments to investors associated with the 2014 and 2015 Private Placement transactions and related non-cash amortization costs of $1,438,000 and other non-cash costs of $129,000.
 
The Company recorded a non-cash extinguishment loss on debt of $1,198,000 for the year ended December 31, 2015 as a result of the repayment of $5,000,000 in Notes Payable to one of the investors from the January 2015 Private Placement through issuance of a new November 2015 Note Payable. This loss represents the difference between the reacquisition value of the new debt to the holder of the note and the carrying amount of the holder’s extinguished debt (see Note 5, to the consolidated financial statements.)  
 
Change in Fair Value of Warrant Derivative Liability . Various factors are considered in the pricing models we use to value the warrants, including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk free interest rate. Future changes in these factors may have a significant impact on the computed fair value of the warrant liability. As such, we expect future changes in the fair value of the warrants to continue and may vary significantly from year to year (see Note 7, to the consolidated financial statements.)
 
The extinguishment loss on debt and warrant liability revaluations has not had a cash impact on our working capital, liquidity or business operations.
 
Income Taxes 
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. The Company has determined through consideration of all positive and negative evidence that the US deferred tax assets are more likely than not to be realized. The Company does not have a valuation allowance in the US Federal tax jurisdiction. A valuation allowance remains on the state and foreign tax attributes that are likely to expire before realization. The valuation allowance increased approximately $183,000 for the year ended December 31, 2016 and increased approximately $161,000 for the year ended December 31, 2015.We have recognized an income tax benefit of $190,000, which is our estimated federal, state and foreign income tax liability for the year ended December 31, 2016. The current effective tax rate is 32.3% compared to the Federal statutory tax rate of 35.0%.  
 
Net Loss
 
For the year ended December 31, 2016, the Company reported a net loss of $398,000 as compared to a net loss of $1,706,000 for the year ended December 31, 2015. The primary reason for the decrease in net loss when compared to prior year was due to the decrease in income tax provision from $1,384,000 in tax provision in 2015 to a tax benefit of $190,000 in 2016, offset by an increase in net loss before income taxes from $322,000 in 2015 to $588,000 in net loss before income taxes in 2016.
 
 
 
 
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Adjusted EBITDA
 
EBITDA (earnings before interest, income taxes, depreciation and amortization) as adjusted to remove the effect of stock based compensation expense and the non-cash loss on extinguishment of debt and the change in the fair value of the warrant derivative or "Adjusted EBITDA," decreased 26.5% to $6,772,000 for the year ended December 31, 2016 compared to $9,215,000 in the same period for the prior year.
 
Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period changes. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.
 
Adjusted EBITDA is a non-GAAP financial measure.  We calculate adjusted EBITDA by taking net income (loss), and adding back the expenses related to interest, income taxes, depreciation, amortization, stock based compensation expense, change in the fair value of the warrant derivative, non-cash impairment loss and debt extinguishment gain or loss, as each of those elements are calculated in accordance with GAAP.  Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.
 
A reconciliation of our adjusted EBITDA to net loss for the years ended December 31, 2016 and 2015 is included in the table below (in thousands):
 
 
 
Years Ended
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Net loss
  $ (398 )
  $ (1,706 )
Add
       
       
Interest, net
    4,474  
    4,491  
Income taxes
    (190 )
    1,384  
Depreciation
    1,518  
    1,242  
Amortization
    2,344  
    2,112  
EBITDA
    7,748  
    7,523  
Add
       
       
Stock based compensation
    395  
    455  
Change in the fair value of warrant derivative
    (1,371 )
    39  
Extinguishment loss on debt
    -  
    1,198  
Adjusted EBITDA
  $ 6,772  
  $ 9,215  
 
Liquidity and Capital Resources
 
Sources of Liquidity  
 
At December 31, 2016 we had cash and cash equivalents of approximately $869,000 as compared to cash and cash equivalents of $3,875,000 as of December 31, 2015. The decrease in cash was primarily due to inventory purchases, cash for payments of financing activities and cash used for capital expenditures. 
 
Cash Flows 
 
Cash used in operating activities . Net cash used in operating activities for the year ended December 31, 2016 was $161,000 as compared to net cash provided by operating activities of $1,367,000 for the year ended December 31, 2015. Net cash used in operating activities consisted of net loss of $398,000, net non-cash operating activity of $2,030,000 offset by $1,793,000 in changes in operating assets and liabilities.
 
Net non-cash operating expenses included $3,862,000 in depreciation and amortization, $395,000 in stock based compensation expense, $360,000 related to the amortization of deferred financing costs associated with our Private Placements, $1,053,000 related to the amortization of debt discounts, $128,000 related to the amortization of warrant issuance costs and $88,000 in other non-cash items, offset by $1,371,000 related to the change in the fair value of warrant derivative liability, $325,000 related to deferred income taxes, $698,000 in expenses allocated in profit sharing agreement and $1,462,000 related to the change in the fair value of contingent acquisition debt.
 
 
 
 
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Changes in operating assets and liabilities were attributable to decreases in working capital, primarily related to changes in inventory of $3,515,000, changes in accounts receivable of $525,000 of which $522,000 related to an increase in our factoring receivable and an increase of $3,000 from trade related receivables, prepaid expenses and other current assets of $733,000, accrued distributor compensation of $60,000, deferred revenues of $710,000 and income tax receivable of $138,000. Increases in working capital primarily related to changes in accrued expenses and other liabilities of $2,729,000, and accounts payable of $1,159,000.
 
Cash used in investing activities . Net cash used in investing activities for the year ended December 31, 2016 was $1,445,000, as compared to net cash used in investing activities of $3,230,000 for the year ended December 31, 2015. Net cash used in investing activities consisted of purchases of property and equipment, leasehold improvements and cash expenditures related to business acquisitions.   
 
Cash used in financing activities . Net cash used in financing activities was $1,508,000 for the year ended December 31, 2016 as compared to net cash provided by financing activities of $2,792,000 for the year ended December 31, 2015. The decrease in cash provided by financing activities was primarily due to the net proceeds related to the January 2015 Private Placement of approximately $5,080,000 received during the prior year period.
 
Net cash used in financing activities consisted of $833,000 in payments related to the CLR Roasters factoring agreement, $453,000 in payments to reduce notes payable, $773,000 in payments related to contingent acquisition debt, and $36,000 in payments related to our share repurchase program offset by proceeds from the exercise of stock options and warrants, net, of $30,000 and $557,000 in proceeds from capital lease financing net of payments to reduce capital lease obligations.
 
Payments Due by Period
 
The following table summarizes our expected contractual obligations and commitments subsequent to December 31, 2016 (in thousands):
 
 
 
 
 
 
  Current
 
 
Long-Term                          
 
Contractual Obligations*
Total
2017
2018
2019
2020
2021
Thereafter
Operating Leases
  $ 4,578  
  $ 1,138  
  $ 930  
  $ 634  
  $ 557  
  $ 571  
  $ 748  
Capital Leases
    2,678
  984
  972
  604
  90
    28
    -  
Purchase Obligations
    1,164  
    1,164  
    -  
    -  
    -  
    -  
    -  
Convertible Notes Payable, “July 2014 Private Placement”(*)
    4,750  
    -  
    -  
    4,750  
    -  
    -  
    -  
Convertible Notes Payable, “November 2015 Private Placement” (*)
    7,188  
    -  
    7,188  
    -  
    -  
    -  
    -  
Notes Payable, Operating
    4,650  
    220  
    162  
    141  
    143  
    108  
    3,876  
Contingent Acquisition Debt
    8,001  
    628  
    719  
    694  
    814  
    382  
    4,764  
Total
  $ 33,009
  $ 4,134
  $ 9,971
  $ 6,823
  $ 1,604
  $ 1,089
  $ 9,388  
 
(*) The notes issued in the November 2015 and July 2014 Private Placements mature in three and five years, respectively, after their date of issuance unless they are converted into shares of Common Stock prior to maturity.
 
“Operating leases” generally provide that property taxes, insurance, and maintenance expenses are our responsibility. Such expenses are not included in the operating lease amounts that are outlined in the table above.
  
During the third quarter of fiscal year ended December 31, 2014, we completed a private placement and entered into Note Purchase Agreements with seven (7) accredited investors pursuant to which we sold units consisting of five (5) year senior secured convertible Notes in the aggregate principal amount of $4,750,000, that are convertible into shares of our common stock. The Notes are due in September 2019 if the option to convert has not been exercised (see Note 5, to the consolidated financial statements.)
 
 
 
 
-39-
 
 
In November 2015, we completed a private placement and entered into Note Purchase Agreements with three (3) accredited investors pursuant to which we sold senior secured convertible notes in the aggregate principal amount of $7,187,500, that are convertible into shares of Common Stock. The Notes are due in October 2018 if the option to convert has not been exercised (see Note 5, to the consolidated financial statements.)
 
The “Notes Payable, Operating” relates primarily to our note and mortgage on our corporate office property 2400 Boswell building. On March 15, 2013, we acquired 2400 Boswell for approximately $4.6 million dollars.  2400 Boswell LLC is the owner and lessor of the building occupied by us for our corporate office and warehouse in Chula Vista, CA. The purchase was from an immediate family member of our Chief Executive Officer and consisted of approximately $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, payable in equal payments over 5 years and bears interest at 5.00%.  Additionally, we assumed a long-term mortgage of $3,625,000, payable over 25 years and have an initial interest rate of 5.75%. The interest rate is the prime rate plus 2.50%. The lender will adjust the interest rate on the first calendar day of each change period. As of December 31, 2016 the balance on the long-term mortgage was $3,363,000 and the balance on the promissory note was $108,000, both of which are included in notes payable.
  
The “Contingent acquisition debt” relates to contingent liabilities related to business acquisitions. Generally, these liabilities are payments to be made in the future based on a level of revenue derived from the sale of products.  These numbers are estimates and actual numbers could be higher or lower because many of our contingent liabilities relate to payments on sales that have no maximum payment amount. In many of those transactions, we have recorded a liability for contingent consideration as part of the purchase price.  All contingent consideration amounts are based on management’s best estimates utilizing all known information at the time of the calculation.
 
In connection with our 2011 acquisition of FDI, we assumed mortgage guarantee obligations made by FDI on the building previously housing our New Hampshire operations.  The balance of the mortgages is approximately $1,806,000 as of December 31, 2016.
 
Factoring Agreement
 
We have a factoring agreement (“Factoring Agreement”) with Crestmark Bank (“Crestmark”) related to the Company’s accounts receivable resulting from sales of certain products within its commercial coffee segment. Effective May 1, 2016, the Company entered into a third amendment to the factoring agreement (“Agreement”). Under the terms of the Agreement, all new receivables assigned to Crestmark shall be “Client Risk Receivables” and no further credit approvals will be provided by Crestmark and there will be no new credit-approved receivables. The changes to the Agreement include expanding the factoring facility to include borrowings to be advanced against acceptable eligible inventory up to 50% of landed cost of finished goods inventory and meeting certain criteria, not to exceed the lesser of $1,000,000 or 85% of the value of the receivables already advanced with a maximum overall borrowing of $3,000,000. Interest accrues on the outstanding balance and a factoring commission is charged for each invoice factored which is calculated as the greater of $5.00 or 0.75% to 0.875% of the gross invoice amount and is recorded as interest expense. In addition the Company and the Company’s CEO Mr. Wallach have entered into a Guaranty and Security Agreement with Crestmark Bank if in the event that CLR were to default. This Agreement continues in full force and is effective until February 1, 2019.
 
The Company accounts for the sale of receivables under the Factoring Agreement as secured borrowings with a pledge of the subject inventories and receivables as well as all bank deposits as collateral, in accordance with the authoritative guidance for accounting for transfers and servicing of financial assets and extinguishments of liabilities. The caption “Accounts receivable, due from factoring company” on the accompanying consolidated balance sheets in the amount of approximately $1,078,000 and $556,000 as of December 31, 2016 and December 31, 2015, respectively, reflects the related collateralized accounts.
 
The Company's outstanding liability related to the Factoring Agreement was approximately $1,290,000 and $457,000 as of December 31, 2016 and December 31, 2015, respectively, and is included in other current liabilities, net on the consolidated balance sheets.
 
Future Liquidity Needs
 
We believe that current cash balances, future cash provided by operations, and available amounts under our accounts receivable factoring agreement will be sufficient to cover our operating and capital needs in the ordinary course of business for at least the next 12 months.
 
 
 
-40-
Table of Contents
 
 
Though our operations are currently meeting our working capital requirements, if we experience an adverse operating environment or unusual capital expenditure requirements, or if we continue our expansion internationally or through acquisitions, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
 
Off-Balance Sheet Arrangements
 
There were no off-balance sheet arrangements as of December 31, 2016.
 
I tem 7A. Quantitative and Qualitative Disclosures About Market Risk
 
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
 
I tem 8.  Consolidated Financial Statements
 
Index to Consolidated Financial Statements
 
 42
Financial Statements:
 43
 43
 44
 45
 46
 47
 
 
 
 
-41-
 
REPORT OF I N DEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Youngevity International, Inc.
Chula Vista, California
 
We have audited the accompanying consolidated balance sheets of Youngevity International, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Youngevity International, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of its operations and cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ Mayer Hoffman McCann P.C.
 
San Diego, California
March 30, 2017
 
 
 
-42-
 
 
Youngevity Intern a tional, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
 
 
 
As of
 
 
 
December 31,
2016
 
 
December 31,
2015
 
ASSETS
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
869
 
 
$
3,875
 
Accounts receivable, due from factoring company
 
 
1,078
 
 
 
556
 
Trade accounts receivable, net
 
 
1,071
 
 
 
1,068
 
Income tax receivable
 
 
311
 
 
 
173
 
Deferred tax assets, net current
 
 
565
 
 
 
711
 
Inventory
 
 
21,492
 
 
 
17,977
 
Prepaid expenses and other current assets
 
 
3,087
 
 
 
2,412
 
Total current assets
 
 
28,473
 
 
 
26,772
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
14,006
 
 
 
12,699
 
Deferred tax assets, long-term
 
 
2,292
 
 
 
1,821
 
Intangible assets, net
 
 
14,914
 
 
 
13,714
 
Goodwill
 
 
6,323
 
 
 
6,323
 
Total assets
 
$
66,008
 
 
$
61,329
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
8,174
 
 
$
7,015
 
Accrued distributor compensation
 
 
4,163
 
 
 
4,223
 
Accrued expenses
 
 
3,701
 
 
 
3,605
 
Deferred revenues
 
 
1,870
 
 
 
2,580
 
Other current liabilities
 
 
2,389
 
 
 
577
 
Capital lease payable, current portion
 
 
821
 
 
 
111
 
Notes payable, current portion
 
 
219
 
 
 
456
 
Warrant derivative liability
 
 
3,345
 
 
 
4,716
 
Contingent acquisition debt, current portion
 
 
628
 
 
 
264
 
Total current liabilities
 
 
25,310
 
 
 
23,547
 
 
 
 
 
 
 
 
 
 
Capital lease payable, net of current portion
 
 
1,569
 
 
 
294
 
Notes payable, net of current portion
 
 
4,431
 
 
 
4,647
 
Convertible notes payable, net of debt discount
 
 
8,327
 
 
 
6,786
 
Contingent acquisition debt, net of current portion
 
 
7,373
 
 
 
7,174
 
Total liabilities
 
 
47,010
 
 
 
42,448
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies, Note 9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
Convertible Preferred Stock, $0.001 par value: 100,000,000 shares authorized; 161,135 shares issued and outstanding at December 31, 2016 and December 31, 2015
 
 
-
 
 
 
-
 
Common Stock, $0.001 par value: 600,000,000 shares authorized; 392,698,557 and 392,583,015 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively
 
 
393
 
 
 
393
 
Additional paid-in capital
 
 
169,839
 
 
 
169,432
 
Accumulated deficit
 
 
(151,016
)
 
 
(150,618
)
Accumulated other comprehensive loss
 
 
(218
)
 
 
(326
)
 Total stockholders’ equity
 
 
18,998
 
 
 
18,881
 
  Total Liabilities and Stockholders’ Equity
 
$
66,008
 
 
$
61,329
 
 
See accompanying notes.
 
 
 
-43-
 
Youngevity I n ternational, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
 
 
 
Years Ended
December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Revenues
 
$
162,667
 
 
$
156,597
 
Cost of revenues
 
 
64,530
 
 
 
63,628
 
Gross profit
 
 
98,137
 
 
 
92,969
 
Operating expenses
 
 
 
 
 
 
 
 
Distributor compensation
 
 
67,148
 
 
 
63,276
 
Sales and marketing
 
 
10,413
 
 
 
8,212
 
General and administrative
 
 
18,061
 
 
 
16,075
 
Total operating expenses
 
 
95,622
 
 
 
87,563
 
Operating income
 
 
2,515
 
 
 
5,406
 
Interest expense, net
 
 
(4,474
)
 
 
(4,491
)
Extinguishment loss on debt
 
 
-
 
 
 
(1,198
) 
Change in fair value of warrant derivative liability
 
 
1,371
 
 
 
(39
) 
Total other expense
 
 
(3,103
)
 
 
(5,728
)
Loss before income taxes
 
 
(588
) 
 
 
(322
) 
Income tax (benefit) provision
 
 
(190
) 
 
 
1,384
 
Net loss
 
 
(398
) 
 
 
(1,706
) 
Preferred stock dividends
 
 
(12
)
 
 
(12
)
Net loss available to common stockholders
 
$
(410
) 
 
$
(1,718
) 
 
 
 
 
 
 
 
 
 
Net loss per share, basic
 
$
0.00
 
 
$
0.00
 
Net loss per share, diluted
 
$
0.00
 
 
$
0.00
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic
 
 
392,641,735
 
 
 
392,075,608
 
Weighted average shares outstanding, diluted
 
 
392,641,735
 
 
 
392,075,608
 
 
See accompanying notes.
 
 
 
-44-
 
Youngevity Interna t ional, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(In thousands)
 
 
 
Years Ended
December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Net loss
 
$
(398
)
 
$
(1,706
)
Foreign currency translation
 
 
108
 
 
 
(51
)
Total other comprehensive income (loss)
 
 
108
 
 
 
(51
)
Comprehensive loss
 
$
(290
)
 
$
(1,757
)
 
See accompanying notes.
 
 
 
-45-
 
Youngevity I n ternational, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
 
 
 
  Preferred Stock    
 
 
  Common Stock         
 
 
  Additional Paid-in
 
  Accumulated Other Comprehensive
 
  Accumulated
 
 
  Total
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
Capital
  Income (loss)
 
  Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance at December 31, 2014
    161,135  
  $ -  
    390,301,312  
  $ 390  
  $ 167,386  
  $ (275 )
  $ (148,912 )
  $ 18,589  
Net loss
    -  
    -  
    -  
    -  
    -  
    -  
    (1,706 )
    (1,706 )
Foreign currency
       
       
       
       
       
       
       
       
translation adjustment
    -  
    -  
    -  
    -  
    -  
    (51 )
    -  
    (51 )
Beneficial conversion feature of convertible notes payable, net of tax
    -  
    -  
    -  
    -  
    402  
    -  
    -  
    402  
Issuance of common stock pursuant to Notes Payable
    -  
    -  
    2,450,000  
    2  
    585  
    -  
    -  
    587  
Issuance of warrants pursuant to Convertible Notes Payable debt financing
    -  
    -  
    -  
    -  
    384  
    -  
    -  
    384  
Issuance of common stock pursuant to the exercise of warrants
    -  
    -  
    806,250  
    1  
    201  
    -  
    -  
    202  
Issuance of common stock pursuant to the exercise of stock options
    -  
    -  
    369,675  
    -  
    70  
    -  
    -  
    70  
Repurchase of common stock
    -  
    -  
    (1,344,222 )
    -  
    (426 )
    -  
    -  
    (426 )
Dividends on preferred stock
    -  
    -  
    -  
    -  
    (12 )
    -  
    -  
    (12 )
Warrant modification expense
    -  
    -  
    -  
    -  
    779  
    -  
    -  
    779  
Stock based compensation expense
    -  
    -  
    -  
    -  
    455  
    -  
    -  
    455  
 
       
       
       
       
       
       
       
       
Balance at December 31, 2015
    161,135  
  $ -  
    392,583,015  
  $ 393  
  $ 169,432  
  $ (326 )
  $ (150,618 )
  $ 18,881  
 
       
       
       
       
       
       
       
       
Net loss
    -  
    -  
    -  
    -  
    -  
    -  
    (398 )
    (398 )
Foreign currency translation adjustment
    -  
    -  
    -  
    -  
    -  
    108  
    -  
    108  
Issuance of common stock pursuant to the exercise of warrants
    -  
    -  
    39,250  
    -  
    10  
    -  
    -  
    10  
Issuance of common stock pursuant to the exercise of stock options
    -  
    -  
    102,000  
    -  
    20  
    -  
    -  
    20  
Issuance of common stock for services
    -  
    -  
    100,000  
    -  
    30  
    -  
    -  
    30  
Repurchase of common stock
    -  
    -  
    (125,708 )
    -  
    (36 )
    -  
    -  
    (36 )
Dividends on preferred stock
    -  
    -  
    -  
    -  
    (12 )
    -  
    -  
    (12 )
Stock based compensation expense
    -  
    -  
    -  
    -  
    395  
    -  
    -  
    395  
 
       
       
       
       
       
       
       
       
Balance at December 31, 2016
    161,135  
  $ -  
    392,698,557  
  $ 393  
  $ 169,839  
  $ (218 )
  $ (151,016 )
  $ 18,998  
 
See accompanying notes.
 
 
 
-46-
 
Youngevity International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
  (In thousands, except share amounts)
 
 
 
Years Ended
December 31,
 
 
 
2016
 
 
2015
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net loss
 
$
(398
)
 
$
(1,706
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
3,862
 
 
 
3,354
 
Stock based compensation expense
 
 
395
 
 
 
455
 
Warrant modification expense
 
 
-
 
 
 
253
 
Amortization of deferred financing costs
 
 
360
 
 
 
899
 
Amortization of prepaid advisory fees
 
 
58
 
 
 
20
 
Stock issuance for services
 
 
30
 
 
 
-
 
Change in fair value of warrant derivative liability
 
 
(1,371
)
 
 
39
 
Amortization of debt discount
 
 
1,053
 
 
 
967
 
Amortization of warrant issuance costs
 
 
128
 
 
 
21
 
Expenses allocated in profit sharing agreement
 
 
(698
)
 
 
(528
)
Change in fair value of contingent acquisition debt
 
 
(1,462
)
 
 
(446
)
Extinguishment loss on debt
 
 
-
 
 
 
1,198
 
Deferred income taxes
 
 
(325
)
 
 
1,409
 
Changes in operating assets and liabilities, net of effect from business combinations:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(525
)
 
 
168
 
Inventory
 
 
(3,515
)
 
 
(6,194
)
Prepaid expenses and other current assets
 
 
(733
)
 
 
885
 
Accounts payable
 
 
1,159
 
 
 
1,608
 
Accrued distributor compensation
 
 
(60
)
 
 
46
 
Deferred revenues
 
 
(710
)
 
 
(2,495
)
Accrued expenses and other liabilities
 
 
2,729
 
 
 
1,278
 
Income taxes receivable
 
 
(138
)
 
 
136
 
Net Cash (Used In) Provided by Operating Activities
 
 
(161
)
 
 
1,367
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired
 
 
(48
)
 
 
(32
)
Purchases of property and equipment
 
 
(1,397
)
 
 
(3,198
)
Net Cash Used in Investing Activities
 
 
(1,445
)
 
 
(3,230
)
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Proceeds from issuance of secured promissory notes and common stock, net of offering costs
 
 
-
 
 
 
5,080
 
Proceeds from issuance of convertible notes payable, net
 
 
-
 
 
 
2,383
 
Proceeds from the exercise of stock options and warrants, net
 
 
30
 
 
 
272
 
(Payments) proceeds to factoring company
 
 
(833
)
 
 
82
 
Payments of notes payable, net
 
 
(453
)
 
 
(1,214
)
Payments of contingent acquisition debt
 
 
(773
)
 
 
(3,338
)
Proceeds (payments) of capital leases
 
 
557
 
 
 
(47
)
Repurchase of common stock
 
 
(36
)
 
 
(426
)
Net Cash (Used In) Provided by Financing Activities
 
 
(1,508
)
 
 
2,792
 
Foreign Currency Effect on Cash and Cash Equivalents
 
 
108
 
 
 
(51
)
Net (decrease) increase in cash and cash equivalents
 
 
(3,006
)
 
 
878
 
Cash and Cash Equivalents, Beginning of Period
 
 
3,875
 
 
 
2,997
 
Cash and Cash Equivalents, End of Period
 
$
869
 
 
$
3,875
 
 
 
 
 
 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
 
Interest
 
$
2,966
 
 
$
2,127
 
Income taxes
 
$
181
 
 
$
-
 
 
 
 
 
 
 
 
 
 
Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
 
 
 
 
 
Purchases of property and equipment funded by capital leases and accounts payable agreements
 
$
1,582
 
 
$
429
 
Common stock issued in connection with financing
 
$
-
 
 
$
587
 
Acquisitions of net assets in exchange for contingent acquisition debt (see Note 2 for non-cash activity)
 
$
3,604
 
 
$
1,136
 
 
During 2015, the Company issued certain convertible notes payable that included warrants. The related beneficial conversion feature, valued at approximately $15,000 was classified as an equity instrument and recorded as a discount to the carrying value of the related debt. The warrants, valued at approximately $1,491,000, were recognized as a derivative liability. In addition, the Company issued warrants to the placement agent, valued at approximately $384,000 was classified as an equity instrument and recorded as issuance costs.
 
See accompanying notes.
 
 
 
-47-
 
  Youngevity International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
 
Note 1. Basis of Presentation and Description of Business
 
Nature of Business
 
Youngevity International, Inc. (the “Company”), founded in 1996, develops and distributes health and nutrition related products through its global independent direct selling network, also known as multi-level marketing, and sells coffee products to commercial customers.  The Company operates in two business segments, its direct selling segment where products are offered through a global distribution network of preferred customers and distributors and its commercial coffee segment where products are sold directly to businesses. In the following text, the terms “we,” “our,” and “us” may refer, as the context requires, to the Company or collectively to the Company and its subsidiaries.
 
The Company operates through the following domestic wholly-owned subsidiaries: AL Global Corporation, which operates our direct selling networks, CLR Roasters, LLC (“CLR”), our commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC, Youngevity Global LLC and the wholly-owned foreign subsidiaries Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles Plantation Family Group S.A., located in Nicaragua, Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd., Youngevity Russia, LLC, Youngevity Colombia S.A.S, Youngevity International Singapore Pte. Ltd., Mialisia Canada, Inc., and Legacy for Life Limited (Hong Kong).
 
The Company also operates subsidiary branches of Youngevity Global LLC in the Philippines and Taiwan.
 
Summary of Significant Accounting Policies
 
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
 
Basis of Presentation
 
The Company consolidates all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.    
 
Certain reclassifications have been made to conform to the current year presentations including the Company’s adoption of Accounting Standards Update (“ASU”) 2015-03 and ASU 2015-15, pertaining to the presentation of debt issuance costs with retrospective application effective January 1, 2016. This resulted in a reclassification from prepaid expenses and other assets to convertible notes payable, net of debt discount . Refer below to “Recently Issued Accounting Pronouncements” below and Note 5 to the consolidated financial statements for further details. These reclassifications did not affect revenue, total costs and expenses, income (loss) from operations, or net income (loss). The adoption of ASU No. 2015-03 resulted in a reclassification of unamortized debt issuance costs of $1,456,000 from an asset to a liability classification on the Company’s consolidated financial statements as of December 31, 2015.
 
Segment Information
 
The Company has two reporting segments: direct selling and commercial coffee. The direct selling segment develops and distributes health and wellness products through its global independent direct selling network also known as multi-level marketing. The commercial coffee segment is a coffee roasting and distribution company specializing in gourmet coffee. The determination that the Company has two reportable segments is based upon the guidance set forth in Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.” During the twelve months ended December 31, 2016 and 2015, we derived approximately 89% of our revenue from our direct sales segment and approximately 11% of our revenue from our commercial coffee sales segment, respectively.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes, and related valuation allowances, fair value of derivative liabilities, uncertain tax positions, loss contingencies, fair value of options granted under our stock based compensation plan, fair value of assets and liabilities acquired in business combinations, capital leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, value of contingent acquisition debt, inventory obsolescence, and sales returns.  
 
 
 
-48-
 
Actual results may differ from previously estimated amounts and such differences may be material to the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected prospectively in the period they occur.
 
Liquidity
 
We believe that current cash balances, future cash provided by operations, and available amounts under our accounts receivable factoring agreement will be sufficient to cover our operating and capital needs in the ordinary course of business for at least the next 12 months as of March 30, 2017.
 
Though our operations are currently meeting our working capital requirements, if we experience an adverse operating environment or unusual capital expenditure requirements, or if we continue our expansion internationally or through acquisitions, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
 
Cash and Cash Equivalents
 
The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents.
 
Derivative Financial Instruments
 
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency.
 
The Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
 
Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
 
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
 
Accounts Receivable
 
Accounts receivable are recorded net of an allowance for doubtful accounts. Accounts receivable are considered delinquent when the due date on the invoice has passed. The Company records its allowance for doubtful accounts based upon its assessment of various factors including past experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay. Accounts receivable are written off against the allowance for doubtful accounts when all collection efforts by the Company have been unsuccessful. Certain accounts receivable are financed as part of a factoring agreement. During the fourth quarter of fiscal 2016, the Company recorded a $10,000 allowance towards outstanding receivables associated with CLR. There was no allowance for doubtful accounts recorded as of December 31, 2015.
 
Inventory and Cost of Revenues
 
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. The Company records an inventory reserve for estimated excess and obsolete inventory based upon historical turnover, market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items with a definite life are taken into consideration.
 
Inventories consist of the following (in thousands):
 
 
December 31,
 
 
 
2016
 
 
2015
 
Finished goods
 
$
11,550
 
 
$
9,893
 
Raw materials
 
 
11,006
 
 
 
8,970
 
Total inventory 
 
 
22,556
 
 
 
18,863
 
Reserve for excess and obsolete
 
 
(1,064
)
 
 
(886
)
Inventory, net
 
$
21,492
 
 
$
17,977
 
 
 
 
 
-49-
 
A summary of the reserve for obsolete and excess inventory is as follows (in thousands):
 
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Balance as of December 31, 2015
 
$
(886
)
 
$
(478
)
Addition to provision
 
 
(1,564
)
 
 
(1,114
)
Write-off of inventory
 
 
1,386
 
 
 
706
 
Balance as of December 31, 2016
 
$
(1,064
)
 
$
(886
)
 
Cost of revenues includes the cost of inventory, shipping and handling costs, royalties associated with certain products, transaction banking costs, warehouse labor costs and depreciation on certain assets.
 
Deferred Issuance Costs
 
Deferred issuance costs and debt discounts of approximately $3,611,000 and $5,152,000, as of December 31, 2016 and 2015, respectively, associated with our 2015 and 2014 Private Placement transactions are included with convertible notes payable on the Company's consolidated balance sheets.  Deferred issuance costs related to our offerings are amortized over the life of the notes and are amortized as issuance costs to interest expense. See Note 5, below.
 
Warrant Issuance Costs
 
As of December 31, 2016 and 2015, warrant issuance costs associated with our November 2015 Private Placement include the fair value of the warrants issues of approximately $235,000 and $384,000 respectively, and is included with convertible notes payable, net of debt discounts on the Company's consolidated balance sheets. The warrant issuance costs related to this offering are being amortized over the life of the convertible notes and are amortized as issuance costs to interest expense. See note 5, below.
 
Plantation Costs
 
The Company’s commercial coffee segment CLR includes the results of the Siles Plantation Family Group (“Siles”), which is a 500 acre coffee plantation and a dry-processing facility located on 26 acres both located in Matagalpa, Nicaragua. Siles is a wholly-owned subsidiary of CLR, and the results of CLR include the depreciation and amortization of capitalized costs, development and maintenance and harvesting costs of Siles.  In accordance with US generally accepted accounting principles (“GAAP”), plantation maintenance and harvesting costs for commercially producing coffee farms are charged against earnings when sold. Deferred harvest costs accumulate throughout the year, and are expensed over the remainder of the year as the coffee is sold. The difference between actual harvest costs incurred and the amount of harvest costs recognized as expense is recorded as either an increase or decrease in deferred harvest costs, which is reported as an asset and included with prepaid expenses and other current assets in the consolidated balance sheets. Once the harvest is complete, the harvest cost is then recognized as the inventory value.
 
Costs associated with the 2017 and 2016 harvest as of December 31, 2016 and 2015 total approximately $452,000 and $350,000, respectively and are included in prepaid expenses and other current assets as deferred harvest costs on the Company’s consolidated balance sheet.
 
Inventory related to our previously harvested coffee in Nicaragua as of December 31, 2016 is $112,000 and as of December 31, 2015 was $192,000.
 
Property and Equipment
 
Property and equipment are recorded at historical cost. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over the estimated useful lives of the related assets. The straight-line method of depreciation and amortization is followed for financial statement purposes. Leasehold improvements are amortized over the shorter of the life of the respective lease or the useful life of the improvements. Estimated service lives range from 3 to 39 years. When such assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in operations in the period of disposal. The cost of normal maintenance and repairs is charged to expense as incurred. Significant expenditures that increase the useful life of an asset are capitalized and depreciated over the estimated useful life of the asset.
 
Coffee trees, land improvements and equipment specifically related to the plantations are stated at cost, net of accumulated depreciation.  Depreciation of coffee trees and other equipment is reported on a straight-line basis over the estimated useful lives of the assets (25 years for coffee trees, between 5 and 15 years for equipment and land improvements, respectively). 
 
Property and equipment are considered long-lived assets and are evaluated for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. Management has determined that no impairment of its property and equipment occurred as of December 31, 2016 or 2015.
 
 
 
 
-50-
 
Property and equipment consist of the following (in thousands):
 
 
December 31,
 
 
 
2016
 
 
2015
 
Building
  $ 3,873  
  $ 2,930  
Leasehold improvements
    2,532  
    2,302  
Land
    2,544  
    2,544  
Land improvements
    602  
    602  
Producing coffee trees
    553  
    553  
Manufacturing equipment
    4,570
    4,344  
Furniture and other equipment
    1,580  
    1,417  
Computer software
    1,236  
    1,100  
Computer equipment
    699  
    663  
Vehicles
    103  
    103  
Construction in process 
    1,859  
    799  
 
    20,151  
    17,357  
Accumulated depreciation
    (6,145 )
    (4,658 )
Total property and equipment
  $ 14,006  
  $ 12,699  
 
Depreciation expense totaled approximately $1,518,000 and $1,242,000 for the years ended December 31, 2016 and 2015, respectively.
 
Business Combinations
 
The Company accounts for business combinations under the acquisition method and allocates the total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on their estimated fair values. When a business combination includes the exchange of the Company’s common stock, the value of the common stock is determined using the closing market price as of the date such shares were tendered to the selling parties. The fair values assigned to tangible and identified intangible assets acquired and liabilities assumed are based on management or third-party estimates and assumptions that utilize established valuation techniques appropriate for the Company’s industry and each acquired business. Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. A liability for contingent consideration, if applicable, is recorded at fair value as of the acquisition date. In determining the fair value of such contingent consideration, management estimates the amount to be paid based on probable outcomes and expectations on financial performance of the related acquired business. The fair value of contingent consideration is reassessed quarterly, with any change in the estimated value charged to operations in the period of the change. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in actual or estimated revenue streams, discount periods, discount rates and probabilities that contingencies will be met.
 
Intangible Assets
 
Intangible assets are comprised of distributor organizations, trademarks and tradenames, customer relationships and internally developed software.  The Company's acquired intangible assets, which are subject to amortization over their estimated useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset exceeds its fair value.
 
Intangible assets consist of the following (in thousands):
 
 
 
December 31, 2016
 
 
December 31, 2015
 
 
 
Cost
 
 
Accumulated
Amortization
 
 
Net
 
 
Cost
 
 
Accumulated
Amortization
 
 
Net
 
Distributor organizations
 
$
12,930
 
 
$
7,162
 
 
$
5,768
 
 
$
11,173
 
 
$
6,086
 
 
$
5,087
 
Trademarks and tradenames
 
 
5,394
 
 
 
815
 
 
 
4,579
 
 
 
4,666
 
 
 
537
 
 
 
4,129
 
Customer relationships
 
 
7,846
 
 
 
3,642
 
 
 
4,204
 
 
 
6,787
 
 
 
2,751
 
 
 
4,036
 
Internally developed software
 
 
720
 
 
 
357
 
 
 
363
 
 
 
720
 
 
 
258
 
 
 
462
 
Intangible assets
 
$
26,890
 
 
$
11,976
 
 
$
14,914
 
 
$
23,346
 
 
$
9,632
 
 
$
13,714
 
 
Amortization expense related to intangible assets was approximately $2,344,000 and $2,112,000 for the years ended December 31, 2016 and 2015, respectively.
 
 
 
 
 
-51-
 
 
As of December 31, 2016, future expected amortization expense related to definite lived intangible assets for the next five years is as follows (in thousands):
 
Years ending December 31,
 
2017
 
$
2,471
 
2018
 
 
2,096
 
2019
 
 
1,502
 
2020
 
 
1,413
 
2021
 
 
1,336
 
 
As of December 31, 2016, the weighted-average remaining amortization period for intangibles assets was approximately 5.18 years.
 
Trade names, which do not have legal, regulatory, contractual, competitive, economic, or other factors that limit the useful lives are considered indefinite lived assets and are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Approximately $2,267,000 in trademarks from business combinations have been identified as having indefinite lives.
 
The Company has determined that no impairment occurred for its definite and indefinite lived intangible assets for the years ended December 31, 2016 and 2015.
 
Goodwill
 
Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles — Goodwill and Other”, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company conducts annual reviews for goodwill and indefinite-lived intangible assets in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable.
 
The Company first assesses qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that goodwill is impaired. After considering the totality of events and circumstances, the Company determines whether it is more likely than not that goodwill is not impaired.  If impairment is indicated, then the Company conducts the two-step impairment testing process. The first step compares the Company’s fair value to its net book value. If the fair value is less than the net book value, the second step of the test compares the implied fair value of the Company’s goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss equal to that excess amount. The testing is generally performed at the “reporting unit” level. A reporting unit is the operating segment, or a business one level below that operating segment (referred to as a component) if discrete financial information is prepared and regularly reviewed by management at the component level. The Company has determined that its reporting units for goodwill impairment testing are the Company’s reportable segments. As such, the Company analyzed its goodwill balances separately for the commercial coffee reporting unit and the direct selling reporting unit. The goodwill balance as of December 31, 2016 and December 31, 2015 was $6,323,000.
 
The Company has determined that no impairment of its goodwill occurred for the years ended December 31, 2016 and 2015.
 
Goodwill activity for the years ended December 31, 2016 and 2015 by reportable segment consists of the following (in thousands):
 
 
 
Direct selling
 
 
Commercial coffee
 
 
Total
 
Balance at December 31, 2014
 
$
3,009
 
 
$
3,314
 
 
$
6,323
 
    Goodwill recognized
 
 
-
 
 
 
-
 
 
 
-
 
    Goodwill impaired
 
 
-
 
 
 
-
 
 
 
-
 
Balance at December 31, 2015
 
$
3,009
 
 
$
3,314
 
 
$
6,323
 
    Goodwill recognized
 
 
-
 
 
 
-
 
 
 
-
 
    Goodwill impaired
 
 
-
 
 
 
-
 
 
 
-
 
Balance at December 31, 2016
 
$
3,009
 
 
$
3,314
 
 
$
6,323
 
 
Revenue Recognition
 
The Company recognizes revenue from product sales when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. The Company ships the majority of its direct selling segment products directly to the distributors via UPS or USPS and receives substantially all payments for these sales in the form of credit card transactions. The Company regularly monitors its use of credit card or merchant services to ensure that its financial risk related to credit quality and credit concentrations is actively managed. Revenue is recognized upon passage of title and risk of loss to customers when product is shipped from the fulfillment facility. The Company ships the majority of its coffee segment products via common carrier and invoices its customer for the products. Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point.
 
 
 
 
-52-
 
 
The Company also charges fees to become a distributor, and earn a position in the network genealogy, which are recognized as revenue in the period received. Our distributors are required to pay a one-time enrollment fee and receive a welcome kit specific to that country region that consists of forms, policy and procedures, selling aids, and access to our distributor website and a genealogy position with no down line distributors.
 
Sales revenue and a reserve for estimated returns are recorded net of sales tax when product is shipped.
 
Deferred Revenues and Costs
 
Deferred revenues relate primarily to the Heritage Makers product line and represent the Company’s obligation for points purchased by customers that have not yet been redeemed for product. Cash received for points sold is recorded as deferred revenue. Revenue is recognized when customers redeem the points and the product is shipped. As of December 31, 2016 and December 31, 2015, the balance in deferred revenues was approximately $1,870,000 and $2,580,000 respectively, of which the portion attributable to Heritage Makers was approximately $1,662,000 and $2,485,000, respectively. The remaining balance of approximately $208,000 and $95,000 as of December 31, 2016 and 2015, related primarily to the Company’s 2017 and 2016 conventions whereby attendees pre-enroll in the events and the Company does not recognize this revenue until the conventions occur, respectively.
 
Deferred costs relate to Heritage Makers prepaid commissions that are recognized in expense at the time the related revenue is recognized. As of December 31, 2016 and 2015, the balance in deferred costs was approximately $415,000 and $967,000 respectively, and was included in prepaid expenses and current assets.
 
Product Return Policy
 
All products, except food products and commercial coffee products are subject to a full refund within the first 30 days of receipt by the customer, subject to an advance return authorization procedure. Returned product must be in unopened resalable condition. Product returns as a percentage of our net sales have been approximately 1% of our monthly net sales over the last two years. Commercial coffee products are returnable only if defective.
 
Shipping and Handling
 
Shipping and handling costs associated with inbound freight and freight to customers, including independent distributors, are included in cost of sales. Shipping and handling fees charged to customers are included in sales. Shipping expense was approximately $9,927,000 and $10,394,000 for the years ended December 31, 2016 and 2015, respectively.
 
Distributor Compensation
 
In the direct selling segment, the Company utilizes a network of independent distributors, each of whom has signed an agreement with the Company, enabling them to purchase products at wholesale prices, market products to customers, enroll new distributors for their down-line and earn compensation on product purchases made by those down-line distributors and customers.
 
The payments made and stock options issued under the compensation plans are the only form of compensation paid to the distributors. Each product has a point value, which may or may not correlate to the wholesale selling price of a product. A distributor must qualify each month to participate in the compensation plan by making a specified amount of product purchases, achieving specified point levels. Once qualified, the distributor will receive payments based on a percentage of the point value of products sold by the distributor’s down-line. The payment percentage varies depending on the qualification level of the distributor and the number of levels of down-line distributors. There are also additional incentives paid upon achieving predefined activity and or down-line point value levels. There can be multiple levels of independent distributors earning incentives from the sales efforts of a single distributor. Due to the multi-layer independent sales approach, distributor incentives are a significant component of the Company’s cost structure. The Company accrues all distributor compensation expense in the month earned and pays the compensation the following month.
 
Earnings Per Share
 
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock method. Dilutive common share equivalents are comprised of in-the-money stock options, warrants and convertible preferred stock, based on the average stock price for each period using the treasury stock method. Since the Company incurred a loss for the year ended December 31, 2016 and 2015, therefore 105,647,443 and 99,625,809 common share equivalents including potential convertible shares of common stock associated with the Company's convertible notes, were not included in the weighted-average calculations for each respective year since their effect would have been anti-dilutive.
 
 
 
 
-53-
 
 
Foreign Currency Translation
 
The financial position and results of operations of the Company’s foreign subsidiaries are measured using each foreign subsidiary’s local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments. Translation gains or losses resulting from transactions in currencies other than the respective entities functional currency are included in the determination of income and are not considered significant to the Company for 2016 and 2015.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) consists of net gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net income (loss). For the Company, the only items are the foreign currency translation and net income (loss).
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC Topic 740, "Income Taxes," under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial statement and tax basis of assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.
 
The Company is subject to income taxes in the United States and certain foreign jurisdictions. The calculation of the Company’s tax provision involves the application of complex tax laws and requires significant judgment and estimates. The Company evaluates the realizability of its deferred tax assets for each jurisdiction in which it operates at each reporting date and establishes a valuation allowance when it is more likely than not that all or a portion of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. The Company considers all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that deferred tax assets are not more likely than not realizable, the Company will establish a valuation allowance.
 
The Company applies ASC Topic 740 “Accounting for Uncertainty in Income Taxes” recognized in its financial statements. ASC 740 requires that all tax positions be evaluated using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as adjustments to income taxes payable or receivable, or adjustments to deferred taxes, or both. The Company believes that its accruals for uncertain tax positions are adequate for all open audit years based on its assessment of many factors including past experience and interpretation of tax law. To the extent that new information becomes available, which causes the Company to change its judgment about the adequacy of its accruals for uncertain tax positions, such changes will impact income tax expense in the period such determination is made. The Company’s policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
 
Stock Based Compensation
 
The Company accounts for stock based compensation in accordance with ASC Topic 718, “ Compensation – Stock Compensation,” which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the vesting period of the equity grant.
 
The Company accounts for equity instruments issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value, determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
 
Other Income (Expense)
 
We record interest income, interest expense, and change in derivative liabilities, as well as other non-operating transactions, as other income (expense) on our consolidated statements of operations.
 
 
 
 
-54-
 
 
Recently Issued Accounting Pronouncements
 
In October 2016, the FASB issued Accounting Standard Update ("ASU") 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. This standard amends the guidance issued with ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis in order to make it less likely that a single decision maker would individually meet the characteristics to be the primary beneficiary of a Variable Interest Entity ("VIE"). When a decision maker or service provider considers indirect interests held through related parties under common control, they perform two steps. The second step was amended with this ASU to say that the decision maker should consider interests held by these related parties on a proportionate basis when determining the primary beneficiary of the VIE rather than in their entirety as was called for in the previous guidance. This ASU will be effective for fiscal years beginning after December 15, 2016, and early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this ASU on our financial position and results of operations.
 
In February 2016, the FASB issued ASU 2016-02, Leases   (Topic 842). The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We will adopt the standard no later than July 1, 2019. The Company is currently assessing the impact that the new standard will have on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases. The Company does not believe the adoption of the new standard will have a significant impact on our consolidated financial statements.
 
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost s. This ASU more closely aligns the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs be presented as a direct deduction from the carrying amount of the related debt. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This guidance has been applied on a retrospective basis on the Company’s consolidated financial statements as of December 31, 2015. 
 
In August 2014, the FASB issued ASU No. 2014-15 Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern . The new standard requires management to perform interim and annual assessments of an entity’s ability to continue to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company evaluated the impact of this new standard and concluded as of December 31, 2016 that the adoption of this new standard did not have a significant impact on our consolidated financial statements.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for us in the first quarter of fiscal 2018 and we do not plan to early adopt. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
 
Note 2.  Acquisitions and Business Combinations
 
During 2016 and 2015, the Company entered into eight acquisitions, which are detailed below. The acquisitions were conducted in an effort to expand the Company’s distributor network, enhance and expand its product portfolio, and diversify its product mix.  As such, the major purpose for all of the business combinations was to increase revenue and profitability.  The acquisitions were structured as asset purchases which resulted in the recognition of certain intangible assets. 
 
2016 Acquisitions
 
Legacy for Life, LLC
 
On August 18, 2016, with an effective date of September 1, 2016 the Company entered into an agreement to acquire certain assets of Legacy for Life, LLC, an Oklahoma based direct sales company and entered into an agreement to acquire the equity of two wholly owned subsidiaries of Legacy for Life, LLC; Legacy for Life Taiwan and Legacy for Life Limited (Hong Kong) collectively referred to as (“Legacy for Life”).
 
Legacy for Life is a science-based direct seller of i26, a product made from the IgY Max formula or hyperimmune whole dried egg, which is the key ingredient in Legacy for Life products. Additionally, the Company has entered into an Ingredient Supply Agreement to market i26 worldwide. IgY Max promotes healthy gut flora and healthy digestion and was created by exposing a specially selected flock of chickens to natural elements from the human world, whereby the chickens develop immunity to these elements. In a highly patented process, these special eggs are harvested as a whole food and are processed as a whole food into i26 egg powder, an all-natural product. Nothing is added to the egg nor does any chemical extraction take place.
 
 
 
 
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As a result of this acquisition, the Company’s distributors and customers have access to the unique line of the Legacy for Life products and the Legacy for Life distributors and customers have gained access to products offered by the Company. The Company has agreed to purchase certain inventories and assume certain liabilities. The Company is obligated to make monthly payments based on a percentage of the Legacy for Life distributor revenue derived from sales of the Company’s products and a percentage of royalty revenue derived from sales of the Legacy for Life products until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid to Legacy for Life aggregate cash payments of Legacy for Life distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price.
 
The acquisition of Legacy for Life was accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed by the Company were recognized at their estimated fair values as of the acquisition date. The fair values of the acquired assets have not been finalized pending further information that may impact the valuation of certain assets or liabilities. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
The contingent consideration’s estimated fair value at the date of acquisition was $825,000 as determined by management using a discounted cash flow methodology. In addition the Company paid $221,000 for the net assets of the Taiwan and Hong Kong entities and certain inventories from Legacy for Life.
 
The preliminary purchase price allocation for the acquisition of Legacy for Life (in thousands) is as follows:
 
Cash paid for the equity in Legacy for Life Taiwan and Legacy for Life Limited (Hong Kong)
  $ 26  
Cash paid for inventory
    195  
Total cash consideration
    221  
Trademarks and trade name
    185  
Customer-related intangible
    250  
Distributor organization
    390  
Total intangible assets acquired, non-cash
    825  
Total purchase price
  $ 1,046  
 
The preliminary fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The Company expects to finalize the valuation within one (1) year from the acquisition date.
 
The revenue impact from the Legacy for Life acquisition, included in the consolidated statement of operations for the year ended December 31, 2016 was approximately $507,000.
 
The pro-forma effect assuming the business combination with Legacy for Life discussed above had occurred at the beginning of the current period is not presented as the information was not available.
 
Nature’s Pearl Corporation
 
On August 1, 2016, the Company entered into an agreement to acquire certain assets of Nature’s Pearl Corporation, (“Nature’s Pearl”) with an effective date of September 1, 2016. Nature’s Pearl is a direct sales company that produces nutritional supplements and skin and personal care products using the muscadine grape grown in the southeastern region of the United States that are deemed to be rich in antioxidants. As a result of this acquisition, the Company’s distributors and customers have access to the unique line of Nature’s Pearl products and Nature’s Pearl distributors and customers have gained access to products offered by the Company. The Company is obligated to make monthly payments based on a percentage of Nature’s Pearl distributor revenue derived from sales of the Company’s products and a percentage of royalty revenue derived from sales of Nature’s Pearl products until the earlier of the date that is ten (10) years from the closing date or such time as the Company has paid to Nature’s Pearl aggregate cash payments of Nature’s Pearl distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price. The Company paid approximately $200,000 for certain inventories, which payment was applied against the maximum aggregate purchase price.
 
The contingent consideration’s estimated fair value of the acquisition was $1,475,000 and was determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
 
 
 
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The assets acquired were recorded at estimated fair values and have not been finalized pending further information that may impact the valuation of certain assets or liabilities. The preliminary purchase price allocation for Nature’s Pearl is as follows (in thousands):
 
Distributor organization
  $ 825  
Customer-related intangible
    400  
Trademarks and trade name
    250  
Total purchase price
  $ 1,475  
 
The preliminary fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The Company expects to finalize the valuation within one (1) year from the acquisition date.
 
The revenue impact from the Nature’s Pearl acquisition, included in the consolidated statement of operations for the year ended December 31, 2016 was approximately $1,488,000.
 
The pro-forma effect assuming the business combination with Nature’s Pearl discussed above had occurred at the beginning of the current period is not presented as the information was not available.
  
Renew Interest, LLC (SOZO Global, Inc.)
 
On July 29, 2016, the Company acquired certain assets of Renew Interest, LLC (“Renew”) formerly owned by SOZO Global, Inc. (“SOZO”), a direct sales company that produces nutritional supplements, skin and personal care products, weight loss products and coffee products. The SOZO brand of products contains CoffeeBerry a fruit extract known for its high level of antioxidant properties. As a result of this business combination, the Company’s distributors and customers have access to the unique line of the Renew products and Renew distributors and customers have gained access to products offered by the Company. The Company is obligated to make monthly payments based on a percentage of Renew distributor revenue derived from sales of the Company’s products and royalty payments until the earlier of the date that is twelve (12) years from the closing date or such time as the Company agreed to pay to Renew, aggregate cash payments of Renew distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price. The Company agreed to pay approximately $300,000 for certain inventories and assumed liabilities, which payment was applied to the maximum aggregate purchase price. The Company also received inventories on a consignment basis.
 
The contingent consideration’s estimated fair value of acquisition was $465,000 and was determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
The assets acquired were recorded at estimated fair values and have not been finalized pending further information that may impact the valuation of certain assets or liabilities. The preliminary purchase price allocation for Renew is as follows (in thousands):
 
Distributor organization
  $ 200  
Customer-related intangible
    155  
Trademarks and trade name
    110  
Total purchase price
  $ 465  
 
The preliminary fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The Company expects to finalize the valuation within one (1) year from the acquisition date.
 
The revenue impact from the Renew acquisition, included in the consolidated statement of operations for the year ended December 31, 2016 was approximately $432,000.
 
The pro-forma effect assuming the business combination with Renew discussed above had occurred at the beginning of the current period is not presented as the information was not available.
 
 
 
 
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South Hill Designs Inc.
 
In January 2016, the Company acquired certain assets of South Hill Designs Inc., (“South Hill”) a direct sales and proprietary jewelry company that sells customized lockets and charms. As a result of this business combination the Company’s distributors have access to South Hill’s customized products and the South Hill distributors and customers have gained access to products offered by the Company. 
 
The Company has agreed to pay South Hill a monthly royalty payment on all gross sales revenue generated by the South Hill distributor organization in accordance with this agreement, regardless of products being sold and a monthly royalty payment on South Hill product revenue for seven (7) years from the closing date.
 
The contingent consideration’s estimated fair value at the date of acquisition was $2,650,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
  
During the fourth quarter ended December 31, 2016 the purchase accounting was finalized and the Company determined that the initial purchase price should be reduced by $1,811,000 from $2,650,000 to $839,000. The final purchase price allocation of the intangible assets acquired for South Hill (in thousands) is as follows:
 
Distributor organization
  $ 396  
Customer-related intangible
    285  
Trademarks and trade name
    158  
Total purchase price
  $ 839  
 
The fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The revenue impact from the South Hill acquisition, included in the consolidated statement of operations for the year ended December 31, 2016 was approximately $4,283,000.
 
The pro-forma effect assuming the business combination with South Hill discussed above had occurred at the beginning of the current period is not presented as the information was not available.
 
2015 Acquisitions
 
Paws Group, LLC
 
On July 1, 2015, the Company acquired certain assets of Paws Group, LLC, (“PAWS”) a direct sales company for pet lovers that offers an exclusive pet boutique carrying treats for dogs and cats as well as grooming and bath products.  The purchase price consisted of a maximum aggregate purchase price of $150,000. The Company paid approximately $61,000, for which the Company received certain inventories, which payment was applied against the maximum aggregate purchase price.
 
The Company recorded a fair value of a distributor network intangible asset of $125,000 as determined by management using a discounted cash flow methodology. The intangible is being amortized over its estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
The revenue impact from the PAWS acquisition, included in the consolidated statement of operations for the years ended December 31, 2016 and 2015 was approximately $222,000 and $98,000, respectively.
 
The pro-forma effect assuming the business combination with PAWS discussed above had occurred at the beginning of the year ended 2015 is not presented as the information was not available.
 
Mialisia & Co., LLC
 
On June 1, 2015, the Company acquired certain assets of Mialisia & Co., LLC, (“Mialisia”) a direct sales jewelry company that specializes in interchangeable jewelry. As a result of this business combination, the Company’s distributors and customers have access to Mialisia’s patent-pending “VersaStyle” jewelry and Mialisia’s distributors and customers have gained access to products offered by the Company. The purchase price consisted of a maximum aggregate purchase price of $1,900,000. The Company paid $118,988 for certain inventories, which payment was applied against the maximum aggregate purchase price.
 
 
 
 
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The Company has agreed to pay Mialisia a monthly payment equal to seven (7%) of all gross sales revenue generated by the Mialisia distributor organization in accordance with the asset purchase agreement, regardless of products being sold and pay five (5%) royalty on Mialisia product revenue until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid aggregate cash payment equal to $1,781,012 provided, however, that in no event will the maximum aggregate purchase price be reduced below $1,650,000.
 
The contingent consideration’s estimated fair value at the date of acquisition was $700,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
During the second quarter ended June 30, 2016 the purchase accounting was finalized and the Company determined that the initial purchase price should be reduced by $108,000 from $700,000 to $592,000. The final purchase price allocation of the intangible assets acquired for Mialisia (in thousands) is as follows:
 
Distributor organization
  $ 296  
Customer-related intangible
    169  
Trademarks and trade name
    127  
Total purchase price
  $ 592  
 
The fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The revenue impact from the Mialisia acquisition, included in the consolidated statement of operations for the years ended December 31, 2016 and 2015 was approximately $3,003,000 and $754,000, respectively.
 
The pro-forma effect assuming the business combination with Mialisia discussed above had occurred at the beginning of the year ended 2015 is not presented as the information was not available.
 
JD Premium LLC
 
On March 4, 2015, the Company acquired certain assets of JD Premium, LLC (“JD Premium”) a dietary supplement company. As a result of this business combination, the Company’s distributors and customers have access to JD Premium’s unique line of products and JD Premium’s distributors and clients gain access to products offered by the Company. The purchase price consisted of a maximum aggregate purchase price of $500,000. The Company paid $50,000 for the purchase of certain inventories, which payment was applied against the maximum aggregate purchase price.
 
The Company has agreed to pay JD Premium a monthly payment equal to seven (7%) of all gross sales revenue generated by the JD Premium distributor organization in accordance with the asset purchase agreement, regardless of products being sold and pay five (5%) royalty on JD Premium product revenue until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid aggregate cash payment equal to $450,000. All payments of JD Premium distributor revenue will be applied against and reduce the maximum aggregate purchase price;  however if the aggregate gross sales revenue generated by the JD Premium distributor organization, effective April 4, 2015 for a twenty-four (24) months period does not equal or exceed $500,000 then the maximum aggregate purchase price will be reduced by the difference of the $500,000 and the average annual distributor revenue; provided, however, that in no event will the maximum aggregate purchase price be reduced below $300,000.
 
The contingent consideration’s estimated fair value at the date of acquisition was $195,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
During the fourth quarter ended December 31, 2015 the purchase accounting was finalized and the Company determined that the initial purchase price should be reduced from $195,000 by approximately $75,000 to $120,000. The final purchase price allocation for JD Premium is as follows (in thousands):
 
Distributor organization
 
$
68
 
Customer-related intangible
 
 
52
 
Total purchase price
 
$
120
 
 
The fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The revenue impact from the JD Premium acquisition, included in the consolidated statement of operations for the years ended December 31, 2016 and 2015 were immaterial.
 
 
 
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The pro-forma effect assuming the business combination with JD Premium discussed above had occurred at the beginning of the year ended 2015 is not presented as the information was not available.
 
Sta-Natural, LLC
 
On February 23, 2015, the Company acquired certain assets and assumed certain liabilities of Sta-Natural, LLC, (“Sta-Natural”) a dietary supplement company and provider of vitamins, minerals and supplements for families and their pets. As a result of this business combination, the Company’s distributors and customers have access to Sta-Natural’s unique line of products and Sta-Natural’s distributors and clients gain access to products offered by the Company. The purchase price consisted of a maximum aggregate purchase price of $500,000. The Company paid $25,000 for certain inventories, which payment was applied against the maximum aggregate purchase price.
 
The Company has agreed to pay Sta-Natural a monthly payment equal to eight (8%) of all gross sales revenue generated by the Sta-Natural distributor organization in accordance with the asset purchase agreement, regardless of products being sold and pay five (5%) royalty on Sta-Natural product revenue until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid aggregate cash payment equal to $450,000. All payments of Sta-Natural distributor revenue will be applied against and reduce the maximum aggregate purchase price;  however if the aggregate gross sales revenue generated by the Sta-Natural distributor organization, for a twelve (12) months period following the closing date does not equal or exceed $500,000 then the maximum aggregate purchase price will be reduced by the difference of the $500,000 and the average distributor revenue for a twelve (12) month period: provided, however, that in no event will the maximum aggregate purchase price be reduced below $300,000.
 
The contingent consideration’s estimated fair value at the date of acquisition was $285,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
 
The final purchase price allocation for Sta-Natural is as follows (in thousands):
 
Distributor organization
 
 $
140
 
Customer-related intangible
 
 
110
 
Trademarks and trade name
 
 
60
 
Initial cash payment
 
 
(25
)
Total purchase price
 
$
285
 
 
The fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.
 
The revenue impact from the Sta-Natural acquisition, included in the consolidated statement of operations for the years ended December 31, 2016 and 2015 was approximately $1,168,000 and $691,000, respectively.
 
The pro-forma effect assuming the business combination with Sta-Natural discussed above had occurred at the beginning of the year ended 2015 is not presented as the information was not available.
 
Note 3. Arrangements with Variable Interest Entities and Related Party Transactions
 
The Company consolidates all variable interest entities in which it holds a variable interest and is the primary beneficiary of the entity. Generally, a variable interest entity (“VIE”) is a legal entity with one or more of the following characteristics: (a) the total at risk equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; (b) as a group the holders of the equity investment at risk lack any one of the following characteristics: (i) the power, through voting or similar rights, to direct the activities of the entity that most significantly impact its economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) some equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is required to consolidate the VIE and is the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
 
In determining whether it is the primary beneficiary of a VIE, the Company considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE's economic performance and which party has the power to direct such activities; the amount and characteristics of Company's interests and other involvements in the VIE; the obligation or likelihood for the Company or other investors to provide financial support to the VIE; and the similarity with and significance to the business activities of Company and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of these VIEs and general market conditions.
 
 
 
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FDI Realty, LLC
 
FDI Realty is the owner and lessor of the building previously occupied by the Company for its sales and marketing office in Windham, NH. In December 2015 the Company relocated its operations from the Windham office, to its corporate headquarters in Chula Vista, California. A former officer of the Company is the single member of FDI Realty. The Company is a co-guarantor of FDI Realty’s mortgages on the building. The Company determined that the fair value of the guarantees is not significant and therefore did not record a related liability. The first mortgage is due on August 13, 2018 and the second mortgage is due on August 13, 2028. The Company’s maximum exposure to loss as a result of its involvement with the unconsolidated VIE is approximately $1,806,000 and $1,900,000 as of December 31, 2016 and 2015, respectively. The Company may be subject to additional losses to the extent of any financial support that it voluntarily provides in the future.
 
At December 31, 2016 and 2015, the Company held a variable interest in FDI Realty, for which the Company is not deemed to be the primary beneficiary. The Company has concluded, based on its qualitative consideration of the terminated lease agreement, and the role of the single member of FDI Realty, that the single member is the primary beneficiary of FDI Realty. In making these determinations, the Company considered that the single member conducts and manages the business of FDI Realty, is authorized to borrow funds on behalf of FDI Realty, is the sole person authorized and responsible for conducting the business of FDI Realty, and is obligated to fund the obligations of FDI Realty. As a result of this determination, the financial position and results of operations of FDI Realty have not been included in the accompanying consolidated financial statements of the Company.
 
Related Party Transactions
 
Richard Renton
 
Richard Renton is a member of the Board of Directors and owns and operates with his wife Roxanna Renton Northwest Nutraceuticals, Inc., a supplier of certain inventory items sold by the Company. The Company made purchases of approximately $126,000 and $93,000 from Northwest Nutraceuticals Inc., for the years ended December 31, 2016 and 2015, respectively. In addition, Mr. Renton and his wife are also distributors of the Company and the Renton’s were paid distributor commissions for the years ended December 31, 2016 and 2015 approximately $457,000 and $422,000 respectively.
 
Hernandez, Hernandez, Export Y Company
 
The Company’s coffee segment CLR is associated with Hernandez, Hernandez, Export Y Company (“H&H”), a Nicaragua company, through sourcing arrangements to procure Nicaraguan green coffee and in March 2014 as part of the Siles Plantation Family Group “Siles” acquisition, CLR engaged the owners of H&H as employees to manage Siles.
 
As an inducement to managing the operations of Siles, CLR and H&H entered into an Operating and Profit Sharing Agreement (“Agreement”).  In accordance with the Agreement, H&H shares equally (50%) in all profits and losses generated by Siles, and profits from any subsequent sale of the plantation, after profits are first distributed to CLR equal to the amount of CLR’s cash contributions for the acquisitions, then after profits are distributed to H&H in an amount equal to their cash contributions, and after certain other conditions are met. During the years ended December 31, 2016 and 2015 CLR recorded expenses allocated to the profit sharing Agreement of $698,000 and $528,000, respectively.   As of December 31, 2016 and 2015 the balance of contingent acquisition debt payable to H&H after the reduction of $698,000 and $528,000 from the allocation of 50% losses recognized in 2016 and 2015 is $83,000 and $894,000, respectively.
 
CLR sources green coffee from H&H and made purchases of approximately $8,810,000 and $10,499,000 for the years ended December 31, 2016 and 2015, respectively. H&H Coffee Group Export, a Florida Company which is affiliated with H&H is a customer of CLR. During the year ended December 31, 2016 CLR sold $2,637,000 in green coffee to H&H Coffee Group Export. There were no related sales of green coffee to H&H Coffee Group Export during 2015.
 
Carl Grover 
 
Mr. Carl Grover is the beneficial owner of in excess of five percent (5%) of our outstanding common shares, including his ownership as the sole beneficial owner of 44,866,952 shares of our common stock. Mr. Grover owns a September 2014 Note in the principal amount of $4,000,000 convertible into 11,428,571 shares of common stock convertible at a conversion price of $0.35 per share, and a September 2014 Warrant exercisable for 15,652,174 shares of common stock at an exercise price of $0.23 per share. Mr. Grover also owns a November 2015 Note in the principal amount of $7,000,000 convertible into 20,000,000 shares of common stock convertible at a conversion price of $0.35 per share, and a November 2015 Warrant exercisable for 9,333,333 shares of common stock at an exercise price of $0.45 per share. He also owns 5,151,240 shares of common stock.
 
2400 Boswell LLC
 
On March 15, 2013, the Company acquired 2400 Boswell LLC (“2400 Boswell”) for approximately $4.6 million. 2400 Boswell is the owner and lessor of the building occupied by the Company for its corporate office and warehouse in Chula Vista, California. The purchase was from an immediate family member of our Chief Executive Officer and consisted of approximately $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, payable in equal payments over 5 years and bears interest at 5.0%.  Additionally, the Company assumed a long-term mortgage of $3,625,000, payable over 25 years and has an initial interest rate of 5.75%. The interest rate is the prime rate plus 2.5%. The lender will adjust the interest rate on the first calendar day of each change period. As of December 31, 2016 the balance on the long-term mortgage is approximately $3,363,000 and the balance on the promissory note is approximately $108,000.  The Company and its Chief Executive Officer are both co-guarantors of the mortgage.
 
 
 
 
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Note 4.  Notes Payable and Other Debt
 
In November 2015, the Company completed a private placement and entered into Note Purchase Agreements with three (3) accredited investors pursuant to which it sold senior secured convertible notes in the aggregate principal amount of $7,187,500, that are convertible into shares of Common Stock. The Notes are due in October 2018 if the option to convert has not been exercised (see Note 5, below.)
 
In January 2015, the Company completed a private placement and entered into Note Purchase Agreements with three (3) accredited investors pursuant to which it sold units consisting of one (1) year senior secured notes in the aggregate principal amount of $5,250,000. One holder of a January 2015 Note in the principal amount of $5,000,000 was prepaid on October 26, 2015 through a cash payment from us to the investor of $1,000,000, and the remaining $4,000,000 owed was applied to the investor’s purchase of a $4,000,000 November 2015 Note in the November 2015 Offering and a November 2015 Warrant exercisable to purchase 5,333,333 shares of Common Stock. The remaining balance of the January 2015 Notes as of December 31, 2015 was $250,000 which amount was paid in January 2016 (see Note 5, below.)
 
During the third quarter of the year ended December 31, 2014, the Company completed a private placement and entered into Note Purchase Agreements with seven (7) accredited investors pursuant to which we sold units consisting of five (5) year senior secured convertible Notes in the aggregate principal amount of $4,750,000, that are convertible into shares of our common stock. The Notes are due in September 2019 if the option to convert has not been exercised (see Note 5, below.)
 
In March 2013, the Company acquired 2400 Boswell for approximately $4.6 million. 2400 Boswell is the owner and lessor of the building occupied by the Company for its corporate office and warehouse in Chula Vista, California. The purchase was from an immediate family member of our Chief Executive Officer and consisted of approximately $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, payable in equal payments over 5 years and bears interest at 5.0%.  Additionally, the Company assumed a long-term mortgage of $3,625,000, payable over 25 years and has an initial interest rate of 5.75%. The interest rate is the prime rate plus 2.5%. The lender will adjust the interest rate on the first calendar day of each change period. As of December 31, 2016 the balance on the long-term mortgage is approximately $3,363,000 and the balance on the promissory note is approximately $108,000.  The Company and its Chief Executive Officer are both co-guarantors of the mortgage.
 
In March 2007, the Company entered into an agreement to purchase certain assets of M2C Global, Inc., a Nevada corporation, for $4,500,000.  The agreement required payments totaling $500,000 in three installments during 2007, followed by monthly payments in the amount of 10% of the sales related to the acquired assets until the entire note balance is paid.  The Company has imputed interest at the rate of 7% per annum.  As of December 31, 2016 and 2015, the carrying value of the liability was approximately $1,156,000 and $1,204,000, respectively. Imputed interest recorded on the note was approximately $29,000 for the year ended December 31, 2015. The interest associated with the note for the year ended December 31, 2016 was minimal.
 
The Company has two other notes payable in the total amount of $23,000 as of December 31, 2016 which expires in 2018 and 2020.
 
The following summarizes the maturities of notes payable (in thousands):
 
Years ending December 31,
 
 
2017
  $ 220  
2018
    7,349  
2019
    4,891  
2020
    143  
2021
    108  
Thereafter
    3,877  
Total
  $ 16,588  
 
Capital Lease
 
The Company leases certain manufacturing and operating equipment under non-cancelable capital leases. The total outstanding balance under the capital leases as of December 31, 2016 excluding interest was approximately $2,390,000, of which $821,000 will be paid in 2017 and the remaining balance of $1,569,000 will be paid through 2021.
 
The following summarizes the maturities of capital leases (in thousands):
 
Years ending December 31,
 
 
 
2017
  $ 984
 
2018
  972
 
2019
    604
 
2020
    90
 
2021
    28
 
Total
  2,678
 
Amount representing interest
    (288 )
Present value of minimum lease payments
    2,390
 
Less current portion
    (821 )
Long term portion
  $ 1,569
 
 
Depreciation expense related to the capitalized lease obligations was approximately $103,000 and $27,000 for the years ended December 31, 2016 and 2015, respectively.
 
 
Factoring Agreement
 
The Company has a factoring agreement (“Factoring Agreement”) with Crestmark Bank (“Crestmark”) related to the Company’s accounts receivable resulting from sales of certain products within its commercial coffee segment. Effective May 1, 2016, the Company entered into a third amendment to the factoring agreement (“Agreement”). Under the terms of the Agreement, all new receivables assigned to Crestmark shall be “Client Risk Receivables” and no further credit approvals will be provided by Crestmark and there will be no new credit-approved receivables. The changes to the Agreement include expanding the factoring facility to include borrowings to be advanced against acceptable eligible inventory up to 50% of landed cost of finished goods inventory and meeting certain criteria, not to exceed the lesser of $1,000,000 or 85% of the value of the receivables already advanced with a maximum overall borrowing of $3,000,000. Interest accrues on the outstanding balance and a factoring commission is charged for each invoice factored which is calculated as the greater of $5.00 or 0.75% to 0.875% of the gross invoice amount and is recorded as interest expense. In addition the Company and the Company’s CEO Mr. Wallach have entered into a Guaranty and Security Agreement with Crestmark Bank if in the event that CLR were to default. This Agreement continues in full force and is effective until February 1, 2019.
 
The Company accounts for the sale of receivables under the Factoring Agreement as secured borrowings with a pledge of the subject inventories and receivables as well as all bank deposits as collateral, in accordance with the authoritative guidance for accounting for transfers and servicing of financial assets and extinguishments of liabilities. The caption “Accounts receivable, due from factoring company” on the accompanying consolidated balance sheets in the amount of approximately $1,078,000 and $556,000 as of December 31, 2016 and December 31, 2015, respectively, reflects the related collateralized accounts.
 
The Company's outstanding liability related to the Factoring Agreement was approximately $1,290,000 and $457,000 as of December 31, 2016 and December 31, 2015, respectively, and is included in other current liabilities on the consolidated balance sheets. The minimum factoring commission payable to the bank is $90,000 during each consecutive 12-month period. Fees and interest paid pursuant to this agreement were approximately $170,000 and $155,000 for the years ended December 31, 2016 and 2015, respectively, which were recorded as interest expense.
 
Contingent Acquisition Debt
 
The Company has contingent acquisition debt associated with its business combinations.  The Company accounts for business combinations under the acquisition method and allocates the total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on their estimated fair values as of the acquisition date. A liability for contingent consideration, if applicable, is recorded at fair value as of the acquisition date and, evaluated each period for changes in the fair value and adjusted as appropriate (see Note 7 below.) The Company’s contingent acquisition debt as of December 31, 2016 is $8,001,000 and is primarily attributable to debt associated with the Company’s direct selling segment which is $7,806,000 and $195,000 is debt associated with the Company’s coffee segment.
 
Line of Credit
 
On October 10, 2014, the Company entered into a revolving line of credit agreement (“Line of Credit”), with Wells Fargo Bank National Association (“Bank”), the Company’s principal banking partner. The Line of Credit provided the Company with a $2.5 million revolving credit line. The outstanding principal balance of the Line of Credit bear interest at a fluctuating rate per annum determined by the Bank to be two and three-quarter percent (2.75%) above Daily One Month LIBOR as in effect from time to time. The bank charged an unused commitment fee equal to five tenths percent (.5%) per annum on the daily unused amount of the Line of Credit and was payable quarterly. The Company did not draw against this credit facility. The agreement expired in October 2015 and was not renewed.
 
Note 5. Debt
 
January 2015 Private Placement
 
In January 2015, the Company entered into Note Purchase Agreements (the “Note” or “Notes”) related to its private placement offering (“January 2015 Private Placement”) with three (3) accredited investors pursuant to which the Company sold units consisting of one (1) year senior secured notes in the aggregate principal amount of $5,250,000. One holder of a January 2015 Note in the principal amount of $5,000,000 was prepaid on October 26, 2015 through a cash payment from us to the investor of $1,000,000 and the remaining $4,000,000 owed was applied to the investor’s purchase of a $4,000,000 November 2015 Note in the November 2015 Private Placement and a November 2015 Warrant exercisable to purchase 5,333,333 shares of Common Stock. The Notes bore interest at a rate of eight percent (8%) per annum and interest was paid quarterly in 2015. The remaining balance of the January 2015 Notes as of December 31, 2015 was $250,000 and was paid in January 2016.
 
The Company recorded a non-cash extinguishment loss on debt of $1,198,000 for the year ended December 31, 2015 as a result of the repayment of $5,000,000 in Notes Payable to one of the investors from the January 2015 Private Placement through issuance of a new November 2015 Note Payable. This loss represents the difference between the reacquisition value of the new debt to the holder of the note and the carrying amount of the holder’s extinguished debt. Issuance costs related to the Notes and the common stock were approximately $170,000 and $587,000 in cash and non-cash costs, respectively, which were recorded as deferred financing costs and were amortized over the term of the Notes. As of December 31, 2015 the deferred financing costs is fully amortized and was recorded as interest expense.
 
 
Convertible Notes Payable
 
Our total convertible notes payable, net of debt discount outstanding consisted of the amount set forth in the following table (in thousands):
 
 
 
December 31, 2016    
 
 
December 31, 2015    
 
8% Convertible Notes due July and August 2019 (July 2014 Private Placement) (1)
  $ 2,296  
  $ 1,346  
8% Convertible Notes due October and November 2018 (November 2015 Private Placement) (2)
    6,999  
    6,896  
Net debt issuance costs (3)
    (968 )
    (1,456 )
Total convertible notes payable, net of debt discount (4)
  $ 8,327  
  $ 6,786  
 
(1)
Principal amount of $4,750,000 are net of unamortized debt discounts of $2,454,000 as of December 31, 2016 and $3,404,000 as of December 31, 2015.
(2)
Principal amount of approximately $7,188,000 are net of unamortized debt discounts of $189,000 as of December 31, 2016 and $292,000 as of December 31, 2015.
(3)
As of January 1, 2016, we adopted ASU 2015-03 with retrospective application. This resulted in a $1,456,000 reclassification from prepaid expenses and other current assets to convertible notes payable, net of debt discount, for unamortized debt issuance costs.
(4)
Principal amounts are net of unamortized discounts and issuance costs of $3,611,000 as of December 31, 2016 and $5,152,000 as of December 31, 2015.
 
July 2014 Private Placement
 
Between July 31, 2014 and September 10, 2014 the Company entered into Note Purchase Agreements (the “Note” or “Notes”) related to its private placement offering (“2014 Private Placement”) with seven accredited investors pursuant to which the Company raised aggregate gross proceeds of $4,750,000 and sold units consisting of five (5) year senior secured convertible Notes in the aggregate principal amount of $4,750,000, that are convertible into 13,571,429 shares of our common stock, at a conversion price of $0.35 per share, and warrants to purchase 18,586,956 shares of common stock at an exercise price of $0.23 per share. The Notes bear interest at a rate of eight percent (8%) per annum and interest is paid quarterly in arrears with all principal and unpaid interest due between July and September 2019. As of December 31, 2016 and December 31, 2015 the principal amount of $4,750,000 remains outstanding.
 
The Company has the right to prepay the Notes at any time after the one year anniversary date of the issuance of the Notes at a rate equal to 110% of the then outstanding principal balance and any unpaid accrued interest. The notes are secured by Company pledged assets and rank senior to all debt of the Company other than certain senior debt that has been previously identified as senior to the convertible notes debt. Additionally, Stephan Wallach, the Company’s Chief Executive Officer, has also personally guaranteed the repayment of the Notes, subject to the terms of a Guaranty Agreement executed by him with the investors.  In addition, Mr. Wallach has agreed not to sell, transfer or pledge 30 million shares of the Common Stock that he owns so long as his personal guaranty is in effect.
 
Additionally, upon issuance of the Convertible Notes, the Company recorded the discount for the beneficial conversion feature of $1,053,000.  The debt discount associated with the beneficial conversion feature is amortized to interest expense over the life of the Notes.
 
Paid in cash issuance costs related to the July 2014 Private Placement were approximately $490,000 and were recorded as deferred financing costs and are included with convertible notes payable, net of debt discounts on the consolidated balance sheets and are being amortized over the term of the Convertible Notes. As of December 31, 2016 and December 31, 2015 the remaining balance in deferred financing costs is approximately $253,000 and $351,000, respectively. The quarterly amortization of the deferred financing costs is approximately $25,000 and is recorded as interest expense.
 
 
 
 
-64-
 
 
November 2015 Private Placement
 
Between October 13, 2015 and November 25, 2015 the Company entered into Note Purchase Agreements (the “Note” or “Notes”) related to its private placement offering (“November 2015 Private Placement”) with three (3) accredited investors pursuant to which the Company raised cash proceeds of $3,187,500 in the offering and converted $4,000,000 of debt from the January 2015 Private Placement to this offering in consideration of the sale of aggregate units consisting of three (3) year senior secured convertible Notes in the aggregate principal amount of $7,187,500, convertible into 20,535,714 shares of common stock, par value $0.001 per share, at a conversion price of $0.35 per share, subject to adjustment as provided therein; and five (5) year Warrants exercisable to purchase 9,583,333 shares of the Company’s common stock at a price per share of $0.45. The Notes bear interest at a rate of eight percent (8%) per annum and interest is paid quarterly in arrears with all principal and unpaid interest due at maturity on October 12, 2018. As of December 31, 2016 and December 31, 2015 the principal amount of $7,187,500 remains outstanding.
 
The Company has the right to prepay the Notes at any time after the one year anniversary date of the issuance of the Notes at a rate equal to 110% of the then outstanding principal balance and any unpaid accrued interest. The notes are secured by Company pledged assets and rank senior to all debt of the Company other than certain senior debt that has been previously identified as senior to the convertible notes debt.   The amounts owed under this Note are secured by a Deed of Trust as of October 13, 2015 executed by the Company’s affiliate 2400 Boswell LLC, a California limited liability company, and encumbering the Company’s headquarters at 2400 Boswell Rd., Chula Vista, CA 91914 (the “Deed of Trust.”). Additionally, Stephan Wallach, the Company’s Chief Executive Officer, has also personally guaranteed the repayment of the Notes, subject to the terms of a Guaranty Agreement executed by him with the investors.  In addition, Mr. Wallach has agreed not to sell, transfer or pledge 30 million shares of the Common Stock that he owns so long as his personal guaranty is in effect.
 
The Company recorded the discount for the beneficial conversion feature of $15,000. The beneficial conversion feature was recorded to equity and the debt discount associated with the beneficial conversion feature will be amortized to interest expense over the life of the Notes.
 
Paid in cash issuance costs related to the November 2015 Private Placement were approximately $786,000 and were recorded as deferred financing costs and are included with convertible notes payable, net of debt discounts on the consolidated balance sheets and are being amortized over the term of the Convertible Notes. As of December 31, 2016 and December 31, 2015 the remaining balance in deferred financing costs is approximately $480,000 and $742,000, respectively. The quarterly amortization of the deferred financing costs is approximately $66,000 and is recorded as interest expense.
 
Registration Rights Agreements
 
The Company entered into a registration rights agreements (“Registration Rights Agreement”) with the investors in the November 2015 and July 2014 Private Placements. Under the terms of the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale of the common stock underlying the units and the common stock that is issuable on exercise of the warrants within 90 days from the final closing date of the Private Placements (the “Filing Deadline”).
 
The Company has agreed to use reasonable efforts to maintain the effectiveness of the registration statement through the one year anniversary of the date the registration statement is declared effective by the Securities and Exchange Commission (the “SEC”), or until Rule 144 of the 1933 Act is available to investors in the Private Placements with respect to all of their shares, whichever is earlier. If the Company does not meet the Filing Deadline or Effectiveness Deadline, as defined in the Registration Rights Agreement, the Company will be liable for monetary penalties equal to one percent (1.0%) of each investor’s investment at the end of every 30 day period following such Filing Deadline or Effectiveness Deadline failure until such failure is cured.
 
The payment amount shall be prorated for partial 30 day periods. The maximum aggregate amount of payments to be made by the Company as the result of such shall be an amount equal to ten (10%) of each investor’s investment amount. Notwithstanding the foregoing, no payments shall be owed with respect to any period during which all of the investor’s registrable securities may be sold by such investor under Rule 144 or pursuant to another exemption from registration.
 
July 2014 Private Placement: The Company filed a registration statement on October 3, 2014 and an amended statement on October 17, 2014 and it was declared effective by the SEC on November 4, 2014.
 
November 2015 Private Placement : The Company filed a registration statement on December 29, 2015 and an amended registration statement on February 9, 2016 that was declared effective by the SEC on February 12, 2016.
 
 
Note 6. Derivative Liability
 
In October and November of 2015, the Company issued 9,583,333 five-year warrants in connection with Convertible Notes associated with our November 2015 Private Placement. The exercise price of the warrants is protected against down-round financing throughout the term of the warrant. Pursuant to ASC Topic 815, “Derivatives and Hedging” the fair value of the warrants of approximately $1,491,000 was recorded as a derivative liability on the issuance dates.  The estimated fair values of the warrants were computed at issuance using a Monte Carlo option pricing models, with the following assumptions: stock price volatility 70%, risk-free rate 1.66%, annual dividend yield 0% and expected life 5.0 years.
 
In July and August of 2014, the Company issued 21,802,793 five-year warrants in connection with Convertible Notes associated with our July 2014 Private Placement. The exercise price of the warrants is protected against down-round financing throughout the term of the warrant. Pursuant to ASC Topic 815, the fair value of the warrants of approximately $3,697,000 was recorded as a derivative liability on the issuance dates. The estimated fair values of the warrants were computed at issuance using a Monte Carlo option pricing models, with the following assumptions: stock price volatility 90%, risk-free rates 1.58%-1.79%, annual dividend yield 0% and expected life 5.0 years.
 
In D ecember 2015, the Company modified the terms of certain warrants that were issued to the placement agent as a result of warrants issued from the July Private Placement that were initially classified as derivative liabilities. The Company entered into an agreement with the placement agent to remove the down-round pricing protection provision contained within the placement agent issued warrants. As a result of this change in the warrants, the Company considered the guidance of Topic ASC 815, “Derivatives and Hedging ” (formerly EITF 07-5 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock)) to determine the appropriate accounting treatment of the warrants and the balance sheet classification of the warrants as either equity or liability. The Company determined that the warrants were indexed to the Company’s stock and the equity classification was appropriate and no longer qualified as derivative liabilities. This determination resulted in the reclassification of 3,215,837 warrants from a liability instrument to equity instruments by removing the derivative liability and a reclassification to additional paid in capital. The Company revalued the warrants as of December 31, 2015 and reduced the derivate liability by approximately $526,000. The warrants were revalued using the Black-Scholes valuation method using a risk-free rate of 1.5%, stock price of $0.30, exercise prices ranging from $0.23 to $0.35, expected life of 3.6 to 3.7 years and stock price volatility of 70.0%.
 
 
 
 
-66-
 
 
Warrants classified as derivative liabilities are recorded at their estimated fair value (see Note 7, below) at the issuance date and are revalued at each subsequent reporting date. We will continue to revalue the derivative liability on each subsequent balance sheet date until the securities to which the derivative liabilities relate are exercised or expire.
 
The Company revalued the warrants as of the end of each reporting period, and the estimated fair value of the outstanding warrant liabilities was approximately $3,345,000 and $4,716,000 as of December 31, 2016 and December 31, 2015, respectively. 
 
Increases or decreases in fair value of the derivative liability are included as a component of total other expense in the accompanying consolidated statements of operations for the respective period.   The changes to the derivative liability for warrants resulted in a decrease of $1,371,000 for the year ended December 31, 2016 and an increase of $39,000 for the year ended December 31, 2015.
 
Various factors are considered in the pricing models we use to value the warrants, including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk free interest rate. Future changes in these factors may have a significant impact on the computed fair value of the warrant liability. As such, we expect future changes in the fair value of the warrants to continue and may vary significantly from year to year. The warrant liability and revaluations have not had a cash impact on our working capital, liquidity or business operations.
   
The estimated fair value of the warrants were computed as of December 31, 2016 and as of December 31, 2015 using Black-Scholes and Monte Carlo option pricing models, using the following assumptions:
 
 
December 31,
2016
December 31,
2015
Stock price volatility
60%-65%
70%
Risk-free interest rates
1.34%-1.70%
1.76%
Annual dividend yield
0%
0%
Expected life
2.6-3.9 years
3.6-4.9 years
 
In addition, Management assessed the probabilities of future financing assumptions in the valuation models.
 
Note 7.   Fair Value of Financial Instruments
 
Fair value measurements are performed in accordance with the guidance provided by ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 defines fair value as the price that would be received from selling an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.
 
ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
  
Level 1 – Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
 
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 – Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.
 
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, capital lease obligations and deferred revenue approximate their fair values based on their short-term nature. The carrying amount of the Company’s long term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.
 
The estimated fair value of the contingent consideration related to the Company's business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
 
 
 
 
-67-
 
 
In connection with the 2015 and 2014 Private Placements, we issued warrants to purchase shares of our common stock which are accounted for as derivative liabilities (see Note 6 above.) The estimated fair value of the warrants is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
 
The following table details the fair value measurement within the three levels of the value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities (in thousands):
 
 
 
Fair Value at December 31, 2016
 
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Contingent acquisition debt, current portion
  $ 628  
  $ -  
  $ -  
  $ 628  
Contingent acquisition debt, less current portion
    7,373  
    -  
    -  
    7,373  
Warrant derivative liability
    3,345  
    -  
    -  
    3,345  
    Total liabilities
  $ 11,346  
  $ -  
  $ -  
  $ 11,346  
 
 
 
Fair Value at December 31, 2015
 
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Contingent acquisition debt, current portion
  $ 264  
  $ -  
  $ -  
  $ 264  
Contingent acquisition debt, less current portion
    7,174  
    -  
    -  
    7,174  
Warrant derivative liability
    4,716  
    -  
    -  
    4,716  
    Total liabilities
  $ 12,154  
  $ -  
  $ -  
  $ 12,154  
  
The following table reflects the activity for the Company’s warrant derivative liability associated with our 2015 and 2014 Private Placements measured at fair value using Level 3 inputs (in thousands):
 
 
 
Warrant Derivative Liability
 
Balance at December 31, 2014
 
$
3,712
 
       Issuance
 
 
1,491
 
      Adjustments to estimated fair value
 
 
39
 
    Warrant liability reclassified to equity
 
 
(526
)
Balance at December 31, 2015
 
 
4,716
 
       Issuance
 
 
-
 
      Adjustments to estimated fair value
 
 
(1,371
)
Balance at December 31, 2016
 
$
3,345
 
 
The following table reflects the activity for the Company’s contingent acquisition liabilities measured at fair value using Level 3 inputs (in thousands):
 
 
 
Contingent Consideration
 
Balance at December 31, 2014
 
$
10,472
 
Level 3 liabilities acquired
 
 
1,353
 
Level 3 liabilities settled
 
 
(3,338
)
Adjustments to liabilities included in earnings
 
 
(446
)
Expenses allocated to profit sharing agreement
 
 
(528
)
Adjustment to purchase price allocation
 
 
(75
)
Balance at December 31, 2015
 
 
7,438
 
Level 3 liabilities acquired
 
 
3,604
 
Level 3 liabilities settled
 
 
(773
)
Adjustments to liabilities included in earnings
 
 
(1,462
)
Expenses allocated to profit sharing agreement
 
 
(698
)
    Adjustment to purchase price allocation
 
 
 (108
)
Balance at December 31, 2016
 
$
8,001
 
 
 
 
 
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The fair value of the contingent acquisition liabilities are evaluated each reporting period using projected revenues, discount rates, and projected timing of revenues. Projected contingent payment amounts are discounted back to the current period using a discount rate. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases in projected revenues will result in higher fair value measurements. Increases in discount rates and the time to payment will result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. During the years ended December 31, 2016 and 2015, the net adjustment to the fair value of the contingent acquisition debt was a decrease of $1,462,000 and a decrease of $446,000, respectively.
 
The weighted-average of the discount rates used was 18.2% and 17.6% as of December 31, 2016 and 2015, respectively. The projected year of payment ranges from 2017 to 2031.
 
Note 8.  Stockholders’ Equity
 
The Company’s Articles of Incorporation, as amended, authorize the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”.
 
Convertible Preferred Stock
 
The Company had 161,135 shares of Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of December 31, 2016 and December 31, 2015, and accrued dividends of approximately $112,000 and $98,000, respectively. The holders of the Series A Preferred Stock are entitled to receive a cumulative dividend at a rate of 8.0% per year, payable annually either in cash or shares of the Company's Common Stock at the Company's election.  Shares of Common Stock paid as accrued dividends are valued at $0.50 per share.  Each share of Series A Preferred is convertible into two shares of the Company's Common Stock. The holders of Series A Preferred are entitled to receive payments upon liquidation, dissolution or winding up of the Company before any amount is paid to the holders of Common Stock. The holders of Series A Preferred shall have no voting rights, except as required by law.  
 
Common Stock
 
The Company had 392,698,557 common shares outstanding as of December 31, 2016. The holders of Common Stock are entitled to one vote per share on matters brought before the shareholders.
 
Warrant Modification Agreements
 
In D ecember 2015, the Company modified the terms of certain warrants that were issued to the placement agent as a result of warrants issued from the July Private Placement that were initially classified as derivative liabilities. The Company entered into an agreement with the placement agent to remove the down-round pricing protection provision contained within the placement agent issued warrants. As a result of this change in the warrants, the Company considered the guidance of Topic ASC 815, “Derivatives and Hedging ” (formerly EITF 07-5 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock)) to determine the appropriate accounting treatment of the warrants and the balance sheet classification of the warrants as either equity or liability. The Company determined that the warrants were indexed to the Company’s stock and that the equity classification was appropriate and the warrants no longer qualified as derivative liabilities. This determination resulted in the reclassification of 3,215,837 warrants from a liability instrument to equity instruments by removing the derivative liability and a reclassification to additional paid in capital. The Company revalued the warrants as of December 31, 2015 and reduced the derivate liability by approximately $526,000. The warrants were revalued using the Black-Scholes valuation method using a risk-free rate of 1.5%, stock price of $0.30, exercise prices ranging from $0.23 to $0.35, expected life of 3.6 to 3.7 years and stock price volatility of 70.0%.
 
In July 2015, the Company entered into agreements which extended the life of 2,418,750 warrants classified as equity instruments by two years after certain conditions were met. The Company recorded a warrant modification expense, as a result of the extension of the expiration dates of approximately $253,000, which is included in general and administrative expense in the Company’s consolidated statements of operations. The expense was calculated using the Black-Scholes valuation method and using a risk-free rate of 0.67%, stock price of $0.31, exercise prices ranging from $0.30 to $0.40, expected life of 2.0 years and stock price volatility of 67.8%.
 
The warrants are exercisable into the Company’s common stock.
 
There were no warrant modifications during 2016.
 
 
 
 
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Repurchase of Common Stock
 
On December 11, 2012, the Company authorized a share repurchase program to repurchase up to 15 million of the Company's issued and outstanding common shares from time to time on the open market or via private transactions through block trades.  Under this program, for the year ended December 31, 2016, the Company repurchased a total of 125,708 shares at a weighted-average cost of $0.28.  A total of 3,931,880 shares have been repurchased to-date at a weighted-average cost of $0.27. The remaining number of shares authorized for repurchase under the plan as of December 31, 2016 is 11,068,120.
 
Warrants to Purchase Preferred Stock and Common Stock
 
As of December 31, 2016, warrants to purchase 37,988,030 shares of the Company's common stock at prices ranging from $0.10 to $0.50 were outstanding. All warrants are exercisable as of December 31, 2016 and expire at various dates through November 2020 and have a weighted average remaining term of approximately 2.75 years and are included in the table below as of December 31, 2016.
 
During the fourth quarter of fiscal year ended December 31, 2015, the Company issued warrants through a Private Placement, to purchase 10,541,666 and 2,053,571 shares of its common stock, exercisable at $0.45 and $0.35 per share, respectively, and expire in October 2020 and October 2018, respectively. (See Note 5, above.)
 
During the third quarter of fiscal year ended December 31, 2014, the Company issued warrants through a Private Placement, to purchase 20,445,650 and 1,357,143 shares of its common stock, exercisable at $0.23 and $0.35 per share, respectively and expire in August 2019. (See Note 5, above.)
 
The following table summarizes warrant activity for the following periods:
 
Balance at December 31, 2014
    35,221,630  
    Granted
    12,595,237  
    Expired / cancelled
    (5,335,821 )
    Exercised
    (806,250 )
Balance at December 31, 2015
    41,674,796  
     Granted
    -  
     Expired / cancelled
    (3,645,516 )
     Exercised
    (41,250 )
Balance at December 31, 2016
    37,988,030  
 
Advisory agreements
 
PCG Advisory Group. On September 1, 2015, the Company entered into an agreement with PCG Advisory Group (“PCG”), pursuant to which PCG agreed to provide investor relations services for six (6) months in exchange for fees paid in cash of $6,000 per month and 100,000 shares of restricted common stock to be issued in accordance with the agreement upon successfully meeting certain criteria in accordance with the agreement.  In connection with this agreement, the Company accrued for the estimated per share value on the agreement date at $0.32 per share, the price of Company’s common stock at September 1, 2015 for a total of $32,000 due to PCG. The fair values of the shares was recorded as prepaid advisory fees and were included in prepaid expenses and other current assets on the Company’s consolidated balance sheets and were amortized on a pro-rata basis over the term of the contract. On June 28, 2016 the Company issued PCG 100,000 restricted shares of our common stock in accordance with the performance of the agreement as previously accrued. These shares were valued at $0.30 per share, based on the price per share of the Company’s common stock on June 28, 2016. During the year ended December 31, 2016 and 2015 the Company recorded expense of approximately $9,000 and $21,000 respectively, in connection with amortization of the stock issuance.
 
On March 1, 2016, the Company signed a renewal contract with PCG, pursuant to which PCG agreed to provide investor relations services for six (6) months in exchange for fees paid in cash of $6,000 per month and 100,000 shares of restricted common stock to be issued in accordance with the agreement upon successfully meeting certain criteria in accordance with the agreement. In connection with this agreement, the Company has accrued for the estimated per share value on the agreement date at $0.30 per share, the price of Company’s common stock at March 1, 2016 for a total of $30,000 due to PCG. The fair values of the shares was recorded as prepaid advisory fees and are included in prepaid expenses and other current assets on the Company’s consolidated balance sheets and will be amortized on a pro-rata basis over the term of the contract. During the year ended December 31, 2016, the Company recorded expense of approximately $30,000 in connection with amortization of the stock issuance. There were no amortization expenses for the year ended December 31, 2015 .
 
 
 
 
-70-
 
 
On September 1, 2016, the Company signed a renewal contract with PCG, pursuant to which PCG agreed to provide investor relations services for six (6) months in exchange for fees paid in cash of $6,000 per month and 100,000 shares of restricted common stock to be issued in accordance with the agreement upon successfully meeting certain criteria in accordance with the agreement. In connection with this agreement, the Company has accrued for the estimated per share value on the agreement date at $0.29 per share, the price of Company’s common stock at September 1, 2016 for a total of $29,000 due to PCG. The fair values of the shares was recorded as prepaid advisory fees and are included in prepaid expenses and other current assets on the Company’s consolidated balance sheets and will be amortized on a pro-rata basis over the term of the contract. During the year ended December 31, 2016, the Company recorded expense of approximately $19,000 in connection with amortization of the stock issuance. There were no amortization expenses for the year ended December 31, 2015 . As of December 31, 2016, the total remaining balance of the prepaid investor relation services is approximately $10,000.
 
Shares Issued in Private Placement
 
On January 29, 2015, we completed our January 2015 Private Placement pursuant to which we entered into Notes Payable Agreements (see Note 5, above) and issued 2,450,000 shares of our common stock. The shares of common stock issued under the January 2015 Private Placement were offered and issued without registration under the Securities Act of 1933, as amended, (the “1933 Act”). The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transaction, that registration in required under the 1933 Act or unless sold pursuant to Rule 144 under the 1933 Act.
 
Stock Options
 
On May 16, 2012, the Company established the 2012 Stock Option Plan (“Plan”) authorizing the granting of options for up to 40,000,000 shares of Common Stock. The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people and consultants with incentives to improve stockholder value and to contribute to the growth and financial success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The Plan permits the granting of stock options, including non-qualified stock options and incentive stock options qualifying under Section 422 of the Code, in any combination (collectively, “Options”). At December 31, 2016, the Company had 6,300,825 shares of Common Stock available for issuance under the Plan. 
 
A summary of the Plan Options for the year ended December 31, 2016 is presented in the following table:
 
 
Number of
Shares
 
 
Weighted
Average
Exercise Price
 
 
Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding December 31, 2014
    28,918,500  
  $ 0.21  
  $ 786  
Issued
    1,124,250  
    0.31  
       
Canceled/expired
    (6,151,475 )
    0.22  
       
Exercised
    (369,675 )
    0.21  
    -  
Outstanding December 31, 2015
    23,521,600  
    0.22  
    2,044  
Issued
    12,792,250  
    0.27  
       
Canceled / expired
    (2,981,350 )
    0.24  
       
Exercised
    (102,500 )
    0.21  
    -  
Outstanding December 31, 2016
    33,230,000  
  $ 0.24  
  $ 1,346  
Exercisable December 31, 2016
    18,830,000  
  $ 0.23  
  $ 993  
 
The weighted-average fair value per share of the granted options for the years ended December 31, 2016 and 2015 was approximately $0.15.
 
The following table sets forth the exercise price range, number of shares, weighted-average exercise price and remaining contractual lives at December 31, 2016:
 
 
Weighted
 
 
 
 
 
Weighted
 
 
Weighted
 
 
Average
 
 
 
 
 
Average
 
 
Average
 
 
Exercise Price
 
 
Options
 
 
Exercise Price
 
 
Remaining Life
 
Outstanding:  
 
 
 
 
 
 
 
 
 
 
 
 
  $    
  $ 0.16 - 0.21  
    6,852,500  
  $ 0.19  
    7.02  
  $    
  $ 0.21 - 0.23  
    11,245,000  
  $ 0.22  
    5.28  
  $    
  $ 0.23 - 0.35  
    14,917,750  
  $ 0.27  
    7.81  
  $    
  $ 0.35 - 0.40  
    214,750  
  $ 0.38  
    1.44  
 
Exercisable:
 
       
       
       
  $    
  $ 0.16 - 0.21  
  3,452,250
  $ 0.19
  6.48
  $    
  $ 0.21 - 0.23  
  11,245,000  
  $ 0.22  
  5.28
  $    
  $ 0.23 - 0.35
  3,917,750  
  $ 0.27
  1.68  
  $    
  $ 0.35 - 0.40
    214,750  
  $ 0.38  
  1.44  
  
 
 
 
-71-
 
 
Total stock based compensation expense included in the consolidated statements of operations was charged as follows in thousands:
 
 
 
Years ended December 31,
 
 
 
2016
 
 
2015
 
Cost of revenues
  $ 10  
  $ 17  
Distributor compensation
    215  
    158  
Sales and marketing
    10  
    28  
General and administrative
    160  
    252  
 
  $ 395  
  $ 455  
 
As of December 31, 2016, there was approximately $2,084,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plan. The expense is expected to be recognized over a weighted-average period of 4.42 years.
 
The Company uses the Black-Scholes option-pricing model (“Black-Scholes model”) to estimate the fair value of stock option grants. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the expected term of the option. The expected life is based on the contractual life of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant. The following were the factors used in the Black Scholes model to calculate the compensation cost:
 
 
 
Years ended December 31,
 
 
 
2016  
 
 
2015
 
Dividend yield
    -  
    -  
Stock price volatility
    57%- 90%  
    66% - 77%  
Risk-free interest rate
    0.71% - 2.25%  
    0.56%- 1.06%  
Expected life of options
  2.6 - 6.5 years  
  1.5 - 5.0 years  
 
Approval of the Amendment of the Company’s 2012 Stock Option Plan
 
On February 23, 2017, the Company’s board of directors received the approval of our stockholders, to amend the 2012 Stock Option Plan (“Plan”) to increase the number of shares of common stock available for grant and to expand the types of awards available for grant under the Plan.
 
The amendment of the Plan increases the number of shares of the Company’s common stock that may be delivered pursuant to awards granted during the life of the plan from 40,000,000 to 80,000,000 shares authorized. The Plan currently provides only for the grant of options; however the Plan amendments will allow for the grant of: (i) incentive stock options; (ii) nonqualified stock options; (iii) stock appreciation rights; (iv) restricted stock; and (v) other stock-based and cash-based awards to eligible individuals. The terms of the awards will be set forth in an award agreement, consistent with the terms of the Plan. No stock option is exercisable later than ten years after the date it is granted.
 
Note 9. Commitments and Contingencies
 
Credit Risk
 
The Company maintains cash balances at various financial institutions primarily located in California. Accounts at the U.S. institutions are secured, up to certain limits, by the Federal Deposit Insurance Corporation. At times, balances may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalent balances.
 
Litigation
 
We are, from time to time, the subject of claims and suits arising out of matters occurring during the operation of our business. We are not presently party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
 
 
 
 
-72-
 
Leases
 
The Company leases its domestic and certain foreign facilities and other equipment under non-cancelable operating lease agreements, which expire at various dates through 2023. In addition to the minimum future lease commitments presented below, the leases generally require that the Company pay property taxes, insurance, maintenance and repair costs. Such expenses are not included in the operating lease amounts.
  
At December 31, 2016, future minimum lease commitments are as follows (in thousands):
 
2017
  $ 1,138  
2018
    930  
2019
    634  
2020
    557  
2021
    571  
Thereafter
    748  
Total
  $ 4,578  
 
Rent expense was $1,558,000 and $1,043,000 for the years ended December 31, 2016 and 2015, respectively.
 
In connection with the Company's 2011 acquisition of FDI, it assumed mortgage guarantee obligations made by FDI on the building previously housing our New Hampshire office.  The balance of the mortgages is approximately $1,806,000 as of December 31, 2016 (see Note 3, above). 
   
The Company purchases its inventory from multiple third-party suppliers at competitive prices. The Company made purchases from three vendors, which individually comprised more than 10% of total purchases and in aggregate approximated 54% and 61% of total purchases for the years ended December 31, 2016 and 2015, respectively. 
 
The Company has purchase obligations related to minimum future purchase commitments for green coffee to be used in the Company’s commercial coffee segment for roasting.  Each individual contract requires the Company to purchase and take delivery of certain quantities at agreed upon prices and delivery dates.  The contracts as of December 31, 2016, have minimum future purchase commitments of approximately $1,164,000, which are to be delivered in 2017.  The contracts contain provisions whereby any delays in taking delivery of the purchased product will result in additional charges related to the extended warehousing of the coffee product.  The fees can average approximately $0.01 per pound for every month of delay, to-date the Company has not incurred such fees.  
 
Note 10. Income Taxes
 
The income tax provision contains the following components (in thousands):
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Current
 
 
 
 
 
 
Federal
  $ 3  
  $ 66  
State
    (18 )
    (161 )
Foreign
    150  
    76  
Total current
    135  
    (19 )
Deferred
       
       
Federal
  $ (304 )
  $ 1,307  
State
    (21 )
    96  
Foreign
    -  
    -  
Total deferred
    (325 )
    1,403  
Net income tax (benefit) expense
  $ (190 )
  $ 1,384  
 
Income (loss) before income taxes relating to non-U.S. operations were $590,000 and $(62,000) in the years ended December 31, 2016 and 2015, respectively.
  
 
 
 
-73-
 
 
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income (loss) as a result of the following differences:
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Federal statutory rate
  $ (206 )
  $ (113 )
 
       
       
Adjustments for tax effects of:
       
       
Foreign rate differential
    (35 )
    26  
State taxes, net
    (112 )
    (241 )
Other nondeductible items
    (50 )
    1,162  
Change in foreign entity tax status
    (77 )
    -  
Rate change
    6  
    91  
Deferred tax asset adjustment
    (201 )
    101  
Change in valuation allowance
    183  
    161  
Foreign tax credit
    275  
    -  
Undistributed foreign earnings
    17  
    197  
Other
    10  
    -  
 
  $ (190 )
  $ 1,384  
 
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Deferred tax assets:
 
 
 
 
 
 
Amortizable assets
  $ 1,117  
  $ 1,146  
Inventory
    726  
    608  
Accruals and reserves
    222  
    174  
Stock options
    285  
    217  
Net operating loss carry-forward
    3,554  
    2,387  
Credit carry-forward
    309  
    581  
Total deferred tax asset
    6,213  
    5,113  
 
       
       
Deferred tax liabilities:
       
       
Prepaids
    (383 )
    (71 )
Other
    (608 )
    (521 )
Depreciable assets
    (464 )
    (270 )
 Total deferred tax liability
    (1,455 )
    (862 )
Net deferred tax asset
    4,758  
    4,250  
Less valuation allowance
    (1,901 )
    (1,718 )
Net deferred tax liabilities
  $ 2,857  
  $ 2,532  
 
The Company has determined through consideration of all positive and negative evidence that the US federal deferred tax assets are more likely than not to be realized.  The Company does not have a valuation allowance in the US Federal tax jurisdiction.  A valuation allowance remains on certain state and foreign tax attributes that are likely to expire before realization. The valuation allowance increased approximately $183,000 for the year ended December 31, 2016 and increased approximately $161,000 for the year ended December 31, 2015.
 
At December 31, 2016, the Company had approximately $4,611,000 in federal net operating loss carryforwards, which begin to expire in 2028, and approximately $24,761,000 in net operating loss carryforwards from various states. The Company had approximately $1,697,000 in net operating losses in foreign jurisdictions.
 
Pursuant to Internal Revenue Code ("IRC") Section 382, use of net operating loss and credit carryforwards may be limited if the Company experienced a cumulative change in ownership of greater than 50% in a moving three-year period.  Ownership changes could impact the Company's ability to utilize the net operating loss and credit carryforwards remaining at an ownership change date.  The Company has not completed a Section 382 study.
 
The Company has analyzed the impact of repatriating earnings from its foreign subsidiaries and has determined that the impact is immaterial. The Company does not assert indefinite reinvestment of earnings from its foreign subsidiaries. Therefore, a deferred tax liability has been recorded. As of December 31, 2016 the deferred tax liability net of tax deemed paid is approximately $310,000.
   
 
 
 
-74-
 
 
The Company has accounted for uncertain tax position related to states. The Company accounts for interest expense and penalties related to income tax issues as income tax expense. Accordingly, interest expense and penalties associated with an uncertain tax position are included in the income tax provision. The total amount of accrued interest and penalties as of December 31, 2016 are approximately $1,000. Income tax expense as of December 31, 2016, included an increase in state income tax expense of approximately $4,000 related to uncertain tax positions.
 
Note 11.  Segment and Geographical Information
 
The Company offers a wide variety of products to support a healthy lifestyle including; nutritional supplements, sports and energy drinks, health and wellness, weight loss, gourmet coffee, skincare and cosmetics, lifestyle services, digital products including scrap books and memory books, packaged foods, pharmacy discount cards, and clothing and jewelry lines. The Company’s business is classified by management into two reportable segments: direct selling and commercial coffee.
 
The Company’s segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker evaluates segment performance primarily based on revenue and segment operating income. The principal measures and factors the Company considered in determining the number of reportable segments were revenue, gross margin percentage, sales channel, customer type and competitive risks. In addition, each reporting segment has similar products and customers, similar methods of marketing and distribution and a similar regulatory environment.
 
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies. Segment revenue excludes intercompany revenue eliminated in the consolidation. The following tables present certain financial information for each segment (in thousands):
 
 
 
Years ended
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Revenues
 
 
 
 
 
 
Direct selling
  $ 145,418  
  $ 138,927  
Commercial coffee
    17,249  
    17,670  
Total revenues
  $ 162,667  
  $ 156,597  
Gross profit
       
       
Direct selling
  $ 97,219  
  $ 93,613  
Commercial coffee
    918  
    (644 )
Total gross profit
  $ 98,137  
  $ 92,969  
Operating income (loss)
       
       
Direct selling
  $ 4,564  
  $ 8,594  
Commercial coffee
    (2,049 )
    (3,188 )
Total operating income
  $ 2,515  
  $ 5,406  
Net income (loss)
       
       
Direct selling
  $ 1,894  
  $ 3,144  
Commercial coffee
    (2,292 )
    (4,850 )
Total net loss
  $ (398 )
  $ (1,706 )
Capital expenditures
       
       
Direct selling
  $ 1,922  
  $ 1,396  
Commercial coffee
    903  
    2,223  
Total capital expenditures
  $ 2,825  
  $ 3,619  
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Total assets
 
 
 
 
 
 
Direct selling
  $ 40,127  
  $ 36,907
Commercial coffee
    25,881  
    24,422  
Total assets
  $ 66,008  
  $ 61,329
 
 
 
-75-
 
Total tangible assets, net located outside the United States are approximately $5.4 million as of December 31, 2016. For the year ended December 31, 2015, total assets, net located outside the United States were approximately $5.2 million.
 
The Company conducts its operations primarily in the United States. For the year ended December 31, 2016 approximately 9% of the Company’s sales were derived from sales outside the United States. As compared to approximately 7% for the year ended December 31, 2015. The following table displays revenues attributable to the geographic location of the customer (in thousands):
 
  
 
Years ended
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Revenues
 
 
 
 
 
 
United States
  $ 147,548  
  $ 145,259  
International
    15,119  
    11,338  
Total revenues
  $ 162,667  
  $ 156,597  
 
Note 12.  Subsequent Events
 
None.
 
 
 
-76-
 
I tem 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
I tem 9A.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
As required by Rule 13a-15(b) under the Exchange Act, our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the foregoing evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control Over Financial Reporting
   
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework   and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013)  . Based on its evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
 
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures and our internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that the breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
 
Changes in Our Controls
 
There were no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
 
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
 
I tem 9B.  Other Information
 
None.
 
 
 
-77-
 
PART III
 
I tem 10. Directors, Executive Officers and Corporate Governance
 
Pursuant to our bylaws, the number of directors is fixed and may be increased or decreased from time to time by resolution of our Board of Directors, or the Board. The Board has fixed the number of directors at five members.
 
Information Regarding the Board of Directors
 
Information with respect to our current directors is shown below.
 
Name
 
Age
 
Director Since
 
Position
Stephan Wallach
 
 
50
 
 2011*
 
Chairman and Chief Executive Officer
David Briskie
 
 
56
 
2011
 
President, Chief Financial Officer and Director
Michelle Wallach
 
 
46
 
 2011*
 
Chief Operating Officer and Director
Richard Renton
 
 
61
 
2012
 
Director
William Thompson
 
 
56
 
2013
 
Director
 
*   Since 1996, Stephen Wallach and Michelle Wallach have been directors of AL Global, Corporation the private company that merged with and into Javalution Coffee Company, our predecessors in 2011.
 
Stephan Wallach, Chief Executive Officer and Chairman of the Board
 
Mr. Stephan Wallach was appointed to the position of Chief Executive Officer on July 11, 2011 pursuant to the terms of the merger agreement between Youngevity® and Javalution. He previously served as President and Chief Executive Officer of AL Global Corporation. He has served as a director of our Company since inception and was appointed Chairman of the Board on January 9, 2012. In 1996, Mr. Wallach and the Wallach family together launched our Youngevity® division and served as its co-founder and Chief Executive Officer from inception until the merger with Javalution.   Mr. Wallach’s extensive knowledge about our business operations and our products makes him an exceptional board member.
 
David Briskie, President, Chief Financial Officer and Director
 
Mr. David Briskie was appointed to the position of President on October 30, 2015 and Chief Financial Officer on May 15, 2012. Prior to that, Mr. Briskie served as President of Commercial Development, a position he was appointed to on July 11, 2011 pursuant to the terms of the merger agreement between Youngevity® and Javalution. From February 2007 until the merger he served as the Chief Executive Officer and director of Javalution and since September 2007 has served as the Managing Director of CLR Roasters. Prior to joining Javalution in 2007, Mr. Briskie had an 18-year career with Drew Pearson Marketing (“DPM”), a consumer product company marketing headwear and fashion accessories. He began his career at DPM in 1989 as Executive Vice President of Finance and held numerous positions in the company, including vice president of marketing, chief financial officer, chief operating officer and president.  Mr. Briskie graduated magna cum laude from Fordham University with a major in marketing and finance. Mr. Briskie’s experience in financial matters, his overall business understanding, as well as his familiarity and knowledge regarding public companies make him an exceptional board member.
 
Michelle G. Wallach, Chief Operating Officer and Director
 
Ms. Michelle Wallach was appointed to the position of Chief Operating Officer on July 11, 2011 pursuant to the terms of the merger agreement between Youngevity® and Javalution.  She previously served as Corporate Secretary and Manager of AL Global Corporation. She has a background in network marketing, including more than 10 years in distributor management. Her career in network marketing began in 1991 in Portland, Oregon, where she developed a nutritional health product distributorship. In 1996, Ms. Wallach and the Wallach family together launched our Youngevity® division and served as its co-founder and Chief Operations Officer from inception until the merger with Javalution. Ms. Wallach has an active role in promotion, convention and event planning, domestic and international training, and product development. Ms. Wallach’s prior experience with network marketing and her extensive knowledge about our business operations and our products make her an exceptional board member.
 
 
 
 
-78-
 
Richard Renton, Director
 
Mr. Richard Renton was appointed to our Board of Directors on January 9, 2012, and currently serves on the Youngevity Medical and Athletic Advisory Boards. For the past five years, Mr. Renton owned his own business providing nutritional products to companies like ours.  The Company purchases certain products from Mr. Renton’s company Northwest Nutraceuticals, Inc.  Mr. Renton graduated from Portland State University with quad majors in Sports Medicine, Health, Physical Education, and Chemistry. He has served as an Associate Professor at PSU in Health and First Aid, and was the Assistant Athletic Trainer for PSU, the Portland Timbers Soccer Team, and the Portland Storm Football team. Mr. Renton is a board certified Athletic Trainer with the National Athletic Trainers Association. Mr. Renton’s understanding of nutritional products makes him an exceptional board member.
 
William Thompson, Director
 
Mr. William Thompson was appointed to our Board of Directors on June 10, 2013 and currently serves as the Chief Financial Officer of Broadcast Company of the Americas, which operates three radio stations in San Diego, California. He served as Corporate Controller for the Company from 2011 to March 2013 and for Breach Security, a developer of web application firewalls, from 2007 to 2010.  Prior to 2007, Mr. Thompson was Divisional Controller for Mediaspan Group and Chief Financial Officer of Triathlon Broadcasting Company. Mr. Thompson’s achievements in financial matters and his overall business understanding make him an exceptional board member.
 
Family Relationships
 
Other than Stephan Wallach and Michelle Wallach, who are husband and wife, none of our officers or directors has a family relationship with any other officer or director.
 
INFORMATION REGARDING THE COMMITTEES OF THE BOARD OF DIRECTORS
 
Committees of the Board of Directors
 
The Board of Directors has a standing Audit Committee, Compensation Committee, and Investment Committee. The following table shows the directors who are currently members or Chairman of each of these committees.
 
Board Members
 
Audit
Committee
 
 
Compensation
Committee
 
 
Investment
Committee
 
Stephan Wallach
 
-
 
 
Chairman
 
 
Member
 
David Briskie
 
-
 
 
Member
 
 
Chairman
 
Michelle Wallach
 
-
 
 
-
 
 
-
 
Richard Renton
 
-
 
 
-
 
 
-
 
William Thompson
 
Member
 
 
-
 
 
-
 
 
Board Committees
 
Compensation Committee . The Compensation Committee of the Board of Directors currently consists of Stephan Wallach (Chair) and David Briskie. The functions of the Compensation Committee include the approval of the compensation offered to our executive officers and recommending to the full Board of Directors the compensation to be offered to our directors, including our Chairman. None of the members of the Compensation Committee are independent under the listing standards of The NASDAQ Stock Market. In addition, the members of the Compensation Committee qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee is governed by a written charter approved by the Board of Directors, a copy of which is available on our website at www.ygyi.com .
 
Audit Committee . The Audit Committee of the Board of Directors currently consists of William Thompson. The functions of the Audit Committee include the retention of our independent registered public accounting firm, reviewing and approving the planned scope, proposed fee arrangements and results of the Company’s annual audit, reviewing the adequacy of the Company’s accounting and financial controls and reviewing the independence of the Company’s independent registered public accounting firm. The Board has determined that William Thompson is an “independent director” under the listing standards of The NASDAQ Stock Market. The Board of Directors has also determined that William Thompson is an “audit committee financial expert” within the applicable definition of the SEC. The Audit Committee is governed by a written charter approved by the Board of Directors, a copy of which is available on our website at www.ygyi.com .
 
Investment Committee . The Investment Committee of the Board of Directors currently consists of David Briskie (Chair) and Stephan Wallach as a member. This Committee determines, approves, and reports to the Board of Directors on all elements of acquisitions and investments for the Company.
 
We do not currently have a separate nominating committee and instead our full board of directors performs the functions of a nominating committee. Due to our size we believe that this is an appropriate structure.
 
 
 
 
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Board Leadership Structure
 
We currently have the same person serving as our Chairman of the Board and Chief Executive Officer and we do not have a formal policy on whether the same person should (or should not) serve as both the Chief Executive Officer and Chairman of the Board.  Mr. Briskie currently serves as our President.  Due to the size of our company, we believe that this structure is appropriate.  Mr. Wallach has served as the Chairman of the Board and Chief Executive Officer since AL Global Corporation, the private company that he owned, merged into our predecessor in 2011 and he served as the Chairman of the Board and Chief Executive Officer of AL Global Corporation, since inception.  In serving as Chairman of the Board, Mr. Wallach serves as a significant resource for other members of management and the Board of Directors.
 
We do not have a separate lead director. We believe the combination of Mr. Wallach as our Chairman of the Board and Chief Executive Officer has been an effective structure for our company. Our current structure is operating effectively to foster productive, timely and efficient communication among the independent directors and management.  We do have active participation in our committees by our independent directors. Each committee performs an active role in overseeing our management and there are complete and open lines of communication with the management and independent directors.
 
Oversight of Risk Management
 
The Board of Directors has an active role, as a whole and also at the committee level, in overseeing management of our risks.  The Board of Directors regularly reviews information regarding our strategy, finances and operations, as well as the risks associated with each.
 
Overview
 
Corporate Governance Guidelines
 
We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are fundamental to the overall success of our business, serving our stockholders well and maintaining our integrity in the marketplace. Our Corporate Governance Guidelines and Code of Business Conduct and Ethics, together with our Certificate of Incorporation, Bylaws and the charters of our Board Committees, form the basis for our corporate governance framework. As discussed above, our Board of Directors has established three standing committees to assist it in fulfilling its responsibilities to the Company and its stockholders: the Audit Committee, the Compensation Committee and the Investment Committee. The Board of Directors performs the functions typically assigned to a Nominating and Corporate Governance Committee.
 
Our Corporate Governance Guidelines are designed to ensure effective corporate governance of our company. Our Corporate Governance Guidelines cover topics including, but not limited to, director qualification criteria, director responsibilities, director compensation, director orientation and continuing education, communications from stockholders to the Board, succession planning and the annual evaluations of the Board and its Committees. Our Corporate Governance Guidelines are reviewed regularly by the Board and revised when appropriate. The full text of our Corporate Governance Guidelines can be found in the “Corporate Governance” section of our website accessible at www.ygyi.com . A printed copy may also be obtained by any stockholder upon request to our Corporate Secretary.
 
Code of Business Conduct and Ethics
 
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. This Code constitutes a “code of ethics” as defined by the rules of the SEC. This Code also contains “whistle blower” procedures adopted by our Audit Committee regarding the receipt, retention and treatment of complaints related to accounting, internal accounting controls or auditing matters and procedures for confidential anonymous employee complaints related to questionable accounting or auditing matters. Copies of the code may be obtained free of charge from our website, www.ygyi.com . Any amendments to, or waivers from, a provision of our code of ethics that applies to any of our executive officers will be posted on our website in accordance with the rules of the SEC.
 
Director Independence
 
Our common stock is not quoted or listed on any national exchange or interdealer quotation system with a requirement that a majority of our Board of Directors is independent and therefore we are not subject to any director independence requirements.  However, for purposes of determining independence we use the definition applied by The NASDAQ Stock Market, our Board of Directors has determined that William Thompson is our only independent director in accordance with such definition.
 
 
 
 
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Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16 of the Exchange Act and the related rules of the Securities and Exchange Commission require our directors and executive officers and beneficial owners of more than 10% of our common stock to file reports, within specified time periods, indicating their holdings of and transactions in our common stock and derivative securities. Based solely on a review of such reports provided to us and written representations from such persons regarding the necessity to file such reports, we are not aware of any failures to file reports or report transactions in a timely manner during our fiscal year ended December 31, 2016 other than late filings of (i) a Form 3, a Form 4 which reported six late transactions and a Form 4 which reported an option issuance, (ii) a Form 4 for Mr. Briskie which reported an option issuance, and (iii)a Form 4 for Mr. Thompson which reported an option issuance.
 
Our Board regularly assesses the appropriate size of our Board, and whether any vacancies on our Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Board will consider various potential candidates who may come to the attention of the Board through current Board members, professional search firms, stockholders or other persons. Each candidate brought to the attention of the Board, regardless of who recommended such candidate, is considered on the basis of the criteria set forth in our corporate governance guidelines. As stated above, our Board will consider candidates proposed for nomination by our significant stockholders. Stockholders may propose candidates by submitting the names and supporting information to: Board of Directors in care of the Corporate Secretary, Youngevity International, Inc. 2400 Boswell, Chula Vista, California 91914. Supporting information should include (a) the name and address of the candidate and the proposing stockholder, (b) a comprehensive biography of the candidate and an explanation of why the candidate is qualified to serve as a director taking into account the criteria identified in our corporate governance guidelines, (c) proof of ownership, the class and number of shares, and the length of time that the shares of our voting securities have been beneficially owned by each of the candidate and the proposing stockholder, and (d) a letter signed by the candidate stating his or her willingness to serve, if elected.
 
 
 
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I tem 11.  Executive Compensation
 
Summary Compensation Table
 
The following table sets forth a summary of cash and non-cash compensation awarded, earned or paid for services rendered to us during the years ended December 31, 2016 and 2015 by our “named executive officers,” consisting of (i) each individual serving as principal executive officer during the year ended December 31, 2016, and (ii) our Chief Financial Officer/Chief Operating Officer, our other executive officer.
 
 
Year
 
Salary
($)
 
 
Bonus
($)
 
 
Option
Awards (2)
($)
 
 
Total
($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stephan Wallach (1)
 2016
 
 
282,500
 
 
 
179,730
 
 
 
-
 
 
 
462,230
 
Chief Executive Officer
 2015
 
 
271,519
 
 
 
89,000
 
 
 
-
 
 
 
360,519
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
David Briskie (1) (2)
2016
 
 
282,500
 
 
 
179,730
 
 
 
748,500
 
 
 
1,210,730
 
President and Chief Financial Officer
2015
 
 
271,519
 
 
 
89,000
 
 
 
-
 
 
 
360,519
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Michelle Wallach (1)
 2016
 
 
192,660
 
 
 
179,730
 
 
 
-
 
 
 
372,390
 
Chief Operating Officer
2015
 
 
200,070
 
 
 
57,500
 
 
 
-
 
 
 
257,570
 
 
(1)
Mr. Stephan Wallach, Mr. David Briskie, and Ms. Michelle Wallach have direct and or indirect (beneficially) distributor positions in our Company that pay income based on the performance of those distributor positions in addition to their base salaries, and the people and or companies supporting those positions based upon the contractual agreements that each and every distributor enter into upon engaging in the network marketing business. The contractual terms of these positions are the same as those of all the other individuals that become distributors in our Company. There are no special circumstances for these officers/directors. Mr. Stephan Wallach and Ms. Michelle Wallach received or beneficially received $357,002 and $312,410 in 2016 and 2015, respectively related to their distributor positions, which are not included above. Mr. Briskie beneficially received $23,889 and $28,010 in 2016 and 2015, respectively, related to his spouse’s distributor position, which is not included above. 
(2)
We use a Black-Scholes option-pricing model (Black-Scholes model) to estimate the fair value of the stock option grant. The amounts do not represent the actual amounts paid to or released by any of the Named Executive Officers during the respective periods. For a discussion of the assumptions used in computing this valuation, see Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
 
 
 
 
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Outstanding Equity Awards at Fiscal Year-End
 
The table below reflects all outstanding equity awards made to each of the named executive officers that are outstanding as of December 31, 2016.  We currently grant stock-based awards pursuant to our 2012 Stock Option Plan.
Name
 
Grant Date
 
Number of Securities
Underlying
Unexercised Options
Exercisable
 
Number of Securities
Underlying
Unexercised Options
Unexercisable
 
Option
Exercise
Price ($)
 
Option
Expiration
Date
Stephan Wallach
 
5/31/2012
 
2,500,000
 
-
 
0.22
 
5/31/2022
David Briskie
 
5/31/2012
 
5,000,000
 
-
 
 0.22
 
5/31/2022
 
 
10/31/2013
 
600,000
 
400,000
 
 0.18
 
10/31/2023
 
 
10/30/2014
 
800,000
 
1,200,000
 
 0.19
 
10/30/2024
 
 
12/27/2016
 
-
 
5,000,000
 
0.27
 
12/27/2026
Michelle Wallach
 
5/31/2012
 
2,500,000
 
-
 
 0.22
 
5/31/2022
 
The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility is calculated based on the historical volatility of the Company’s stock. The risk free interest rate is based on the U.S. Treasury yield for a term equal to the expected life of the options at the time of grant.
 
Employment Agreements
 
Our executive officers work as at-will employees.
 
Code Section 162(m) Provisions
 
Section 162(m) of the U.S. Internal Revenue Code, or the Code, generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to the Chief Executive Officer or any of the four most highly compensated officers. Performance-based compensation arrangements may qualify for an exemption from the deduction limit if they satisfy various requirements under Section 162(m). Although we consider the impact of this rule when developing and implementing our executive compensation programs, we believe it is important to preserve flexibility in designing compensation programs. Accordingly, we have not adopted a policy that all compensation must qualify as deductible under Section 162(m) of the Code. While our stock options are intended to qualify as “performance-based compensation” (as defined by the Code), amounts paid under our other compensation programs may not qualify as such. 
 
2016 Director Compensation
 
The following table sets forth information for the fiscal year ended December 31, 2016 regarding the compensation of our directors who at December 31, 2016 were not also named executive officers.
 
Name
 
Fees Earned or
Paid in Cash ($)
 
 
Option
Awards ($)(1)
 
 
Other
Compensation ($)
 
 
Total ($)
 
Richard Renton
    -  
    2,786  
    -  
    2,786  
William Thompson
    -  
    2,786  
    -  
    2,786  
 
(1) The amounts in the “Option Awards” column reflect the dollar amounts recognized as compensation expense for the financial statement reporting purposes for stock options for the fiscal year ended December 31, 2016 in accordance with FASB ASC Topic 718. The fair value of the options was determined using the Black-Scholes model. For a discussion of the assumptions used in computing this valuation, see Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
 
 
 
 
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As of December 31, 2016 the following table sets forth the number of aggregate outstanding option awards held by each of our directors who were not also named executive officers:
 
Name
 
Aggregate
Number of
Option Awards
 
Richard Renton
    250,000  
William Thompson
    250,000  
 
We have granted to non-employee members of the Board of Directors upon appointment, stock options to purchase shares of our common stock at an exercise price equal to the fair market value of the common stock on the date of grant, and additional stock options each year thereafter for their service. We also reimburse the non-employee directors for travel and other out-of-pocket expenses incurred in attending board of director and committee meetings. During 2016, we granted each non-employee director an option to purchase 100,000 shares of our common stock, of which 20% vests on a pro rata basis over five years starting on December 27, 2017.
 
I tem 12.  Security Ownership of Certain Beneficial Owners and Management
 
The following table provides information regarding the beneficial ownership of our common stock as of March 17, 2017, (the “Evaluation Date”) by: (i) each of our current directors, (ii) each of our named executive officers, and (iii) all such directors and executive officers as a group. We know of no other person or group of affiliated persons who beneficially own more than five percent of our common stock. The table is based upon information supplied by our officers, directors and principal stockholders and a review of Schedules 13D and 13G, if any, filed with the SEC. Unless otherwise indicated in the footnotes to the table and subject to community property laws where applicable, we believe that each of the stockholders named in the table has sole voting and investment power with respect to the shares indicated as beneficially owned.
 
Applicable percentages are based on 392,704,557 shares outstanding as of the Evaluation Date, adjusted as required by rules promulgated by the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of our common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable within 60 days of the Evaluation Date. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
 
 
 
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Name of Beneficial Owner
Number of Shares Beneficially Owned
 
Percentage
Ownership
Executive Officers & Directors   (1)
 
 
 
 
Stephan Wallach, Chairman and Chief Executive Officer
282,556,250
(2)
71.5
%
David Briskie, President , Chief Financial Officer and Director
16,809,155
(3)
4.2
%
Michelle Wallach, Chief Operating Officer and Director
282,500,000
(2)
71.5
%
Richard Renton, Director
434,600
(4)
*
 
William Thompson, Director
100,000
(5)
*
 
All Executive Officers & Directors, as a group (5 persons)
302,400,005
 
77.0
%
 
 
 
 
 
Stockholders owning 5% or more
 
 
 
 
Carl Grover
44,866,952
(6)
9.99
%
 
*less than 1%
 
(1)
Unless otherwise set forth below, the mailing address of Executive Officers, Directors and 5% or greater holders is c/o the Company, 2400 Boswell Road, Chula Vista, California 91914.
(2)
Mr. Stephan Wallach, our Chief Executive Officer, owns 280,000,000 shares of common stock through joint ownership with his wife, Michelle Wallach, with whom he shares voting and dispositive control. Mr. Wallach also owns 56,250 shares and options to purchase 2,500,000 shares of common stock which are exercisable within 60 days of the Evaluation Date and are included in the number of shares beneficially owned by him and Ms. Wallach also owns options to purchase 2,500,000 shares of common stock which are exercisable within 60 days of the Evaluation Date and are included in the number of shares beneficially owned by her.
(3)
Mr. David Briskie, our President and Chief Financial Officer, owns 3,408,588 shares of common stock, and beneficially owns 2,000,567 shares of common stock owned by Brisk Investments, LP, 5,000,000 shares of common stock owned by Brisk Management, LLC.  Mr. Briskie also owns options to purchase 6,400,000 shares of common stocks that are exercisable within 60 days of the Evaluation Date and are included in the number of shares beneficially owned by him.  
(4)
Mr. Renton is a director of the Company, owns 34,850 shares of common stock and 187,500 shares of common stock through joint ownership with his wife, Roxanna Renton, with whom he shares voting and dispositive control.  Mr. Renton also owns 149,750 options to purchase common stock which are exercisable within 60 days of the Evaluation Date, 62,500 shares purchasable upon the excise of outstanding warrants and are included in the number of shares beneficially owned by him.
(5)
Mr. Thompson is a director of the Company, owns 100,000 options to purchase common stock which are exercisable within 60 days of the Evaluation Date and are included in the number of shares beneficially owned by him.
(6)
Mr. Grover is the sole beneficial owner of 44,866,952 shares of common stock. Mr. Grover owns a September 2014 Note in the principal amount of $4,000,000 convertible into 11,428,571 shares of Common Stock and a September 2014 Warrant exercisable for 15,652,174 shares of Common Stock. Mr. Grover also owns a November 2015 Note in the principal amount of $7,000,000 convertible into 20,000,000 shares of Common Stock and a November 2015 Warrant exercisable for 9,333,333 shares of Common Stock. He also owns 5,151,240 shares of common stock. Mr. Grover has a contractual agreement with us that limits his exercise of warrants and conversion of notes such that his beneficial ownership of our equity securities to no more than 9.99% of the voting power of the Company at any one time and therefore his beneficial ownership does not include the shares of Common Stock issuable upon conversion of notes or exercise or warrants owned by Mr. Grover if such conversion or exercise would cause his beneficial ownership to exceed 9.99% of our outstanding shares of Common Stock. Mr. Grover’s address is 1010 S. Ocean Blvd., Apt 1017, Pompano Beach, FL 33062.
    
 
 
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I tem 13. Certain Relationships and Related Transactions
 
FDI Realty, LLC
 
In December 2015 we relocated our marketing operations from Windham, New Hampshire, to our corporate headquarters in Chula Vista, California. The Windham building is owned by FDI Realty and Mr. William Andreoli, our Former President is the single member of FDI Realty. The building consists of 12,750 square feet of office rental space. We are currently a co-guarantor of FDI Realty’s mortgages on the building.
 
2400 Boswell, LLC
 
2400 Boswell, LLC (“2400 Boswell”) is the owner and lessor of the building occupied by us for our corporate office and warehouse in Chula Vista, CA.  As of December 31, 2012, an immediate family member of a greater than 5% shareholder of the Company was the single member of 2400 Boswell and the Company was a co-guarantor of the 2400 Boswell mortgage on the leased building. During 2013 we acquired 2400 Boswell LLC for $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, payable in equal payments over 5 years and bears interest at 5.00%.  Additionally, we assumed a long-term mortgage of $3,625,000, payable over 25 years at an interest rate of 5.75%.
 
Richard Renton
 
Richard Renton is a member of the Board of Directors and owns and operates with his wife Roxanna Renton Northwest Nutraceuticals, Inc., a supplier of certain inventory items sold by the Company. The Company made purchases of approximately $126,000 and $93,000 from Northwest Nutraceuticals Inc., for the years ended December 31, 2016 and 2015, respectively. In addition, Mr. Renton and his wife are also distributors of the Company and the Renton’s were paid distributor commissions for the years ended December 31, 2016 and 2015 approximately $457,000 and $422,000 respectively.
 
Hernandez, Hernandez, Export Y Company
 
Our Company’s coffee segment CLR is associated with Hernandez, Hernandez, Export Y Company (“H&H”), a Nicaragua company, through sourcing arrangements to procure Nicaraguan green coffee and in March 2014 as part of the Siles Plantation Family Group “Siles” acquisition, CLR engaged H&H as employees to manage Siles.
 
As an inducement to managing the operations Siles, CLR and H&H entered into an Operating and Profit Sharing Agreement (“Agreement”).  In accordance with the Agreement, H&H shares equally (50%) in all profits and losses generated by Siles, and profits from any subsequent sale of the plantation, after profits are first distributed to CLR equal to the amount of CLR’s cash contributions for the acquisitions, then after profits are distributed to H&H in an amount equal to their cash contributions, and after certain other conditions are met. During the years ended December 31, 2016 and 2015CLR recorded expenses allocated to the profit sharing Agreement of $698,000 and $528,000, respectively.   As of December 31, 2016 and 2015 the balance of contingent acquisition debt payable to H&H after the reduction of $698,000 and $528,000 from the allocation of 50% losses recognized in 2016 and 2015 is $83,000 and $894,000, respectively.
 
CLR sources green coffee from H&H and made purchases of approximately $8,810,000 and $10,499,000 for the years ended December 31, 2016 and 2015, respectively. H&H Coffee Group Export, a Florida Company which is affiliated with H&H is a customer of CLR. During the year ended December 31, 2016 CLR sold $2,637,000 in green coffee to H&H Coffee Group Export. There were no related sales of green coffee to H&H Coffee Group Export during 2015.
 
Carl Grover
 
Mr. Carl Grover the beneficial owner of in excess of five percent (5%) of our outstanding common shares is the sole beneficial owner of 44,866,952 shares of our common stock. Mr. Grover owns a September 2014 Note in the principal amount of $4,000,000 convertible into 11,428,571 shares of common stock convertible at $0.35 per share, and a September 2014 Warrant exercisable for 15,652,174 shares of common stock at an exercise price of $0.23 per share. Mr. Grover also owns a November 2015 Note in the principal amount of $7,000,000 convertible into 20,000,000 shares of common stock convertible at $0.35 per share, and a November 2015 Warrant exercisable for 9,333,333 shares of common stock at an exercise price of $0.45 per share. He also owns 5,151,240 shares of common stock. See Item 12 above.
 
Compensation of Our Current Directors and Executive Officers
 
For information with respect to the compensation offered to our current directors and executive officers, please see the descriptions under the heading “Executive Compensation” of this annual report.
 
Related Party Transaction Policy and Procedures
 
Pursuant to our Related Party Transaction and Procedures, our executive officers, directors, and principal stockholders, including their immediate family members and affiliates, are prohibited from entering into a related party transaction with us without the prior consent of our Audit Committee or our independent directors. Any request for us to enter into a transaction with an executive officer, director, principal stockholder, or any of such persons’ immediate family members or affiliates, must first be presented to our Audit Committee for review, consideration and approval. In approving or rejecting the proposed agreement, our Audit Committee will consider the relevant facts and circumstances available and deemed relevant, including, but not limited, to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a director’s independence. Our Audit Committee approves only those agreements that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our Audit Committee determines in the good faith exercise of its discretion.
 
 
 
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I tem 14.  Principal Accounting Fees and Services
 
Independent Registered Public Accounting Firm’s Fee Summary
 
The following table provides information regarding the fees billed to us by Mayer Hoffman McCann P.C. for the years ended December 31, 2016 and 2015. Mayer Hoffman McCann P.C. leases substantially all of its personnel, who work under the control of Mayer Hoffman McCann P.C. shareholders, from wholly-owned subsidiaries of CBIZ, Inc., including CBIZ MHM, LLC, in an alternative practice structure. All fees described below were approved by the Board or the Audit Committee:
 
 
 
December 31,
2016
 
 
December 31,
2015
 
Audit Fees and Expenses (1)
  $ 264,000  
  $ 300,000  
Audit Related Fees (2)
    17,000  
    8,000  
All Other Fees
    -  
    -  
 
  $ 281,000  
  $ 308,000  
 
(1)
Audit fees and expenses were for professional services rendered for the audit and reviews of the consolidated financial statements of the Company, professional services rendered for issuance of consents and assistance with review of documents filed with the SEC.
(2)
The audit related fees were for professional services rendered for additional filing for registration statements and forms with the SEC.
 
Pre-Approval Policies and Procedures
 
Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm.
 
Prior to the engagement of the independent registered public accounting firm for the next year’s audit, management will submit a list of services and related fees expected to be rendered during that year for audit services, audit-related services, tax services and other fees to the Audit Committee for approval.
 
 
 
 
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PART IV
 
I tem 15.   Exhibits, Financial Statement Schedules
 
(a)(1)
The Consolidated Financial Statements of Youngevity International, Inc. and Report of Independent Registered Public Accounting Firm are included in Item 8 of this Annual Report.
     (2)
Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
 
     (3)
The following exhibits are filed as part of this Annual Report pursuant to Item 601 of Regulation S-K:
 
 
 
 
 
Exhibit No.
 
Title of Document
3.1
 
Certificate of Incorporation Dated July 15, 2011 (1)
3.2
 
Bylaws (1)
4.1
 
Specimen Common Stock certificate (1)
4.2
 
Warrant for Common Stock issued to David Briskie (1)
4.3
 
Stock Option issued to Stephan Wallach (1)
4.4
 
Stock Option issued to Michelle Wallach (1)
4.5
 
Stock Option issued to David Briskie (1)
4.6
 
Stock Option issued to William Andreoli (1)
4.7
 
Stock Option issued to Richard Renton (1)
4.8
 
Stock Option issued to John Rochon (1)
4.9
 
Form of Purchase Note Agreement (3)
4.10
 
Form of Secured Convertible Notes (3)
4.11
 
Form of Series A Warrants (3)
4.12
 
Form of Registration Rights Agreement (3)
4.13
 
Form of Note Purchase Agreement (4)
4.14
 
Form of Secured Note (4)
4.15
 
Form of Purchase Note Agreement (6)
4.16
 
Form of Secured Note (6)
4.17
 
Form of Warrant (6)
10.1
 
Purchase Agreement with M2C Global, Inc. dated March 9, 2007 (1)
10.2
 
First Amendment to Purchase Agreement with M2C Global, Inc. dated September 7, 2008 (1)
10.3
 
Asset Purchase Agreement with MLM Holdings, Inc. dated  June 10, 2010 (1)
10.4
 
Agreement of Purchase and Sale with Price Plus, Inc. dated September 21, 2010 (1)
10.5
 
Amended and Restated Agreement and Plan of Reorganization Javalution Coffee Company, YGY Merge, Inc. dated July 11, 2011 (1)
10.6
 
Asset Purchase Agreement with R-Garden Inc. dated July 1, 2011 (1)
10.7
 
Re-Purchase Agreement with R-Garden dated September 12, 2012 (1)
10.8
 
Agreement and Plan of Reorganization with Javalution dated July 18, 2011 (1)
10.9
 
Asset Purchase Agreement with Adaptogenix, LLC dated August 22, 2011 (1)
10.10
 
Amended Asset Purchase Agreement with Adaptogenix, LLC dated January 27, 2012 (1)
10.11
 
Asset Purchase Agreement with Prosperity Group, Inc. dated October 10, 2011 (1)
10.12
 
Amended and Restated Equity Purchase Agreement with Financial Destination, Inc., FDI Management Co, Inc., FDI Realty, LLC, and MoneyTRAX, LLC dated October 25, 2011 (1)
10.13
 
Exclusive License/Marketing Agreement with GLIE, LLC dba True2Life dated March 20, 2012 (1)
10.14
 
Bill of Sale with Livinity, Inc. dated July 10, 2012 (1)
10.15
 
Consulting Agreement with Livinity, Inc. dated July 10, 2012 (1)
10.16
 
Employment Agreement with William Andreoli dated October 25, 2011 (1)
10.17
 
Promissory Note with 2400 Boswell LLC dated July 15, 2012 (1)
10.18
 
Promissory Note with William Andreoli dated July 1, 2012 (1)
10.19
 
2012 Stock Option Plan (1)
 
 
10.20
 
Form of Stock Option(1)
10.21
 
Lease with 2400 Boswell LLC dated May 1, 2001(1)
10.22
 
Lease with FDI Realty LLC dated July 29, 2008(1)
10.23
 
First Amendment to Lease with FDI Realty LLC dated October 25, 2011(1)
10.24
 
Lease with Perc Enterprises dated February 6, 2008(1)
10.25
 
Lease with Perc Enterprises dated September 25, 2012(1)
10.26
 
Factoring Agreement with Crestmark Bank dated February 12, 2010(1)
10.27
 
First Amendment to Factoring Agreement with Crestmark Bank dated April 6, 2011(1)
10.28
 
Second Amendment to Factoring Agreement with Crestmark Bank dated February 1, 2013(1)
10.29
 
Lease with Perc Enterprises dated March 19, 2013(1)
10.30
 
Purchase Agreement with Ma Lan Wallach dated March 15, 2013(1)
10.31
 
Promissory Note with Plaza Bank dated March 14, 2013(1)
10.32
 
Form of Security Agreement(3)
10.33
 
Guaranty Agreement made by Stephan Wallach(3)
10.34
 
Form of Security Agreement(4)
10.35
 
Guaranty Agreement made by Stephan Wallach(4)
10.36
 
Credit Agreement with Wells Fargo Bank, National Association dated October 10, 2014(5)
10.37
 
Amended and Restated 2012 Stock Incentive Plan (7)
10.38
 
Form of Stock Option*
10.39
 
Third Amendment with Crestmark Bank dated May 1, 2016*
21.1
 
Subsidiaries of Youngevity International, Inc. *
23.1
 
Consent of Independent Registered Public Accounting Firm *
31.1
 
Certification of Stephan Wallach, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) *
31.2
 
Certification of David Briskie, Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) *
32.1
 
Certification of Stephan Wallach, Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 *
32.2
 
Certification David Briskie, Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 *
101.INS
 
XBRL Instance Document **
101.SCH
 
XBRL Taxonomy Extension Schema Document **
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document **
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document **
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document **
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document **
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
*  
Filed herewith
 
(1)  
Incorporated by reference to the Company’s Form 10-12G, File No. 000-54900, filed with  the  Securities and  Exchange Commission on  February 12, 2013
(2)  
Incorporated by reference to the Company’s Form 10-K, File No. 000-54900, filed with the Securities and Exchange Commission on March 27, 2014
(3)  
Incorporated by reference to the Company’s 8-K, File No. 000-54900, filed with the Securities and Exchange Commission on August 5, 2014
(4)  
Incorporated by reference to the Company’s 8-K, File No. 000-54900, filed with the Securities and Exchange Commission on January 7, 2015
(5)  
Incorporated by reference to the Company’s Form 10-K, File No. 000-54900, filed with the Securities and Exchange Commission on March 30, 2015
(6)  
Incorporated by reference to the Company’s 8-K, File No. 000-54900, filed with the Securities and Exchange Commission on October 16, 2015
(7)  
Previously filed with the Company’s Current Report on Schedule 14C File No. 000-54900, filed with the Securities and Exchange Commission on March 21, 2017
 
Item 16.   F orm 10-K Summary
 
Not applicable
 
 
S IGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
YOUNGEVITY INTERNATIONAL, INC.
 
 
 
March 30, 2017
By:     
/s/ Stephan Wallach
 
 
Stephan Wallach,
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant in the capacities and on the dates indicated.
 
Signature
Title
Date
 
 
 
 
 
 
/s/ Stephan Wallach
Chief Executive Officer and Director (Principal Executive Officer)
March 30, 2017
Stephan Wallach
 
 
 
 
 
/s/ David Briskie
Chief Financial Officer and Director (Principal Financial and Accounting Officer)
March 30, 2017
David Briskie
 
 
 
/s/ Michelle Wallach
Chief Operating Officer and Director
March 30, 2017
Michelle Wallach
 
 
 
/s/ William Thompson
Director
March 30, 2017
William Thompson
 
 
 
 /s/ Richard Renton
Director
March 30, 2017
Richard Renton
 
 
 
 
 
 
 
 
 
-90-
 
Exhibit 10.38
 
YOUNGEVITY INTERNATIONAL, INC.
 
INCENTIVE STOCK OPTION AGREEMENT
 
 
                                                                      

Name of Option Holder
No.                                                     
 
 
                                                                      
 
Total Number of Shares Subject to Option
Date:                                                 
 
$                                                                    
Exercise Price Per Share
 
INCENTIVE STOCK OPTION granted by Youngevity International, Inc., a Delaware corporation, (the “Company”) to the above-named option holder (the “Optionee”) an employee of the Company or one of its subsidiaries, pursuant to the Company’s 2012 Stock Option Plan (the “Plan”), the terms of which are incorporated herein by reference and which, in the event of any conflict, shall control over the terms contained herein.
 
1.  Grant, Vesting and Expiration of Option .
 
Subject to the vesting schedule below, the Company hereby grants to the Optionee an option to purchase on the terms herein provided a total of the number of shares of common stock of the Company (the “Common Stock”) set forth above, at an exercise price per share as set forth above.
 
This Option may be exercised only with respect to the portion thereof that is vested in the Optionee. The Optionee’s right to exercise this option shall become vested in accordance with the following vesting schedule:
 
This option shall expire and shall not be exercisable upon the earlier of: (i) Ten (10) years after the date of this Agreement; or (ii) three (3) months after the Optionee’s termination of employment with the Company.
 
2.  Stock to be Delivered .
 
Stock to be delivered upon the exercise of this option may constitute an original issue of authorized stock or may consist of treasury stock.
 
The Company may, in its sole discretion, determine not to issue or deliver any certificates for shares of Common Stock pursuant to the exercise of this Option prior to (i) the completion of any registration or other qualification of such shares under any federal or state law or regulation, or the maintaining in effect of any such registration or other qualification which the Company shall, in its reasonable discretion upon the advice of counsel, determine to be necessary or advisable; and (ii) the obtaining of any other consent approval, or permit from any state or federal governmental agency which the Company shall, in its reasonable discretion upon the advice of counsel, determine to be necessary or advisable.
 
 
 
 
Unless the shares of Common Stock to be acquired pursuant to the exercise of the Option shall have been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), prior to such exercise, each notice of the exercise of the Option shall include a representation that any of the Option shares purchased shall be acquired for investment only and not with a view to, or for sale in connection with, any public distribution, and that any subsequent resale of any of such shares either shall be made pursuant to a registration statement under the Securities Act which has become effective and is current with regard to the shares being sold, or shall be made pursuant to an exemption from registration under the Securities Act. In addition, the certificates representing such shares shall bear a legend in substantially the following form:
 
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT") OR ANY STATE SECURITIES OR "BLUE SKY" LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH SUCH ACT AND ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.
 
3.  Exercise of Option .
 
Each election to exercise this option shall be in writing, signed by the Optionee or by the person authorized to exercise this option under paragraph 9 hereof, and delivered or mailed to the Chief Financial Officer of the Company at its principal office, 2400 Boswell Road, Chula Vista, CA 91914 accompanied by this certificate.
 
In the event an option is exercised by the executor or administrator of a deceased Optionee, or by the person or person to whom the option has been transferred by the Optionee's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver stock thereunder unless and until the Company is satisfied that the person or person exercising the option is or are the duly appointed executor or administrator of the deceased Optionee or the person to whom the option has been transferred by the Optionee's will or by the applicable laws of descent and distribution.
 
4.  Payment for and Delivery of Stock .
 
Payment in full by a certified or bank check shall be made for all shares of which this option is exercised at the time of such exercise, and no shares shall be delivered until such payment is made.
 
The Company shall not be obligated to deliver any stock unless and until all applicable Federal and state laws and regulations have been complied with, or in the event the outstanding common stock is at the time listed upon the Nasdaq SmallCap Market or any stock exchange, unless and until the shares to be delivered have been listed, or authorized to be added to the list by the Nasdaq SmallCap Market or the exchanges where it is listed, unless and until all legal matters in connection with the issuance and delivery of the shares have been approved by counsel for the Company. The Optionee shall have no rights as a shareholder until the stock is actually delivered to him.
 
5.  Exercise of Option .
 
Each election to exercise this option shall be in writing, signed by the Optionee or by the person authorized to exercise this option, and delivered or mailed to the Treasurer of the Company at its principal office, at its office at 2400 Boswell Road, Chula Vista, CA 91914 accompanied by this certificate.
 
In the event an option is exercised by the executor or administrator of a deceased Optionee, or by the person or person to whom the option has been transferred by the Optionee's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver stock thereunder unless and until the Company is satisfied that the person or person exercising the option is or are the duly appointed executor or administrator of the deceased Optionee or the person to whom the option has been transferred by the Optionee's will or by the applicable laws of descent and distribution.
 
 
 
 
6.  Payment for and Delivery of Stock .
 
Payment in full by a certified or bank check shall be made for all shares of which this option is exercised at the time of such exercise, and no shares shall be delivered until such payment is made.
 
The Company shall not be obligated to deliver any stock unless and until all applicable Federal and state laws and regulations have been complied with, or in the event the outstanding common stock is at the time listed upon the Nasdaq SmallCap Market or any stock exchange, unless and until the shares to be delivered have been listed, or authorized to be added to the list by the Nasdaq SmallCap Market or the exchanges where it is listed, unless and until all legal matters in connection with the issuance and delivery of the shares have been approved by counsel for the Company. The Optionee shall have no rights as a shareholder until the stock is actually delivered to him.
 
7.  Non-transferablility of Option .
 
This option may not be transferred by the Optionee otherwise than by will or the laws of descent and distribution, and during the Optionee's lifetime this option may be exercised only by him.
 
8.  Changes in Stock .
 
In the event of a stock dividend, split-up, combination of shares, recapitalization, merger in which the Company is the surviving corporation or other similar capital change, or in the event of a spin-off or other significant distribution of stock or property by the Company to its shareholders, the number and kind of shares of stock of the Company covered by this option, the option price and other relevant provisions shall be appropriately adjusted by the Board of Directors of the Company whose determination shall be binding on all persons.
 
In the event of a consolidation or merger in which the Company is not the surviving corporation, or in the event of complete liquidation of the Company, this option shall thereupon terminate, provided that the Board of Directors shall, at least twenty days prior to the effective date of any such consolidation or merger, either (a) make this option immediately exercisable, or (b) arrange to have the surviving corporation grant to the Optionee a replacement option on terms which the Board determines to be fair and reasonable.
 
9.  Continuance of Employment .
 
This option shall not be deemed to obligate the Company or any subsidiary to retain the Optionee in its employ for any period.
 
10.  Retirement .
 
If pursuant to the retirement policy of the Company or any subsidiary, the Optionee shall be retired in good standing from the employ of the Company or its subsidiaries prior to the expiration of an option because of age (including early retirement), this option shall terminate on the ninetieth (90 th ) day after such retirement and the Optionee may exercise this option prior to such time but only to the extent to which he was entitled immediately prior to such retirement. Nothing herein shall be construed as extending the exercisability of this option to a date more than Ten (10) years after the date this option is granted.
 
11.  Disability .
 
In the event of termination of employment of the Optionee because of disability, this option shall terminate one year after such termination and the Optionee may exercise this option prior to such time but only to the extent to which he was entitled immediately prior to such termination because of disability. Nothing herein shall be construed as extending the exercisability of this option to a date more than Ten (10) years after the date this option is granted.
 
 
 
 
12.  Death .
 
In the event of the death of the Optionee while employed by the Company or within ninety (90) days after his retirement in good standing because of age or disability, this option shall be exercisable within one (1) year of his death, provided the option does not expire by its terms prior to that date, by the executor, administrator or other legal representative of the estate of the deceased Optionee or the person or persons to whom the deceased Optionee's rights under the option shall pass by will or the laws of descent and distribution but only to the extent the deceased Optionee was entitled to exercise this option immediately prior to his death. Nothing herein shall be construed as extending the exercisability of this option to a date more than Ten (10) years after the date this option is granted.
 
13.  Provisions of the Plan and Section 422A of the Internal Revenue Code .
 
This certificate incorporates by reference the terms of the Plan and of Section 422A of the Internal Revenue Code of 1986, as amended, and is subject to the provisions thereof. The Plan and the options granted pursuant to this certificate are intended to comply with Section 422A of the Internal Revenue Code of 1986, as amended and all of the regulations issued pursuant thereto. This certificate shall be construed in accordance with the Plan, said Section 422A and the regulations issued thereunder and any provision of this certificate held to be inconsistent therewith shall be severable and of no force or effect.
 
14.  Provisions of the Plan .
 
This certificate incorporates by reference the terms of the Plan and is subject to the provisions thereof. This certificate shall be construed in accordance with the Plan and any provision of this certificate held to be inconsistent therewith shall be severable and of no force or effect.
 
IN WITNESS WHEREOF, Youngevity International, Inc., has caused this certificate to be executed by a duly authorized Member of the Board of Directors. This option is granted at the Company's principal executive office, on the date stated above.
 
 
 
By: _______________________________
 
       Member of the Board of Directors
 
  
 
 
 
 
RECORD OF PARTIAL EXERCISE
 
Please do not write in these spaces. Entries will be made by the Company upon partial exercise.
 
 
 
 
 
 
NUMBER OF SHARES
PURCHASED UNDER OPTION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DATE OF EXERCISE
 
 
 
OFFICIAL SIGNATURE
 
 
 
 
 
 
Exhibit 10.39
 
THIRD AMENDMENT TO FACTORING AGREEMENT
 
THIS THIRD AMENDMENT TO FACTORING AGREEMENT is effective as of May 1, 2016, and between CLR ROASTERS LLC, a Florida limited liability company (“Client”), and CRESTMARK BANK, a Michigan banking corporation (“Crestmark”).
 
WITNESSETH
 
WHEREAS, Client and Crestmark entered into a Factoring Agreement dated February 12, 2010 and Amendments dated April, 6, 2011 and February 1, 2013 (the “Agreement"); and
 
WHEREAS, Client and Crestmark desire to amend the terms of the Agreement as provided herein.
 
NOW THEREFORE, it is hereby agreed as follows:
 
1. The terms of the Agreement are hereby amended as follows:
 
a. Effective May 1, 2016, all new Receivables assigned to Crestmark shall be “Client Risk Receivables” and no further Credit Approvals will be provided by Crestmark, and there will be no new Credit-Approved Receivables.
 
b. Paragraph 6(a) is hereby deleted in its entirety and the following is inserted in lieu thereof:
 
“(a) For your services hereunder, we shall pay and you shall be entitled to receive a factoring commission equal to three seven eighths of one percent (0.875%) of the gross Invoice Amount of each Receivable for annual sales volume up to Ten Million Dollars ($10,000,000); a factoring commission equal to three quarters of one percent (0.75%) of the gross Invoice Amount of each Receivable for annual sales volume over Ten Million Dollars ($10,000,000), which commission shall be due and payable to you on the date such Receivable arises, even if we should fail to assign any such Receivable to you. Factoring commissions shall be chargeable to our account with you. You shall be entitled to receive a surcharge equal to at least one percent (1.00%) of the gross Invoice Amount of all Receivables arising out of our sales to Debtors-In-Possession or special account relationships. The minimum factoring commission on each invoice or credit memo shall be Five dollars ($5.00).”
 
c. The first sentence in Paragraph 10 is hereby deleted in its entirety and the following is inserted in lieu thereof:
 
 
“This Agreement shall continue in full force and effect until February 1, 2019 and shall be deemed renewed from year to year thereafter unless we give you notice in writing, by registered or certified mail, not less than thirty (30) and not more than sixty (60) days prior to the expiration of the original term of this Agreement (or any renewal term thereof) of our intention to terminate this Agreement as of the end of such term.”
 
 
2. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement.
 
3. Except as above amended, the Agreement remains in full force and effect and binding upon the Client without any defenses, setoffs or counterclaims of any kind whatsoever.
 
 
 
 
 
WITNESSES: 
CLR ROASTERS LLC
 
 
a Florida limited liability company
 
 
 
 
/s/                                           
By: /s/ David Briskie
 
Witness:
By: David Briskie
 
 
Its: Manager
 
/s/                                           
 
 
Witness:
By: /s/ Ernest G. Aguila
 
 
By: Ernesto G. Aguila
 
/s/                                           
Its: Manager
 
Witness:
 
 
 
 
 
/s/                                           
 
 
Witness:
 
 
 
CRESTMARK BANK
 
 
a Michigan banking corporation
 
 
 
 
 
By: /s/ Martin F. Lewald
By: Martin F. Lewald
Its:  Regional Executive Vice President
 
 
 
 
 
 
        The undersigned, being the guarantors of the obligations of Client to Crestmark under the term of that Guarantee dated February 12, 2010 (the “Guarantee”), hereby consent to the above Amendment to Factoring Agreement and reaffirm the Guarantee and confirm that the Guarantee is in full force and effect and binding upon the undersigned without any defenses, setoffs or counterclaims of any kind whatsoever.
 
 
By: /s/ David Briskie
David Briskie
 
 
 
 
Exhibit 21.1
Subsidiaries of Youngevity International, Inc.
 
Subsidiary Name(*)
Names Under Which
Subsidiary Does Business(**)
State or Jurisdiction of
Incorporation or Organization
 
 
 
AL Global Corporation
 
California
CLR Roasters, LLC
 
Florida
Siles Plantation Family Group S.A.
 
Nicaragua
Youngevity NZ, Ltd.
 
New Zealand
Youngevity Australia Pty. Ltd.
 
Australia
2400 Boswell, LLC
 
California
MK Collaborative, LLC
 
Delaware
Youngevity Global, LLC
 
Delaware
Youngevity Global, LLC – Philippine Branch
 
Philippines
Youngevity Mexico S.A. de CV
 
Mexico
Youngevity Israel, Ltd.
 
Israel
Youngevity Russia, LLC
 
Russia
Youngevity Colombia, S.A.S.
 
Colombia
Youngevity Singapore PTE LTD
 
Singapore
Mialisia Canada, Inc.
 
Canada
Legacy for Life Limited (Hong Kong)
 
Hong Kong 
________________________
 
 
 
 
 
 
 
Exhibit 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We hereby consent to the incorporation by reference in Registration Statement No. 333-189748 on Form S-8 of our report dated March 30, 2017, relating to the consolidated financial statements of Youngevity International, Inc. and Subsidiaries, included in this Annual Report on Form 10-K for the year ended December 31, 2016 .
 
 
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 30, 2017
 
 
 
 
 
Exhibit 31.1
 
CERTIFICATIONS
 
I, Stephan Wallach, certify that:
 
1. 
I have reviewed this annual report on Form 10-K of Youngevity International, Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:
 
 
a) 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b) 
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c) 
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d) 
Disclosed in this report any change in the registrant’s internal control over  financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a) 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b) 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated: March 30, 2017
/s/ Stephan Wallach
 
Stephan Wallach,
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
 
Exhibit 31.2
 
CERTIFICATIONS
 
I, David Briskie, certify that:
 
1. 
I have reviewed this annual report on Form 10-K of Youngevity International, Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:
 
 
a) 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b) 
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c) 
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d) 
Disclosed in this report any change in the registrant’s internal control over  financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a) 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b) 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated: March 30, 2017
/s/ David Briskie
 
David Briskie,
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
 
 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of YOUNGEVITY INTERNATIONAL, INC. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Stephan Wallach, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(1)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for, the periods presented in the Report.
 
Dated: March 30, 2017
/s/ Stephan Wallach
 
Stephan Wallach,
 
Chief Executive Officer
 
(Principal Executive Officer)
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
 
 
Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of YOUNGEVITY INTERNATIONAL, INC. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David Briskie, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(1)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for, the periods presented in the Report.
 
Dated: March 30, 2017
/s/ David Briskie
 
David Briskie,
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.