|
As
filed with the Securities and Exchange Commission on February
6, 2018
|
Registration
No. 333-221847
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 2
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
YOUNGEVITY
INTERNATIONAL, INC.
(Exact Name of
Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
5961
(Primary Standard
Industrial Classification Code Number)
90-0890517
(I.R.S. Employer
Identification No.)
2400
Boswell Road
Chula
Vista, California 91914
(619)
934-3980
(Address and telephone
number of principal executive offices)
Stephan
Wallach
Chief
Executive Officer
Youngevity
International, Inc.
2400
Boswell Road
Chula
Vista, California 91914
(619)
934-3980
(Name, address and
telephone number of agent for service)
With
copies to:
|
Leslie
Marlow, Esq.
Hank
Gracin, Esq.
Patrick
J. Egan, Esq.
Gracin
& Marlow, LLP
The
Chrysler Building
405
Lexington Avenue, 26th Floor
New
York, New York 10174
(212)
907-6457
|
Louis
Taubman, Esq.
Hunter
Taubman Fischer & LI LLC
1450
Broadway, 26th Floor
New
York, New York 1018
(917)
512-0827
|
Approximate Date of
Proposed Sale to the Public: From time to time after the date this
registration statement becomes effective.
If any of the
securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.
☒
If this Form is
filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
☐
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ☐
If this Form is a
post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ☐
Indicate by check
mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act of 1934.
|
Large accelerated
filer
|
☐
|
Accelerated
filer
|
☐
|
|
Non-accelerated
filer
|
☐
|
Smaller reporting
company
|
☒
|
|
(Do not check if a
smaller reporting company)
|
|
Emerging growth
company
|
☒
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
CALCULATION
OF REGISTRATION FEE
|
Title
of each class of securities to be registered
|
Proposed
maximum aggregate offering price
(1)
|
Amount
of registration fee
(2)
|
|
Series B
Convertible Preferred Stock, par value $0.001 per
share
|
$
10,000,000
|
$
1,245
|
|
Common stock, par
value $0.001 per share, issuable upon conversion of the
Series
B Convertible Preferred Stock
(2)(3)
|
$
—
|
$
—
|
|
Selling
Agent’s Warrants
(4)
|
$
—
|
$
—
|
|
Shares of Common
Stock underlying Selling Agent’s Warrants
(2)(5)
|
$
600,000
|
$
75
|
|
Total
|
$
10,600,000
|
$
1,320
(6)
|
________________
(1)
Estimated solely
for the purpose of calculating the amount of the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933, as amended
(the “Securities Act”).
(2)
Pursuant to Rule
416, the securities being registered hereunder include such
indeterminate number of additional securities as may be issued
after the date hereof as a result of stock splits, stock dividends
or similar transactions.
(3)
No fee
pursuant to Rule 457(i) under the Securities Act.
(4)
No fee
pursuant to Rule 457(g) under the Securities Act.
(5)
Estimated solely
for the purpose of calculating the registration fee pursuant to
Rule 457(g) under the Securities Act. The selling agent’s
warrants are exercisable at a per share exercise price equal to
120% of the public offering price per share. As estimated solely
for the purpose of calculating the registration fee pursuant to
Rule 457(g) under the Securities Act, the proposed maximum
aggregate offering price of the selling agent’s warrants is
$600,000, which is equal to 120% of $500,000 (5% of
$10,000,000).
(6)
Previously
paid.
The
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act or until the
Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to Section
8(a), may determine.
The
information in this preliminary prospectus is not complete and may
be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities, nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not
permitted.
Subject to completion, dated February 6,
2018
PRELIMINARY PROSPECTUS
Shares
of Series B Convertible Preferred Stock
YOUNGEVITY
INTERNATIONAL, INC.
1,052,631
Shares of Series B Convertible
Preferred Stock
Convertible
into 2,105,262 Shares of Common Stock
We
are offering up to $10,000,000 of our Series B Convertible
Preferred Stock on a best efforts basis without any minimum
offering amount. The offering will terminate at the earlier of (i)
the date at which $10,000,000 of Series B Convertible Preferred
Stock has been sold; (ii) the date on which this offering is
terminated by the Company in its sole discretion or (iii)
March 31, 2018. Until the offering terminates the
proceeds of the offering will be held in an escrow account and
Wilmington Trust, National Association will serve as the escrow
agent
,
except with respect to those investors who choose to invest through
the BANQ online platform
.
We will pay cumulative dividends on the Series B
Convertible Preferred Stock from the date of original issue at a
rate of 5.0% per annum
payable
quarterly in arrears on or about the last day of March, June,
September and December of each year, beginning June 30, 2018. The
Series B Convertible Preferred Stock will rank senior to our
outstanding Series A Convertible Preferred Stock and our common
stock par value $0.001 (the "Common Stock") with respect to
dividend rights and rights upon liquidation, dissolution or winding
up. Each holder of Series B Convertible Preferred Stock shall
receive a credit towards our merchandise equal to ten percent (10%)
of the amount of their investment up to a maximum credit of $1,000.
Holders of the Series B Convertible Preferred Stock will have
limited voting rights. Each share of Series B Convertible Preferred
Stock is initially convertible at any time, in whole or in part, at
the option of the holders,
at
an initial conversion price of $4.75 per share,
into
two shares of common stock and automatically converts into two
shares of Common Stock on its two-year anniversary of
issuance.
The
Common Stock is listed on the NASDAQ Capital Market under the
symbol “YGYI.” On February 5, 2018, the
last reported sale price of the Common Stock on the NASDAQ Capital
Market was $4.78 per share. There is no established
trading market for the Series B Convertible Preferred Stock and we
do not expect a market to develop. In addition, we do not intend to
apply for the listing of the Series B Convertible Preferred Stock
on any national securities exchange or other trading market.
Without an active trading market, the liquidity of the Series B
Convertible Preferred Stock will be limited.
The
offering price of the Series B Convertible Preferred Stock is $9.50
per share. We effected a 1-for-20 reverse stock split of our
outstanding Common Stock on June 7, 2017.
TriPoint
Global Equities, LLC has agreed to act as our exclusive selling
agent to offer shares of the Series B Convertible Preferred Stock
to prospective investors on a best efforts basis. The selling agent
is not purchasing any shares of Series B Convertible Preferred
Stock offered by us and is not required to sell any specific number
or dollar amount of Series B Convertible Preferred Stock in the
offering. In connection with the sale of the Series B Convertible
Preferred Stock, TriPoint Global Equities, LLC will be
deemed to be an “underwriter” within the meaning of the
Securities Act and the compensation of TriPoint Global Equities,
LLC will be deemed to be underwriting commissions or
discounts.
We are an
“emerging growth company” as that term is used in the
Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”) and, as such, have elected to comply with certain
reduced public company reporting requirements. See
“Prospectus Summary—Implications of Being an Emerging
Growth Company.”
Investing in our securities involves risk. See
“Risk Factors” beginning on page
15 of this prospectus for a discussion of
information that should be considered in connection with an
investment in our securities.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
|
|
Per Share
|
Total
|
|
Public
offering price
|
$
9.50
|
$
10,000,000
|
|
Selling agent’s fee's
(1)
|
$
0.38
|
$
400,000
|
|
Proceeds, before expenses, to us
(2)(3)
|
$
9.12
|
$
9,600,000
|
———————
|
|
|
|
(1)
|
We have also agreed
to reimburse the selling agent for certain expenses. In addition,
we have agreed to issue to the selling agent warrants, to purchase
up to 105,263 shares of our common stock
equal to five percent (5.0%) of the shares of
common stock underlying the Series B Convertible Preferred Stock
that is sold in the offering
at an exercise price of $5.70
per share of our common stock as additional compensation, see the
“Plan of Distribution”.
|
|
(2)
|
We estimated that
our total expenses for this offering including the 10% merchandise
credit (which based on the average cost of sales of our products is
estimated to be $350,000), excluding selling agent commissions,
will be approximately $600,000.
|
|
(3)
|
Assumes that all of
the securities offered are sold.
|
The selling agent
is not required to sell any specific number or dollar amount of
securities but will use best efforts to sell the maximum number of
securities offered. All funds received from subscribers will be
deposited in escrow in a non-interest bearing account (the
“Escrow Account”) at Wilmington Trust, National
Association
except
with respect to those investors who choose to invest through the
BANQ online platform
. We expect that delivery of the
Series B Convertible Preferred Stock offered hereby against payment
will be made on or about ________, 2018 after release of the funds
from escrow.
|
|
|
|
|
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Sole Book Running Manager
|
|
The date of this
prospectus is ____________, 2018
TAB
L
E OF CONTENTS
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Page
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1
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1
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2
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12
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13
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15
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30
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31
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32
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32
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33
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49
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62
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63
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65
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68
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70
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71
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74
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80
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80
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80
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80
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81
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II-1
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A
BOUT THIS PROSPECTUS
You should rely
only on the information contained in this prospectus or in any free
writing prospectus that we may specifically authorize to be
delivered or made available to you. We have not, and the selling
agent has not, authorized anyone to provide you with any
information other than that contained in this prospectus or in any
free writing prospectus we may authorize to be delivered or made
available to you. We take no responsibility for, and can provide no
assurance as to the reliability of, any other information that
others may give you. This prospectus may only be used where it is
legal to offer and sell our securities. The information in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any sale
of shares of our common stock. Our business, financial condition,
results of operations and prospects may have changed since that
date. We are not, and the selling agent is not, making an offer of
these securities in any jurisdiction where the offer is not
permitted.
For investors
outside the United States: We have not and the selling agent has
not done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action
for that purpose is required, other than in the United States.
Persons outside the United States who come into possession of this
prospectus must inform themselves about, and observe any
restrictions relating to, the offering of shares of our stock and
the distribution of this prospectus outside of the United
States.
It is important for
you to read and consider all of the information contained in this
prospectus in making your investment decision. To understand the
offering fully and for a more complete description of the offering
you should read this entire document carefully, including
particularly the “Risk Factors” section beginning on
page 15. You also should read and consider the information in the
documents to which we have referred you in the sections entitled
“Where You Can Find More Information”.
This prospectus
includes trademarks, service marks and trade names owned by us and
our subsidiaries. All trademarks, service marks and trade names
included in this prospectus are the property of their respective
owners.
All trademarks,
service marks and trade names included in this prospectus are the
property of their respective owners.
C
AUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus
contains forward-looking statements that are based on current
management expectations. Statements other than statements of
historical fact included in this prospectus, including statements
about us and the future growth and anticipated operating results
and cash expenditures, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. When used in this
prospectus the words “anticipate,”
“objective,” “may,” “might,”
“should,” “could,” “can,”
“intend,” “expect,” “believe,”
“estimate,” “predict,”
“potential,” “plan” or the negative of
these and similar expressions identify forward-looking statements.
These statements reflect our current views with respect to
uncertain future events and are based on imprecise estimates and
assumptions and subject to risk and uncertainties. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. While we believe our plans, intentions
and expectations reflected in those forward-looking statements are
reasonable, these plans, intentions or expectations may not be
achieved. Our actual results, performance or achievements could
differ materially from those contemplated, expressed or implied by
the forward-looking statements contained in, or incorporated by
reference into, this prospectus for a variety of
reasons.
We have included
more detailed descriptions of these risks and uncertainties and
other risks and uncertainties applicable to our business in
“Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and “Business,”
We urge investors
to review carefully the section of this prospectus entitled
“Risk Factors” in evaluating the forward-looking
statements contained in this prospectus. We caution investors not
to place significant reliance on forward-looking statements
contained in this document; such statements need to be evaluated in
light of all the information contained herein.
All forward-looking
statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the risk factors and other
cautionary statements set forth in this prospectus. Other than as
required by applicable securities laws, we are under no obligation,
and we do not intend, to update any forward-looking statement,
whether as result of new information, future events or
otherwise.
P
ROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not intended to be complete and does
not contain all of the information that you should consider before
deciding to invest in our securities. We urge you to read this
entire prospectus carefully, especially the “Risk
Factors” section beginning on page 15. Except where the
context requires otherwise, in this prospectus the terms
“Company,” “Youngevity,” “we,”
“us” and “our” refer to Youngevity
International, Inc., a Delaware corporation. Unless otherwise
indicated, all share amounts and per share amounts in this
prospectus have been presented on a retrospective and pro forma
basis to reflect the reverse stock split of our outstanding shares
of Common Stock at a ratio of 1-for-20 which we effected on June 7,
2017.
Overview
We are a leading
omni-direct lifestyle company offering a hybrid of the direct
selling business model that also offers e-commerce and the power of
social selling. Assembling a virtual main street of products and
services under one corporate entity, we offer products from the six
top selling retail categories: health/nutrition, home/family,
food/beverage (including coffee), spa/beauty, apparel/jewelry, as
well as innovative services.
We
operate in two segments: the direct selling segment where products
are offered through a global distribution network of preferred
customers and distributors and the commercial coffee segment where
products are sold directly to businesses. During the nine months
ended September 30, 2017, we derived approximately 86% of our
revenue from our direct sales and approximately 14% of our revenue
from our commercial coffee sales and during the year ended December
31, 2016, we derived approximately 89% of our revenue from our
direct sales and approximately 11% of our revenue from our
commercial coffee sales.
Direct
Selling Segment
- In the direct
selling segment we sell health and wellness, beauty product and
skin care, scrap booking and story booking items, packaged food
products and other service based products on a global basis and
offer a wide range of products through an international direct
selling network. Our direct sales are made through our network,
which is a web-based global network of customers and distributors.
Our independent sales force markets a variety of products to an
array of customers, through friend-to-friend marketing and social
networking. We consider our company to be an e-commerce company
whereby personal interaction is provided to customers by our
independent sales network. Initially, our focus was solely on the
sale of products in the health, beauty and home care market through
our marketing network; however, we have since expanded our selling
efforts to include a variety of other products in other markets.
Our direct selling segment offers more than 5,000 products to
support a healthy lifestyle including:
Since
2010 we have expanded our operations through a series of
acquisitions of the assets of other direct selling companies
including their product lines and sales forces. We have also
substantially expanded our distributor base by merging the assets
that we have acquired under our web-based independent distributor
network, as well as providing our distributors with additional new
products to add to their product offerings.
Set forth below is information regarding each of our acquisitions
since 2012.
|
Business
|
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Date
of
Acquisition
|
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Product
Categories
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BeautiControl,
Inc.
|
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December 13,
2017
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Cosmetic and Skin
Care Products
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Future Global
Vision, Inc.
|
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November 6,
2017
|
|
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Nutritional
Supplements and Automotive Fuel Additive
Products
|
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Sorvana
International, LLC
(FreeLife
International, Inc.)
|
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July 1,
2017
|
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Health and wellness
products
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Ricolife,
LLC
|
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March 1,
2017
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Teas
|
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Bellavita Group,
LLC
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March 1,
2017
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Health and Beauty
Products
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Legacy for Life,
LLC
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September 1,
2016
|
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Nutritional
Supplements
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Nature’s
Pearl Corporation
|
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September 1,
2016
|
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Nutritional
Supplements and Skin Care Products
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Renew Interest, LLC
(SOZO Global, Inc.)
|
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July 29,
2016
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Nutritional
Supplements and Skin Care Products
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South Hill Designs
Inc.
|
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January 20,
2016
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Jewelry
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PAWS Group,
LLC
|
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July 1,
2015
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Pet
treats
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Mialisia & Co.,
LLC
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June 1,
2015
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Jewelry
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JD Premium
LLC
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March 4,
2015
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Dietary Supplement
Company
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Sta-Natural,
LLC
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February 23,
2015
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Vitamins, Minerals
and Supplements for families and their pets
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Restart Your Life,
LLC
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October 1,
2014
|
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Dietary
Supplements
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Beyond Organics,
LLC
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May 1,
2014
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Organic Food and
Beverages
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Good Herbs,
Inc.
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April 28,
2014
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Herbal
Supplements
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Biometics
International, Inc.
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November 19,
2013
|
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Liquid
Supplements
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GoFoods Global,
LLC
|
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October 1,
2013
|
|
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Packaged
Foods
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Heritage Markers,
LLC
|
|
August 14,
2013
|
|
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Digital
Products
|
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Livinity,
Inc.
|
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July 10,
2012
|
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Nutritional
Products
|
|
GLIE, LLC (DBA
True2Life)
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March 20,
2012
|
|
|
Nutritional
Supplements
|
Coffee
Segment
- We engage in the
commercial sale of one of our products, our coffee through our
subsidiary CLR Roasters, LLC (“CLR”). We own a
traditional coffee roasting business that produces coffee under its
own Café La Rica brand, Josie’s Java House Brand and
Javalution brands. CLR produces a variety of private labels through
major national sales outlets and to major customers including
cruise lines and office coffee service operators, as well as
through our distributor network. CLR was established in 2001 and is
our wholly-owned subsidiary. CLR produces and markets a unique line
of coffees with health benefits under the JavaFit® brand which
is sold directly to consumers.
In April 2017, CLR reached an
agreement with Major League Baseball's Miami Marlins to feature
CLR’s Café La Rica Gourmet Espresso coffee as the
"Official Cafecito of the Miami Marlins" at Marlins Park in Miami,
Florida.
Our
roasting facility is located in Miami, Florida and is 50,000 square
foot and is SQF Level 2 certified, which is a stringent food safety
process that verifies the coffee bean processing plant and
distribution facility is in compliance with Certified HACCP (Hazard
Analysis, Critical Control Points) food safety plans.
|
In
March 2014, we expanded our coffee segment and started our new
green coffee business with CLR’s acquisition of Siles
Plantation Family Group, which is a wholly-owned subsidiary of CLR
located in Matagalpa, Nicaragua. Siles Plantation Family Group
includes “La Pita,” a dry-processing facility on
approximately 26 acres of land and “El Paraiso,” a
coffee plantation consisting of approximately 500 acres of land and
thousands of coffee plants which produces 100 percent Arabica
coffee beans that are shade grown, Organic, Rainforest Alliance
Certified™ and Fair Trade Certified™.
|
|
|
The
plantation and dry-processing facility allows CLR to control the
coffee production process from field to cup. The dry-processing
plant allows CLR to produce and sell green coffee to major coffee
suppliers in the United States and around the world. CLR has
engaged a husband and wife team to operate the Siles Plantation
Family Group by way of an operating agreement. The agreement
provides for the sharing of profits and losses generated by the
Siles Plantation Family Group after certain conditions are met. CLR
has made substantial improvements to the land and facilities since
2014. The 2018 harvest season started in November 2017 and will
continue through April of 2018.
In November 2017,
CLR entered into a purchase contract to deliver $7.5 million of
green coffee for the 2018 selling season and in December 2017, CLR
entered into a purchase contract to deliver $10.5 million of green
coffee for the 2018 selling season.
|
|
Industry Overview
We
are engaged in two industries, the direct selling industry and the
coffee industry.
|
Direct Selling Industry
Direct
selling is a business distribution model that allows a company to
market its products directly to consumers by means of independent
contractors and relationship referrals. Independent, unsalaried
salespeople, referred to as distributors, represent us and are
awarded a commission based upon the volume of product sold through
each of their independent business operations.
|
The Direct Selling Association (“DSA”)
reported in its “2016 An Overview” that the fastest
growing product was Wellness followed by Services & Other, the
two categories alone representing approximately $20 billion in
sales in 2016. Top product categories continue to gain market
share: home and family care/durables, personal care, jewelry,
clothing, leisure/educations. Wellness products include weight-loss
products and dietary supplements. In the United States, as reported
by the DSA, a record 20.5 million people were involved in direct
selling in 2016, an increase of 1.5% compared to 2015. Estimated
direct retail sales for 2016 was reported by the 2017 Growth &
Outlook Report to be $35.54 billion compared to $36.12 billion in
2015.
Coffee Industry
Our coffee segment
includes coffee bean roasting and the sales of green coffee beans.
Our roasting facility, located in Miami, Florida, procures coffee
primarily from Central America. Our green coffee business procures
coffee from Nicaragua by way of growing our own coffee beans and
purchasing green coffee beans directly from other farmers. CLR
sells coffee to domestic and international customers, both green
and roasted coffee.
The United States
Department of Agriculture (“USDA”) reported in its June
2017 “Coffee: World Markets and Trade” report for the
2017/18 Forecast Overview that world coffee production is
forecasted at 159 million bags (60 kilograms or approximately 132
pounds), which is unchanged from the previous year. World exports
of green coffee are expected to remain steady totaling 111 million
bags in 2018, with global consumption forecasted at a record 158
million bags. For 2018, Central America and Mexico are forecasted
to contribute 18.1 million bags of coffee beans and approximately
40 percent of the exports are destined to the United States and 35
percent to the European Union. The United States imports the
second-largest amount of coffee beans worldwide and is forecasted
at 26 million bags.
Our Corporate History
|
Youngevity International, Inc., formerly AL
International, Inc., founded in 1996, operates through two segments
including the following wholly-owned subsidiary: CLR Roasters, LLC
(“CLR”) which operates our commercial coffee business,
including the Siles Plantation Family Group S.A. located in
Nicaragua.
Our direct selling
network includes the domestic operations of AL Global Corporation,
2400 Boswell LLC, MK Collaborative LLC, and Youngevity Global
LLC.
|
Our
foreign wholly-owned subsidiaries include Youngevity Australia Pty.
Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity
Israel, Ltd., Youngevity Russia LLC, Youngevity Colombia S.A.S.,
Youngevity International Singapore Pte. Ltd., Mialisia Canada,
Inc., and Legacy for Life Limited (Hong Kong). The Company also
operates through the BellaVita Group LLC, with operations in;
Taiwan, Hong Kong, Singapore, Indonesia, Malaysia and
Japan.
The Company also
operates subsidiary branches of Youngevity Global LLC in the
Philippines and Taiwan.
On
July 11, 2011, AL Global Corporation, a privately held California
corporation (“AL Global”), merged with and into a
wholly-owned subsidiary of Javalution Coffee Company, a publicly
traded Florida corporation (“Javalution”). After the
merger, Javalution reincorporated in Delaware and changed its name
to AL International, Inc. In connection with this merger, CLR,
which had been a wholly-owned subsidiary of Javalution prior to the
merger, continued to be a wholly-owned subsidiary of the Company.
CLR operates a traditional coffee roasting business, and through
the merger we were provided access to additional distributors, as
well as added the JavaFit® product line to our network of
direct marketers.
|
Effective
July 23, 2013, we changed our name from AL International, Inc. to
Youngevity International, Inc.
On June 7, 2017, an
amendment to our
Certificate of Incorporation became effective which effectuated:
(i) a 1-for-20 reverse stock split (the “Reverse
Split”) of the issued and outstanding shares of Common Stock;
(ii) a decrease in the number of shares of (a) Common Stock
authorized from 600,000,000 to 50,000,000 and (b) preferred stock
authorized from 100,000,000 to 5,000,000.
|
|
Corporate
Information
Our principal offices are located
at 2400 Boswell Road, Chula Vista, California 91914, and our
telephone number at that office is (619) 934-3980. We maintain an
Internet website at
www.ygyi.com
.
Neither this website nor the information on this website is
included or incorporated in, or is a part of, this prospectus or
any supplement to the prospectus.
Emerging Growth Company
We
are an emerging growth company under the JOBS ACT, which was
enacted in April 2012. We shall continue to be deemed an emerging
growth company until the earliest of:
(a)
the last day of the fiscal year in which we have total annual gross
revenues of $1.07 billion or more;
(b)
the last day of the fiscal year of the issuer following the fifth
anniversary of the date of the first sale of common equity
securities of the issuer pursuant to an effective registration
statement;
(c)
the date on which we have issued more than $1.0 billion in
non-convertible debt, during the previous 3-year period, issued;
or.
(d)
the date on which we are deemed to be a large accelerated
filer.
As
an emerging growth company we are 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. 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 requires 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.
Risks
Our business and
our ability to execute our business strategy are subject to a
number of risks of which you should be aware of before you decide
to buy our securities. In particular, you should carefully consider
following risks, which are discussed more fully in “Risk
Factors” beginning on page 15 of this
prospectus.
●
it is difficult to
predict to what extent we will be able to maintain or improve our
current level of revenues and profitability because we have
recently acquired several businesses and significantly increased
our investment in our green coffee business;
●
there is
substantial risk about our ability to continue as a going concern,
which may hinder our ability to obtain future
financing;
●
our business is
difficult to evaluate because we have recently expanded our product
offering and customer base;
●
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;
●
we may have
difficulty managing our future growth;
●
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;
●
a decrease in sales
of The Beyond Tangy Tangerine line, Osteo-fx line and,
Ultimate EFA line of products could seriously harm our
business;
●
our business is
subject to strict government regulations;
●
unfavorable
publicity could materially hurt our business;
●
product returns may
adversely affect our business;
●
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;
●
we face significant
competition;
●
our success
depends, in part, on the quality and safety of our
products;
●
our ability to
anticipate and respond to market trends and changes in consumer
preferences could affect our financial results;
●
if we are unable to
protect our intellectual property rights, specifically patents and
trademarks, our ability to compete could be negatively
impacted;
●
we may become
involved in the future in legal proceedings that, if adversely
adjudicated or settled, could adversely affect our financial
results;
●
government reviews,
inquiries, investigations, and actions could harm our business or
reputation;
●
the loss of key
management personnel could adversely affect our
business;
●
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;
●
shortages of raw
materials may temporarily adversely affect our margins or our
profitability related to the sale of those products;
●
a failure of our
information technology systems would harm our
business;
●
we are dependent
upon access to external sources of capital to grow our
business;
●
our business is
subject to online security risks, including security
breaches;
●
our ability to
conduct business in international markets may be affected by
political, legal, tax and regulatory risks;
●
currency exchange
rate fluctuations could reduce our overall profits;
●
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;
●
non-compliance with
anti-corruption laws could harm our business;
●
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;
●
independent
distributor activities that violate laws could result in
governmental actions against us and could otherwise harm our
business;
●
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;
●
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;
●
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;
●
the loss of a
significant Youngevity distributor could adversely affect our
business;
●
nutritional
supplement products may be supported by only limited availability
of conclusive clinical studies;
●
our manufacturers
are subject to certain risks;
●
challenges by
private parties to the direct selling system could harm our
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;
●
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;
●
we may not be able
to raise enough funds to fully implement our business plan and
investors may lose their entire investment as a result of this
offering being conducted on a “best efforts” basis and
without a requirement that a minimum amount be raised;
●
there is no public
market for the Series B Convertible Preferred Stock and prospective
investors may not be able to resell their shares at or above the
offering price, if at all;
●
conversion of the
Series B Convertible Preferred Stock will dilute the ownership
interest of existing stockholders, including holders who had
previously converted their Series B Convertible Preferred
Stock;
●
holders of Series B
Convertible Preferred Stock have extremely limited voting
rights;
●
the automatic
conversion feature may not adequately compensate holders of Series
B Convertible Preferred Stock and may make it more difficult for a
party to take over our company or discourage a party from taking
over our company;
●
our ability to pay
dividends is limited by the requirements of Delaware
law;
●
dividends on the
Series B Convertible Preferred Stock will be taxable;
●
we may allocate the
net proceeds from this offering in ways that you and other
stockholders may not approve;
●
we are controlled
by one principal stockholder who is also our Chief Executive
Officer and Chairman;
●
a majority of our
directors will not be required to be "independent" and several of
our directors and officers have other business
interests;
●
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 securities less
attractive to investors;
●
our stock has
historically had a limited market;
●
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;
●
our stock price has
been volatile and subject to various market
conditions;
●
we may issue
preferred stock with rights senior to the Series B Convertible
Preferred Stock;
●
we cannot assure
you that the Common Stock will remain listed on the NASDAQ Capital
Market;
●
we cannot assure
you that the reverse stock split that was effected in June 2017
will improve the trading liquidity of the shares of the Common
Stock;
●
anti-takeover
provisions in our charter documents and under Delaware law could
make an acquisition of us more difficult, limit attempts by our
stockholders to replace or remove our current management and limit
the market price of our Common Stock;
●
our failure to
fulfill all of our registration requirements may cause us to suffer
liquidated damages, which may be very costly;
●
reports published
by securities or industry analysts, including projections in those
reports that exceed our actual results, could adversely affect our
Common Stock price and trading volume; and
●
shareholders
purchasing shares in this offering will experience immediate and
substantial dilution, causing their investment to immediately be
worth less than their purchase price.
THE
O
FFERING
(1)
Except
as otherwise indicated herein, all information in this prospectus,
including the number of shares of Common Stock that will be
outstanding after the Offering, without taking into account the
shares offered in the Offering or the conversion of such shares
into Common Stock, will be based on 19,723,285 shares of Common
Stock outstanding as of December 31, 2017, excludes (i) 678,568
shares of Common Stock that are issuable upon conversion of the
notes (the “2014 Notes”) issued in the 2014 Private
Placement (the “2014 Private Placement”) with an
exercise price of $7.00 per share; (ii) 428,571 shares of Common
Stock that are issuable upon conversion of the notes (the
“2015 Notes”) issued in the 2015 Private Placement (the
“2015 Private Placement”) with an exercise price of
$7.00 per share; (iii) 1,577,033 shares of Common Stock that are
issuable upon conversion of the notes (the “2017
Notes”) issued in the 2017 Private Placement (the “2017
Private Placement”) with a conversion price of $4.60 per
share; (iv) 1,149,712 shares of Common Stock that are issuable upon
exercise of the warrants (the “2017 $5.56 Warrants”)
issued in the 2017 Private Placement; (v) 247,916 are shares of
Common Stock that are issuable upon exercise of the warrants (the
“2015 $9.00 Warrants”) issued in the 2015 Private
Placement; (vi) 102,678 are shares of Common Stock that are
issuable upon exercise of the warrants (the “$7.00 2015
Warrants”) issued in the 2015 Private Placement; (vii)
1,022,279 are shares of Common Stock that are, issuable upon
exercise of the warrants (the “2014 $4.60 Warrants”)
issued in the 2014 Private Placement; (viii) 67,857 are shares of
Common Stock that are issuable upon exercise of the warrants
(“2014 $7.00 Warrants”) issued in the 2014 Private
Placement; (ix) 44,624 are shares of Common Stock that are issuable
upon exercise of other current outstanding warrants at an average
exercise price of $10.00; (x) 75,000 are shares of Common Stock
that are issuable upon exercise of other current outstanding
warrants at an average exercise price of $2.00;(xi) 1,584,523
shares of Common Stock that are issuable upon exercise of
outstanding options, with a weighted average exercise price of
$4,76; (xi) 500,000 shares of Common Stock that are issuable upon
being vested of restricted stock units which were issued under our
2012 Equity Incentive Plan; and (xii) 1,040,678 shares of Common
Stock that are reserved for equity awards that may be granted under
our equity 2012 Stock Option Plan.
The 2014 Notes, the 2015 Notes and the 2017 Notes are collectively referred to as the “Notes”.
The 2014 Notes, the 2015 Notes and the 2017 Notes are collectively referred to as the “Notes”.
S
UMMARY CONSOLIDATED FINANCIAL DATA
The
following table sets forth our summary statement of operations data
for the periods and at the dates indicated. The selected statements
of operations data for the years ended December 31, 2016 and 2015
are derived from our audited consolidated financial statements and
related notes included elsewhere in this prospectus and our summary
statements of operations data for the nine months ended September
30, 2017 and 2016 and our balance sheet data as of September 30,
2017 are derived from our unaudited consolidated financial
statements and related notes included elsewhere in this prospectus.
In our opinion, such unaudited consolidated financial statements
include all adjustments consisting of only normal recurring
adjustments that we consider necessary for a fair presentation of
the financial information set forth in those statements. Our
consolidated financial statements are prepared and presented in
accordance with generally accepted accounting principles in the
United States. Our historical results of operations and financial
condition are not necessarily indicative of the results or
financial condition that may be expected in the
future.
You
should read this information together with the sections entitled
“Capitalization,” “Management’s Discussion
and Analysis of Financial Condition & Results of
Operations” and our consolidated financial statements and
related notes included elsewhere in this prospectus.
Summary
Consolidated Statement of Operations Data
|
|
For the years ended
December 31,
|
For the nine months ended
September 30,
|
||
|
|
2016
|
2015
|
2017
|
2016
|
|
($000
)
|
|
|
(Unaudited)
|
(Unaudited)
|
|
Revenues
|
$
162,667
|
$
156,597
|
$
124,655
|
$
124,264
|
|
Gross
profit
|
$
98,137
|
$
92,969
|
$
71,732
|
$
75,162
|
|
Total
operating expenses
|
$
95,622
|
$
87,563
|
$
76,625
|
$
71,899
|
|
Operating
income (loss)
|
$
2,515
|
$
5,406
|
$
(4,893
)
|
$
3,263
|
|
Net
income (loss) available to common stockholders
|
$
(410
)
|
$
(1,718
)
|
$
(5,866
)
|
$
100
|
|
|
|
|
|
|
|
Net (loss) income per share, basic
(1)
|
$
(0.02
)
|
$
(0.09
)
|
$
(0.30
)
|
$
0.00
|
|
Net (loss) income per share, diluted
(1)
|
$
(0.02
)
|
$
(0.09
)
|
$
(0.30
)
|
$
0.00
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
(1)
|
19,632,086
|
19,603,780
|
19,655,312
|
19,631,195
|
|
Weighted average shares outstanding, diluted
(1)
|
19,632,086
|
19,603,780
|
19,655,312
|
20,005,758
|
(1)
All share data have
been retroactively adjusted to reflect Youngevity’s 1-for-20
reverse stock split, which was effective on June 7,
2017.
Summary
Consolidated Balance Sheet Data
|
|
December 31, 2016
|
September
30, 2017
|
|
Balance
Sheet Data ($000):
|
|
(Unaudited)
|
|
Cash and Cash
Equivalents
|
$
869
|
$
1,373
|
|
Total Current
Assets
|
$
27,908
|
$
29,664
|
|
Total
Assets
|
$
66,008
|
$
73,997
|
|
Total Current
Liabilities
|
$
25,310
|
$
31,820
|
|
Total
Liabilities
|
$
47,010
|
$
59,377
|
|
Total
Stockholders’ Equity
|
$
18,998
|
$
14,620
|
|
———————
|
R
ISK
FACTORS
Investing in our securities 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
securities.
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 20 business
acquisitions of companies in the direct selling line of business,
substantially increasing our Youngevity® health and wellness
product lines. It is too early to predict whether consumers will
accept, and continue to use on a regular basis, the products we
added from these new acquisitions since we have had limited recent
operating history as a combined entity. In addition, we continue to
expand our coffee business product line with the single-serve
K-Cup® manufacturing capabilities and our investment in the
green coffee business. It is too early to predict the results of
these investments. In addition, since each acquisition involves the
addition of new distributors and new products, it is difficult to
assess whether initial product sales of any new product acquired
will be maintained, and if sales by new distributors will be
maintained.
There is substantial risk about our ability to continue as a going
concern, which may hinder our ability to obtain future
financing.
The
accompanying condensed consolidated financial statements as of
September 30, 2017 have been prepared and presented on a basis
assuming we will continue as a going concern. We have sustained
significant operating losses during the nine months ended September
30, 2017 of $4,893,000, compared to operating income during the
nine months ended September 30, 2016 of $3,263,000. The losses as
of September 30, 2017 were primarily due to lower than anticipated
revenues, increases in legal fees, distributor events and sales and
marketing costs. Net cash used in operating activities was
$1,783,000 for the nine months ended September 30, 2017. Based on
our current cash levels as of September 30, 2017, our current rate
of cash requirements, we will need to raise additional capital and
we will need to significantly reduce our expenses from current
levels to be able to continue as a going concern. There can be
no assurance that we can raise capital upon favorable terms, if at
all, or that we can significantly reduce our
expenses.
The failure to comply with the terms of our outstanding Notes could
result in a default under the terms of the notes and, if uncured,
it could potentially result in action against the pledged assets of
the Company.
We
currently have outstanding 2015 Notes which are convertible notes
in the principal amount of $3,000,000 that we issued to investors
in November 2015 that are secured by certain of our assets and
those of CLR other than its inventory and accounts
receivable. We have also issued an additional $4,750,000 in
principal amount of 2014 Notes. The 2014 Private Placement is
secured by CLR’s pledge of the Nicaragua green coffee
beans acquired with the proceeds, the contract rights under a
letter of intent and all proceeds of the foregoing (which lien is
junior to CLR’s factoring agreement and equipment lease but
senior to all of its other obligations), In July and August of
2017, we issued 2017 Notes in the aggregate principal amount of
$7,254,349, all of which are outstanding. Stephan Wallach, our
Chief Executive Officer, has also personally guaranteed the
repayment of the 2015 Notes and the 2014 Notes, and has agreed not
to sell, transfer or pledge 30 million shares of our common stock
that he owns so long as his personal guaranty is in effect. The
2015 Notes mature in 2018, the 2014 Notes mature in 2019 and the
2017 Notes mature in 2020. The 2015 Notes and the 2014
Notes require us, among other things, to maintain the security
interest given by CLR for the notes and all of the notes require us
to make quarterly installments of interest, reserve a sufficient
number of our shares of common stock for conversion requests and
honor any conversion requests made by the investors to convert
their notes into shares of our common stock. If we fail to comply
with the terms of the notes, the note holders could declare a
default under the notes and if the default were to remain uncured,
as secured creditors they would have the right to proceed against
the collateral secured by the loans. Any action by secured
creditors to proceed against CLR assets or our assets would
likely have a serious disruptive effect on our coffee and direct
selling operations.
We identified a material weakness in our internal controls in prior
periods, and we cannot provide assurances that additional material
weaknesses will not occur in the future. If our internal control
over financial reporting or our disclosure controls and procedures
are not effective, we may not be able to accurately report our
financial results, prevent fraud, or file our periodic reports in a
timely manner, which may cause investors to lose confidence in our
reported financial information and may lead to a decline in our
stock price.
Our management is
responsible for establishing and maintaining adequate internal
control over our financial reporting, as defined in Rule 13a- 15(f)
under the Exchange Act. Due to an error in our Statements of Cash
Flows for the year ended December 31, 2016, and the quarters ended
March 31, 2016, June 30, 2016, September 30, 2016 and March 31,
2017, we have restated our Statements of Cash Flows for such prior
periods and certain related matters. Although we have added an
additional review process that we believe has eliminated the
identified material weakness in our internal controls, there can be
no assurances that additional material weaknesses will not occur in
the future.
Our business is difficult to evaluate because we have recently
expanded our product offering and customer base.
We
have recently expanded our operations, engaging in the sale of new
products through new distributors. There is a risk that we will be
unable to successfully integrate the newly acquired businesses with
our current management and structure. Although we are based in
California, several of the businesses we acquired are based in
other places such as Utah and Florida, making the integration of
our newly acquired businesses difficult. In addition, our
dry-processing plant and coffee plantation is located overseas in
the country of Nicaragua. Our estimates of capital, personnel and
equipment required for our newly acquired businesses are based on
the historical experience of management and businesses they are
familiar with. Our management has limited direct experience in
operating a business of our current size as well as one that is
publicly traded.
Our ability to generate profit will be impacted by payments we are
required to make under the terms of our acquisition agreements, the
extent of which is uncertain.
Since
many of our acquisition agreements are based on future
consideration, we could be obligated to make payments that exceed
expectations. Many of our acquisition agreements require us to make
future payments to the sellers based upon a percentage of sales of
products. The carrying value of the contingent acquisition debt,
which requires re-measurement each reporting period, is based on
our estimates of future sales and therefore is difficult to
accurately predict. Profits could be adversely impacted in future
periods if adjustment of the carrying value of the contingent
acquisition debt is required.
We may have difficulty managing our future growth.
Since
we initiated our network marketing sales channel in fiscal 1997,
our business has grown significantly. This growth has placed
substantial strain on our management, operational, financial and
other resources. If we are able to continue to expand our
operations, we may experience periods of rapid growth, including
increased resource requirements. Any such growth could place
increased strain on our management, operational, financial and
other resources, and we may need to train, motivate, and manage
employees, as well as attract management, sales, finance and
accounting, international, technical, and other professionals. Any
failure to expand these areas and implement appropriate procedures
and controls in an efficient manner and at a pace consistent with
our business objectives could have a material adverse effect on our
business and results of operations. In addition, the financing for
any of future acquisitions could dilute the interests of our
stockholders; resulting in an increase in our indebtedness or both.
Future acquisitions may entail numerous risks,
including:
|
●
|
difficulties
in assimilating acquired operations or products, including the loss
of key employees from acquired businesses
and
disruption to our direct selling channel;
|
|
●
|
diversion
of management's attention from our core business;
|
|
●
|
adverse
effects on existing business relationships with suppliers and
customers; and
|
|
●
|
risks
of entering markets in which we have limited or no prior
experience.
|
Our
failure to successfully complete the integration of any acquired
business could have a material adverse effect on our business,
financial condition, and operating results. In addition, there can
be no assurance that we will be able to identify suitable
acquisition candidates or consummate acquisitions on favorable
terms.
We generate a substantial portion of our revenue from the sale of
The Beyond Tangy Tangerine line, Osteo-fx line and, Ultimate EFA
line of products. A decrease in sales of these products could
seriously harm our business.
A
significant portion of our revenue during the year ended December
31, 2016 and the nine months ended September 30, 2017,
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.
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.
We face significant competition.
We
face competition from competing products in each of our lines of
business, in both the domestic and international markets.
Worldwide, we compete against products sold to consumers by other
direct selling and direct sales companies and through the Internet,
and against products sold through the mass market and prestige
retail channels. We also face increasing competition in our
developing and emerging markets.
Within
the direct selling channel, we compete on a regional and often
country-by-country basis, with our direct selling competitors.
There are also a number of direct selling companies that sell
product lines similar to ours, some of which also have worldwide
operations and compete with us globally. We compete against large
and well-known companies that manufacture and sell broad product
lines through various types of retail establishments. Our largest
direct sales competitors are Herbalife, Amway, USANA Health
Sciences and NuSkin Enterprises. In the energy drink market we
compete with companies such as Red Bull, Gatorade and Rock Star.
Our beauty, skin care and cosmetic products compete with Avon and
Bare Essentials. In addition, we compete against many other
companies that manufacture and sell in narrower product lines sold
through retail establishments. This industry is highly competitive
and some of our principal competitors in the industry are larger
than we are and have greater resources than we do. Competitive
activities on their part could cause our sales to suffer. From time
to time, we need to reduce the prices for some of our products to
respond to competitive and customer pressures or to maintain our
position in the marketplace. Such pressures also may restrict our
ability to increase prices in response to raw material and other
cost increases. Any reduction in prices as a result of competitive
pressures, or any failure to increase prices when raw material
costs increase, would harm profit margins and, if our sales volumes
fail to grow sufficiently to offset any reduction in margins, our
results of operations would suffer.
If our advertising, promotional, merchandising, or
other marketing strategies are not successful, if we are unable to
deliver new products that represent technological breakthroughs, if
we do not successfully manage the timing of new product
introductions or the profitability of these efforts, or if for
other reasons our end customers perceive competitors' products as
having greater appeal, then our sales and financial results may
suffer.
If
we do not succeed in effectively differentiating ourselves from our
competitors’ products, including by developing and
maintaining our brands or our competitors adopt our strategies,
then our competitive position may be weakened and our sales, and
accordingly our profitability, may be materially adversely
affected.
We
are also subject to significant competition from other network
marketing organizations for the time, attention, and commitment of
new and existing distributors. Our ability to remain competitive
depends, in significant part, on our success in recruiting and
retaining distributors. There can be no assurance that our programs
for recruiting and retaining distributors will be successful. The
pool of individuals who may be interested in network marketing is
limited in each market, and it is reduced to the extent other
network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive
opportunity for distributors, there can be no assurance that other
network marketing companies will not be able to recruit our
existing distributors or deplete the pool of potential distributors
in a given market.
Our
coffee segment also faces strong competition. The coffee industry
is highly competitive and coffee is widely distributed and readily
available. Our competition will seek to create advantages in many
areas including better prices, more attractive packaging, stronger
marketing, more efficient production processes, speed to market,
and better quality verses value opportunities. Many of our
competitors have stronger brand recognition and will reduce prices
to keep our brands out of the market. Our competitors may have more
automation built into their production lines allowing for more
efficient production at lower costs. We compete not only with other
widely advertised branded products, but also with private label or
generic products that generally are sold at lower prices.
Consumers’ willingness to purchase our products will depend
upon our ability to maintain consumer confidence that our products
are of a higher quality and provide greater value than less
expensive alternatives. If the difference in quality between our
brands and private label products narrows, or if there is a
perception of such a narrowing, then consumers may choose not to
buy our products at prices that are profitable for us.
Our success depends, in part, on the quality and safety of our
products.
Our
success depends, in part, on the quality and safety of our
products, including the procedures we employ to detect the
likelihood of hazard, manufacturing issues, and unforeseen product
misuse. If our products are found to be, or are perceived to be,
defective or unsafe, or if they otherwise fail to meet our
distributors' or end customers' standards, our relationship with
our distributors or end customers could suffer, we could need to
recall some of our products, our reputation or the appeal of our
brand could be diminished, and we could lose market share and or
become subject to liability claims, any of which could result in a
material adverse effect on our business, results of operations, and
financial condition.
Our ability to anticipate and respond to market trends and changes
in consumer preferences could affect our financial
results.
Our
continued success depends on our ability to anticipate, gauge, and
react in a timely and effective manner to changes in consumer
spending patterns and preferences. We must continually work to
discover and market new products, maintain and enhance the
recognition of our brands, achieve a favorable mix of products, and
refine our approach as to how and where we market and sell our
products. While we devote considerable effort and resources to
shape, analyze, and respond to consumer preferences, consumer
spending patterns and preferences cannot be predicted with
certainty and can change rapidly. If we are unable to anticipate
and respond to trends in the market for beauty and related products
and changing consumer demands, our financial results will
suffer.
Furthermore,
material shifts or decreases in market demand for our products,
including as a result of changes in consumer spending patterns and
preferences or incorrect forecasting of market demand, could result
in us carrying inventory that cannot be sold at anticipated prices
or increased product returns. Failure to maintain proper inventory
levels or increased product returns could result in a material
adverse effect on our business, results of operations and financial
condition.
If we are unable to protect our intellectual property rights,
specifically patents and trademarks, our ability to compete could
be negatively impacted.
Most
of our products are not protected by patents. The labeling
regulations governing our nutritional supplements require that the
ingredients of such products be precisely and accurately indicated
on product containers. Accordingly, patent protection for
nutritional supplements often is impractical given the large number
of manufacturers who produce nutritional supplements having many
active ingredients in common. Additionally, the nutritional
supplement industry is characterized by rapid change and frequent
reformulations of products, as the body of scientific research and
literature refines current understanding of the application and
efficacy of certain substances and the interactions among various
substances. In this respect, we maintain an active research and
development program that is devoted to developing better, purer,
and more effective formulations of our products. We protect our
investment in research, as well as the techniques we use to improve
the purity and effectiveness of our products, by relying on trade
secret laws. Notwithstanding our efforts, there can be no assurance
that our efforts to protect our trade secrets and trademarks will
be successful. We intend to maintain and keep current all of our
trademark registrations and to pay all applicable renewal fees as
they become due. The right of a trademark owner to use its
trademarks, however, is based on a number of factors, including
their first use in commerce, and trademark owners can lose
trademark rights despite trademark registration and payment of
renewal fees. We therefore believe that these proprietary rights
have been and will continue to be important in enabling us to
compete and if for any reason we were unable to maintain our
trademarks, our sales of the related products bearing such
trademarks could be materially and negatively affected. Nor can
there be any assurance that third-parties will not assert claims
against us for infringement of their intellectual proprietary
rights. If an infringement claim is asserted, we may be required to
obtain a license of such rights, pay royalties on a retrospective
or prospective basis, or terminate our manufacturing and marketing
of our infringing products. Litigation with respect to such matters
could result in substantial costs and diversion of management and
other resources and could have a material adverse effect on our
business, financial condition, or operating results.
We
consider our roasting methods essential to the flavor and richness
of our coffee and, therefore, essential to our various brands.
Because our roasting methods cannot be patented, we would be unable
to prevent competitors from copying our roasting methods, if such
methods became known. If our competitors copy our roasting methods,
the value of our brands could be diminished and we could lose
customers to our competitors. In addition, competitors could
develop roasting methods that are more advanced than ours, which
could also harm our competitive position.
We may become involved in the future in legal proceedings that, if
adversely adjudicated or settled, could adversely affect our
financial results.
We
are a party to litigation at the
present time and may become party to litigation in the future. In
general, litigation claims can be expensive and time consuming to
bring or defend against and could result in settlements or damages
that could significantly affect financial results. However, it is
not possible to predict the final resolution of any litigation to
which we are, or may be party to, and the impact of certain of
these matters on our business, results of operations, and financial
condition could be material.
Government reviews, inquiries, investigations, and actions could
harm our business or reputation.
As
we operate in various locations around the world, our operations in
certain countries are subject to significant governmental scrutiny
and may be harmed by the results of such scrutiny. The regulatory
environment with regard to direct selling in emerging and
developing markets where we do business is evolving and officials
in such locations often exercise broad discretion in deciding how
to interpret and apply applicable regulations. From time to time,
we may receive formal and informal inquiries from various
government regulatory authorities about our business and compliance
with local laws and regulations. Any determination that our
operations or activities or the activities of our distributors, are
not in compliance with existing laws or regulations could result in
the imposition of substantial fines, interruptions of business,
loss of supplier, vendor or other third party relationships,
termination of necessary licenses and permits, or similar results,
all of which could potentially harm our business and or reputation.
Even if an inquiry does not result in these types of
determinations, it potentially could create negative publicity
which could harm our business and or reputation.
The loss of
key management personnel could adversely affect our
business.
Our
founder, Dr. Joel Wallach, is a highly visible spokesman for our
products and our business, and our message is based in large part
on his vision and reputation, which helps distinguish us from our
competitors. Any loss or limitation on Dr. Wallach as a lead
spokesman for our mission, business, and products could have a
material adverse effect upon our business, financial condition, or
results of operations. In addition, our executive officers,
including Stephan Wallach and David Briskie, are primarily
responsible for our day-to-day operations, and we believe our
success depends in part on our ability to retain our executive
officers, to compensate our executive officers at attractive
levels, and to continue to attract additional qualified individuals
to our management team. We cannot guarantee continued service by
our key executive officers. We do not maintain key man life
insurance on any of our executive officers. The loss or limitation
of the services of any of our executive officers or the inability
to attract additional qualified management personnel could have a
material adverse effect on our business, financial condition, or
results of operations.
The inability to obtain adequate supplies of raw materials for
products at favorable prices, or at all, or the inability to obtain
certain products from third-party suppliers or from our
manufacturers, could have a material adverse effect on our
business, financial condition, or results of
operations.
We
contract with third-party manufacturers and suppliers for the
production of some of our products, including most of our powdered
drink mixes and nutrition bars, and certain of our personal care
products. These third-party suppliers and manufacturers produce
and, in most cases, package these products according to
formulations that have been developed by, or in conjunction with,
our in-house product development team. There is a risk that any of
our suppliers or manufacturers could discontinue manufacturing our
products or selling their products to us. Although we believe that
we could establish alternate sources for most of our products, any
delay in locating and establishing relationships with other sources
could result in product shortages or back orders for products, with
a resulting loss of net sales. In certain situations, we may be
required to alter our products or to substitute different products
from another source. We have, in the past, discontinued or
temporarily stopped sales of certain products that were
manufactured by third parties while those products were on back
order. There can be no assurance that suppliers will provide the
raw materials or manufactured products that are needed by us in the
quantities that we request or at the prices that we are willing to
pay. Because we do not control the actual production of certain raw
materials and products, we are also subject to delays caused by any
interruption in the production of these materials, based on
conditions not within our control, including weather, crop
conditions, transportation interruptions, strikes by supplier
employees, and natural disasters or other catastrophic
events.
Shortages of raw materials may temporarily adversely affect our
margins or our profitability related to the sale of those
products.
We
may experience temporary shortages of the raw materials used in
certain of our nutritional products. While we periodically
experience price increases due to unexpected raw material shortages
and other unanticipated events, this has historically not resulted
in a material effect on our overall cost of goods sold. However,
there is no assurance that our raw materials will not be
significantly adversely affected in the future, causing our
profitability to be reduced. A deterioration of our relationship
with any of our suppliers, or problems experienced by these
suppliers, could lead to inventory shortages. In such case, we may
not be able to fulfill the demand of existing customers, supply new
customers, or expand other channels of distribution. A raw material
shortage could result in decreased revenue or could impair our
ability to maintain or expand our business.
A failure of our information technology systems would harm our
business.
The
global nature of our business and our seamless global compensation
plan requires the development and implementation of robust and
efficiently functioning information technology systems. Such
systems are vulnerable to a variety of potential risks, including
damage or interruption resulting from natural disasters,
telecommunication failures, and human error or intentional acts of
sabotage, vandalism, break-ins and similar acts. Although we have
adopted and implemented a business continuity and disaster recovery
plan, which includes routine back-up, off-site archiving and
storage, and certain redundancies, the occurrence of any of these
events could result in costly interruptions or failures adversely
affecting our business and the results of our
operations.
We are dependent upon access to external sources of capital to grow
our business.
Our
business strategy contemplates future access to debt and equity
financing to fund the expansion of our business. The inability to
obtain sufficient capital to fund the expansion of our business
could have a material adverse effect on us.
Our business is subject to online security risks, including
security breaches.
Our
businesses involve the storage and transmission of users’
proprietary information, and security breaches could expose us to a
risk of loss or misuse of this information, litigation, and
potential liability. An increasing number of websites, including
several large companies, have recently disclosed breaches of their
security, some of which have involved sophisticated and highly
targeted attacks on portions of their sites. Because the techniques
used to obtain unauthorized access, disable or degrade service, or
sabotage systems, change frequently and often are not recognized
until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative measures. A
party that is able to circumvent our security measures could
misappropriate our or our customers’ proprietary information,
cause interruption in our operations, damage our computers or those
of our customers, or otherwise damage our reputation and business.
Any compromise of our security could result in a violation of
applicable privacy and other laws, significant legal and financial
exposure, damage to our reputation, and a loss of confidence in our
security measures, which could harm our business.
Currently,
a significant number of our customers authorize us to bill their
credit card accounts directly for all transaction fees charged by
us. We rely on encryption and authentication technology licensed
from third parties to provide the security and authentication to
effectively secure transmission of confidential information,
including customer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography or other
developments may result in the technology used by us to protect
transaction data being breached or compromised. Non-technical
means, for example, actions by a suborned employee, can also result
in a data breach.
Under
payment card rules and our contracts with our card processors, if
there is a breach of payment card information that we store, we
could be liable to the payment card issuing banks for their cost of
issuing new cards and related expenses. In addition, if we fail to
follow payment card industry security standards, even if there is
no compromise of customer information, we could incur significant
fines or lose our ability to give customers the option of using
payment cards to fund their payments or pay their fees. If we were
unable to accept payment cards, our business would be seriously
damaged.
Our
servers are also vulnerable to computer viruses, physical or
electronic break-ins, “denial-of-service” type attacks
and similar disruptions that could, in certain instances, make all
or portions of our websites unavailable for periods of time. We may
need to expend significant resources to protect against security
breaches or to address problems caused by breaches. These issues
are likely to become more difficult as we expand the number of
places where we operate. Security breaches, including any breach by
us or by parties with which we have commercial relationships that
result in the unauthorized release of our users’ personal
information, could damage our reputation and expose us to a risk of
loss or litigation and possible liability. Our insurance policies
carry coverage limits, which may not be adequate to reimburse us
for losses caused by security breaches.
Our
web customers, as well as those of other prominent companies, may
be targeted by parties using fraudulent “spoof” and
“phishing” emails to misappropriate passwords, credit
card numbers, or other personal information or to introduce viruses
or other malware programs to our customers’ computers. These
emails appear to be legitimate emails sent by our company, but they
may direct recipients to fake websites operated by the sender of
the email or request that the recipient send a password or other
confidential information via email or download a program. Despite
our efforts to mitigate “spoof” and
“phishing” emails through product improvements and user
education, “spoof” and “phishing” remain a
serious problem that may damage our brands, discourage use of our
websites, and increase our costs.
Our ability to conduct business in international markets may be
affected by political, legal, tax and regulatory
risks.
For
the year ended December 31, 2016 approximately 9% of our sales were
derived from sales outside the United States. For the nine months
ended September 30, 2017 approximately 11% of our sales were
derived from sales outside the United States. Our green coffee
business in based in Nicaragua. We own one plantation and intend to
purchase another in Nicaragua. Our ability to capitalize on growth
in new international markets and to maintain the current level of
operations in our existing international markets is exposed to the
risks associated with international operations,
including:
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the
possibility that local civil unrest, political instability or
changes in diplomatic or trade relationships might disrupt our
operations in an international market;
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the
lack of well-established or reliable legal systems in certain
areas;
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the
presence of high inflation in the economies of international
markets;
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the
possibility that a foreign government authority might impose legal,
tax or other financial burdens on us or our coffee operations, or
sales force, due, for example, to the structure of our operations
in various markets;
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the
possibility that a government authority might challenge the status
of our sales force as independent contractors or impose employment
or social taxes on our sales force; and
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the
possibility that governments may impose currency remittance
restrictions limiting our ability to repatriate cash.
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Currency exchange rate fluctuations could reduce our overall
profits.
For
the year ended December 31, 2016, approximately 9% of our sales
were derived from sales outside the United States. For the nine
months ended September 30, 2017 approximately 11% of our sales were
derived from sales outside the United States. In preparing our
consolidated financial statements, certain financial information is
required to be translated from foreign currencies to the U.S.
dollar using either the spot rate or the weighted-average exchange
rate. If the U.S. dollar changes relative to applicable local
currencies, there is a risk our reported sales, operating expenses,
and net income could significantly fluctuate. We are not able to
predict the degree of exchange rate fluctuations, nor can we
estimate the effect any future fluctuations may have upon our
future operations. To date, we have not entered into any hedging
contracts or participated in any hedging or derivative
activities.
Taxation and transfer pricing affect our operations and we could be
subjected to additional taxes, duties, interest, and penalties in
material amounts, which could harm our business.
As
a multinational corporation, in several countries, including the
United States, we are subject to transfer pricing and other tax
regulations designed to ensure that our intercompany transactions
are consummated at prices that have not been manipulated to produce
a desired tax result, that appropriate levels of income are
reported as earned by the local entities, and that we are taxed
appropriately on such transactions. Regulators closely monitor our
corporate structure, intercompany transactions, and how we
effectuate intercompany fund transfers. If regulators challenge our
corporate structure, transfer pricing methodologies or intercompany
transfers, our operations may be harmed and our effective tax rate
may increase.
A
change in applicable tax laws or regulations or their
interpretation could result in a higher effective tax rate on our
worldwide earnings and such change could be significant to our
financial results. In the event any audit or assessments are
concluded adversely to us, these matters could have a material
impact on our financial condition.
Non-compliance with anti-corruption laws could harm our
business.
Our
international operations are subject to anti-corruption laws,
including the Foreign Corrupt Practices Act (the
“FCPA”). Any allegations that we are not in compliance
with anti-corruption laws may require us to dedicate time and
resources to an internal investigation of the allegations or may
result in a government investigation. Any determination that our
operations or activities are not in compliance with existing
anti-corruption laws or regulations could result in the imposition
of substantial fines, and other penalties. Although we have
implemented anti-corruption policies, controls and training
globally to protect against violation of these laws, we cannot be
certain that these efforts will be effective. We are aware that one
of our direct marketing competitors is under investigation in the
United States for allegations that its employees violated the FCPA
in China and other markets. If this investigation causes adverse
publicity or increased scrutiny of our industry, our business could
be harmed.
RISKS RELATED TO OUR DIRECT SELLING BUSINESS
Independent distributor activities that violate laws could result
in governmental actions against us and could otherwise harm our
business.
Our
independent distributors are independent contractors. They are not
employees and they act independently of us. The network marketing
industry is subject to governmental regulation. We implement strict
policies and procedures to try to ensure that our independent
distributors comply with laws. Any determination by the Federal
Trade Commission or other governmental agency that we or our
distributors are not in compliance with laws could potentially harm
our business. Even if governmental actions do not result in rulings
or orders against us, they could create negative publicity that
could detrimentally affect our efforts to recruit or motivate
independent distributors and attract customers.
Network marketing is heavily regulated and subject to government
scrutiny and regulation, which adds to the expense of doing
business and the possibility that changes in the law might
adversely affect our ability to sell some of our products in
certain markets.
Network
marketing systems, such as ours, are frequently subject to laws and
regulations, both in the United States and internationally, that
are directed at ensuring that product sales are made to consumers
of the products and that compensation, recognition, and advancement
within the marketing organization are based on the sale of products
rather than on investment in the sponsoring company. These laws and
regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as “pyramid”
schemes, which compensate participants for recruiting additional
participants irrespective of product sales, use high pressure
recruiting methods and or do not involve legitimate products.
Complying with these rules and regulations can be difficult and
requires the devotion of significant resources on our part.
Regulatory authorities, in one or more of our present or future
markets, could determine that our network marketing system does not
comply with these laws and regulations or that it is prohibited.
Failure to comply with these laws and regulations or such a
prohibition could have a material adverse effect on our business,
financial condition, or results of operations. Further, we may
simply be prohibited from distributing products through a
network-marketing channel in some countries, or we may be forced to
alter our compensation plan.
We
are also subject to the risk that new laws or regulations might be
implemented or that current laws or regulations might change, which
could require us to change or modify the way we conduct our
business in certain markets. This could be particularly detrimental
to us if we had to change or modify the way we conduct business in
markets that represent a significant percentage of our net
sales.
Our principal business segment is conducted worldwide in one
channel, direct selling and therefore any negative
perceptive of direct selling would greatly impact our
sales.
Our
principal business segment is conducted worldwide in the direct
selling channel. Sales are made to the ultimate consumer
principally through independent distributors and customers
worldwide. There is a high rate of turnover among distributors,
which is a common characteristic of the direct selling business. As
a result, in order to maintain our business and grow our business
in the future, we need to recruit, retain and service distributors
on a continuing basis and continue to innovate the direct selling
model. Consumer purchasing habits, including reducing purchases of
products generally, or reducing purchases from distributors or
buying products in channels other than in direct selling, such as
retail, could reduce our sales, impact our ability to execute our
global business strategy or have a material adverse effect on our
business, financial condition and results of operations. If our
competitors establish greater market share in the direct selling
channel, our business, financial condition and operating results
may be adversely affected. Furthermore, if any government bans or
severely restricts our business method of direct selling, our
business, financial condition and operating results may be
adversely affected.
Our
ability to attract and retain distributors and to sustain and
enhance sales through our distributors can be affected by adverse
publicity or negative public perception regarding our industry, our
competition, or our business generally. Negative public perception
may include negative publicity regarding the sales structure of
significant, pure network marketing companies which has been the
case recently with large network marketing companies, the quality
or efficacy of nutritional supplement products or ingredients in
general or our products or ingredients specifically, and regulatory
investigations, regardless of whether those investigations involve
us or our distributors or the business practices or products of our
competitors or other network marketing companies. Any adverse
publicity may also adversely impact the market price of our stock
and cause insecurity among our distributors. There can be no
assurance that we will not be subject to adverse publicity or
negative public perception in the future or that such adverse
publicity will not have a material adverse effect on our business,
financial condition, or results of operations.
As a network marketing company, we are dependent upon an
independent sales force and we do not have direct control over the
marketing of our products.
We
rely on non-employee, independent distributors to market and sell
our products and to generate our sales. Distributors typically
market and sell our products on a part-time basis and likely will
engage in other business activities, some of which may compete with
us. We have a large number of distributors and a relatively small
corporate staff to implement our marketing programs and to provide
motivational support to our distributors. We rely primarily upon
our distributors to attract, train and motivate new distributors.
Our sales are directly dependent upon the efforts of our
distributors. Our ability to maintain and increase sales in the
future will depend in large part upon our success in increasing the
number of new distributors, retaining and motivating our existing
distributors, and in improving the productivity of our
distributors.
We
can provide no assurances that the number of distributors will
increase or remain constant or that their productivity will
increase. Our distributors may terminate their services at any
time, and, like most direct selling companies, we experience a high
turnover among new distributors from year-to-year. We cannot
accurately predict any fluctuation in the number and productivity
of distributors because we primarily rely upon existing
distributors to sponsor and train new distributors and to motivate
new and existing distributors. Our operating results in other
markets could also be adversely affected if we and our existing
distributors do not generate sufficient interest in our business to
successfully retain existing distributors and attract new
distributors.
The loss of a significant Youngevity distributor could adversely
affect our business.
We
rely on the successful efforts of our distributors that become
leaders. If these downline distributors in turn sponsor new
distributors, additional business centers are created, with the new
downline distributors becoming part of the original sponsoring
distributor’s downline network. As a result of this network
marketing system, distributors develop business relationships with
other distributors. The loss of a key distributor or group of
distributors, large turnover or decreases in the size of the key
distributors force, seasonal or other decreases in purchase volume,
sales volume reduction, the costs associated with training new
distributors, and other related expenses may adversely affect our
business, financial condition, or results of operations. Moreover,
our ability to continue to attract and retain distributors can be
affected by a number of factors, some of which are beyond our
control, including:
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General
business and economic conditions;
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Adverse
publicity or negative misinformation about us or our
products;
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Public
perceptions about network marketing programs;
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High-visibility
investigations or legal proceedings against network marketing
companies by federal or state authorities or private
citizens;
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Public
perceptions about the value and efficacy of nutritional, personal
care, or weight management products generally;
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Other
competing network marketing organizations entering into the
marketplace that may recruit our existing distributors or reduce
the potential pool of new distributors; and
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Changes
to our compensation plan required by law or implemented for
business reasons that make attracting and retaining distributors
more difficult.
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There
can be no assurance that we will be able to continue to attract and
retain distributors in sufficient numbers to sustain future growth
or to maintain our present growth levels, which could have a
material adverse effect on our business, financial condition, or
results of operations.
Nutritional supplement products may be supported by only limited
availability of conclusive clinical studies.
Some
of our products include nutritional supplements that are made from
vitamins, minerals, herbs, and other substances for which there is
a long history of human consumption. Other products contain
innovative ingredients or combinations of ingredients. Although we
believe that all of our products are safe when taken as directed,
there is little long-term experience with human consumption of
certain of these product ingredients or combinations of ingredients
in concentrated form. We conduct research and test the formulation
and production of our products, but we have performed or sponsored
only limited clinical studies. Furthermore, because we are highly
dependent on consumers' perception of the efficacy, safety, and
quality of our products, as well as similar products distributed by
other companies, we could be adversely affected in the event that
those products prove or are asserted to be ineffective or harmful
to consumers or in the event of adverse publicity associated with
any illness or other adverse effects resulting from consumers' use
or misuse of our products or similar products of our
competitors.
Our manufacturers are subject to certain risks.
We
are dependent upon the uninterrupted and efficient operation of our
manufacturers and suppliers of products. Those operations are
subject to power failures, the breakdown, failure, or substandard
performance of equipment, the improper installation or operation of
equipment, natural or other disasters, and the need to comply with
the requirements or directives of government agencies, including
the FDA. There can be no assurance that the occurrence of these or
any other operational problems at our facilities would not have a
material adverse effect on our business, financial condition, or
results of operations.
Challenges by private parties to the direct selling system could
harm our business.
Direct
selling companies have historically been subject to legal
challenges regarding their method of operation or other elements of
their business by private parties, including their own
representatives, in individual lawsuits and through class actions,
including lawsuits claiming the operation of illegal pyramid
schemes that reward recruiting over sales. We can provide no
assurance that we would not be harmed if any such actions were
brought against any of our current subsidiaries or any other direct
selling company we may acquire in the future.
RISKS RELATED TO OUR COFFEE BUSINESS
Increases in the cost of high-quality arabica coffee beans or other
commodities or decreases in the availability of high-quality
arabica coffee beans or other commodities could have an adverse
impact on our business and financial results.
We
purchase, roast, and sell high-quality whole bean arabica coffee
beans and related coffee products. The price of coffee is subject
to significant volatility. The high-quality arabica coffee of the
quality we seek tends to trade on a negotiated basis at a premium
above the “C” price. This premium depends upon the
supply and demand at the time of purchase and the amount of the
premium can vary significantly. An increase in the “C”
coffee commodity price does increase the price of high-quality
arabica coffee and also impacts our ability to enter into
fixed-price purchase commitments. We frequently enter into supply
contracts whereby the quality, quantity, delivery period, and other
negotiated terms are agreed upon, but the date, and therefore
price, at which the base “C” coffee commodity price
component will be fixed has not yet been established.
These
are known as price-to-be-fixed contracts. We also enter into supply
contracts whereby the quality, quantity, delivery period, and price
are fixed. The supply and price of coffee we purchase can also be
affected by multiple factors in the producing countries, including
weather, natural disasters, crop disease, general increase in farm
inputs and costs of production, inventory levels, and political and
economic conditions, as well as the actions of certain
organizations and associations that have historically attempted to
influence prices of green coffee through agreements establishing
export quotas or by restricting coffee supplies. Speculative
trading in coffee commodities can also influence coffee prices.
Because of the significance of coffee beans to our operations,
combined with our ability to only partially mitigate future price
risk through purchasing practices, increases in the cost of
high-quality arabica coffee beans could have an adverse impact on
our profitability. In addition, if we are not able to purchase
sufficient quantities of green coffee due to any of the above
factors or to a worldwide or regional shortage, we may not be able
to fulfill the demand for our coffee, which could have an adverse
impact on our profitability.
Adverse public or medical opinions about the health effects of
consuming our products, as well as reports of incidents involving
food-borne illnesses, food tampering, or food contamination,
whether or not accurate, could harm our business.
Some
of our products contain caffeine and other active compounds, the
health effects of which are the subject of public scrutiny,
including the suggestion that excessive consumption of caffeine and
other active compounds can lead to a variety of adverse health
effects. In the United States, there is increasing consumer
awareness of health risks, including obesity, due in part to
increased publicity and attention from health organizations, as
well as increased consumer litigation based on alleged adverse
health impacts of consumption of various food products, frequently
including caffeine. An unfavorable report on the health effects of
caffeine or other compounds present in our products, or negative
publicity or litigation arising from certain health risks could
significantly reduce the demand for our products.
Similarly,
instances or reports, whether true or not, of food-borne illnesses,
food tampering and food contamination, either during manufacturing,
packaging or preparation, have in the past severely injured the
reputations of companies in the food processing, grocery and
quick-service restaurant sectors and could affect us as well. Any
report linking us to the use of food tampering or food
contamination could damage our brand value, severely hurt sales of
our products, and possibly lead to product liability claims,
litigation (including class actions) or damages. If consumers
become ill from food-borne illnesses, tampering or contamination,
we could also be forced to temporarily stop selling our products
and consequently could materially harm our business and results of
operations.
RISKS ASSOCIATED WITH INVESTING IN OUR SECURITIES
This Offering is being conducted on a “best efforts”
basis and does not require a minimum amount to be raised. As a
result, we may not be able to raise enough funds to fully implement
our business plan and our investors may lose their entire
investment.
This Offering is on
a “best efforts” basis and does not require a minimum
amount to be raised. If we are not able to raise sufficient funds,
we may not be able to fund our operations as planned, and our
growth opportunities may be materially adversely affected. This
could increase the likelihood that an investor may lose their
entire investment.
Investors funds will be placed in escrow during the offering period
and investors will not have use of their funds during the offering
period
.
The selling agent
is offering the Series B Convertible Preferred Stock on a best
efforts basis. No commitment by anyone exists to purchase all or
any part of the shares offered hereby. Those investor's funds
deposited by non-BANQ investors will be held in escrow
pending closing of this Offering and such funds may be escrowed for
as long as 60 days (or longer if the selling agent extends the
offering period). Investors will not have use of any funds paid for
the shares during the offering period. See “Plan of
Distribution.”
There is no public market for the Series B Convertible Preferred
Stock and prospective investors may not be able to resell their
shares at or above the offering price, if at all.
There is no market
for our Series B Convertible Preferred Stock and no assurance can
be given that an active trading market will develop for the Series
B Convertible Preferred Stock or, if one does develop, that it will
be maintained. We do not intend to apply for listing of the Series
B Convertible Preferred Stock on any securities exchange or other
stock market. In the absence of a public trading market, an
investor may be unable to liquidate his investment in our company.
The offering price of this Offering is not indicative of future
market prices.
The stock market in
general may experience extreme price and volume fluctuations.
Continued market fluctuations could result in extreme volatility in
the price of the Common Stock, which could cause a decline in the
value of the Common Stock and the Series B Convertible Preferred
Stock. Prospective investors should also be aware that price
volatility may be worse if the trading volume of the Common Stock
is low.
The liquidity of
the trading market, if any, and future trading prices of the Series
B Convertible Preferred Stock will depend on many factors,
including, among other things, the market price of our common
stock, prevailing interest rates, our operating results, financial
performance and prospects, the market for similar securities and
the overall securities market, and may be adversely affected by
unfavorable changes in these factors. It is possible that the
market for the Series B Convertible Preferred Stock will be subject
to disruptions which may have a negative effect on the holders of
the Series B Convertible Preferred Stock, regardless of our
operating results, financial performance or prospects.
If we raise at least $3,000,000 in this offering, shareholders will
experience dilution from the automatic conversion of the 2017
Notes. In addition, conversion
of the Series B Convertible Preferred Stock will dilute the
ownership interest of existing stockholders, including holders who
had previously converted their Series B Convertible Preferred
Stock
To the extent we
issue Common Stock upon conversion of the 2017 Notes or the Series
B Convertible Preferred Stock, such conversions will dilute the
ownership interests of existing stockholders, including holders who
had previously converted their Series B Convertible Preferred
Stock. Any sales in the public market of the Common Stock issuable
upon such conversion could adversely affect prevailing market
prices of our common stock. In addition, the existence of the
Series B Convertible Preferred Stock may encourage short selling by
market participants because the conversion of the Series B
Convertible Preferred Stock could depress the price of the Common
Stock.
Holders of Series B Convertible Preferred Stock have extremely
limited voting rights.
The voting rights
as a holder of Series B Convertible Preferred Stock
will be
limited. Shares of the Common Stock are currently the only class of
our securities carrying full voting rights. Voting rights for
holders of Series B Convertible Preferred Stock
exist
primarily with respect to voting on amendments to our charter that
alter or change adversely the powers, preferences or rights of the
Series B Convertible Preferred Stock. See “Description of the
Series B Convertible Preferred Stock—Limited Voting
Rights.”
The automatic conversion feature may not adequately compensate
holders of Series B Convertible Preferred Stock and may make it
more difficult for a party to take over our company or discourage a
party from taking over our company.
Upon the two-year anniversary of issuance, each
share of Series B Convertible Preferred Stock automatically
converts into two shares of Common Stock. See “Description of
Securities - Preferred Stock Series B - Conversion Rights.”
If the Common Stock price is less 50% of the price paid for each
share of Series B Convertible Preferred Stock, the value of the
Series B Convertible Preferred Stock will be less than the price
paid for the Series B Convertible Preferred Stock
excluding the merchandise
credit.
Our ability to pay dividends is limited by the requirements of
Delaware law.
Our ability to pay
dividends on the Series B Convertible Preferred Stock is limited by
the laws of Delaware. Under applicable Delaware law, a Delaware
corporation generally may not make a distribution if, the
corporation’s net assets (total assets minus total
liabilities) do not exceed its capital. Accordingly, we generally
may not make a distribution on the of Series B Convertible
Preferred Stock if, we have not been able to pay our debts as they
become due in the usual course of business or our total assets
would be less than the sum of our total liabilities plus the par
value of each share of issued stock.
Dividends on the Series B Convertible Preferred Stock will be
taxable.
Income from
“qualified dividends” payable to U.S. stockholders that
are individuals, trusts and estates are generally subject to tax at
preferential rates.
We may allocate the net proceeds from this Offering in ways that
you and other stockholders may not approve.
We currently intend
to use the net proceeds of this Offering for general corporate
purposes. Our management will have broad discretion in the
application of the net proceeds from this offering and could spend
the proceeds in ways that do not necessarily improve our operating
results or enhance the value of the Common Stock.
We are controlled by two principal stockholders who are also our
Chief Executive Officer and Chairman and Chief Operating Officer
and director.
Through
their voting power, each Mr. Stephan Wallach, our Chief Executive
Officer and Chairman, and Michelle Wallach, our Chief Operating
Officer and Director has the ability to elect a majority of our
directors and to control all other matters requiring the approval
of our stockholders, including the election of all of our
directors. Mr. Wallach and Michelle Wallach, his wife, together
beneficially own approximately 71.2% of our total equity securities
(assuming exercise of the options to purchase Common Stock held by
Mr. Wallach and Ms. Wallach). As our Chief Executive Officer, Mr.
Wallach has the ability to control our business
affairs.
We are an “emerging growth company,” and any decision
on our part to comply with certain reduced disclosure requirements
applicable to emerging growth companies could make our Common Stock
less attractive to investors.
We
are an “emerging growth company,” as defined in the
Jumpstart Our Business Startups Act enacted in April 2012, and, for
as long as we continue to be an emerging growth company, we may
choose to take advantage of exemptions from various reporting
requirements applicable to other public companies including, but
not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, not being required to comply with any new requirements
adopted by the Public Company Accounting Oversight Board, or the
PCAOB, requiring mandatory audit firm rotation or a supplement to
the auditor's report in which the auditor would be required to
provide additional information about the audit and the financial
statements of the issuer, not being required to comply with any new
audit rules adopted by the PCAOB after April 5, 2012 unless the SEC
determines otherwise, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously
approved.
We
could remain an emerging growth company until the earliest of: (i)
the last day of the fiscal year in which we have total annual gross
revenues of $1.07 billion or more; (ii) the last day of our fiscal
year following the fifth anniversary of the date of our first sale
of common equity securities pursuant to an effective registration
statement; (iii) the date on which we have issued more than $1.0
billion in nonconvertible debt during the previous three years; or
(iv) the date on which we are deemed to be a large accelerated
filer. We have elected to use the extended transition period for
complying with new or revised accounting standards under Section
102(b)(2) of the Jobs Act, that allows us to delay the adoption of
new or revised accounting standards that have different effective
dates for public and private companies until those standards apply
to private companies. We cannot predict if investors will find our
Common Stock less attractive if we choose to rely on these
exemptions. If some investors find our Common Stock less attractive
as a result of any choices to reduce future disclosure, there may
be a less active trading market for our Common Stock and our stock
price may be more volatile. Further, as a result of these scaled
regulatory requirements, our disclosure may be more limited than
that of other public companies and you may not have the same
protections afforded to shareholders of such
companies.
Our financial statements may not be comparable to companies that
comply with public company effective dates.
We
have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(2) of
the JOBS Act, that allows us to delay the adoption of new or
revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Our stock has historically had a limited market. If an active
trading market for our Common Stock does develop, trading prices
may be volatile.
In
the event that an active trading market develops, the market price
of the shares of Common Stock may be based on factors that may not
be indicative of future market performance. Consequently, the
market price of the Common Stock may vary greatly. If an active
market for the Common Stock develops, there is a significant risk
that the stock price may fluctuate dramatically in the future in
response to any of the following factors, some of which are beyond
our control:
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variations
in our quarterly operating results;
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announcements
that our revenue or income/loss levels are below analysts’
expectations;
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general
economic slowdowns;
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changes
in market valuations of similar companies;
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announcements
by us or our competitors of significant contracts; or
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acquisitions,
strategic partnerships, joint ventures or capital
commitments.
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We are subject to the reporting requirements of Federal Securities
Laws, which can be expensive.
We
are subject to the information and reporting requirements under the
Securities Exchange Act of 1934 and other federal securities laws,
and the compliance obligations of the Sarbanes-Oxley Act of 2002.
The costs of preparing and filing annual and quarterly reports and
other information with the SEC has and will continue to cause our
expenses to be higher than they would be if we were a
privately-held company.
Sales by our shareholders of a substantial number of shares of our
Common Stock in the public market could adversely affect the market
price of our Common Stock.
A
large number of outstanding shares of Common Stock are held by two
of our principal shareholders. If any of these principal
shareholders were to decide to sell large amounts of stock over a
short period of time such sales could cause the market price of the
Common Stock to decline.
Our stock price has been volatile and subject to various market
conditions.
The
trading price of the Common Stock has been subject to wide
fluctuations. The price of the Common Stock may fluctuate in the
future in response to quarter-to-quarter variations in operating
results, material announcements by us or our competitors,
governmental regulatory action, conditions in the nutritional
supplement industry, negative publicity, or other events or
factors, many of which are beyond our control. In addition, the
stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market
prices of many dietary and nutritional supplement companies and
which have, in certain cases, not had a strong correlation to the
operating performance of these companies. Our operating results in
future quarters may be below the expectations of securities
analysts and investors. If that were to occur, the price of the
Common Stock would likely decline, perhaps
substantially.
We may issue preferred stock with rights senior to the Series B
Convertible Preferred Stock.
Our
certificate of incorporation authorizes the issuance of up to five
million shares of preferred stock without shareholder approval and
on terms established by our directors. We may issue shares of
preferred stock in order to consummate a financing or other
transaction, in lieu of the issuance of Common Stock. The rights
and preferences of any such class or series of preferred stock
would be established by our board of directors in its sole
discretion and may have dividend, voting, liquidation and other
rights and preferences that are senior to the rights of the Common
Stock.
You should not rely on an investment in our Common Stock for the
payment of cash dividends.
We
intend to retain future profits, if any, to expand our business. We
have never paid cash dividends on the Common Stock and do not
anticipate paying any cash dividends on the Common Stock in the
foreseeable future. You should not make an investment in the Common
Stock if you require dividend income. Any return on investment in
the Common Stock would only come from an increase in the market
price of our stock, which is uncertain and
unpredictable.
We cannot assure you that the common stock will remain listed on
the NASDAQ Capital Market.
The Common Stock is
currently listed on the NASDAQ Capital Market. Although we
currently meet the listing standards of the NASDAQ Capital Market,
we cannot assure you that we will be able to maintain the continued
listing standards of the NASDAQ Capital Market. If we fail to
satisfy the continued listing requirements of the NASDAQ Capital
Market, such as the corporate governance requirements, minimum bid
price requirement or the minimum stockholder’s equity
requirement, the NASDAQ Capital Market may take steps to de-list
our common stock. If we are delisted from the NASDAQ Capital Market
then our common stock will trade, if at all, only on the
over-the-counter market, such as the OTC Bulletin Board securities
market, and then only if one or more registered broker-dealer
market makers comply with quotation requirements. In addition,
delisting of our common stock could depress our stock price,
substantially limit liquidity of our common stock and materially
adversely affect our ability to raise capital on terms acceptable
to us, or at all. Delisting from the NASDAQ Capital Market could
also have other negative results, including the potential loss of
confidence by suppliers and employees, the loss of institutional
investor interest and fewer business development
opportunities.
The reverse stock split that was effected in June 2017 may decrease
the liquidity of the shares of the Common Stock.
The liquidity of
the Common Stock may be affected adversely by the reverse stock
split given the reduced number of shares that are now outstanding.
In addition, the reverse stock split increased the number of
shareholders who own odd lots (less than 100 shares) of the Common
Stock, creating the potential for such shareholders to experience
an increase in the cost of selling their shares and greater
difficulty effecting such sales.
Although we believe
that a higher market price of the Common Stock may help generate
greater or broader investor interest, there can be no assurance
that the reverse stock split will result in a share price that will
attract new investors, including institutional
investors.
A majority of our directors are not required to be "independent"
and several of our directors and officers have other business
interests.
We qualify as a
"controlled company" for listing purposes on the NASDAQ Capital
Market because Stephen Wallach and Michelle Wallach will continue
to hold in excess of 50% of our voting securities. As a controlled
company, we qualify for certain exemptions to the NASDAQ Capital
Market listing requirements, including the requirement that a
majority of our directors be independent, and the requirements to
have a compensation committee and a nominating/corporate governance
committee, each composed of entirely independent directors. A
majority of our directors are not currently "independent" under the
NASDAQ Capital Market independence standards. This lack of
"independence" may interfere with our directors' judgment in
carrying out their responsibilities as directors.
Several of our
directors have other business interests, including Richard Renton,
Paul Sallwasser, William Thompson and Kevin Allodi. Those other
interests may come into conflict with our interests and the
interests of our shareholders. We may compete with these other
business interests for such directors' time and
efforts.
Anti-takeover provisions in our charter documents and under
Delaware law could make an acquisition of us more difficult, limit
attempts by our stockholders to replace or remove our current
management and limit the market price of our Common
Stock.
Provisions in our
certificate of incorporation and bylaws, as amended and restated in
connection with this Offering, may have the effect of delaying or
preventing a change in control or changes in our management. Our
amended and restated certificate of incorporation and amended and
restated bylaws will include provisions that:
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authorize our board
of directors to issue Preferred Stock, without further stockholder
action and with voting liquidation, dividend and other rights
superior to our Common Stock; and
|
|
●
|
provide that
vacancies on our board of directors may be filled only by the vote
of a majority of directors then in office, even though less than a
quorum.
|
These provisions
may frustrate or prevent any attempts by our stockholders to
replace or remove our current management by making it more
difficult for stockholders to replace members of our board of
directors, which is responsible for appointing the members of our
management. In addition, because we are incorporated in Delaware,
we are governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the “DGCL”),
which generally prohibits a Delaware corporation from engaging in
any of a broad range of business combinations with any
“interested” stockholder for a period of three years
following the date on which the stockholder became an
“interested” stockholder. Any of the foregoing
provisions could limit the price that investors might be willing to
pay in the future for shares of Common Stock, and they could deter
potential acquirers of our company, thereby reducing the likelihood
that you would receive a premium for the Common Stock in an
acquisition.
Our failure to fulfill all of our registration requirements may
cause us to suffer liquidated damages, which may be very
costly.
Pursuant to the
terms of the registration rights agreement that we entered into
with investors in our recent private placement offering, we are
required to file a registration statement with respect to
securities issued to them within a certain time period and maintain
the effectiveness of such registration statement. The failure to do
so could result in the payment of damages by us. There can be no
assurance we will be able to maintain the effectiveness of any
registration statement subject to certain conditions, and therefore
there can be no assurance that we will not incur damages with
respect to such agreements.
Reports published by securities or industry analysts, including
projections in those reports that exceed our actual results, could
adversely affect our Common Stock price and trading
volume.
Securities research
analysts, including those affiliated with our selling agents
establish and publish their own periodic projections for our
business. These projections may vary widely from one another and
may not accurately predict the results we actually achieve. Our
stock price may decline if our actual results do not match
securities research analysts' projections. Similarly, if one or
more of the analysts who writes reports on us downgrades our stock
or publishes inaccurate or unfavorable research about our business
or if one or more of these analysts ceases coverage of our company
or fails to publish reports on us regularly, our stock price or
trading volume could decline. While we expect securities research
analyst coverage following this offering, if no securities or
industry analysts begin to cover us, the trading price for our
stock and the trading volume could be adversely
affected.
USE
OF
P
ROCEEDS
If we sell shares
of Series B Convertible Preferred Stock for aggregate gross
proceeds of $10,000,000, we estimate that the net proceeds of this
offering will be approximately $9,000,000 after deducting the
estimated selling agent’s commission and estimated offering
expenses payable by us, which offering expenses include $350,000 of
the expense that we may incur in connection with the 10%
merchandise credit that we issue, which is an estimate based on our
average cost of sales of our products.
We intend to use
the net proceeds from the Offering for working capital
purposes.
As of the date of
this prospectus, we cannot specify with certainty all of the
particular uses for the net proceeds to be received from the
Offering. Accordingly, our management will have broad discretion in
the application of the net proceeds, and investors will be relying
on the judgment of management regarding the application of the net
proceeds from the Offering.
CAPITALIZATION
The following
table sets forth our capitalization as of September 30,
2017:
|
●
|
on
an actual (unaudited) basis;
|
|
●
|
on
a pro forma basis to give effect to the conversion of the 2017
Notes into 1,577,033 shares of Common Stock upon the closing of the
Offering, assuming gross proceeds from the Offering of $10,000,000;
and
|
|
●
|
on
a pro forma adjusted basis to give effect to the proforma
adjustment above and to give further effect to the Offering,
assuming the sale of 1,052,631 shares of Series B Convertible
Preferred Stock at an Offering price of $9.50 per share, and gross
proceeds from the Offering of $10,000,000 and after deducting
expenses related to the Offering payable by us estimated at
approximately $1,000,000 including selling agent fees.
|
This capitalization
table should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our historical financial statements and notes
to those financial statements that are incorporated by reference in
this prospectus.
|
(in thousands)
|
As of September 30, 2017
|
||
|
|
Actual
|
Pro Forma
|
Pro Forma As Adjusted (1)
|
|
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|
Cash
and cash equivalents
|
$
1,373
|
$
1,373
|
$
10,373
|
|
|
|
|
|
|
Total
liabilities
|
$
59,377
|
$
54,216
|
$
54,216
|
|
Shareholders’
Equity:
|
|
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized:
|
|
|
|
|
Series
A Convertible Preferred Stock, 161,135 shares issued and
outstanding as of September 30, 2017 on an actual, pro forma and
pro forma as adjusted basis.
|
-
|
-
|
-
|
|
Series
B Convertible Preferred Stock, 0, 0 and 1,052,631 shares issued and
outstanding as of September 30, 2017 on an actual, pro forma and
pro forma as adjusted basis, respectively.
|
-
|
-
|
1
|
|
Common
stock, $0.001 par value; 50,000,000 shares authorized: 19,723,285,
21,300,318 and 21,300,318 shares issued and outstanding as of
September 30, 2017 on an actual, pro forma and proforma as adjusted
basis, respectively.
|
20
|
21
|
21
|
|
Additional
paid-in capital
|
171,693
|
178,946
|
187,945
|
|
Accumulated
deficit
|
(156,873
)
|
(158,966
)
|
(158,966
)
|
|
Accumulated
other comprehensive loss
|
(220
)
|
(220
)
|
(220
)
|
|
Total
stockholders’ equity
|
14,620
|
19,781
|
28,781
|
|
Total
capitalization
|
$
14,620
|
$
19,781
|
$
28,781
|
————————
(1)
The number of
shares of Common Stock shown above to be outstanding after this
Offering is based on 19,723,285 shares outstanding as of September
30, 2017 and gives effect to the conversion of the 2017 Notes into
1,577,033 shares of Common Stock, and excludes as of that
date:
●
678,568
shares of Common Stock that are issuable upon conversion of the
2014 Notes issued in the 2014 Private Placement with an exercise
price of $7.00 per share;
●
428,571
shares of Common Stock that are issuable upon conversion of the
2015 Notes issued in the 2015 Private Placement with an exercise
price of $7.00 per share;
●
1,149,712
are shares of Common Stock that are issuable upon exercise of the
2017 $5.56 Warrants issued in the 2017 Private
Placement;
●
247,916
are shares of Common Stock that are issuable upon exercise of the
2015 $9.00 Warrants issued in the 2015 Private
Placement;
●
102,678
are shares of Common Stock that are issuable upon exercise of the
2015 $7.00 Warrants issued in the 2015 Private
Placement;
●
1,022,279
are shares of Common Stock that are, issuable upon exercise of the
2014 $4.60 Warrants issued in the 2014 Private
Placement;
●
67,857
are shares of Common Stock that are issuable upon exercise of the
2014 $7.00 Warrants issued in the 2014 Private
Placement;
●
44,624
are shares of Common Stock that are issuable upon exercise of other
current outstanding warrants at an exercise price of
$10.00;
●
75,000
are shares of Common Stock that are issuable upon exercise of other
current outstanding warrants at an exercise price of
$2.00;
●
1,595,932
shares of Common Stock that are issuable upon exercise of
outstanding options, with a weighted average exercise price of
$4.76 which were issued under our equity incentive
plan;
●
500,000
shares of Common Stock that are issuable upon the vesting of
restricted stock units which were issued under our equity incentive
plan:
●
1,874,380
shares of our Common Stock which are reserved for equity awards
that may be granted under our equity incentive plan;
●
2,105,262
shares of our Common Stock issuable upon conversion of the Series B
Convertible Preferred Stock in connection with this Offering;
and
●
105,263
shares of our Common Stock issuable upon exercise of the warrants
issued to the selling agent in connection with this
Offering.
M
ARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND
ISSUER
PURCHASES OF EQUITY SECURITIES
Common
Stock Listing and Holders
Since
June 21, 2017, the Common Stock has been traded on the NASDAQ
National Market under the symbol “YGYI.” From June 2013
until July 2017, the Common Stock has been traded on the OTCQX
Marketplace operated by the OTC Markets Group under the symbol
“YGYI”. Previously, the Common Stock was quoted on the
OTC Markets OTC Pink Market system under the symbol
“JCOF”. The range of high and low sales prices for the
years ended December 31, 2017 and 2016 is presented
below:
The
trading price of the Common Stock has been subject to wide
fluctuations. The price of the Common Stock may fluctuate in the
future in response to quarter-to-quarter variations in operating
results, material announcements by us or our competitors,
governmental regulatory action, conditions in the nutritional
supplement industry, negative publicity, or other events or
factors, many of which are beyond our control. In addition, the
stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market
prices of many dietary and nutritional supplement companies and
which have, in certain cases, not had a strong correlation to the
operating performance of these companies. Our operating results in
future quarters may be below the expectations of securities
analysts and investors. If that were to occur, the price of the
Common Stock would likely decline, perhaps
substantially.
|
|
2017
|
2016
|
||
|
|
High
|
Low
|
High
|
Low
|
|
First
Quarter
|
$
5.96
|
$
5.00
|
$
6.60
|
$
4.40
|
|
Second
Quarter
|
$
7.00
|
$
3.00
|
$
6.40
|
$
4.80
|
|
Third
Quarter
|
$
6.75
|
$
4.28
|
$
6.40
|
$
4.60
|
|
Fourth
Quarter
|
$
5.16
|
$
3.79
|
$
6.40
|
$
5.20
|
The last reported
sale price of the Common Stock on the NASDAQ National Market on
February 5, 2018, was $4.78 per share. As
of December 31, 2017, there were approximately 532 holders of
record of the Common Stock.
D
IVIDEND POLICY
We have never declared or paid any cash dividends
on our common stock and we do not currently intend to pay any cash
dividends on the Common Stock in the foreseeable future. Other than
the payment of dividends on our preferred stock, we expect to
retain all available funds and future earnings, if any, to fund the
development and growth of our business. Any future determination to
pay dividends, if any, on the Common Stock will be at the
discretion of our board of directors and will depend on, among
other factors, our results of operations, financial condition,
capital requirements and contractual restrictions. The Series B
Convertible Preferred Stock will pay cumulative dividends from the
date of issuance at a rate of 5% per annum
payable quarterly in arrears on or about the last
day of March, June, September and December of each year beginning
June 30, 2018
.
If the aggregate amount of dividends accrued and
payable to a holder is less than $10.00, we may, at our option,
retain and not make payment in the respect of such dividends until
the aggregate number of dividends then accrued and payable to the
holder is not less than $10.00.
M
ANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of
significant factors affecting our financial condition and results
of operations for the periods indicated. The discussion should be
read in conjunction with our consolidated financial statements and
the notes presented herein and the risk factors and the financial
statements and the other information set forth herein. In addition
to historical information, the following Management's Discussion
and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ significantly from
those anticipated in these forward-looking statements as a result
of certain factors discussed herein and any other periodic reports
filed and to be filed with the Securities and Exchange
Commission.
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. During the nine months
ended September 30, 2017 and September 30, 2016, we derived
approximately 86% and 89% of our revenue from direct sales and
approximately 14% and 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.
We
conduct our operations primarily in the United States. For the nine
months ended September 30, 2017 and the year ended December 31,
2016 approximately 89% and 91%, respectively, of our revenues were
derived from sales within the United States.
Recent Events
New Acquisitions
On December 13,
2017, we entered into an agreement with BeautiControl whereby we
acquired certain assets of the BeautiControl cosmetic company.
BeautiControl is a direct sales company specializing in cosmetics
and skincare products.
Effective November
6, 2017, we acquired certain assets and assumed certain liabilities
of Future Global Vision, Inc., a direct selling company that offers
a unique line of products that include a fuel additive for vehicles
that improves the efficiency of the engine and reduces fuel
consumption. In addition, Future Global Vision, Inc., offers a line
of nutraceutical products providing health benefits that the whole
family can use.
Effective
July 1, 2017, we acquired certain assets and assumed certain
liabilities of Sorvana International, LLC “Sorvana”.
Sorvana was the result of the unification of the two companies
FreeLife International, Inc. “FreeLife”, and
L’dara. Sorvana offers a variety of products with the
addition of the FreeLife and L’dara product lines. Sorvana
offers an extensive line of health and wellness product solutions
including healthy weight loss supplements, energy and performance
products and skin care product lines as well as organic product
options.
Effective March 1,
2017, we acquired certain assets of Bellavita Group, LLC, a direct
sales company and producer of health and beauty products primarily
in the Asian market and Ricolife, LLC, a direct sales company and
producer of teas with health benefits contained within its tea
formulas.
2017 Financing
During July and August 2017,
we engaged in the July 2017 Private Placement pursuant to
which we raised an aggregate of $3,054,000 in cash and offered for
sale a minimum of $100,000 of units up to a maximum of
$10,000,000 of units, with each unit (a “Unit”)
consisting of: (i) a three (3) year convertible note in the
principal amount of $25,000 initially convertible into shares of
Common Stock, at $4.60 per share (subject to adjustment); and (ii)
a Series D Warrant (the “Class D Warrant”), exercisable
to purchase 50% of the number of shares issuable upon conversion of
the 2017 Note at an exercise price equal to $5.56.
In
July and August 2017, we entered into a Note Purchase Agreement
with 28 accredited investors pursuant to which we raised gross cash
proceeds of $3,054,000 in the 2017 Private Placement and sold 2017
Notes in the aggregate principal amount of $3,054,000, convertible
into 663,914 shares of our common stock, at a conversion price of
$4.60 per share, subject to adjustment as provided therein; and
2017 Warrants to purchase 331,956 shares of common stock at an
exercise price of $5.56.
In addition, as
part of the 2017 Private Placement, three (3) investors in our
November 2015 Private Placement (the “Prior
Investors”), converted their 8% Series C Convertible Notes in
the aggregate principal amount of $4,200,349 together with accrued
interest thereon into new convertible notes for an equal principal
amount, convertible into 913,119 shares of Common Stock and 2017
Warrants to purchase an aggregate of 456,560 shares of Common
Stock. The new note carries the same interest rate as the prior
note. The Prior Investors also exchanged their Series A Warrants
dated October 26, 2015 to purchase an aggregate of 279,166 shares
of Common Stock for a new 2017 Warrant to purchase an aggregate of
182,065 shares of Common Stock. We used the proceeds from the 2017
Private Placement for working capital
purposes.
For twelve (12)
months following the closing, the investors in the 2017 Private
Placement have the right to participate in any future equity
financings by us including the Offering, up to their pro rata share
of the maximum Offering amount in the aggregate.
The 2017 Notes bear
interest at a rate of eight percent (8%) per annum. We have the
right to prepay the 2017 Notes at any time after the one year
anniversary date of the issuance of the 2017 Notes at a rate equal
to 110% of the then outstanding principal balance and accrued
interest. The 2017 Notes automatically convert to Common Stock if
prior to the maturity date we sell Common Stock, preferred stock or
other equity-linked securities with aggregate gross proceeds of no
less than $3,000,000 for the purpose of raising capital. The 2017
Notes provide for full ratchet price protection for a period of
nine months after their issuance and thereafter weighted average
price adjustment.
We paid a placement
fee of $321,248, excluding legal expenses and we have agreed to
issue to the selling agent, who was the placement agent in the 2017
Private Placement, three-year warrants to purchase 179,131 shares
of Common Stock at an exercise price of $5.56 per share and we have
agreed to issue the placement agent 22,680 shares of Common
Stock.
In
connection with the 2017 Private Placement, we also entered into
the “Registration Rights Agreement” with the investors
in the 2017 Private Placement. The Registration Rights Agreement
requires that we file a registration statement (the
“Registration Statement”) with the Securities and
Exchange Commission within ninety (90) days of the final closing
date of the Private Placement for the resale by the investors of
all of the shares Common Stock underlying the senior convertible
notes and warrants and all shares of Common Stock issuable upon any
stock split, dividend or other distribution, recapitalization or
similar event with respect thereto (the “Registrable
Securities”) and that the Initial Registration Statement be
declared effective by the SEC within 180 days of the final closing
date of the 2017 Private Placement or if the registration statement
is reviewed by the SEC 210 days after the final closing date or the
2017 Private Placement. Upon the occurrence of certain events (each
an “Event”), we will be required to pay to the
investors liquidated damages of 1.0% of their respective aggregate
purchase price upon the date of the Event and then monthly
thereafter until the Event is cured. In no event may the aggregate
amount of liquidated damages payable to each of the investors
exceed in the aggregate 10% of the aggregate purchase price paid by
such investor for the Registrable Securities. The Registration
Statement was declared effective on September 27,
2017.
Critical Accounting Policies and Estimates
Discussion
and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates; including those related to collection of
receivables, inventory obsolescence, sales returns and non-monetary
transactions such as stock and stock options issued for services,
deferred taxes and related valuation allowances, fair value of
assets and liabilities acquired in business combinations, asset
impairments, useful lives of property, equipment and intangible
assets and value of contingent acquisition debt. We base our
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.
Emerging Growth Company
We
have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(2) of
the Jobs Act, that allows us to delay the adoption of new or
revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Revenue Recognition
We
recognize revenue from product sales when the following four
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the selling
price is fixed or determinable, and collectability is reasonably
assured. We ship the majority of 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 is carried at estimated
fair value.
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.
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.
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 Common Stock, the value of the
Common Stock is determined using the closing market price as of the
date such shares were tendered to the selling parties. The fair
values assigned to tangible and identified intangible assets
acquired and liabilities assumed are based on management or third
party estimates and assumptions that utilize established valuation
techniques appropriate for our industry and each acquired business.
Goodwill is recorded as the excess, if any, of the aggregate fair
value of consideration exchanged for an acquired business over the
fair value (measured as of the acquisition date) of total net
tangible and identified intangible assets acquired. A liability for
contingent consideration, if applicable, is recorded at fair value
as of the acquisition date. In determining the fair value of such
contingent consideration, management estimates the amount to be
paid based on probable outcomes and expectations on financial
performance of the related acquired business. The fair value of
contingent consideration is reassessed quarterly, with any change
in the estimated value charged to operations in the period of the
change. Increases or decreases in the fair value of the contingent
consideration obligations can result from changes in actual or
estimated revenue streams, discount periods, discount rates, and
probabilities that contingencies will be met.
Long-Lived Assets
Long-lived
assets, including property and equipment and definite lived
intangible assets are carried at cost less accumulated
amortization. Costs incurred to renew or extend the life of a long
lived asset are reviewed for capitalization. All finite-lived
intangible assets are amortized on a straight-line basis, which
approximates the pattern in which the estimated economic benefits
of the assets are realized, over their estimated useful lives. We
evaluate long-lived assets for impairment whenever events or
changes in circumstances indicate their net book value may not be
recoverable. Impairment, if any, is based on the excess of the
carrying amount over the fair value, based on market value when
available, or discounted expected cash flows, of those assets and
is recorded in the period in which the determination is
made.
Goodwill
Goodwill
is recorded as the excess, if any, of the aggregate fair value of
consideration exchanged for an acquired business over the fair
value (measured as of the acquisition date) of total net tangible
and identified intangible assets acquired. Goodwill and other
intangible assets with indefinite lives are not amortized but are
tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable.
Stock Based Compensation
We account for stock based compensation in
accordance with Financial Accounting Standards Board ("FASB")
Accounting Standards Board ("ASC") Topic 718,
Compensation – Stock
Compensation
, which establishes
accounting for equity instruments exchanged for employee services.
Under such provisions, stock based compensation cost is measured at
the grant date, based on the calculated fair value of the award,
and is recognized as an expense, under the straight-line method,
over the vesting period of the equity grant. We account for equity
instruments issued to non-employees in accordance with
authoritative guidance for equity based payments to non-employees.
Stock options issued to non-employees are accounted for at their
estimated fair value determined using the Black-Scholes
option-pricing model. The fair value of options granted to
non-employees is re-measured as they vest, and the resulting
increase in value, if any, is recognized as expense during the
period the related services are rendered.
Income Taxes
We
account for income taxes under the asset and liability method which
includes the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the consolidated financial statements. Under this
approach, deferred taxes are recorded for the future tax
consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income
taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred taxes
result from differences between the financial statement and tax
bases of our assets and liabilities, and are adjusted for changes
in tax rates and tax laws when changes are enacted. The effects of
future changes in income tax laws or rates are not
anticipated.
Results of Operations
We operate in two
segments: the direct selling segment where products are offered
through a global distribution network of preferred customers and
distributors and the commercial coffee segment where products are
sold directly to businesses.
Segment revenue as
a percentage of total revenue is as follows (in
thousands):
In the direct
selling segment we sell health and wellness products on a global
basis and offer a wide range of products through an international
direct selling network of independent distributors. Our multiple
independent selling forces sell a variety of products through
friend-to-friend marketing and social networking.
We also engage in
the commercial sale of coffee. We own a traditional coffee roasting
business, CLR, that sells roasted and unroasted coffee and produces
coffee under its own Café La Rica brand, Josie’s Java
House brand and Javalution brands. CLR produces coffee under a
variety of private labels through major national sales outlets and
major customers including cruise lines and office coffee service
operators. During fiscal 2014 CLR acquired the Siles Plantation
Family Group, a coffee plantation and dry-processing facility
located in Matagalpa, Nicaragua, an ideal coffee growing region
that is historically known for high quality coffee production. The
dry-processing facility is approximately 26 acres and the
plantation is approximately 500 acres and produces 100 percent
Arabica coffee beans that are shade grown, Rainforest Alliance
Certified™ and Fair Trade Certified™. The plantation,
dry-processing facility and existing U.S. based coffee roaster
facilities allows CLR to control the coffee production process from
field to cup.
We conduct our
operations primarily in the United States. For the three months
ended September 30, 2017 and 2016 approximately 12% and 9%,
respectively, of our sales were derived from outside the United
States. For the nine months ended September 30, 2017 and 2016
approximately 11% and 9%, respectively, of our sales were derived
from outside the United States.
The comparative
financials discussed below show the condensed consolidated
financial statements of Youngevity International, Inc. as of and
for the three and nine months ended September 30, 2017 and
2016.
Three months ended September 30, 2017 compared to three months
ended September 30, 2016
Revenues
For
the three months ended September 30, 2017, our revenue increased
1.9% to $44,395,000 as compared to $43,562,000 for the three months
ended September 30, 2016. During the three months ended
September 30, 2017, we derived approximately 85% of our revenue
from our direct sales and approximately 15% of our revenue from our
commercial coffee sales. Direct selling segment revenues
decreased by $622,000 or 1.6% to $37,954,000 as compared to
$38,576,000 for the three months ended September 30, 2016. This
decrease was primarily attributed to a decrease of $5,366,000 in
revenues from existing business offset by additional revenues of
$4,744,000 derived from our 2016 and 2017 acquisitions compared to
the prior period. The decrease in existing business was primarily
due to reduction in revenues related to key management and
distributors moving to another direct selling company. For the
three months ended September 30, 2017, commercial coffee segment
revenues increased by $1,455,000 or 29.2% to $6,441,000 as compared
to $4,986,000 for the three months ended September 30, 2016. This
increase was primarily attributed to increased revenues in our
green coffee business.
The
following table summarizes our revenue in thousands by
segment:
|
|
For the three months
ended September 30,
|
Percentage
|
|
|
Segment
Revenues
|
2017
|
2016
|
change
|
|
Direct
selling
|
$
37,954
|
$
38,576
|
(1.6
)%
|
|
Commercial
coffee
|
6,441
|
4,986
|
29.2
%
|
|
Total
|
$
44,395
|
$
43,562
|
1.9
%
|
Cost of Revenues
For the three months ended September 30, 2017,
overall cost of revenues increased approximately 8.4% to
$18,631,000 as compared to $17,194,000 for the three months ended
September 30, 2016. The direct selling segment cost of revenues
increased 1.1% when compared to the same period last year as a
result of product mix. The commercial coffee segment cost of
revenues increased 26.8% when compared to the same period last
year. This was primarily attributable to
increases
in revenues related to the green
coffee business.
Cost
of revenues includes the cost of inventory including green coffee,
shipping and handling costs incurred in connection with shipments
to customers, direct labor and benefits costs, royalties associated
with certain products, transaction merchant fees and depreciation
on certain assets.
Gross Profit
For
the three months ended September 30, 2017, gross profit decreased
approximately 2.3% to $25,764,000 as compared to $26,368,000 for
the three months ended September 30, 2016. Overall gross profit as
a percentage of revenues decreased to 58.0%, compared to 60.5% in
the same period last year.
Gross
profit in the direct selling segment decreased by 2.9% to
$25,472,000 from $26,233,000 in the prior period 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 0.9% to 67.1% for the three months ended September
30, 2017, compared to 68.0% in the same period last year. This was
primarily due to increased social selling discounts offered in the
current period.
Gross profit
in the commercial coffee segment increased by 116% to $292,000
compared to $135,000 in the prior period. The increase in gross
profit in the commercial coffee segment was primarily due to the
increase in green coffee revenues discussed above. Gross profit as
a percentage of revenues in the commercial coffee segment increased
by 1.8% to 4.5% for the period ended September 30, 2017, compared
to 2.7% in the same period last year.
Below
is a table of gross profit by segment (in thousands) and gross
profit as a percentage of segment revenues:
Operating Expenses
For
the three months ended September 30, 2017, our operating expenses
increased approximately 6.9% to $27,581,000 as compared to
$25,792,000 for the three months ended September 30, 2016. Included
in operating expense is distributor compensation paid to our
independent distributors in the direct selling segment. For the
three months ended September 30, 2017, distributor compensation
decreased 3.9% to $17,391,000 from $18,101,000 for the three months
ended September 30, 2016. This decrease was primarily attributable
to the decrease in revenues and lower commissions paid on
discounted items. Distributor compensation as a percentage of
direct selling revenues decreased to 45.8% for the three months
ended September 30, 2017 as compared to 46.9% for the three months
ended September 30, 2016.
For
the three months ended September 30, 2017, the sales and marketing
expense increased 28.1% to $4,074,000 from $3,181,000 for the three
months ended September 30, 2016 primarily due to expenses related
to our twentieth anniversary convention held in Dallas, Texas in
August 2017 and increase in wages and related benefits. Sales and
marketing expenses also increased in the commercial coffee segment
primarily due to increased wages and advertising expense related to
the agreement with the Miami Marlins.
For
the three months ended September 30, 2017, the general and
administrative expense increased 35.6% to $6,116,000 from
$4,510,000 for the three months ended September 30, 2016 primarily
due to increases in costs related to legal fees, computer and
internet related costs, international expansion, investor
relations, wages and related benefits, amortization and stock based
compensation costs. In addition, we revalued the contingent
liability, which resulted in a benefit of $339,000 for the three
months ended September 30, 2017 compared to a benefit of $315,000
for the three months ended September 30, 2016.
Operating (Loss) Income
For
the three months ended September 30, 2017, operating loss increased
to $1,817,000 compared to operating income of $576,000 for the
three months ended September 30, 2016. This was primarily due to
the lower gross profit and the increase in operating expenses
discussed above.
Total Other Expense
For the three months ended September 30, 2017,
total other expense decreased by $36,000 to $541,000 as compared to
other expense of $577,000 for the three months ended September 30,
2016. Total other expense includes net interest expense, the change
in the fair value of warrant derivative and extinguishment loss on
debt.
Net
interest expense increased by $806,000 for the three months ended
September 30, 2017 to $1,752,000 as compared to $946,000 for the
three months ended September 30, 2016. Interest expense includes
interest payments related to acquisitions and other operating debt,
interest payments to investors associated with the 2014, 2015 and
2017 Private Placement transactions of $1,043,000 and related
non-cash amortization costs of $710,000 and other non-cash costs of
$8,000. Net interest expense also includes $9,000 in interest
income.
Change
in fair value of warrant derivative liability increased by
$1,150,000 for the three months ended September 30, 2017 to
$1,519,000 compared to $369,000 for the three months ended
September 30, 2016. 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 condensed
consolidated financial statements.)
We
recorded a non-cash extinguishment loss on debt of $308,000 in the
current quarter ended September 30, 2017 as a result of the
repayment of $4,200,349 in notes including interest to the three
investors from the November 2015 Private Placement through issuance
of a new July 2017 note. This loss represents the difference
between the reacquisition value of the new debt to the holders of
the notes and the carrying amount of the holder’s
extinguished debt (see Note 6, to the condensed consolidated
financial statements.)
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using statutory tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the effective date
of the change. 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. We have recognized an
income tax benefit of $1,290,000, which is our estimated federal,
state and foreign income tax benefit for the three months ended
September 30, 2017. The income tax benefit for the three months
ended September 30, 2016 was $68,000. The current effective tax
rate for the three months ended September 30, 2017 was 54.7%
compared to the Federal statutory tax rate of
35%.
Net (Loss) Income
For
the three months ended September 30, 2017, the Company reported a
net loss of $1,068,000 as compared to net income of $67,000 for the
three months ended September 30, 2016. The primary reason for the
increase in net loss when compared to the prior period was due to a
net loss before income taxes of $2,358,000 in 2017 compared to a
net loss before income taxes in 2016 of $1,000.
Nine months ended September 30, 2017 compared to nine months ended
September 30, 2016
Revenues
For
the nine months ended September 30, 2017, our revenues increased
0.3% to $124,655,000 as compared to $124,264,000 for the nine
months ended September 30, 2016. During the nine months ended
September 30, 2017, we derived approximately 86% of our revenue
from our direct sales and approximately 14% of our revenue from our
commercial coffee sales. Direct selling segment revenues
decreased by $3,659,000 or 3.3% to $106,734,000 as compared to
$110,393,000 for the nine months ended September 30, 2016. This
decrease was primarily attributed to a decrease of $13,242,000 in
revenues from existing business offset by additional revenues of
$9,583,000 derived from our Company’s 2016 and 2017
acquisitions compared to the prior period. The decrease in existing
business was primarily due to reduction in revenues related to key
management and distributors moving to another direct selling
company. For the nine months ended September 30, 2017, commercial
coffee segment revenues increased by $4,050,000 or 29.2% to
$17,921,000 as compared to $13,871,000 for the nine months ended
September 30, 2016. This increase was primarily attributed to
increased revenues in our green coffee business and coffee roasting
business.
The
following table summarizes our revenue in thousands by
segment:
|
|
For the nine months
ended September 30,
|
Percentage
|
|
|
Segment
Revenues
|
2017
|
2016
|
change
|
|
Direct
selling
|
$
106,734
|
$
110,393
|
(3.3
)%
|
|
Commercial
coffee
|
17,921
|
13,871
|
29.2
%
|
|
Total
|
$
124,655
|
$
124,264
|
0.3
%
|
Cost of Revenues
For the nine months ended September 30, 2017,
overall cost of revenues increased approximately 7.8% to
$52,923,000 as compared to $49,102,000 for the nine months ended
September 30, 2016. The direct selling segment cost of revenues
decreased 1.4% when compared to the same period last year,
primarily as a result of lower revenues and lower shipping costs
during the nine months ended September 30, 2017. The commercial
coffee segment cost of revenues increased 32.2% when compared to
the same period last year. This was primarily attributable
to
increases
in revenues
related to the green coffee business, and additional costs incurred
due to inventory adjustments, increased direct labor costs, repairs
and maintenance and depreciation expense.
Cost
of revenues includes the cost of inventory including green coffee,
shipping and handling costs incurred in connection with shipments
to customers, direct labor and benefits costs, royalties associated
with certain products, transaction merchant fees and depreciation
on certain assets.
Gross Profit
For
the nine months ended September 30, 2017, gross profit decreased
approximately 4.6% to $71,732,000 as compared to $75,162,000 for
the nine months ended September 30, 2016. Overall gross profit as a
percentage of revenues decreased to 57.5%, compared to 60.5% in the
same period last year.
Gross
profit in the direct selling segment decreased by 4.2% to
$71,522,000 from $74,690,000 in the prior period 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 0.7% to 67.0% for the nine months ended September 30,
2017, compared to 67.7% in the same period last year. This was
primarily due to increased social selling discounts offered in the
current year compared to the prior year.
Gross profit
in the commercial coffee segment decreased by 55.5% to $210,000
compared to $472,000 in the prior period. The decrease in gross
profit in the commercial coffee segment was primarily due to an
increase in costs discussed above. Gross profit as a percentage of
revenues in the commercial coffee segment decreased by 2.2% to 1.2%
for the period ended September 30, 2017, compared to 3.4% in the
same period last year.
Below
is a table of gross profit by segment (in thousands) and gross
profit as a percentage of segment revenues:
Operating Expenses
For
the nine months ended September 30, 2017, our operating expenses
increased approximately 6.6% to $76,625,000 as compared to
$71,899,000 for the nine months ended September 30, 2016. Included
in operating expense is distributor compensation paid to our
independent distributors in the direct selling segment. For the
nine months ended September 30, 2017, distributor compensation
decreased 2.7% to $49,496,000 from $50,871,000 for the nine months
ended September 30, 2016. This decrease was primarily attributable
to the decrease in revenues. Distributor compensation as a
percentage of direct selling revenues increased to 46.4% for the
nine months ended September 30, 2017 as compared to 46.1% for the
nine months ended September 30, 2016. This increase was primarily
attributable to an increase in incentive payouts.
For
the nine months ended September 30, 2017, the sales and marketing
expense increased 39.8% to $10,650,000 from $7,619,000 for the nine
months ended September 30, 2016 primarily due to increases in
convention and distributor events costs, increased wages and
related benefits and increased marketing expenses.
For
the nine months ended September 30, 2017, the general and
administrative expense increased 22.9% to $16,479,000 from
$13,409,000 for the nine months ended September 30, 2016 primarily
due to legal fees, computer and internet related costs,
international expansion, investor relations, depreciation,
amortization and stock based compensation costs. In addition, the
contingent liability revaluation resulted in a benefit of
$1,019,000 for the nine months ended September 30, 2017 compared to
a benefit of $1,185,000 for the nine months ended September 30,
2016.
Operating (Loss) Income
For
the nine months ended September 30, 2017, operating loss increased
to $4,893,000 as compared to operating income of $3,263,000 for the
nine months ended September 30, 2016. This was primarily due to the
lower gross profit and the increase in operating expenses discussed
above.
Total Other Expense
For
the nine months ended September 30, 2017, total other expense
increased by $1,123,000 to $3,727,000 as compared to $2,604,000 for
the nine months ended September 30, 2016. Total other expense
includes net interest expense, the change in the fair value of
warrant derivative and extinguishment loss on debt.
Net
interest expense increased by $1,068,000 for the nine months ended
September 30, 2017 to $4,207,000 compared to $3,139,000 in 2016.
Interest expense includes interest payments related to acquisitions
and other operating debt, interest payments to investors associated
with our Private Placement transactions of $2,773,000, $1,270,000
non-cash amortization costs and $22,000 of other non-cash interest.
In addition we recorded $231,000 related to issuance costs
associated with our 2017 Private Placement. Net interest expense
also includes $67,000 in interest income.
Change
in fair value of warrant derivative liability increased by $253,000
for the nine months ended September 30, 2017 to $788,000 compared
to $535,000 for the nine months ended September 30, 2016. 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 condensed consolidated financial
statements.)
We
recorded a non-cash extinguishment loss on debt of $308,000 in the
current quarter ended September 30, 2017 as a result of the
repayment of $4,200,349 in notes including interest to the three
investors from the November 2015 Private Placement through issuance
of a new July 2017 note. This loss represents the difference
between the reacquisition value of the new debt to the holders of
the notes and the carrying amount of the holder’s
extinguished debt (see Note 6, to the condensed consolidated
financial statements.)
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using statutory tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the effective date
of the change. 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. We have recognized an
income tax benefit of $2,763,000, which is our estimated federal,
state and foreign income tax benefit for the nine months ended
September 30, 2017. The income tax expense for the nine months
ended September 30, 2016 was $550,000. The current effective tax
rate for the nine months ended September 30, 2017 was 32.1%
compared to the Federal statutory tax rate of
35%.
Net Income (Loss)
For
the nine months ended September 30, 2017, the Company reported a
net loss of $5,857,000 as compared to net income of $109,000 for
the nine months ended September 30, 2016. The primary reason for
the decrease in net income to a loss when compared to the prior
period was due to a net loss before income taxes of $8,620,000 in
2017 compared to net income before income taxes in 2016 of
$659,000.
Adjusted EBITDA
EBITDA (earnings before interest, income taxes,
depreciation and amortization)
as adjusted to remove the
effect of stock based compensation expense, the change in the fair
value of the warrant derivative and
extinguishment loss on debt or "Adjusted EBITDA,"
decreased to a negative $359,000 for the three months ended
September 30, 2017 compared to $1,620,000 in 2016 and decreased to
a negative $851,000 for the nine months ended September 30, 2017
compared to $6,420,000 in 2016, respectively.
Management
believes that Adjusted EBITDA, when viewed with our results under
GAAP and the accompanying reconciliations, provides useful
information about our period-over-period growth. Adjusted EBITDA is
presented because management believes it provides additional
information with respect to the performance of our fundamental
business activities and is also frequently used by securities
analysts, investors and other interested parties in the evaluation
of comparable companies. We also rely on Adjusted EBITDA as a
primary measure to review and assess the operating performance of
our company and our management team.
Adjusted
EBITDA is a non-GAAP financial measure. We calculate adjusted
EBITDA by taking net income, and adding back the expenses related
to interest, income taxes, depreciation, amortization, stock based
compensation expense, extinguishment loss on debt and the change in
the fair value of the warrant derivative, as each of those elements
are calculated in accordance with GAAP. Adjusted EBITDA
should not be construed as a substitute for net income (loss) (as
determined in accordance with GAAP) for the purpose of analyzing
our operating performance or financial position, as Adjusted EBITDA
is not defined by GAAP.
A
reconciliation of our adjusted EBITDA to net income (loss) for
the three and nine months ended September 30, 2017 and 2016 is
included in the table below (in thousands):
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.
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 our 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
CLR 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 CLR’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 our 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 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:
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.
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.
We
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.
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.
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. We have determined through consideration of all
positive and negative evidence that the US deferred tax assets are
more likely than not to be realized. We do 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, we 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.
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
September 30, 2017 we had cash and cash equivalents of
approximately $1,373,000 as compared to cash and cash equivalents
of $869,000 as of December 31, 2016.
Cash Flows for the nine months ended September 30, 2017
compared to the nine months ended September 30, 2016
Cash used
in operating activities
.
Net cash used in operating activities for the nine months ended
September 30, 2017 was $1,783,000 as compared to net cash used
in operating activities of $697,000 for the nine months ended
September 30, 2016. Net cash used in operating activities consisted
of a net loss of $5,857,000, offset by net non-cash operating
activity of $1,101,000 and by $2,973,000 in changes in operating
assets and liabilities.
Net
non-cash operating expenses included $3,230,000 in depreciation and
amortization, $471,000 in stock based compensation expense,
$281,000 related to the amortization of deferred financing costs
associated with our Private Placements, $799,000 related to the
amortization of debt discounts, $172,000 related to the
amortization of warrant issuance costs, $200,000 for stock issued
for services, $106,000 related to stock issuance costs associated
with debt financing, $341,000 related to warrant issuance costs for
other compensation, $308,000 in extinguishment of debt and $42,000
in other non-cash items, offset by $788,000 related to the
change in the fair value of warrant derivative liability, $195,000
in expenses allocated in profit sharing agreement that relates to
contingent debt, $1,020,000 related to the change in the fair value
of contingent acquisition debt and $2,846,000 related to the change
in deferred taxes.
Changes
in operating assets and liabilities were attributable to decreases
in working capital, primarily related changes in accounts
receivable of $1,452,000and decrease in prepaid expenses and other
current assets of $282,000. Increases in working capital primarily
related to changes in inventory of $440,000, changes in, accounts
payable of $2,143,000, accrued distributor compensation of
$515,000, changes in deferred revenues of $129,000 and changes in
accrued expenses and other liabilities of $1,480,000.
Cash used in
investing activities
. Net cash used in investing activities for
the nine months ended September 30, 2017 was $865,000 as compared
to net cash used in investing activities of $1,026,000 for the nine
months ended September 30, 2016. Net cash used in investing
activities consisted of purchases of property and equipment,
leasehold improvements and cash expenditures related to business
acquisitions.
Cash provided
by financing activities
.
Net cash provided by financing activities was $3,154,000 for the
nine months ended September 30, 2017 as compared to net cash
provided by financing activities of $34,000 for the nine months
ended September 30, 2016.
Net
cash provided by financing activities consisted of proceeds from
the exercise of stock options $28,000, proceeds from factoring of
$1,723,000 and $2,720,000 of net proceeds related to the
Convertible Notes Payable associated with our July 2017 Private
Placement, offset by $159,000 in payments to reduce notes payable,
$440,000 in payments related to contingent acquisition debt, and
$718,000 in payments related to capital lease financing
obligations.
Cash Flows
year ended December
31, 2016 compared to year ended December 31, 2015
Cash used in operating
activities
. Net cash used in operating activities for the
year ended December 31, 2016 was $1,827,000 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 noncash operating activity of
$2,030,000 offset by $3,459,000 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.
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
$1,063,000, 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 provided by financing
activities.
Net cash provided by financing activities was
$158,000 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 provided
by financing activities consisted of $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 $833,000 in proceeds related to the
factoring agreement, 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.
New Accounting
Pronouncements
In January 2017,
the FASB issued
Accounting Standard
Update (“
ASU”) No. 2017-04,
Intangibles — Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
. This ASU
simplifies the test for goodwill impairment by removing Step 2 from
the goodwill impairment test. Companies will now perform the
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount, recognizing an impairment charge for
the amount by which the carrying amount exceeds the reporting
unit’s fair value not to exceed the total amount of goodwill
allocated to that reporting unit. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The
amendments in this update are effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019, with early
adoption permitted for goodwill impairment tests performed after
January 1, 2017. We are evaluating the potential impact of this
adoption on our consolidated financial
statements.
In
October 2016, the FASB issued ASU 2016-17, Consolidation (Topic
810): Interests Held through Related Parties That Are under Common
Control. This standard amends the guidance issued with ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
in order to make it less likely that a single decision maker would
individually meet the characteristics to be the primary beneficiary
of a Variable Interest Entity ("VIE"). When a decision maker or
service provider considers indirect interests held through related
parties under common control, they perform two steps. The second
step was amended with this ASU to say that the decision maker
should consider interests held by these related parties on a
proportionate basis when determining the primary beneficiary of the
VIE rather than in their entirety as was called for in the previous
guidance. This ASU was effective for fiscal years beginning after
December 15, 2016, and early adoption was not permitted. We adopted
ASU 2016-17 effective the quarter ended March 31, 2017. The
adoption of ASU 2016-17 did not have a significant impact on our
consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The
standard requires lessees to recognize lease assets and lease
liabilities on the balance sheet and requires expanded disclosures
about leasing arrangements. We expect to adopt the standard no
later than January 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. We have not evaluated the
impact of this new standard will have on our consolidated financial
statements; however it is expected to gross-up the consolidated
balance sheet as a result of recognizing a lease asset along with a
similar lease liability.
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes. This guidance
requires that entities with a classified statement of financial
position present all deferred tax assets and liabilities as
noncurrent. This update is effective for annual and interim periods
for fiscal years beginning after December 15, 2016, which required
the Company to adopt the new guidance in the first quarter of
fiscal 2017. Early adoption was permitted for financial statements
that have not been previously issued and may be applied on either a
prospective or retrospective basis. We adopted ASU 2015-17
effective the quarter ended March 31, 2017. The adoption of ASU
2015-17 did not have a significant impact on our consolidated
financial statements other than the netting of current and
long-term deferred tax assets and liabilities in the non-current
section of the balance sheet and footnote disclosures.
In
July 2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory (Topic 330): Simplifying the Measurement
of Inventory.” The amendments in ASU 2015-11
require an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments do not apply to inventory that is measured using
last-in, first out (LIFO) or the retail inventory
method. The amendments apply to all other inventory,
which includes inventory that is measured using first-in, first-out
(FIFO) or average cost. The amendments should be applied
prospectively with earlier application permitted as of the
beginning of an interim or annual reporting
period. Management is currently assessing the effect
that ASU 2015-11 will have on our condensed consolidated financial
statements and related disclosures. Included in
management’s assessment is the determination of an effective
adoption date and transition method for adoption. We expect to
complete our initial assessment process, including the selection of
an effective adoption date and transition method for adoption, by
December 31, 2017.
In May 2014, the
FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606). The new revenue recognition standard
provides a five-step analysis of contracts to determine when and
how revenue is recognized. The core principle is that a company
should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In August 2015, the FASB
deferred the effective date of ASU No. 2014-09 for all entities by
one year to annual reporting periods beginning after December 15,
2018, and interim periods beginning after December 15, 2019. The
FASB has issued several updates subsequently including
implementation guidance on principal versus agent considerations,
on how an entity should account for licensing arrangements with
customers, and to improve guidance on assessing collectability,
presentation of sales taxes, noncash consideration, and contract
modifications and completed contracts at transition. The amendments
in this series of updates shall be applied either retrospectively
to each period presented or as a cumulative-effect adjustment as of
the date of adoption. Early adoption is permitted. We continue to
assess the impact of this ASU, and related subsequent updates, will
have on our consolidated financial statements. As of September 30,
2017, we are in the process of reviewing the guidance to identify
how this ASU will apply to our revenue reporting process. The final
impact of this ASU on our financial statements will not be known
until the assessment is complete. We will update our disclosures in
future periods as the analysis is completed.
In August 2014, the
FASB issued ASU No. 2014-15 regarding ASC topic No. 205,
Presentation of Financial Statements - Going Concern. The standard
requires all companies to evaluate if conditions or events raise
substantial doubt about an entity’s ability to continue as a
going concern and requires different disclosure of items that raise
substantial doubt that are, or are not, alleviated as a result of
consideration of management’s plans. The new guidance is
effective for annual periods ending after December 15, 2016.
The adoption of
ASU No. 2014-15 did not have a significant impact
on our consolidated financial
statements.
Contractual Obligations
The
following table summarizes our expected contractual obligations and
commitments subsequent to September 30, 2017 (in
thousands):
|
|
|
|
Payments
Due by Period
|
||||
|
|
Total
|
(3
months)
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
|
Operating
Leases
|
$
4,109
|
$
314
|
$
1,066
|
$
742
|
$
628
|
$
587
|
$
772
|
|
Capital
Leases
|
1,931
|
276
|
948
|
553
|
123
|
31
|
-
|
|
Purchase
Obligations
|
2,740
|
2,740
|
-
|
-
|
-
|
-
|
-
|
|
Convertible
Notes Payable (*)
|
15,004
|
-
|
3,000
|
4,750
|
7,254
|
-
|
-
|
|
Notes
Payable, Operating
|
4,627
|
59
|
173
|
156
|
160
|
167
|
3,912
|
|
Contingent
Acquisition Debt
|
11,827
|
119
|
408
|
547
|
820
|
480
|
9,453
|
|
Total
|
$
40,238
|
$
3,508
|
$
5,595
|
$
6,748
|
$
8,985
|
$
1,265
|
$
14,137
|
(*)
The Convertible Notes Payable includes the principal balances
associated with our 2017, 2015 and 2014 Private
Placements.
“Operating
leases” generally provide that property taxes, insurance, and
maintenance expenses are our responsibility. Such expenses are not
included in the operating lease amounts that are outlined in the
table above.
In September 2014, we completed
the 2014 Private Placement and entered into Note Purchase
Agreements with seven (7) accredited investors pursuant to which we
sold units consisting of five (5) year senior secured convertible
2014 Notes in the aggregate principal amount of $4,750,000, that
are currently convertible into shares of Common Stock. The 2014
Notes are due in 2019 if the option to convert has not been
exercised. The outstanding 2014 Notes are secured by certain of our
pledged assets, bear interest at a rate of eight percent (8%) per
annum and paid quarterly in arrears with all principal and unpaid
interest due between July and September 2019.
The principal balance of the 2014
Note of $4,750,000 remains outstanding.
In November 2015,
we completed the 2015 Private Placement and entered into Note
Purchase Agreements with three (3) accredited investors pursuant to
which we sold senior secured convertible notes in the aggregate
principal amount of $7,187,500 (which included $4,000,000 owed on a
prior debt that was applied to the purchase of units in the 2015
Private Placement, that were convertible into shares of common
stock. In July 2017, as part of the 2017 Private Placement (see
below), three (3) investors in the 2015 Private Placement (the
“Prior Investors”), converted their 2015 Notes in the
aggregate principal amount of $4,200,349 together with accrued
interest thereon into new convertible notes for an equal principal
amount (included in the 2017 Notes referred to below).
The 2015 Notes are due in 2018 if the option to
convert has not been exercised.
The outstanding 2015 Notes are secured by certain
of our pledged assets, bear interest at a rate of eight percent
(8%) per annum and paid quarterly in arrears with all principal and
unpaid interest due in October 2018.
The principal balance
of the 2015 Notes of $3,000,000 remains outstanding.
In
August 2017 we completed the 2017 Private Placement and entered
into Note Purchase Agreements with 26 accredited investors pursuant
to which we sold the 2017 Notes in the aggregate principal amount
of $7,254,349 that are currently convertible into shares of Common
Stock. As part of the 2017 Private Placement, three (3) investors
in the 2015 Private Placement (the “Prior Investors”),
converted their 2015 Notes in the aggregate principal amount of
$4,200,349 together with accrued interest thereon into 2017 Notes
for an equal principal amount (included in the notes referred to
above). The July 2017 Notes automatically convert to Common Stock
if prior to the maturity date we sell common stock, preferred stock
or other equity-linked securities with aggregate gross proceeds of
no less than $3,000,000 for the purpose of raising capital. The
2017 Notes are due in 2020 if the option to convert has not been
exercised. The outstanding 2017 Notes bear interest at a rate of
eight percent (8%) per annum and paid quarterly in arrears with all
principal and unpaid interest due between July and August 2020. The
principal balance of the 2017 Notes of $7,254,349 remains
outstanding.
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 September 30, 2017 the
balance on the long-term mortgage was approximately $3,308,000 and
the balance on the promissory note was approximately $44,000, 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 $1,732,000 as of September 30, 2017. This amount
is not included in the table above.
Factoring Agreement
We
have a factoring agreement (“Factoring Agreement”) with
Crestmark Bank (“Crestmark”) related to our 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
$3,088,000 and $1,078,000 as of September 30, 2017 and
December 31, 2016, respectively, reflects the related
collateralized accounts.
The
Company's outstanding liability related to the Factoring Agreement
was approximately $3,014,000 and $1,290,000 as of September 30,
2017 and December 31, 2016, respectively, and is included in other
current liabilities on the consolidated balance
sheets.
Future Liquidity Needs
Our condensed
consolidated financial statements have been prepared and presented
on a basis assuming we will continue as a going concern as of
September 30, 2017. We have sustained significant operating losses
for the nine months ended September 30, 2017 of $4,893,000,
compared to operating income in the prior year of $3,263,000. The
losses in the current year were primarily due to lower than
anticipated revenues, increases in legal fees, distributor events
and sales and marketing costs. Net cash used in operating
activities was $1,783,000 in the current year. Based on our current
cash levels and our current rate of cash requirements, we will need
to raise additional capital and we will need to significantly
reduce our expenses from current levels to be able to continue as a
going concern.
We have already
commenced the process to increase our Crestmark line of credit
during the fourth quarter of this year and we are considering
multiple alternatives, including, but not limited to, additional
equity financings and debt financings. Depending on market
conditions, we cannot be sure that additional capital will be
available when needed or that, if available, it will be obtained on
terms favorable to us or to our stockholders.
We believe our
legal fees will decrease in the future from the levels spent in the
current year. Furthermore, we expect to get reimbursements from our
insurance company for legal fees already incurred. We expect costs
related to distributor events will decrease next year from current
year levels as our costs in the current year were unusually high
due to the twentieth anniversary
convention
held in Dallas in August and
one-time events held at the beginning of the year to stabilize the
sales force due to the departure of the previous president and
high-level sales management and distributors. We anticipate
revenues to start growing again and we intend to make necessary
cost reductions related to our international programs that are not
performing and also reduce non-essential expenses.
Failure to raise
additional funds from the issuance of equity securities and failure
to implement cost reductions could adversely affect our ability to
operate as a going concern. The financial statements do not include
any adjustments that might be necessary from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
There
were no off-balance sheet arrangements as of December 31, 2016 and
as of September 30, 2017.
B
USINESS
We are a leading
omni-direct lifestyle company offering a hybrid of the direct
selling business model that also offers e-commerce and the power of
social selling. Assembling a virtual main street of products and
services under one corporate entity, we offer products from the six
top selling retail categories: health/nutrition, home/family,
food/beverage (including coffee), spa/beauty, apparel/jewelry, as
well as innovative services.
We
operate in two segments: the direct selling segment where products
are offered through a global distribution network of preferred
customers and distributors and the commercial coffee segment where
products are sold directly to businesses. During the nine months
ended September 30, 2017, we derived approximately 86% of our
revenue from our direct sales and approximately 14% of our revenue
from our commercial coffee sales, respectively and during the year
ended December 31, 2016, we derived approximately 89% of our
revenue from our direct sales and approximately 11% of our revenue
from our commercial coffee sales, 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 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:
Since
2010 we have expanded our operations through a series of
acquisitions of the assets of other direct selling companies
including their product lines and sales forces. We have also
substantially expanded our distributor base by merging the assets
that we have acquired under our web-based independent distributor
network, as well as providing our distributors with additional new
products to add to their product offerings.
Set forth below is information regarding each of our acquisitions
since 2012.
|
Business
|
|
Date
of
Acquisition
|
|
|
Products
Categories
|
|
|
|
|
|
|
|
|
BeautiControl,
Inc.
|
|
December 13,
2017
|
|
|
Cosmetic and Skin
Care Products
|
|
Future Global
Vision, Inc.
|
|
November 6,
2017
|
|
|
Nutritional
Supplements and Automotive Fuel Additive
Products
|
|
Sorvana
International, LLC
(FreeLife
International. Inc.)
|
|
July 1,
2017
|
|
|
Nutritional
Supplements and Skin Care Products
|
|
Ricolife,
LLC
|
|
March 1,
2017
|
|
|
Teas
|
|
Bellavita Group,
LLC
|
|
March 1,
2017
|
|
|
Health and Beauty
Products
|
|
Legacy for Life,
LLC
|
|
September 1,
2016
|
|
|
Nutritional
Supplements
|
|
Nature’s
Pearl Corporation
|
|
September 1,
2016
|
|
|
Nutritional
Supplements and Skin Care Products
|
|
Renew Interest, LLC
(SOZO Global, Inc.)
|
|
July 29,
2016
|
|
|
Nutritional
Supplements and Skin Care Products
|
|
South Hill Designs
Inc.
|
|
January 20,
2016
|
|
|
Jewelry
|
|
PAWS Group,
LLC
|
|
July 1,
2015
|
|
|
Pet
treats
|
|
Mialisia & Co.,
LLC
|
|
June 1,
2015
|
|
|
Jewelry
|
|
JD Premium
LLC
|
|
March 4,
2015
|
|
|
Dietary Supplement
Company
|
|
Sta-Natural,
LLC
|
|
February 23,
2015
|
|
|
Vitamins Minerals
and Supplements for families and their pets
|
|
Restart Your Life,
LLC
|
|
October 1,
2014
|
|
|
Dietary
Supplements
|
|
Beyond Organics,
LLC
|
|
May 1,
2014
|
|
|
Organic Food and
Beverages
|
|
Good Herbs,
Inc.
|
|
April 28,
2014
|
|
|
Herbal
Supplements
|
|
Biometics
International, Inc.
|
|
November 19,
2013
|
|
|
Liquid
Supplements
|
|
GoFoods Global,
LLC
|
|
October 1,
2013
|
|
|
Packaged
Foods
|
|
Heritage Markers,
LLC
|
|
August 14,
2013
|
|
|
Digital
Products
|
|
Livinity,
Inc.
|
|
July 10,
2012
|
|
|
Nutritional
Products
|
|
GLIE, LLC (DBA
True2Life)
|
|
March 20,
2012
|
|
|
Nutritional
Supplements
|
BeautiControl,
Inc.
On December 13,
2017, we entered into an agreement with BeautiControl whereby we
acquired certain assets of the BeautiControl cosmetic company.
BeautiControl is a direct sales company specializing in cosmetics
and skincare products.
We are obligated to make monthly payments based on a
percentage of BeautiControl’s distributor revenue and royalty
revenue until the earlier of the date that is twelve (12) years
from the closing date or such time as we have paid
BeautiControl’s aggregate cash payments of
BeautiControl’s distributor revenue and royalty revenue equal
to a predetermined maximum aggregate purchase
price
.
Future Global Vision, Inc.
Effective November
6, 2017, we acquired certain assets and assumed certain liabilities
of Future Global Vision, Inc., a direct selling company that offers
a unique line of products that include a fuel additive for vehicles
that improves the efficiency of the engine and reduces fuel
consumption. In addition, Future Global Vision, Inc., offers a line
of nutraceutical products providing health benefits that the whole
family can use.
We are obligated to make monthly payments based on
a percentage of
Future Global Vision, Inc.’s
distributor revenue and royalty
revenue until the earlier of the date that is twelve (12) years
from the closing date or such time as we have paid Future Global
Vision Inc. aggregate cash payments of Future Global Vision
Inc.’s distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
Sorvana International, LLC
Effective
July 1, 2017, we acquired certain assets and assumed certain
liabilities of Sorvana International “Sorvana”. Sorvana
was the result of the unification of the two companies FreeLife
International, Inc. “FreeLife”, and L’dara.
Sorvana offers a variety of products with the addition of the
FreeLife and L’dara product lines. Sorvana offers an
extensive line of health and wellness product solutions including
healthy weight loss supplements, energy and performance products
and skin care product lines as well as organic product options. The
contingent consideration’s estimated fair value at the date
of acquisition was $3,487,000 as determined by management using a
discounted cash flow methodology. We are obligated to make monthly
payments based on a percentage of Sorvana’s distributor
revenue and royalty revenue until the earlier of the date that is
twelve (12) years from the closing date or such time as we have
paid Sorvana’s aggregate cash payments of Sorvana’s
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
Ricolife, LLC
Effective March 1,
2017, we acquired certain assets of Ricolife, LLC
“Ricolife” a direct sales company and producer of teas
with health benefits contained within its tea formulas.
The contingent consideration’s
estimated fair value at the date of acquisition was $920,000 as
determined by management using a discounted cash flow methodology.
During the three months ended September 30, 2017 we determined that
the initial estimated fair value of the acquisition should be
reduced by $222,000 from $920,000 to $698,000. In addition, we have
assumed certain liabilities in accordance with the agreement. We
are obligated to make monthly payments based on a percentage of the
Ricolife distributor revenue derived from sales of our products and
a percentage of royalty revenue derived from sales of Ricolife
products until the earlier of the date that is twelve (12) years
from the closing date or such time as we have paid to Ricolife
aggregate cash payments of the Ricolife distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price.
BellaVita Group, LLC
Effective March 1,
2017, we acquired certain assets of BellaVita Group, LLC
“BellaVita” a direct sales company and producer of
health and beauty products with locations and customers primarily
in the Asian market.
The contingent
consideration’s estimated fair value at the date of
acquisition was $1,750,000 as determined by management using a
discounted cash flow methodology. During the three months ended
September 30, 2017 we determined that the initial estimated fair
value of the acquisition should be reduced by $15,000 from
$1,750,000 to $1,735,000.
In
addition, we have assumed certain liabilities in accordance with
the agreement. We are obligated to make monthly payments based on a
percentage of the BellaVita distributor revenue derived from sales
of our products and a percentage of royalty revenue derived from
sales of BellaVita products until the earlier of the date that is
twelve (12) years from the closing date or such time as we have
paid to BellaVita aggregate cash payments of the BellaVita
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
Legacy for Life, LLC
Effective September
1, 2016, we acquired certain assets of Legacy for Life, LLC, an
Oklahoma based direct sales company and acquired the equity of two
wholly-owned subsidiaries of Legacy for Life, LLC. Legacy for Life
Taiwan and Legacy for Life Limited (Hong Kong) collectively
referred to as (“Legacy for Life”). Legacy for Life is
a science based direct seller of i26, a product made from the IgY
Max formula or hyperimmune whole dried egg, which is the key
ingredient in Legacy for Life products. Additionally, we entered
into an Ingredient Supply Agreement to market i26 worldwide. The
contingent consideration’s estimated fair value at the date
of acquisition was $825,000.
During
the three months ended September 30, 2017 the purchase accounting
was finalized and we determined that the initial purchase price for
the related intangibles should be reduced by $92,000 from $825,000
to $733,000.
In addition we paid $221,000
over a stated term in accordance with the
agreement
for the net assets of the Taiwan and Hong Kong
entities and certain inventories from Legacy for Life.
We are obligated to make monthly payments based on
a percentage of the Legacy for Life distributor revenue derived
from sales of our products and a percentage of royalty revenue
derived from sales of Legacy for Life products until the earlier of
the date that is fifteen (15) years from the closing date or such
time as we have paid to Legacy for Life aggregate cash payments of
the Legacy for Life distributor revenue and royalty revenue equal
to a predetermined maximum aggregate purchase
price
Nature’s Pearl Corporation
Effective September
1, 2016, we acquired certain assets of Nature’s Pearl
Corporation, (“Nature’s Pearl”) a direct sales
company that produces nutritional supplements and skin and personal
care products using the muscadine grape grown in the southeastern
region of the United States that are deemed to be rich in
antioxidants. The contingent consideration’s estimated fair
value at the date of acquisition was $2,765,000.
During the three months ended December 31, 2016,
we determined that the initial estimated fair value of the
acquisition should be reduced $1,290,000 from the initial purchase
price of $2,765,000 to $1,475,000. During the three months ended
September 30, 2017 the purchase accounting was finalized and we
determined that the purchase price should be reduced by $266,000 to
$1,209,000.
We paid $200,000
for the purchase of certain inventories, which has been applied
against and reduced the maximum aggregate purchase price. We are
obligated to make monthly payments based on a percentage of the
Nature Pearl’s distributor revenue derived from sales of our
products and a percentage of royalty revenue derived from sales of
Nature Pearl’s products until the earlier of the date that is
ten (10) years from the closing date or such time as we have paid
to Nature Pearl’s aggregate cash payments of the Nature Pearl
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
Renew Interest, LLC (SOZO Global, Inc.)
On July 29, 2016,
we acquired certain assets of Renew Interest, LLC
(“Renew”) formerly owned by SOZO Global, Inc.
(“SOZO”), a direct sales company that offers
nutritional supplements, skin and personal care products, weight
loss products and coffee products. The SOZO brand of products
contains CoffeeBerry a fruit extract known for its high level of
antioxidant properties. The contingent consideration’s
estimated fair value at the date of acquisition was $465,000.
During the three months ended
September 30, 2017 the purchase accounting was finalized and we
determined that the initial purchase price should be reduced by
$30,000 from $465,000 to $435,000. We paid $300,000 for the
purchase of certain inventories and assumed liabilities over a
stated term in accordance with the agreement, which has been
applied against and reduced the maximum aggregate purchase price.
We also received additional inventories on a consignment basis. We
are obligated to make monthly payments based on a percentage of the
Renew’s distributor revenue derived from sales of our
products and a percentage of royalty revenue derived from sales of
Renew’s products until the earlier of the date that is twelve
(12) years from the closing date or such time as we have paid to
Renew’s aggregate cash payments of the Renew’s
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
South Hill Designs Inc.
On January 20,
2016, we acquired certain assets of South Hill Designs Inc.,
(“South Hill”) a direct sales and proprietary jewelry
company that
specializes in
customized lockets and charms.
The
purchase price
allocation of the intangible assets acquired
for South Hill was $839,000 as of December 31, 2016
.
Additionally, we entered into an
Exclusive, Licensing and Source Agreement with two of the founders
of South Hill for services and the use of certain intellectual
property.
We are obligated to make
monthly payments based on a percentage of the South Hill
distributor revenue derived from sales of our products and a
percentage of royalty revenue derived from sales of South
Hill’s products until the earlier of the date that is seven
(7) years from the closing date or such time as we have paid to
South Hill’s aggregate cash payments of the South Hill
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
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. We are obligated to make monthly payments based on
a percentage of the PAWS distributor revenue derived from sales of
our products and a percentage of royalty revenue derived from sales
of PAWS’ products until the earlier of the date that is ten
(10) years from the closing date or such time as we have paid to
South Hill’s aggregate cash payments of the PAWS distributor
revenue and royalty revenue equal to a predetermined 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. We are obligated to
make monthly payments based on a percentage of the Mialisia
distributor revenue derived from sales of our products and a
percentage of royalty revenue derived from sales of
Mialisia’s products until the earlier of the date that is
fifteen (15) years from the closing date or such time as we have
paid to Mialisia’s aggregate cash payments of the Mialisia
distributor revenue and royalty revenue equal to a predetermined
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. We are obligated to
make monthly payments based on a percentage of the JD Premium
distributor revenue derived from sales of our products and a
percentage of royalty revenue derived from sales of JD
Premium’s products until the earlier of the date that is
fifteen (15) years from the closing date or such time as we have
paid to JD Premium’s aggregate cash payments of the JD
Premium distributor revenue and royalty revenue equal to a
predetermined 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. We are obligated to
make monthly payments based on a percentage of the Sta-Natural
distributor revenue derived from sales of our products and a
percentage of royalty revenue derived from sales of
Sta-Natural’s products until the earlier of the date that is
fifteen (15) years from the closing date or such time as we have
paid to Sta-Natural’s aggregate cash payments of the
Sta-Natural distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
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. 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 segment 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.
In
April 2017, CLR reached an agreement with Major League Baseball's
Miami Marlins to feature CLR’s Café La Rica Gourmet
Espresso coffee as the "Official Cafecito of the Miami Marlins" at
Marlins Park in Miami, Florida.
Our
coffee roasting facility is located in Miami, Florida and is 50,000
square foot and is SQF Level 2 certified, which is a stringent food
safety process that verifies the coffee bean processing plant and
distribution facility is in compliance with Certified HACCP (Hazard
Analysis, Critical Control Points) food safety plans.
In
March 2014, we expanded our coffee segment and started our new
green coffee business with CLR’s acquisition of Siles
Plantation Family Group, which is 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 2018 harvest season started in November 2017 and will
continue through April of 2018.
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.
Our acquisition of Heritage Makers in August of
2013 allowed customers and distributors to create and publish a
number of products utilizing their personal photos. Soon after, we
introduced Our Memories For Life, a scrapbooking and memory keeping
line of products, and Anthology DIY by Lisa Bearnson, a creative
new approach to start-to-finish DIY projects. Heritage Makers
account provides ongoing access to Studio, a user friendly, online
program, where a person can make one-of-a-kind keepsakes,
storybooks, photo gifts and more, using Heritage Makers rich
library of digital art and product templates. Products available
include Storybooks, Digital Scrapbooking, Cards, and Photo
Gifts.
In
2014 we introduced our MK Collaboration line of fashion and jewelry
accessories to complement our nutritional and makeup products and
with the acquisition of Mialisia in 2015 and the licensing
agreement we entered into with South Hill Designs which was
effective January 13, 2016 (a proprietary jewelry company that
sells customized lockets and charms), we have further expanded our
jewelry line that our distributors have access to offering more
variety and appealing to a broader consumer base.
Coffee Segment - CLR
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. 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. CLR’s Café La Rica Gourmet Espresso coffee
is featured as the "Official Cafecito of the Miami Marlins" at
Marlins Park in Miami, Florida.
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:
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. During the nine months ended September 30, 2017, approximately
11% 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.
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:
Information
contained on our websites are not incorporated by reference into,
and do not form any part of, this registration statement. We have
included the website address as a factual reference and do not
intend it to be an active link to the website.
Introducing
new distributors and the training of the new distributors are the
primary responsibilities of key independent distributors supported
by our marketing home office staff. The independent distributors
are independent contractors compensated exclusively based on total
sales of products achieved by their down-line distributors and
customers. Although the independent distributors are not paid a fee
for recruiting or introducing additional distributors, they have
the incentive to recruit onboard additional distributors to
increase their opportunities for increasing their total product
sales and related sales commissions. Acquisitions of other direct
selling businesses and personal contacts, including recommendations
from current distributors, and local market advertising constitute
the primary means of obtaining new distributors and customers.
Distributors also 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 CLR owned brands
that are currently on retail shelves includes Café La Rica and
the Josie’s Java House of brands.
The
coffee segment also includes our green coffee business. CLR sources
green coffee from Nicaragua in Central America and sells procured
coffee to other coffee distributors. With the addition of the
Nicaragua plantation and dry-processing facility we have further
expanded our coffee segment with the ability to process green
coffee not only for our own use but also provide this service to
other coffee growers.
Seasonality and Back Orders
Our
business in both the direct selling and coffee segment can
experience weaker sales during the summer months; however, based on
recent experience, seasonality has not been material to our
operating results. We have not experienced significant back
orders.
Promotion and Marketing
Direct Selling Segment
- Sales
promotion and sales development activities are directed at
assisting distributors through sales aids such as brochures,
product samples, demonstration product videos and live training
sessions. 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”.
We
own certain intellectual property, including trade secrets that we
seek to protect, in part, through confidentiality agreements with
employees and other parties. Most of our products are not protected
by patents and therefore such agreements are often our only form of
protection. Even where these agreements exist, there can be no
assurance that these agreements will not be breached, that we will
have adequate remedies for any breach, or that our trade secrets
will not otherwise become known to or independently developed by
competitors. Our proprietary product formulations are generally
considered trade secrets, but are not otherwise protected under
intellectual property laws.
We
intend to protect our legal rights concerning intellectual property
by all appropriate legal action. Consequently, we may become
involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing
proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical
personnel.
Industry Overview
We
are engaged in two industries, the direct selling industry and the
coffee industry.
Direct Selling Industry
Direct
selling is a business distribution model that allows a company to
market its products directly to consumers by means of independent
contractors and relationship referrals. Independent, unsalaried
salespeople, referred to as distributors, represent us and are
awarded a commission based upon the volume of product sold through
each of their independent business operations.
The Direct Selling Association (“DSA”)
reported in its “2016 An Overview” that the fastest
growing product was Wellness followed by Services & Other, the
two categories alone representing approximately $20 billion in
sales in 2016. Top product categories continue to gain market
share: home and family care/durables, personal care, jewelry,
clothing, leisure/educations. Wellness products include weight-loss
products and dietary supplements. In the United States, as reported
by the DSA, a record 20.5 million people were involved in direct
selling in 2016, an increase of 1.5% compared to 2015. Estimated
direct retail sales for 2016 was reported by the 2017 Growth &
Outlook Report to be $35.54 billion compared to $36.12 billion in
2015.
Coffee Industry
Our coffee segment
includes coffee bean roasting and the sales of green coffee beans.
Our roasting facility, located in Miami, Florida, procures coffee
primarily from Central America. Our green coffee business procures
coffee from Nicaragua by way of growing our own coffee beans and
purchasing green coffee beans directly from other farmers. CLR
sells coffee to domestic and international customers, both green
and roasted coffee.
The United States
Department of Agriculture (“USDA”) reported in its June
2017 “Coffee: World Markets and Trade” report for the
2017/18 Forecast Overview that world coffee production is
forecasted at 159 million bags (60 kilograms or approximately 132
pounds), which is unchanged from the previous year. World exports
of green coffee are expected to remain steady totaling 111 million
bags in 2018, with global consumption forecasted at a record 158
million bags. For 2018, Central America and Mexico are forecasted
to contribute 18.1 million bags of coffee beans and approximately
40 percent of the exports are destined to the United States and 35
percent to the European Union. The United States imports the
second-largest amount of coffee beans worldwide and is forecasted
at 26 million bags.
Competition
Direct Selling
Segment
– The diet
fitness and health food industries, as well as the food and drink
industries in general, are highly competitive, rapidly evolving and
subject to constant change. The number of competitors in the
overall diet, fitness, health food, and nutraceutical industries is
virtually endless. We believe that existing industry competitors
are likely to continue to expand their product offerings. Moreover,
because there are few, if any, substantial barriers to entry, we
expect that new competitors are likely to enter the
“functional foods” and nutraceutical markets and
attempt to market “functional food” or nutraceutical
coffee products similar to our products, which would result in
greater competition. We cannot be certain that we will be able to
compete successfully in this extremely competitive
market.
We
face competition from competing products in each of our lines of
business, in both the domestic and international markets.
Worldwide, we compete against products sold to consumers by other
direct selling and direct sales companies and through the Internet,
and against products sold through the mass market and prestige
retail channels. We also face increasing competition in our
developing and emerging markets.
Within
the direct selling channel, we compete on a regional and often
country-by-country basis, with our direct selling competitors.
There are also a number of direct selling companies that sell
product lines similar to ours, some of which also have worldwide
operations and compete with us globally. We compete against large
and well-known companies that manufacture and sell broad product
lines through various types of retail establishments such as
General Foods and 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.
These
regulations require dietary supplements to be prepared, packaged,
and held in compliance with certain rules. These regulations could
raise our costs and negatively impact our business. Additionally,
our third-party suppliers or vendors may not be able to comply with
these rules without incurring substantial expenses. If our
third-party suppliers or vendors are not able to timely comply with
these new rules, we may experience increased cost or delays in
obtaining certain raw materials and third-party products. Also, the
FDA has announced that it plans to publish guidance governing the
notification of new dietary ingredients. Although FDA guidance is
not mandatory, it is a strong indication of the FDA’s current
views on the topic discussed in the guidance, including its
position on enforcement.
In
addition, there are an increasing number of laws and regulations
being promulgated by the U.S. government, governments of individual
states and governments overseas that pertain to the Internet and
doing business online. In addition, a number of legislative and
regulatory proposals are under consideration by federal, state,
local, and foreign governments and agencies. Laws or regulations
have been or may be adopted with respect to the Internet relating
to:
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liability
for information retrieved from or transmitted over the
Internet;
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online
content regulation;
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commercial
e-mail;
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visitor
privacy; and
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taxation
and quality of products and services.
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Moreover,
the applicability to the Internet of existing laws governing issues
such as:
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intellectual
property ownership and infringement;
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consumer
protection;
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obscenity;
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defamation;
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employment
and labor;
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the
protection of minors;
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health
information; and
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personal
privacy and the use of personally identifiable
information.
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This
area is uncertain and developing. Any new legislation or regulation
or the application or interpretation of existing laws may have an
adverse effect on our business. Even if our activities are not
restricted by any new legislation, the cost of compliance may
become burdensome, especially as different jurisdictions adopt
different approaches to regulation.
We
are also subject to laws and regulations, both in the U.S. and
internationally, that are directed at ensuring that product sales
are made to consumers of the products and that compensation,
recognition, and advancement within the marketing organization are
based on the sale of products rather than on investment in the
sponsoring company. These laws and regulations are generally
intended to prevent fraudulent or deceptive schemes, often referred
to as “pyramid” schemes, which compensate participants
for recruiting additional participants irrespective of product
sales, use high pressure recruiting methods and or do not involve
legitimate products. Complying with these rules and regulations can
be difficult and requires the devotion of significant resources on
our part.
Management Information, Internet and Telecommunication
Systems
The
ability to efficiently manage distribution, compensation, inventory
control, and communication functions through the use of
sophisticated and dependable information processing systems is
critical to our success.
We
continue to upgrade systems and introduce new technologies to
facilitate our continued growth and support of independent
distributor activities. These systems include: (1) an internal
network server that manages user accounts, print and file sharing,
firewall management, and wide area network connectivity; (2) a
leading brand database server to manage sensitive transactional
data, corporate accounting and sales information; (3) a centralized
host computer supporting our customized order processing,
fulfillment, and independent distributor management software; (4) a
standardized telecommunication switch and system; (5) a hosted
independent distributor website system designed specifically for
network marketing and direct selling companies; and (6) procedures
to perform daily and weekly backups with both onsite and offsite
storage of backups.
Our
technology systems provide key financial and operating data for
management, timely and accurate product ordering, commission
payment processing, inventory management and detailed independent
distributor records. Additionally, these systems deliver real-time
business management, reporting and communications tools to assist
in retaining and developing our sales leaders and independent
distributors. We intend to continue to invest in our technology
systems in order to strengthen our operating platform.
Product Returns
Our
return policy in the direct selling segment provides that customers
and distributors may return to us any products purchased within 30
days of their initial order for a full refund. Product damaged
during shipment is replaced. Product returns as a percentage of our
net sales have been approximately 2% of our monthly net sales over
the last two years. Commercial coffee segment sales are only
returnable if defective.
Employees
As of December 31,
2017, we have 449 total employees, of which 396 are full-time
employees and 53 are temporary labor. 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 two segments
including the following wholly-owned subsidiary: CLR Roasters, LLC
(“CLR”) which operates our commercial coffee business,
including the Siles Plantation Family Group S.A. located in
Nicaragua.
Our direct selling
network includes the domestic operations of: AL Global Corporation,
2400 Boswell LLC, MK Collaborative LLC, and Youngevity Global
LLC.
Our
foreign wholly-owned subsidiaries include Youngevity Australia Pty.
Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity
Israel, Ltd., Youngevity Russia LLC, Youngevity Colombia S.A.S.,
Youngevity International Singapore Pte. Ltd., Mialisia Canada,
Inc., and Legacy for Life Limited (Hong Kong). The Company also
operates through the BellaVita Group LLC, with operations in;
Taiwan, Hong Kong, Singapore, Indonesia, Malaysia and
Japan.
The Company also
operates subsidiary branches of Youngevity Global LLC in the
Philippines and Taiwan.
On
July 11, 2011, AL Global Corporation, a privately held California
corporation (“AL Global”), merged with and into a
wholly-owned subsidiary of Javalution Coffee Company, a publicly
traded Florida corporation (“Javalution”). After the
merger, Javalution reincorporated in Delaware and changed its name
to AL International, Inc. In connection with this merger, CLR,
which had been a wholly-owned subsidiary of Javalution prior to the
merger, continued to be a wholly-owned subsidiary of the Company.
CLR operates a traditional coffee roasting business, and through
the merger we were provided access to additional distributors, as
well as added the JavaFit® product line to our network of
direct marketers.
Effective
July 23, 2013, we changed our name from AL International, Inc. to
Youngevity International, Inc.
On
June 7, 2017, an amendment to our Certificate of Incorporation
became effective which effectuated: (i) the 1-for-20 Reverse Split
of the issued and outstanding shares of Common Stock; (ii) a
decrease in the number of shares of (a) Common Stock authorized
from 600,000,000 to 50,000,000 and (b) preferred stock authorized
from 100,000,000 to 5,000,000.
Corporate Information
Our principal offices are located
at 2400 Boswell Road, Chula Vista, California 91914, and our
telephone number at that office is (619) 934-3980. We maintain an
Internet website at
www.ygyi.com
.
Neither this website nor the information on this website is
included or incorporated in, or is a part of, this prospectus or
any supplement to the prospectus.
Emerging Growth Company
We
are an emerging growth company under the JOBS ACT, which was
enacted in April 2012. We shall continue to be deemed an emerging
growth company until the earliest of:
(a)
the last day of the fiscal year in which we have total annual gross
revenues of $1.07 billion or more;
(b)
the last day of the fiscal year of the issuer following the fifth
anniversary of the date of the first sale of common equity
securities of the issuer pursuant to an effective registration
statement;
(c)
the date on which we have issued more than $1.0 billion in
non-convertible debt, during the previous 3-year period, issued;
or.
(d)
the date on which we are deemed to be a large accelerated
filer.
As
an emerging growth company we will be subject to reduced public
company reporting requirements and are exempt from Section 404(b)
of Sarbanes Oxley. Section 404(a) requires issuers to publish
information in their annual reports concerning the scope and
adequacy of the internal control structure and procedures for
financial reporting. This statement shall also assess the
effectiveness of such internal controls and procedures. Section
404(b) requires that the registered accounting firm shall, in the
same report, attest to and report on the assessment on the
effectiveness of the internal control structure and procedures for
financial reporting.
As
an emerging growth company we are also exempt from Section 14A (a)
and (b) of the Securities Exchange Act of 1934 which require the
shareholder approval, on an advisory basis, of executive
compensation and golden parachutes.
We
have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(2) of
the Jobs Act, that allows us to delay the adoption of new or
revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Operation Properties
Our
corporate headquarters are located at 2400 Boswell, Road, Chula
Vista, California 91914. This is also the location of our 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)
|
|
-
|
|
CLR
|
|
Miami,
FL
|
50,000
|
-
|
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
of our facilities include office space, warehouse and distribution
center. Approximate rent expense above relates to the twelve months
ended December 31, 2016.
(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. As
of September 30, 2017 the balance on the long-term mortgage was
approximately $3,308,000, and the balance on the promissory note
was approximately $44,000.
(2)
CLR headquarters, coffee roaster, warehouse, and
distribution center.
Roasting, distribution and operations
for our CLR division are handled in our Miami, Florida based
facility, which consists of 50,000 square feet. Our lease for this
space expires in May 2023.
(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.
Legal 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.
D
IRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
Pursuant to our
bylaws, the number of directors is fixed and may be increased or
decreased from time to time by resolution of our Board of
Directors, or the Board. The Board has fixed the number of
directors at seven members.
Information
with respect to our current directors is shown below.
|
Name
|
|
Age
|
|
Director Since
|
|
Position
|
|
Stephan
Wallach
|
|
51
|
|
2011*
|
|
Chairman
and Chief Executive Officer
|
|
David
Briskie
|
|
57
|
|
2011
|
|
President,
Chief Financial Officer and Director
|
|
Michelle
Wallach
|
|
46
|
|
2011*
|
|
Chief
Operating Officer and Director
|
|
Richard
Renton
|
|
62
|
|
2012
|
|
Director
|
|
William
Thompson
|
|
57
|
|
2013
|
|
Director
|
|
Paul
Sallwasser
|
|
63
|
|
2017
|
|
Director
|
|
Kevin
Allodi
|
|
61
|
|
2017
|
|
Director
|
*
Since 1996,
Stephen Wallach and Michelle Wallach have been directors of AL
Global, Corporation the private company that merged with and into
Javalution Coffee Company, our predecessors in
2011.
Stephan Wallach,
Chief Executive Officer and
Chairman of the Board
Mr.
Stephan Wallach was appointed to the position of Chief Executive
Officer on July 11, 2011 pursuant to the terms of the merger
agreement between Youngevity® and Javalution. He previously
served as President and Chief Executive Officer of AL Global
Corporation. He has served as a director of our Company since
inception and was appointed Chairman of the Board on January 9,
2012. In 1996, Mr. Wallach and the Wallach family together launched
our Youngevity® division and served as its co-founder and
Chief Executive Officer from inception until the merger with
Javalution. Mr. Wallach’s extensive knowledge about our
business operations and our products makes him an exceptional board
member.
David Briskie,
President, Chief Financial
Officer and Director
Mr.
David Briskie was appointed to the position of President on October
30, 2015 and Chief Financial Officer on May 15, 2012. Prior to
that, Mr. Briskie served as President of Commercial Development, a
position he was appointed to on July 11, 2011 pursuant to the terms
of the merger agreement between Youngevity® and Javalution.
From February 2007 until the merger he served as the Chief
Executive Officer and director of Javalution and since September
2007 has served as the Managing Director of CLR Roasters. Prior to
joining Javalution in 2007, Mr. Briskie had an 18-year career with
Drew Pearson Marketing (“DPM”), a consumer product
company marketing headwear and fashion accessories. He began his
career at DPM in 1989 as Executive Vice President of Finance and
held numerous positions in the company, including vice president of
marketing, chief financial officer, chief operating officer and
president. Mr. Briskie graduated magna cum laude from Fordham
University with a major in marketing and finance. Mr.
Briskie’s experience in financial matters, his overall
business understanding, as well as his familiarity and knowledge
regarding public companies make him an exceptional board
member.
Michelle G. Wallach,
Chief Operating Officer and
Director
Ms.
Michelle Wallach was appointed to the position of Chief Operating
Officer on July 11, 2011 pursuant to the terms of the merger
agreement between Youngevity® and Javalution. She previously
served as Corporate Secretary and Manager of AL Global Corporation.
She has a background in network marketing, including more than 10
years in distributor management. Her career in network marketing
began in 1991 in Portland, Oregon, where she developed a
nutritional health product distributorship. In 1996, Ms. Wallach
and the Wallach family together launched our Youngevity®
division and served as its co-founder and Chief Operations Officer
from inception until the merger with Javalution. Ms. Wallach has an
active role in promotion, convention and event planning, domestic
and international training, and product development. Ms.
Wallach’s prior experience with network marketing and her
extensive knowledge about our business operations and our products
make her an exceptional board member.
Richard Renton,
Director
Mr.
Richard Renton was appointed to our Board of Directors on January
9, 2012, and currently serves on the Youngevity Medical and
Athletic Advisory Boards. For the past five years, Mr. Renton owned
his own business providing nutritional products to companies like
ours. We purchase certain products from Mr. Renton’s company
Northwest Nutraceuticals, Inc. Mr. Renton graduated from Portland
State University with quad majors in Sports Medicine, Health,
Physical Education, and Chemistry. He has served as an Associate
Professor at PSU in Health and First Aid, and was the Assistant
Athletic Trainer for PSU, the Portland Timbers Soccer Team, and the
Portland Storm Football team. Mr. Renton is a board certified
Athletic Trainer with the National Athletic Trainers Association.
Mr. Renton’s understanding of nutritional products makes him
an exceptional board member.
William Thompson,
Director
Mr.
William Thompson was appointed to our Board of Directors on June
10, 2013 and currently serves as the Chief Financial Officer of
Broadcast Company of the Americas, which operates three radio
stations in San Diego, California. He served as Corporate
Controller for the Company from 2011 to March 2013 and for Breach
Security, a developer of web application firewalls, from 2007 to
2010. Prior to 2007, Mr. Thompson was Divisional Controller for
Mediaspan Group and Chief Financial Officer of Triathlon
Broadcasting Company. Mr. Thompson’s achievements in
financial matters and his overall business understanding make him
an exceptional board member.
Paul Sallwasser,
Director
Mr.
Paul Sallwasser was appointed to our Board of Directors on June 5,
2017. Mr. Sallwasser is a certified CPA, joined the audit staff of
Ernst & Young LLP in 1976 and remained with Ernst & Young
LLP for 38 years. Mr. Sallwasser served a broad range of clients
primarily in the healthcare and biotechnology industries of which a
significant number were SEC registrants. He became a partner of
Ernst & Young in 1988 and from 2011 until he retired from Ernst
& Young LLP Mr. Sallwasser served in the national office as a
member of the Quality and Regulatory Matters Group working with
regulators and the Public Company Accounting Oversight Board
(PCAOB). Mr. Sallwasser’s qualification as an “audit
committee financial expert,” as defined by the rules of the
SEC, and his vast audit experience serves as the basis for his
position on the Board and its audit committee.
Kevin Allodi,
Director
Mr.
Kevin Allodi was appointed to our Board of Directors on June 5,
2017. Mr. Allodi is currently the CEO and Co-Founder of Philo
Broadcasting, a media holding company that includes award-winning
digital content studio Philo Media and a broadcast television
production company Backyard Productions. Philo is headquartered in
Chicago with production offices in Los Angeles. Prior to joining
Portal (described above) Mr. Allodi spent ten years with
Communications Industry Division of Computer Sciences Corporation
(NYSE:CSC) where he was VP Global Billing & Customer Care
practice. Currently, Mr. Allodi also serves as a Managing Partner
of KBA Holdings, LLC, a private equity investment firm active in
the digital media, hi-tech, alternative energy and bio-tech
industries. Mr. Allodi serves as a partner, limited partner,
director and/or advisory board member to several portfolio
companies including G2T3V LLC, uBid, LynxIT Solutions, Ridge
Partners LLC, Social Ventures Partners Chicago and is on the Board
of Directors of FNBC Bank & Trust. Mr. Allodi’s business
experience and investment experience serves as the basis for his
position on the Board and its audit committee.
Family Relationships
Other
than Stephan Wallach and Michelle Wallach, who are husband and
wife, none of our officers or directors has a family relationship
with any other officer or director.
INFORMATION REGARDING THE COMMITTEES OF THE BOARD OF
DIRECTORS
Committees of the Board of Directors
The
Board of Directors has a standing Audit Committee, Compensation
Committee, and Investment Committee. The following table shows the
directors who are currently members or Chairman of each of these
committees.
|
Board Members
|
|
Audit
Committee
|
|
|
Compensation
Committee
|
|
|
Investment
Committee
|
|
|
Stephan
Wallach
|
|
-
|
|
|
Chairman
|
|
|
Member
|
|
|
David
Briskie
|
|
-
|
|
|
Member
|
|
|
Chairman
|
|
|
Michelle
Wallach
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Richard
Renton
|
|
-
|
|
|
-
|
|
|
-
|
|
|
William
Thompson
|
|
Chairman
|
|
|
-
|
|
|
-
|
|
|
Paul
Sallwasser
|
|
Member
|
|
|
-
|
|
|
-
|
|
|
Kevin
Allodi
|
|
Member
|
|
|
-
|
|
|
-
|
|
Director Independence
Our
Board of Directors has determined that William Thompson, Paul
Sallwasser and Kevin Allodi are each independent directors in
accordance with the definition of independence applied by the
NASDAQ Stock Market. Since we qualify as a “controlled
company” we qualify for certain exemptions to the NASDAQ
Capital Market listing requirements.
Board Committees
Audit
Committee
. The Audit Committee
of the Board of Directors currently consists of William Thompson
(Chair), Paul Sallwasser and Kevin Allodi. The functions of the
Audit Committee include the retention of our independent registered
public accounting firm, reviewing and approving the planned scope,
proposed fee arrangements and results of the Company’s annual
audit, reviewing the adequacy of the Company’s accounting and
financial controls and reviewing the independence of the
Company’s independent registered public accounting firm. The
Board has determined that William Thompson, Paul Sallwasser and
Kevin Allodi are each an “independent director” under
the listing standards of The NASDAQ Stock Market. The Board of
Directors has also determined that each of Mr. Thompson and Mr.
Sallwasser is an “audit committee financial expert”
within the applicable definition of the SEC. The Audit Committee is
governed by a written charter approved by the Board of Directors, a
copy of which is available on our website at
www.ygyi.com
.
Information contained on our website are not incorporated by
reference into and do not form any part of this registration
statement. We have included the website address as a factual
reference and do not intend it to be an active link to the
website.
Compensation
Committee
. The Compensation
Committee of the Board of Directors currently consists of Stephan
Wallach (Chair) and David Briskie. The functions of the
Compensation Committee include the approval of the compensation
offered to our executive officers and recommending to the full
Board of Directors the compensation to be offered to our directors,
including our Chairman. None of the members of the Compensation
Committee are independent under the listing standards of The NASDAQ
Stock Market. In addition, the members of the Compensation
Committee qualify as “non-employee directors” for
purposes of Rule 16b-3 under the Exchange Act and as “outside
directors” for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended. The Compensation Committee is
governed by a written charter approved by the Board of Directors, a
copy of which is available on our website at
www.ygyi.com
.
Information contained on our website are not
incorporated by reference into and do not form any part of this
registration statement. We have included the website address
as a factual reference and do not intend it to be an active link to
the website.
Investment
Committee
. The Investment
Committee of the Board of Directors currently consists of David
Briskie (Chair) and Stephan Wallach as a member. This Committee
determines, approves, and reports to the Board of Directors on all
elements of acquisitions and investments for the
Company.
We
do not currently have a separate nominating committee and instead
our full board of directors performs the functions of a nominating
committee. Due to our size we believe that this is an appropriate
structure.
Board Leadership Structure
We
currently have the same person serving as our Chairman of the Board
and Chief Executive Officer and we do not have a formal policy on
whether the same person should (or should not) serve as both the
Chief Executive Officer and Chairman of the Board. Mr. Briskie
currently serves as our President and Chief Financial Officer. Due
to the size of our company, we believe that this structure is
appropriate. Mr. Wallach has served as the Chairman of the Board
and Chief Executive Officer since AL Global Corporation, the
private company that he owned, merged into our predecessor in 2011
and he served as the Chairman of the Board and Chief Executive
Officer of AL Global Corporation, since inception. In serving as
Chairman of the Board, Mr. Wallach serves as a significant resource
for other members of management and the Board of
Directors.
We
do not have a separate lead director. We believe the combination of
Mr. Wallach as our Chairman of the Board and Chief Executive
Officer and Mr. Briskie as our President and Chief Financial
Officer has been an effective structure for our company. Our
current structure is operating effectively to foster productive,
timely and efficient communication among the independent directors
and management. We do have active participation in our committees
by our independent directors. Each committee performs an active
role in overseeing our management and there are complete and open
lines of communication with the management and independent
directors.
Oversight of Risk Management
The
Board of Directors has an active role, as a whole and also at the
committee level, in overseeing management of our risks. The Board
of Directors regularly reviews information regarding our strategy,
finances and operations, as well as the risks associated with
each.
Overview
Corporate Governance Guidelines
We
are committed to maintaining the highest standards of business
conduct and corporate governance, which we believe are fundamental
to the overall success of our business, serving our stockholders
well and maintaining our integrity in the marketplace. Our
Corporate Governance Guidelines and Code of Business Conduct and
Ethics, together with our Certificate of Incorporation, Bylaws and
the charters of our Board Committees, form the basis for our
corporate governance framework. As discussed above, our Board of
Directors has established three standing committees to assist it in
fulfilling its responsibilities to us and our stockholders: the
Audit Committee, the Compensation Committee and the Investment
Committee. The Board of Directors performs the functions typically
assigned to a Nominating and Corporate Governance
Committee.
Our Corporate Governance Guidelines are designed
to ensure effective corporate governance of our company. Our
Corporate Governance Guidelines cover topics including, but not
limited to, director qualification criteria, director
responsibilities, director compensation, director orientation and
continuing education, communications from stockholders to the
Board, succession planning and the annual evaluations of the Board
and its Committees. Our Corporate Governance Guidelines are
reviewed regularly by the Board and revised when appropriate. 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. 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.
EXECUTIVE
AND DIRECTOR COMPENSATION
Summary Compensation Table
The
following table sets forth a summary of cash and non-cash
compensation awarded, earned or paid for services rendered to us
during the years ended December 31, 2017 and 2016 by our
“named executive officers,” consisting of each
individual serving as (i) principal Chief Executive Officer, (ii)
our principal Chief Financial Officer, and (iii) Chief Operating
Officer.
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Option
Awards (2)
($)
|
|
|
Total
($)
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stephan Wallach
(1)
|
2017
|
|
|
357,212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
357,212
|
|
|
Chief Executive Officer
|
2016
|
|
|
282,500
|
|
|
|
179,730
|
|
|
|
-
|
|
|
|
462,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Briskie
(1)(2)
|
2017
|
|
|
357,212
|
|
|
|
-
|
|
|
|
670,875
|
|
|
|
1,028,087
|
|
|
President and Chief Financial Officer
|
2016
|
|
|
282,500
|
|
|
|
179,730
|
|
|
|
748,500
|
|
|
|
1,210,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michelle Wallach
(1)
|
2017
|
|
|
192,660
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192,660
|
|
|
Chief Operating Officer
|
2016
|
|
|
192,660
|
|
|
|
179,730
|
|
|
|
-
|
|
|
|
372,390
|
|
|
(1)
|
Mr.
Stephan Wallach, Mr. David Briskie, and Ms. Michelle Wallach have
direct and or indirect (beneficially) distributor positions in our
company that pay income based on the performance of those
distributor positions in addition to their base salaries, and the
people and or companies supporting those positions based upon the
contractual agreements that each and every distributor enter into
upon engaging in the network marketing business. The contractual
terms of these positions are the same as those of all the other
individuals that become distributors in our Company. There are no
special circumstances for these officers/directors. Mr. Stephan
Wallach and Ms. Michelle Wallach received or beneficially received
an aggregate of $362,292 and $357,002 in 2017 and 2016,
respectively related to their distributor positions, which are not
included above. Mr. Briskie beneficially received $19,196 and
$23,889 in 2017 and 2016, respectively, related to his
spouse’s distributor position, which is not included
above.
|
|
(2)
|
We
use a Black-Scholes option-pricing model (Black-Scholes model) to
estimate the fair value of the stock option grant. Expected
volatility is calculated based on the historical volatility of the
Company’s stock. The risk-free interest rate is based on the
U.S. Treasury yield for a term equal to the expected life of the
options at the time of grant. The amounts do not represent the
actual amounts paid to or released by any of the Named Executive
Officers during the respective periods.
|
Outstanding
Equity Awards at Fiscal Year-End
The table below
reflects all outstanding equity awards made to each of the named
executive officers that are outstanding as of December 31, 2017. We
currently grant stock-based awards pursuant to our 2012 Stock
Option Plan.
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
||||||||||||||||||
|
|
|
No. Of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
No. Of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
No.
Of Shares
or Units
of Stock
That Have Not
Vested (#)
|
|
|
Market Value
Of Shares or
Units of
Stock That
Have Not
Vested ($)
|
|
||||||
|
Stephan
Wallach
|
|
|
125,000
|
(1)
|
|
|
-
|
|
|
$
|
4.40
|
|
|
|
5/31/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
David
Briskie
|
|
|
250,000
|
(2)
|
|
|
-
|
|
|
$
|
4.40
|
|
|
|
5/31/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
(3)
|
|
|
10,000
|
|
|
$
|
3.60
|
|
|
|
10/31/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
(4)
|
|
|
40,000
|
|
|
$
|
3.80
|
|
|
|
10/30/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(5)
|
|
|
200,000
|
|
|
$
|
5.40
|
|
|
|
12/27/2026
|
|
|
|
250,000
|
(6)
|
|
$
|
1,032,500
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Michelle
Wallach
|
|
|
125,000
|
(7)
|
|
|
-
|
|
|
$
|
4.40
|
|
|
|
5/31/2022
|
|
|
|
|
|
|
|
|
|
|
(1)
|
125,000 stock
options granted on May 31, 2012, vested and
exercisable.
|
|
(2)
|
250,000 stock
options granted on May 31, 2012, vested and
exercisable.
|
|
(3)
|
50,000 stock
options granted on October 31, 2013, 40,000 stock options vested
and are exercisable, with the remaining option shares vesting on
October 31, 2018.
|
|
(4)
|
100,000 stock
options granted on October 30, 2014, 60,000 stock options vested
and are exercisable, with the remaining option shares vesting in
equal annual amounts over the next two years as of December 31,
2017.
|
|
(5)
|
250,000 stock
options granted on December 27, 2016, 50,000 stock options vested
and are exercisable, with the remaining option shares vesting in
equal annual amounts over the next four years as of December 31,
2017 .
|
|
(6)
|
250,000 restricted
stock units were granted on August 9, 2017, each unit representing
contingent right to receive one share of Common Stock, vesting as
follows: (i) Year 3 - 25,000 shares; (ii) Year 4 – 37,500
shares; (iii) Year 5 - 125,000 shares; and (iv) Year 6 –
62,500 shares; if Mr. Briskie continues to serve as an executive
officer or otherwise is not terminated for cause prior to such
dates. The market value of the restricted stock units was
multiplied by the closing market price of our common stock at the
end of the 2017 fiscal year, which was $4.13 on December 29, 2017
(the last business day of the 2017 fiscal year.)
|
|
(7)
|
125,000 stock
options granted on May 31, 2012, vested and
exercisable.
|
Employment Agreements
Our
executive officers work as at-will employees.
Code Section 162(m) Provisions
Section
162(m) of the U.S. Internal Revenue Code, or the Code, generally
disallows a tax deduction to public companies for compensation in
excess of $1 million paid to the Chief Executive Officer or any of
the four most highly compensated officers. Performance-based
compensation arrangements may qualify for an exemption from the
deduction limit if they satisfy various requirements under Section
162(m). Although we consider the impact of this rule when
developing and implementing our executive compensation programs, we
believe it is important to preserve flexibility in designing
compensation programs. Accordingly, we have not adopted a policy
that all compensation must qualify as deductible under Section
162(m) of the Code. While our stock options are intended to qualify
as “performance-based compensation” (as defined by the
Code), amounts paid under our other compensation programs may not
qualify as such.
2017 Director Compensation
The
following table sets forth information for the fiscal year ended
December 31, 2017 regarding the compensation of our directors who
at December 31, 2017 were not also named executive
officers.
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Option
Awards ($)(1)
|
Other
Compensation ($)
|
Total ($)
|
|
Richard
Renton
|
-
|
20,437
|
-
|
20,437
|
|
William
Thompson
|
-
|
20,437
|
-
|
20,437
|
|
Paul
Sallwasser
|
-
|
14,708
|
-
|
14,708
|
|
Kevin
Allodi
|
-
|
14,708
|
-
|
14,708
|
|
(1)
|
The
amounts in the “Option Awards” column reflect the
dollar amounts recognized as compensation expense for the financial
statement reporting purposes for stock options for the fiscal year
ended December 31, 2017 in accordance with FASB ASC Topic 718. The
fair value of the options was determined using the Black-Scholes
model.
|
As
of December 31, 2017, the following table sets forth the number of
aggregate outstanding option awards held by each of our directors
who were not also named executive officers:
|
Name
|
Aggregate
Number of
Option Awards
|
|
Richard
Renton
|
15,000
|
|
William
Thompson
|
17,500
|
|
Paul
Sallwasser
|
5,000
|
|
Kevin
Allodi
|
5,000
|
We
grant to non-employee members of the Board of Directors upon
appointment, stock options to purchase shares of our Common Stock
at an exercise price equal to the fair market value of the Common
Stock on the date of grant, and additional stock options each year
thereafter for their service. We also reimburse the non-employee
directors for travel and other out-of-pocket expenses incurred in
attending board of director and committee meetings. During 2017, we
granted each non-employee director a ten-year option to purchase
5,000 shares of our Common Stock at an exercise price of $4.53, all
of which vested immediately.
Equity Compensation Plan Information
The
2012 Stock Option Plan, or the Plan, is our only active equity
incentive plan pursuant to which options to acquire common stock
have been granted and are currently outstanding.
As
of December 31, 2017, the number of stock options and restricted
common stock outstanding under our equity compensation plans, the
weighted average exercise price of outstanding options and
restricted common stock and the number of securities remaining
available for issuance were as follows:
|
Plan category
|
Number of
securities issued
under equity
compensation plan
|
Weighted-average
exercise price of
outstanding options
|
Number of securities remaining available for
future issuance under equity compensation plans
|
|
Equity
compensation plans approved by security holders
|
-
|
$
-
|
-
|
|
Equity
compensation plans not approved by security holders
|
2,084,923
|
4.70
|
1,885,389
|
|
Total
|
2,084,923
|
$
4.70
|
1,885,389
|
On February 23, 2017, our board of
directors
received the approval
of our stockholders, to amend the 2012 Stock Option Plan (the
“Plan”) to increase the number of shares of common
stock available for grant and to expand the types of awards
available for grant under the Plan. The amendment of the Plan
increased the number of shares of the Company’s common stock
that may be delivered pursuant to awards granted during the life of
the Plan from 2,000,000 to 4,000,000 shares authorized (as adjusted
for the 1-for-20 reverse stock split, which was effective on June
7, 2017). The Plan as amended allows for the grant of: (i)
incentive stock options; (ii) nonqualified stock options; (iii)
stock appreciation rights; (iv) restricted stock; and (v) other
stock-based and cash-based awards to eligible individuals. The
terms of the awards will be set forth in an award agreement,
consistent with the terms of the Plan. No stock option is
exercisable later than ten years after the date it is
granted.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table provides information regarding the beneficial
ownership of the Common Stock as of December 31, 2017, by: (i) each
of our current directors, (ii) each of our named executive
officers, and (iii) all such directors and executive officers as a
group. The table is based upon information supplied by our
officers, directors and principal stockholders and a review of
Schedules 13D and 13G, if any, filed with the SEC. We know of no
other person or group of affiliated persons who beneficially own
more than five percent of our Common Stock. Unless otherwise
indicated in the footnotes to the table and subject to community
property laws where applicable, we believe that each of the
stockholders named in the table has sole voting and investment
power with respect to the shares indicated as beneficially
owned.
Applicable
percentages are based on 19,723,285 shares outstanding as of the
December 31, 2017, adjusted as required by rules promulgated by the
SEC. These rules generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power or
investment power with respect to those securities. In addition, the
rules include shares of the Common Stock issuable pursuant to the
exercise of stock options or warrants that are either immediately
exercisable or exercisable within 60 days of the Evaluation Date.
These shares are deemed to be outstanding and beneficially owned by
the person holding those options for the purpose of computing the
percentage ownership of that person, but they are not treated as
outstanding for the purpose of computing the percentage ownership
of any other person.
|
Name of Beneficial Owner
|
Number of Shares Beneficially Owned
|
|
Percentage
Ownership
|
|
Executive Officers &
Directors
(1)
|
|
|
|
|
Stephan Wallach,
Chairman and Chief Executive
Officer
|
14,127,811
|
(2
)
|
71.2
%
|
|
David Briskie,
President
,
Chief Financial Officer and
Director
|
920,457
|
(3
)
|
4.6
%
|
|
Michelle Wallach,
Chief Operating Officer and
Director
|
14,125,000
|
(2
)
|
71.2
%
|
|
Richard Renton,
Director
|
25,603
|
(4
)
|
*
|
|
William Thompson,
Director
|
12,000
|
(5
)
|
*
|
|
Paul Sallwasser,
Director
|
108,934
|
(6
)
|
*
|
|
Kevin Allodi,
Director
|
31,490
|
(7
)
|
*
|
|
All
Executive Officers & Directors, as a group
(7 persons)
|
15,351,295
|
|
75.1
%
|
|
|
|
|
|
|
Stockholders owning 5% or more
|
|
|
|
|
Carl
Grover
|
2,353,959
|
(8
)
|
9.99
%
|
*less
than 1%
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 us was the single
member of 2400 Boswell and the Company was a co-guarantor of the
2400 Boswell mortgage on the leased building. During 2013 we
acquired 2400 Boswell LLC for $248,000 in cash, $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.00%. Additionally, we assumed a long-term
mortgage of $3,625,000, payable over 25 years at an interest rate
of 5.75%.
Richard Renton
Richard
Renton is a member of the Board of Directors and owns and operates
with his wife Roxanna Renton, Northwest Nutraceuticals, Inc., a
supplier of certain inventory items sold by the Company. The
Company made purchases of approximately $61,000 and $33,000 from
Northwest Nutraceuticals Inc., for the three months ended September
30, 2017 and 2016, respectively, and $142,000 and $83,000 for the
nine months ended September 30, 2017 and 2016, respectively. In
addition, Mr. Renton and his wife are distributors of the Company
and can earn commissions on product sales.
Carl Grover
As
of December 31, 2017, Mr. Carl Grover, is the beneficial owner of
in excess of five percent (5%) of our outstanding common shares, is
the sole beneficial owner of 2,353,959 shares of Common Stock. Mr.
Grover owns a 2014 Note in the principal amount of $4,000,000
convertible into 571,428 shares of Common Stock and a 2014 Warrant
exercisable for 782,602 shares of Common Stock. Mr. Grover also
owns a 2015 Note in the principal amount of $3,000,000 convertible
into 428,571 shares of Common Stock and a 2015 Warrant exercisable
for 200,000 shares of Common Stock. Mr. Grover also owns two 2017
Notes in the aggregate principal amount of $5,162,273 convertible
into 1,122,233 shares of Common and two 2017 Warrants exercisable
for 735,030 shares of Common Stock. He also owns 257,562 shares of
Common Stock.
Paul Sallwasser
As
of December 31, 2017, Mr. Paul Sallwasser is a member of the board
directors and owns a 2014 Note in the principal amount of $75,000
convertible into 10,714 shares of Common Stock and a 2014 Warrant
exercisable for 14,673 shares of Common Stock. Mr. Sallwasser
acquired in the 2017 Private Placement a 2017 Note in the principal
amount of $37,615 convertible into 8,177 shares of Common Stock and
a 2017 Warrant exercisable for 10,611 shares of Common Stock. Mr.
Sallwasser also acquired in the 2017 Private Placement in exchange
for the 2015 Note he owned, a 2017 Note in the principal amount of
$5,000 convertible into 1,087 shares of Common Stock and a 2017
Warrant exercisable for 543 shares of Common Stock. He also owns
58,129 shares of Common Stock and an option to purchase 5,000
shares of Common Stock that are immediately
exercisable.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company
The
Company’s coffee segment, CLR, is associated with Hernandez,
Hernandez, Export Y Company (“H&H”), a Nicaragua
company, through sourcing arrangements to procure Nicaraguan green
coffee beans and in March 2014 as part of the Siles
acquisition, CLR engaged the owners of H&H as employees to
manage Siles. The Company made purchases of approximately
$3,533,000 and $2,700,000 from this supplier for the three months
ended September 30, 2017 and 2016, respectively and $8,707,000 and
$7,400,000 for the nine months ended September 30, 2017 and 2016,
respectively.
In
addition, CLR sold approximately $2,387,000 and $0 for the three
months ended September 30, 2017 and 2016, respectively and
$3,934,000 and $2,200,000 for the nine months ended September 30,
2017 and 2016, respectively, of green coffee beans to H&H
Coffee Group Export, a Florida based company which is affiliated
with H&H.
In
March 2017, the Company entered a settlement agreement and release
with H&H Coffee Group Export pursuant to which it was agreed
that $150,000 owed to H&H Coffee Group Export for services that
had been rendered would be settled by the issuance of Common Stock.
In May 2017, the Company issued to H&H Coffee Group Export
27,500 shares of Common Stock in accordance with this
agreement.
In
May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s Common Stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the three months
ended September 30, 2017 the Company replaced the non-qualified
stock option and issued a warrant agreement with the same terms.
There was no financial impact related to the cancellation of the
option and the issuance of the warrant. As of September 30, 2017,
the warrant remains outstanding.
Compensation of Our Current Directors and Executive
Officers
For
information with respect to the compensation offered to our current
directors and executive officers, please see the descriptions under
the heading “Executive and Director Compensation” of
this registration statement.
Related Party Transaction Policy and Procedures
Pursuant
to our Related Party Transaction and Procedures, our executive
officers, directors, and principal stockholders, including their
immediate family members and affiliates, are prohibited from
entering into a related party transaction with us without the prior
consent of our Audit Committee or our independent directors. Any
request for us to enter into a transaction with an executive
officer, director, principal stockholder, or any of such
persons’ immediate family members or affiliates, must first
be presented to our Audit Committee for review, consideration and
approval. In approving or rejecting the proposed agreement, our
Audit Committee will consider the relevant facts and circumstances
available and deemed relevant, including, but not limited, to the
risks, costs and benefits to us, the terms of the transaction, the
availability of other sources for comparable services or products,
and, if applicable, the impact on a director’s independence.
Our Audit Committee approves only those agreements that, in light
of known circumstances, are in, or are not inconsistent with, our
best interests, as our Audit Committee determines in the good faith
exercise of its discretion.
P
LAN OF DISTRIBUTION
We are currently
party to an engagement agreement, as amended, with TriPoint Global
Equities, LLC (the “Selling Agent”), who along with its
division BANQ, will act as the lead managing selling agent and book
runner with respect to the sale of the Series B Convertible
Preferred Stock. The term of the engagement agreement began on
April 6, 2017, and was amended on November 15, 2017, and will
continue until March 31, 2018, unless one of the following events
occurs prior to March 31, 2018, in which case the engagement
agreement would be terminated early:
|
(i)
|
we
or the Selling Agent terminate the agreement for any
reason;
|
|
|
|
|
(ii)
|
we
execute a definitive selling agency agreement with the Selling
Agent; or
|
|
|
|
|
(iii)
|
we
decide not to proceed with the Offering or withdraw any
registration statement submitted to or filed with the
SEC.
|
The Selling Agent has agreed to act as our exclusive
selling agent to offer shares of the Series B Convertible Preferred
Stock to prospective investors on a best efforts basis. The Selling
Agent is not purchasing any shares of Series B Convertible
Preferred Stock offered by us and is not required to sell any
specific number or dollar amount of Series B Convertible Preferred
Stock in the offering. The Selling Agent will be
deemed to be an “underwriter” within the meaning of the
Securities Act and the compensation of the Selling Agent
will be deemed to be underwriting commissions or
discounts.
Selling Agent Compensation
We
have agreed, subject to execution of the definitive selling agency
agreement that we will pay a commission of 4.0% of the gross
proceeds received by us in the Offering, which shall be allocated
by the Selling Agent to members of the selling group and soliciting
dealers in its sole discretion.
The
following table summarizes the public offering price, Selling Agent
Fees and proceeds before expenses to us:
|
|
Per Share
|
Total
|
|
Public
offering price
|
$
9.50
|
$
10,000,000
|
|
Selling
Agent fees
|
$
0.38
|
$
400,000
|
|
Proceeds
to us (before expenses)
|
$
9.12
|
$
9,600,000
|
Offering
Expenses
. We are responsible
for all Offering fees and expenses, including the following: (i)
fees and disbursements of our legal counsel, accountants, and other
professionals we engage; (ii) fees and expenses incurred in the
production of Offering documents, including design, printing,
photograph, and written material procurement costs; (iii) all
filing fees, including those charged by the Financial Industry
Regulatory Authority (“FINRA”); (iv) our
transportation, accommodation, and other roadshow expenses
(up to a maximum of $10,000,
which will be pre-approved by
us)
;
and (v) a $20,000 due diligence fee payable to the Selling Agent,
with $20,000 paid upon the execution of the engagement agreement,
which will be reimburse to us to the extent not actually incurred
by the Selling Agent.
We have
agreed to reimburse the Selling Agent for its reasonable and
documented legal costs (we must pre-approve any expenses in excess
of $1,000), up to a maximum of $45,000.
Our Offering
expenses also include approximately $350,000 of the expense that we
may incur in connection with the 10% merchandise credit that we
issue, which is an estimate, based on our average cost of sales of
our products
.
Reimbursable Expenses in the
Event of Termination
. In the
event the Offering does not close or the engagement agreement is
terminated for any reason, we have agreed to reimburse the Selling
Agent for all unreimbursed, reasonable, documented, out-of-pocket
fees, expenses, and disbursements, including the Selling
Agent’s legal fees, up to $20,000.
Selling
Agent Warrants.
Upon each
closing of this Offering, we have agreed to issue certain warrants
(the “Selling Agent’s Warrants”) to the Selling
Agent to purchase a number of shares of the Common Stock equal to
5.0% of the total shares of the Common Stock underlying the
Preferred Stock that is sold in such closing. The Selling
Agent’s Warrants are exercisable commencing six (6) months
after the date of the applicable closing, until the five (5) year
anniversary of the effective date of the Registration Statement.
The Selling Agent’s Warrants are not redeemable by us. The
Selling Agent’s Warrants will be exercisable at a price equal
to 120.0% of the public offering price in connection with the
Offering.
The
Selling Agent’s Warrants and the Common Stock underlying the
Selling Agent’s Warrants have been deemed compensation by
FINRA and are therefore subject to a 180-day lock-up pursuant to
Rule 5110(g)(1) of FINRA. The Selling Agent, or permitted assignees
under such rule, may not exercise, sell, transfer, assign, pledge,
or hypothecate the Selling Agent’s Warrants or the Common
Stock underlying the Selling Agent’s Warrants, nor will the
Selling Agent or permitted assignees engage in any hedging, short
sale, derivative, put, or call transaction that would result in the
effective economic disposition of the Selling Agent’s
Warrants or the underlying shares for a period of 180 days from the
applicable closing, except that they may be transferred, in whole
or in part, by operation of law or by reason of our reorganization,
or to any Selling Agent or selected dealer participating in the
Offering and their officers or partners if the Selling
Agent’s Warrants or the underlying shares so transferred
remain subject to the foregoing lock-up restrictions for the
remainder of the time period. The Selling Agent’s Warrants
will provide for adjustment in the number and price of the Selling
Agent’s Warrants and the shares underlying such Selling
Agent’s Warrants in the event of recapitalization, merger,
stock split, or other structural transaction, or a future financing
undertaken by us.
The Common Stock is listed on the NASDAQ Capital
Market under the symbol “YGYI.” On February
5, 2018, the last reported sale price of the Common Stock on
the NASDAQ Capital Market was
$4.78.
We are offering pursuant to this prospectus up to
1,052,631 shares of Series B Convertible Preferred Stock,
but there can be no assurance that the offering will be fully
subscribed.
The Selling
Agent will assist us on a “best efforts” basis and
has no obligation to buy any of the Series B Convertible
Preferred Stock from us, nor is it required to arrange the
purchase or sale of any specific number or dollar amount
of Series B Convertible Preferred Stock.
Accordingly, we may sell substantially less than
all of the Series B Convertible Preferred Stock offered
pursuant to this prospectus in which case our net proceeds would be
substantially reduced and the total placement agent fees may be
substantially less than the maximum total set forth
above.
In
connection with the 2017 Private Placement, we issued the Selling
Agent warrants to purchase 179,131 shares of Common Stock (the
“2017 $5.56 Warrants”), which are exercisable
commencing six (6) months after the date of the applicable closing
until the three (3) year anniversary of the issuance date. The 2017
$5.56 Warrants are not redeemable by us. The 2017 $5.56 Warrants
have an exercise price of $5.56 per share. Also, in connection with
the 2017 Private Placement, we issued the Selling Agent 22,680
shares of Common Stock. (the “2017 Private Placement Common
Stock”, collectively with the 2017 $5.56 Warrants and the
Common Stock underlying the 2017 Private Placement Warrants, the
“2017 Private Placement Securities”).
The 2017 Private Placement Securities have been deemed compensation
by FINRA and are therefore subject to a 180-day lock-up pursuant to
Rule 5110(g)(1) of FINRA. The Selling Agent, or permitted assignees
under such rule, may not exercise, sell, transfer, assign, pledge,
or hypothecate the 2017 Private Placement Securities, nor will the
Selling Agent or permitted assignees engage in any hedging, short
sale, derivative, put, or call transaction that would result in the
effective economic disposition of the 2017 Private Placement
Securities for a period of 180 days from the applicable closing,
except that they may be transferred, in whole or in part, by
operation of law, as permitted by Rule 5110, or by reason of our
reorganization, or to any Selling Agent or selected dealer
participating in the Offering and their officers or partners if the
2017 Private Placement Securities so transferred remain subject to
the foregoing lock-up restrictions for the remainder of the time
period. The 2017 Private Placement Securities provide for
adjustment in the number and price of the 2017 Private Placement
Securities in the event of recapitalization, merger, stock split,
or other structural transaction, or a future financing undertaken
by us.
Lock-Up Agreements
We and our officers, directors, and more than 5%
holders of our Common Stock as of the
effectiveness of the
Registration Statement
and
investors in our recent private placement have agreed, or will
agree, with the Selling Agent, subject to certain exceptions, that,
without the prior written consent of the Selling Agent, we and they
will not, directly or indirectly, during the period ending 180 days
after the date of the final closing of the
Offering:
|
|
●
|
offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, or otherwise dispose of
or transfer any shares of the Common Stock or any securities
convertible into or exchangeable or exercisable for the Common
Stock, whether now owned or hereafter acquired by the undersigned
or with respect to which the undersigned has or hereafter acquires
the power of disposition; or
|
|
|
|
|
|
|
●
|
enter
into any swap or any other agreement or any transaction that
transfers, in whole or in part, the economic consequence of
ownership of the Common Stock, whether any such swap or transaction
is to be settled by delivery of the Common Stock or other
securities, in cash or otherwise.
|
This
agreement does not apply, in our case, to securities issued
pursuant to existing employee benefit plans or securities issued
upon exercise of options, and other exceptions, and in the case of
our officers, directors and other holders of our securities,
exercise of stock options issued pursuant to a stock option or
similar plans, and other exceptions.
Indemnification and Control
We
have agreed to indemnify the Selling Agent against certain
liabilities, including liabilities under the Securities Act. If we
are unable to provide this indemnification, we will contribute to
the payments the Selling Agent and its affiliates and controlling
persons may be required to make in respect of these
liabilities.
The
Selling Agent and its affiliates are engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, investment
research, principal investment, hedging, financing and brokerage
activities. The Selling Agent and its affiliates may in the future
perform various financial advisory and investment banking services
for us, for which they received or will receive customary fees and
expenses.
Our Relationship with the Selling Agent
In
the ordinary course of their various business activities, the
Selling Agent and its affiliates may make or hold a broad array of
investments and actively trade debt and equity securities (or
related derivative securities) and financial instruments (including
bank loans) for their own account and for the accounts of their
customers, and such investment and securities activities may
involve securities and/or instruments of the issuer. The Selling
Agent and its affiliates may also make investment recommendations
and/or publish or express independent research views in respect of
such securities or instruments, or recommend to clients that they
acquire, long and/or short positions in such securities and
instruments.
The Selling Agent acted as our Selling Agent in
our 2014 Private Placement, 2015 Private Placement and 2017 Private
Placement and received aggregate cash proceeds of
$1,517,488
from such private placements and was
issued warrants to purchase an aggregate of 490,516
shares
of Common
Stock.
Procedures
for Subscribing
U.S.
investors may participate in this Offering by opening an account
with BANQ, an online brokerage division of TriPoint Global
Equities, LLC, the Selling Agent. The BANQ website may be found at
Banq.co. BANQ is open to qualified U.S. investors and accepts
individual, joint, corporate or IRA accounts. The application
process can take as little as 5 minutes and there are no account
minimums. Deposits to BANQ can be made via wire transfer or ACH
deposit or by mailing in a check. Deposits usually post to an
account within 3-5 days. BANQ® is a division of the Selling
Agent, a member of FINRA and the Securities Investor Protection
Corporation (“SIPC”), which protects the securities of
its members’ customers up to $500,000 (including $250,000 for
claims for cash). TriPoint and BANQ do not charge a fee for opening
an account or for depositing shares purchased in the Offering into
such account.
Investors
investing through BANQ will be required to open their accounts and
deposit funds into their respective BANQ accounts after the
Registration Statement is effective relating to this Offering but
prior to the applicable closing of the Offering. No investor funds
may be used to purchase securities to be issued in this Offering
until the Registration Statement relating to this Offering and
filed by the Company with the SEC has been declared effective by
the SEC. After an account is opened but no later than 48 hours
prior to the applicable closing of the Offering, the investor will
be required to deposit funds into the account sufficient to
purchase the amount of securities that the investor intends to
purchase in the Offering. Such funds will not be held in an escrow
account or otherwise segregated as part of the Offering
process.
During the marketing
period for the Offering, the investor will provide an indication of
interest as to the amount of securities the investor intends to
purchase, however firm indications of interest can only be made
after the Registration Statement is effective. Forty-eight (48)
hours prior to the close of the Offering, each investor that has
money deposited with BANQ for this Offering will be notified by
BANQ via e-mail and notification to the secure messages section of
the website for the BANQ online brokerage account that the
indication of the amount of securities such investor wishes to
purchase or such lesser amount as may be determined by the Company
and the Selling Agent in their discretion is confirmed and will be
finalized on closing. Indications will not be finalized without
sufficient funds in the investor’s BANQ online brokerage
account or if the investor elects to cancel such
indication
Upon
the applicable closing, the funds required to purchase that amount
of securities will be removed from such investor’s account
and transferred to the account of the Company, and the amount of
securities purchased will be deposited into such investor’s
account. The investor may cancel such investor’s desired
investment within the required time and no funds will be withdrawn,
no securities will be provided and the investor’s indication
will not be confirmed. In addition, if the Offering does not close,
no funds will be withdrawn, no securities will be provided, the
investor’s indication will not be confirmed and the funds in
the investor’s BANQ account will remain available for
withdrawal, in accordance with the investor’s account
agreement with BANQ.
Below
is a summary of the specific steps involved in the
“indication of interest” process:
Step
1. Upon initial effectiveness of the Offering by the SEC, investors
may place a firm indication of interest for the amount of
securities the investor intends to purchase.
Step
2. Investors must fund their BANQ online brokerage account or
Wilmington Trust Escrow Account with sufficient funds to purchase
shares if their indication is confirmed and the allocation is
approved by the Company and the Selling Agent. Indications of
interest will not be finalized without sufficient funds in an
investor’s BANQ online brokerage account or the Wilmington
Trust Escrow Account.
Step
3. Approximately forty-eight (48) hours prior to closing of the
Offering, each investor that has money deposited with BANQ will be
notified by BANQ via e-mail (and notification to the secure
messages section of the BANQ website for BANQ customers) that the
indication of the amount of securities such investor wishes to
purchase is confirmed and will be finalized on closing. The
investor may cancel such investor’s desired investment within
the required timeframe, in which case no funds will be withdrawn,
no securities will be provided and the investor’s indication
will not be confirmed.
Step
4. Upon closing, investor funds will be debited from their BANQ
online brokerage account or the Wilmington Trust Escrow Account,
and shares will delivered in the amount of the allocation granted.
If this Offering fails to close, no funds will be withdrawn, no
securities will be provided, the investor’s indication will
not be confirmed, and the funds in the investor’s BANQ
account will remain available for withdrawal in accordance with the
investor’s account agreement with BANQ, or for non-BANQ
customers funds in the Wilmington Trust Escrow Account will be
promptly returned to the investor.
Escrow Account:
The Company intends to complete one
closing of this Offering, but may undertake one or more closings on
a rolling basis. Therefore, investor funds that are held in escrow
will be released to the Company in its sole discretion at any time,
and without regard to meeting any particular
contingency.
Funds
deposited in an account with BANQ will be held
with Foliofn Investments, Inc. (“Folio”),
which is the clearing agent for Tripoint and BANQ. The funds will
be included in Folio’s “Cash Sweep” program,
which utilizes FDIC-insured accounts to sweep Folio’s
customers’ free credit balances in excess of any maintained
as free credit balances, from the Folio customers’ securities
accounts to FDIC-insured bank accounts. Upon our decision to
conduct a closing, which may be made in our sole discretion at any
time, investor funds held with Folio will be released to
us.
U.S. investors who
participate in this Offering other than through BANQ, including
through selected dealers who do not maintain clearing agreements,
will be required to deposit their funds in an escrow account held
at Wilmington Trust; any such funds that Wilmington Trust receives
shall be held in escrow until the applicable closing of the
Offering or such other time as mutually agreed between the Company
and the Selling Agent, and then used to complete securities
purchases, or returned if this Offering fails to
close.
Selected Dealers
with clearing agreements shall provide the Selling Agent with
executed indications and delivery sheets from their customers and
shall settle the transaction with the Selling
Agent through DTC on closing.
Non-U.S. investors may participate in this
Offering by depositing their funds in the escrow account held
at Wilmington Trust, National Association;
any such funds that Wilmington Trust,
National Association receives shall be held in escrow until the
applicable closing of the Offering or such other time as mutually
agreed between the Company and the Selling Agent, and then used to
complete securities purchases, or returned if this Offering fails
to close.
Right to Reject Subscriptions.
After we
receive your complete, executed subscription agreement and the
funds required under the subscription agreement have been
transferred to the escrow account or remain in your BANQ account,
we have the right to review and accept or reject your subscription
in whole or in part, for any reason or for no reason. We will
return all monies from rejected subscriptions immediately to you,
without interest or deduction.
Acceptance of Subscriptions.
Upon our
acceptance of a subscription agreement, we will countersign the
subscription agreement and issue the shares subscribed at closing.
Once you submit the subscription agreement and it is accepted, you
may not revoke or change your subscription or request your
subscription funds. All accepted subscription agreements are
irrevocable.
D
ESCRIPTION OF SECURITIES
Our
authorized capital consists of 50 million shares of Common Stock,
par value $0.001 per share, and 5 million shares of preferred stock
of which 161,135 shares are designated as Series A Convertible
Preferred Stock and 1,052,631 shares are designated as Series B
Preferred Stock. As of December 31, 2017, 19,723,285 shares of
Common Stock, 161,135 shares of Series A Convertible Preferred and
no shares of Series B Convertible Preferred were
outstanding.
Common Stock
Holders of our
Common Stock have the right to cast one vote for each share of
stock in their name on the books of our company, whether
represented in person or by proxy, on all matters submitted to a
vote of holders of Common Stock, including election of directors.
There is no right to cumulative voting in election of directors.
Except where a greater requirement is provided by statute or by the
certificate of incorporation, or in the by-laws, the presence, in
person or by proxy duly authorized, of the one or more holders of a
majority of the outstanding shares of our Common Stock constitutes
a quorum for the transaction of business. The vote by the holders
of a majority of outstanding shares is required to effect certain
fundamental corporate changes such as liquidation, merger, or
amendment of our articles of incorporation.
There are no
restrictions in our articles of incorporation or by-laws that
prevent us from declaring dividends. The Delaware General
Corporation Law does, however, prohibit us from declaring dividends
where, after giving effect to the distribution of the dividend (1)
we would not be able to pay our debts as they become due in the
usual course of business or (2) our total assets would be less than
the sum of our total liabilities plus the amount that would be
needed to satisfy the rights of stockholders who have preferential
rights superior to those receiving the distribution.
Holders of our
Common Stock are not entitled to preemptive rights, and no
redemption or sinking fund provisions are applicable to our Common
Stock. All outstanding shares of our Common Stock are fully paid
and non-assessable.
Dividends
We have not paid
any dividends on the Common Stock and do not anticipate paying any
such dividends in the near future. Instead, we intend to use any
earnings for future acquisitions and expanding our business.
Nevertheless, at this time there are not any restrictions on our
ability to pay dividends on the Common Stock.
Preferred Stock
Our Board of
Directors has the authority, without action by our stockholders, to
designate and issue up to 5 million shares of preferred stock in
one or more series or classes and to designate the rights,
preferences and privileges of each series or class, which may be
greater than the rights of our common stock. It is not possible to
state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of our common stock until our
Board of Directors determines the specific rights of the holders of
the preferred stock. However, the effects might
include:
●
restricting
dividends on our common stock;
●
diluting the voting
power of our common stock;
●
impairing
liquidation rights of our common stock; or
●
delaying or
preventing a change in control of us without further action by our
stockholders.
The Board of
Directors’ authority to issue preferred stock without
stockholder approval could make it more difficult for a third-party
to acquire control of our company, and could discourage such
attempt. We have no present plans to issue any shares of preferred
stock.
Series A
The Company had
161,135 shares of Series A Convertible Preferred Stock
(“Series A Preferred”) outstanding as of December 31,
2017. The holders of the Series A Preferred are entitled to receive
a cumulative dividend at a rate of 8.0% per year, payable annually
either in cash or shares of our common stock at our 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 our Common Stock. The holders of Series A
Preferred are entitled to receive payments upon liquidation,
dissolution or winding up of our 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.
Series B
The following
summary of the material terms and provisions of our Series B
Convertible Preferred Stock does not purport to be complete and is
qualified in its entirety by reference to our charter, including
the certificate of designation setting forth the terms of the
Series B Convertible Preferred Stock and our bylaws, as amended,
each of which is available from us and have been filed with the
SEC. We have also agreed to provide the purchasers of Series B
Convertible Preferred Stock in this Offering with a credit towards
our merchandise equal to ten percent (10%) of the amount of their
investment, up to a maximum credit of $1,000 per purchaser. The
maximum aggregate credit that could be issued if the full
$10,000,000 is raised is $1,000,000, which assumes that there are
1,000 investors that each invest $10,000.
General
Our
board of directors has designated 1,052,631 shares of our
authorized but unissued Preferred Stock as Series B Convertible
Preferred Stock. When issued in accordance with this prospectus,
the Series B Convertible Preferred Stock will be validly issued,
fully paid and non-assessable. Our board of directors may authorize
the issuance and sale of additional shares of Series B Convertible
Preferred Stock from time to time.
Ranking
The Series B
Convertible Preferred Stock will rank, with respect to dividend
rights and rights upon voluntary or involuntary liquidation,
dissolution or winding up of our affairs:
●
senior
to the Series A Preferred, all classes or series of our common
stock and to any other class or series of our capital stock
expressly designated as ranking junior to the Series B Convertible
Preferred Stock;
●
on
parity any class or series of our capital stock expressly
designated as ranking on parity with the Series B Convertible
Preferred Stock, none of which exists on the date hereof;
and
●
junior
to any other class or series of our capital stock expressly
designated as ranking senior to the Series B Convertible Preferred
Stock, none of which exists on the date hereof.
The term
“capital stock” does not include convertible or
exchangeable debt securities, which, prior to conversion or
exchange, rank senior in right of payment to the Series B
Convertible Preferred Stock. The Series B Convertible Preferred
Stock will also rank junior in right of payment to our other
existing and future debt obligations.
Dividends
Subject to the
preferential rights of the holders of any class or series of our
capital stock ranking senior to the Series B Convertible Preferred
Stock with respect to dividend rights, holders of shares of the
Series B Convertible Preferred Stock are entitled to receive, when,
as and if authorized by our board of directors and declared by us
out of funds legally available for the payment of dividends,
cumulative cash dividends at the rate of 5.0% per
annum.
Dividends on the
Series B Convertible Preferred Stock will accrue and be cumulative
from and including the date of original issue and will be payable
to holders quarterly in arrears on or about the last day of March,
June, September and December of each year commencing June 30, 2018
or, if such day is not a business day, on either the immediately
preceding business day or next succeeding business day at our
option, except that, if such business day is in the next succeeding
year, such payment shall be made on the immediately preceding
business day, in each case with the same force and effect as if
made on such date. The term “business day” means each
day, other than a Saturday or a Sunday, which is not a day on which
banks in New York are required to close.
If the aggregate amount of dividends accrued and
payable to a holder is less than $10.00, we may, at our option,
retain and not make payment in the respect of such dividends until
the aggregate number of dividends then accrued and payable to the
holder is not less than $10.00.
Dividends on the
Series B Convertible Preferred Stock will accrue whether or
not:
●
we have
earnings;
●
there
are funds legally available for the payment of those dividends;
or
●
those
dividends are authorized or declared.
Holders of shares
of Series B Convertible Preferred Stock are not entitled to any
dividend, whether payable in cash, property or shares of capital
stock, in excess of full cumulative dividends on the Series B
Convertible Preferred Stock as described above. Any dividend
payment made on the Series B Convertible Preferred Stock will first
be credited against the earliest accrued but unpaid dividends due
with respect to those shares which remain payable. Accrued but
unpaid dividends on the Series B Convertible Preferred Stock will
accumulate as of the dividend payment date on which they first
become payable.
No dividends will
be authorized by our board of directors and declared by us or paid
or set apart for payment if such authorization, declaration or
payment is restricted or prohibited by law.
Liquidation
Preference
Upon any voluntary
or involuntary liquidation, dissolution or winding up of our
affairs, before any distribution or payment shall be made to
holders of shares of our common stock or any other class or series
of capital stock ranking, as to rights upon any voluntary or
involuntary liquidation, dissolution or winding up of our affairs,
junior to the Series B Convertible Preferred Stock, holders of
shares of Series B Convertible Preferred Stock will be entitled to
be paid out of our assets legally available for distribution to our
stockholders, after payment of or provision for our debts and other
liabilities, an amount equal to the original purchase price plus
any accrued and unpaid dividends (whether or not authorized or
declared) up to but excluding the date of payment. If, upon our
voluntary or involuntary liquidation, dissolution or winding up,
our available assets are insufficient to pay the full amount of the
liquidating distributions on all outstanding shares of Series B
Convertible Preferred Stock and the corresponding amounts payable
on all shares of each other class or series of capital stock
ranking, as to rights upon liquidation, dissolution or winding up,
on parity with the Series B Convertible Preferred Stock in the
distribution of assets, then holders of shares of Series B
Convertible Preferred Stock and each such other class or series of
capital stock ranking, as to rights upon any voluntary or
involuntary liquidation, dissolution or winding up, on parity with
the Series B Convertible Preferred Stock will share ratably in any
distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively
entitled.
Conversion
Rights
Each share of
Series B Convertible Preferred Stock is initially convertible at
any time, in whole or in part, at the option of the holders
at
an initial conversion price of $4.75 per share
initially into two shares of Common Stock and automatically
converts into two shares of Common Stock on its two-year
anniversary of issuance. The conversion price set forth in the
certificate of designations of the preferred stock is also subject
to pro-rated adjustment in the case of stock splits and stock
dividends and other similar transactions.
No fractional
shares shall be issued upon conversion of Series B Convertible
Preferred Stock into Common Stock and no payment. In lieu of
delivering fractional shares, we will pay to the holder, to the
extent permitted by law, an amount in cash equal to the current
fair market value of such fractional share as determined in good
faith by our Board.
No
Maturity, Sinking Fund or Mandatory Redemption
The
Series B Convertible Preferred Stock has no maturity date and we
are not required to redeem the Series B Convertible Preferred Stock
at any time. Accordingly, the Series B Convertible Preferred Stock
will remain outstanding until automatically converted to Common
Stock on the two-year anniversary of issuance, unless the holders
of the Series B Convertible Preferred Stock convert the Series B
Convertible Preferred Stock into our common stock. The Series B
Convertible Preferred Stock is also not subject to any sinking
fund. There are no restrictions on the repurchase or redemption by
the Company of any shares of Series B Convertible Preferred Stock
while there is an arrearage in the payment of
dividends.
Limited
Voting Rights
Holders of shares
of the Series B Convertible Preferred Stock generally do not have
any voting rights. However, as long as any shares of Series B
Convertible Preferred Stock are outstanding, we may not, without
the affirmative vote of the holders of a majority of the then
outstanding shares of the Series B Convertible Preferred Stock
alter or change adversely the powers, preferences or rights given
to the Series B Convertible Preferred Stock or alter or amend its
certificate of designation.
Transfer
Agent
The transfer agent
and registrar for the Series B Convertible Preferred Stock is
Pacific Stock Transfer Company as our transfer agent. They are
located at 6725 Via Austi Pkwy, Suite 300 Las Vegas, Nevada 89119.
Their telephone number is (800) 785-7782.
Outstanding Warrants
As of December 31,
2017, we had issued and outstanding warrants to purchase 2,710,066
shares of common stock at prices ranging from $2.00 to $10.00. All
warrants are currently exercisable and expire at various dates
through November 2020.
Included in the
warrants are (i) warrants to purchase 1,149,712 shares of our
common stock that were issued in the 2017 Private Placement and
have an exercise price of $5.56 per share of common stock and
expire three years after issuance; (ii) warrants to purchase
247,916 shares of our common stock that were issued in the 2015
Private Placement and have an exercise price of $9.00 per share of
common stock and expire five years after issuance; (iii) warrants
to purchase 102,678 shares of our common stock that were issued in
the 2015 Private Placement and have an exercise price of $7.00 per
share of common stock and expire three years after issuance; (iv)
warrants to purchase 67,857 shares of our common stock that were
issued in the 2014 Private Placement and have an exercise price of
$7.00 per share of common stock and expire five years after
issuance; (v) warrants to purchase 1,022,279 shares of our common
stock that were issued in the 2014 Private Placement and have an
exercise price of $4.60 per share of common stock and expire five
years after issuance; (vi) warrants to purchase 44,624 shares of
our common stock issuable upon exercise and have an exercise price
of $10.00 per share of common stock and expire in December 2018:
and (vii) warrants to purchase 75,000 shares of our common stock
issuable upon exercise and have an exercise price of $2.00 per
share of common stock and expire in May 2020. The Warrants issued
in our private placements contain cashless exercise provisions in
the event a registration statement registering the common stock
underlying the Warrants is not effective at the time of exercise
and customary anti-dilution protection and registration
rights.
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Options Outstanding
|
As of December 31,
2017, we had issued and outstanding options to purchase 1,584,523
shares of common stock with a weighted average exercise price of
$4.76, which were issued under our 2012 Equity Incentive Plan.
There are currently 1,040,678 options available for exercise at
various dates through 2027.
Restricted Stock Units
As of December 31,
2017, we had issued and outstanding restricted stock units of
500,000 shares of common stock that are issuable upon being vested
which were issued under our 2012 Equity Incentive
Plan.
Convertible Notes
In August 2014, we
completed the 2014 Private Placement and entered into Note Purchase
Agreements with seven (7) accredited investors pursuant to which we
sold senior secured convertible notes in the aggregate principal
amount of $4,750,000. The 2014 Notes are currently convertible into
an aggregate of 678,568 shares of Common Stock at a conversion
price of $7.00 per share, and warrants to purchase 929,345 shares
of Common Stock at an exercise price of $4.60 per share. The 2014
Notes bear interest at a rate of 8% per annum. We have the right to
prepay the 2014 Notes at any time after the one year anniversary
date of the issuance of the 2014 Notes at a rate equal to 110% of
the then outstanding principal balance and accrued interest. The
2014 Notes rank senior to all of our debt other than certain senior
debt. CLR, our wholly-owned subsidiary, has provided collateral to
secure the repayment of the Notes and has pledged its assets (which
lien is junior to CLR’s equipment leases 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 2014 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 1.5 million
shares of the common stock that he owns so long as his personal
guaranty is in effect.
In
November 2015, we completed the 2015 Private Placement and entered
into Note Purchase Agreements with three (3) accredited investors
pursuant to which we sold senior secured convertible notes in the
aggregate principal amount of $7,187,500 (which includes $4,000,000
owed on a prior debt that was applied to the purchase of units in
this offering), that are convertible into an aggregate of 1,026,784
shares of common stock at a conversion price of $7.00 per share and
warrants exercisable to purchase an aggregate of 479,166 shares of
common stock from us at a price per share of $9.00. The 2015 Notes
are due in October 2018 if the option to convert has not been
exercised. The 2015 Notes bear interest at a rate of eight percent
(8%) per annum. We have the right to prepay the 2015 Notes at any
time after the one year anniversary date of the issuance of the
2015 Notes at a rate equal to 110% of the then outstanding
principal balance and accrued interest. The 2015 Notes rank senior
to all of our debt other than certain debt owed to 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 2015 Notes and
have pledged our assets (which liens are junior to CLR’s
equipment leases 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 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 1.5 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. As of the date hereof, notes
in the principal amount of $3,000,000 remains outstanding, that are
convertible into 428,571 shares of common stock.
In August 2017, we completed the
2017 Private Placement and entered into Note Purchase Agreements
with 26 accredited investors pursuant to which we sold senior
secured convertible notes in the aggregate principal amount of
$7,254,349 initially convertible into an aggregate of 1,577,033
shares of common stock, at $4.60 per share (subject to adjustment);
and (ii) 2017 $5.56 warrants to purchase 1,149,712 shares issuable
upon conversion of the 2017 Note at an exercise price equal to
$5.56. As part of the 2017 Private Placement, three (3) investors
in our 2015 Private Placement (the “Prior Investors”),
converted their 2015 Notes in the aggregate principal amount of
$4,200,349 together with accrued interest thereon into 2017 Notes
for an equal principal amount (included in the notes referred to
above), convertible into 913,119 2017 $5.56 warrants to purchase an
aggregate of 456,560 shares of Common Stock. The 2017 Note will
carry the same interest rate as the prior note. The Prior Investors
exchanged their 2015 $7.00 warrants to purchase an aggregate of
279,166 shares of Common Stock for a new 2017 warrant to purchase
an aggregate of 182,065 shares of Common Stock. For twelve
(12) months following the closing, the investors in the 2017
Private Placement have the right to participate in any future
equity financings by us up to their pro rata share of the maximum
offering amount in the aggregate.
If the aggregate gross proceeds
from this offering are at least $3,000,000, the July 2017 Notes
automatically convert to Common Stock.
Registration Rights
In
connection with the 2017 Private Placement, we also entered into
the “Registration Rights Agreement” with the investors
in the 2017 Private Placement. The Registration Rights Agreement
requires that we file a registration statement (the
“Registration Statement”) with the Securities and
Exchange Commission within ninety (90) days of the final closing
date of the 2017 Private Placement for the resale by the investors
of all of the shares common stock underlying the senior convertible
notes and warrants and all shares of common stock issuable upon any
stock split, dividend or other distribution, recapitalization or
similar event with respect thereto (the “Registrable
Securities”) and that the Initial Registration Statement be
declared effective by the SEC within 180 days of the final closing
date of the 2017 Private Placement or if the registration statement
is reviewed by the SEC 210 days after the final closing date or the
2017 Private Placement. Upon the occurrence of certain events (each
an “Event”), we will be required to pay to the
investors liquidated damages of 1.0% of their respective aggregate
purchase price upon the date of the Event and then monthly
thereafter until the Event is cured. In no event may the aggregate
amount of liquidated damages payable to each of the investors
exceed in the aggregate 10% of the aggregate purchase price paid by
such investor for the Registrable Securities. The registration
statement was declared effective by the SEC on September 29,
2017.
Potential
Anti-Takeover Effects
Certain provisions
set forth in our Certificate of Incorporation, as amended, in our
bylaws and in Delaware law, which are summarized below, may be
deemed to have an anti-takeover effect and may delay, deter or
prevent a tender offer or takeover attempt that a stockholder might
consider to be in its best interests, including attempts that might
result in a premium being paid over the market price for the shares
held by stockholders.
Our Certificate of
Incorporation contains a provision that permits us to issue,
without any further vote or action by the stockholders, up to five
million shares of preferred stock in one or more series and, with
respect to each such series, to fix the number of shares
constituting the series and the designation of the series, the
voting powers, if any, of the shares of the series, and the
preferences and relative, participating, optional and other special
rights, if any, and any qualifications, limitations or
restrictions, of the shares of such series.
In particular our
bylaws and Delaware General Corporate Law, as applicable, among
other things:
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●
|
provide the board
of directors with the ability to alter the bylaws without
stockholder approval; and
|
|
●
|
provide that
vacancies on the board of directors may be filled by a majority of
directors in the office, although less than a quorum.
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While the foregoing
provision of our certificate of incorporation, and provisions of
Delaware law may have an anti-takeover effect, these provisions are
intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain
types of transactions that may involve an actual or threatened
change of control. In that regard, these provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that
may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our
shares and, as a consequence, they also may inhibit fluctuations in
the market price of our common stock that could result from actual
or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
Delaware
Takeover Statute
In general, Section
203 of the Delaware General Corporation Law prohibits a Delaware
corporation that is a public company from engaging in any
“business combination” (as defined below) with any
“interested stockholder” (defined generally as an
entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation and any entity or person affiliated
with such entity or person) for a period of three years following
the date that such stockholder became an interested stockholder,
unless: (1) prior to such date, the board of directors of the
corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder; (2) on consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (3) on or subsequent to such date, the
business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not
by written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 of the
Delaware General Corporation Law defines “business
combination” to include: (1) any merger or consolidation
involving the corporation and the interested stockholder; (2) any
sale, transfer, pledge or other disposition of ten percent or more
of the assets of the corporation involving the interested
stockholder; (3) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder; (4) any
transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or (5) the receipt by the interested stockholder of
the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the
corporation.
Listing of Common Stock
Our common stock is
currently quoted on the NASDAQ National Market under the trading
symbol “YGYI.” The preferred stock will not be quoted
on the NASDAQ National Market or any national securities market;
however, the shares into which the preferred stock is convertible
will be listed on the NASDAQ National Market.
Transfer Agent
We have retained
Pacific Stock Transfer Company as our transfer agent. They are
located at 6725 Via Austi Pkwy, Suite 300,
Las Vegas, Nevada
89119. Their telephone number is (800) 785-7782.
E
XPERTS
The consolidated
financial statements of Youngevity International, Inc. as of
December 31, 2016 and 2015 and for the years then ended included in
this Registration Statement have been so included in reliance on
the reports of Mayer Hoffman McCann P.C., an independent registered
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our directors and
officers are indemnified as provided by the Delaware General
Corporation Law, Certificate of Incorporation and our Bylaws.
Section 145 of the Delaware General Corporation Law provides that a
director or officer is not individually liable to the corporation
or its stockholders or creditors for any damages as a result of any
act or failure to act in his capacity as a director or officer
unless it is proven that: (1) his act or failure to act constituted
a breach of his fiduciary duties as a director or officer; and (2)
his breach of those duties involved intentional misconduct, fraud
or a knowing violation of law. Our Certificate of Incorporation
provides for indemnification of our directors and officers to the
fullest extent permitted by Section 145 of the Delaware General
Corporation Law.
This provision is
intended to afford directors and officers protection against and to
limit their potential liability for monetary damages resulting from
suits alleging a breach of the duty of care by a director or
officer. As a consequence of this provision, stockholders of our
company will be unable to recover monetary damages against
directors or officers for action taken by them that may constitute
negligence or gross negligence in performance of their duties
unless such conduct falls within one of the foregoing exceptions.
The provision, however, does not alter the applicable standards
governing a director’s or officer’s fiduciary duty and
does not eliminate or limit the right of our company or any
stockholder to obtain an injunction or any other type of
non-monetary relief in the event of a breach of fiduciary
duty.
L
EGAL MATTERS
The validity of our
securities offered hereby will be passed upon for us by Gracin
& Marlow, LLP, New York, New York. Hunter Taubman Fischer &
LI LLC, is acting as counsel for the selling agent in connection
with the securities offered hereby.
WHERE
YOU CAN FIND MORE INFORMATION
We are subject to
the informational requirements of the Exchange Act, and file annual
and current reports, proxy statements and other information with
the SEC. These reports, proxy statements and other information
filed by us can be read and copied at the SEC’s Public
Reference Room at 100 F Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also
maintains a website that contains reports, proxy statements,
information statements and other information concerning our company
located at http://www.sec.gov. This prospectus does not contain all
the information required to be included in the registration
statement (including the exhibits), which we have filed with the
SEC under the Securities Act and to which reference is made in this
prospectus.
You may obtain,
free of charge, a copy of any of our filings by writing or calling
us at the following address and telephone number: 2400 Boswell
Road, Chula Vista, California or calling (619) 934-3980. Our
website address is
www.ygyi.com
. The information
contained on our website or that can be accessed through our
website does not constitute part of this document.
I
NDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
|
|
|
F-1
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
|
|
|
|
|
|
F-26
|
|
|
F-27
|
|
|
F-28
|
|
|
F-29
|
|
|
F-30
|
|
|
F-31
|
|
|
F-32
|
|
Youngevity International, Inc. and Subsidiaries
|
||
|
Condensed Consolidated
B
alance
Sheets
|
||
|
(In
thousands, except share amounts)
|
||
|
|
As of
|
|
|
|
September 30,
2017
|
December 31,
2016
|
|
ASSETS
|
(Unaudited)
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$
1,373
|
$
869
|
|
Accounts
receivable, due from factoring company
|
3,088
|
1,078
|
|
Trade
accounts receivable, net
|
513
|
1,071
|
|
Income
tax receivable
|
311
|
311
|
|
Inventory
|
21,052
|
21,492
|
|
Prepaid
expenses and other current assets
|
3,327
|
3,087
|
|
Total
current assets
|
29,664
|
27,908
|
|
|
|
|
|
Property
and equipment, net
|
13,908
|
14,006
|
|
Deferred
tax assets
|
5,703
|
2,857
|
|
Intangible
assets, net
|
18,399
|
14,914
|
|
Goodwill
|
6,323
|
6,323
|
|
Total
assets
|
$
73,997
|
$
66,008
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable
|
$
10,317
|
$
8,174
|
|
Accrued
distributor compensation
|
4,678
|
4,163
|
|
Accrued
expenses
|
5,452
|
3,701
|
|
Deferred
revenues
|
1,999
|
1,870
|
|
Other
current liabilities
|
3,652
|
2,389
|
|
Capital
lease payable, current portion
|
997
|
821
|
|
Notes
payable, current portion
|
175
|
219
|
|
Warrant
derivative liability
|
4,128
|
3,345
|
|
Contingent
acquisition debt, current portion
|
422
|
628
|
|
Total
current liabilities
|
31,820
|
25,310
|
|
|
|
|
|
Capital
lease payable, net of current portion
|
934
|
1,569
|
|
Notes
payable, net of current portion
|
4,452
|
4,431
|
|
Convertible
notes payable (See Note 6)
|
10,766
|
8,327
|
|
Contingent
acquisition debt, net of current portion
|
11,405
|
7,373
|
|
Total
liabilities
|
59,377
|
47,010
|
|
|
|
|
|
Commitments
and contingencies, Note 1
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
Convertible
Preferred Stock, $0.001 par value: 5,000,000 shares authorized;
161,135 shares issued and outstanding at September 30, 2017 and
December 31, 2016
|
-
|
-
|
|
Common
Stock, $0.001 par value: 50,000,000 shares authorized; 19,723,285
and 19,634,345 shares issued and outstanding at September 30, 2017
and December 31, 2016, respectively
(1)
|
20
|
20
|
|
Additional
paid-in capital
|
171,693
|
170,212
|
|
Accumulated
deficit
|
(156,873
)
|
(151,016
)
|
|
Accumulated
other comprehensive loss
|
(220
)
|
(218
)
|
|
Total
stockholders’ equity
|
14,620
|
18,998
|
|
Total Liabilities and
Stockholders’ Equity
|
$
73,997
|
$
66,008
|
|
|
|
|
See
Note 1, “Reverse Stock Split.” All share data have been
retroactively adjusted to reflect Youngevity’s 1-for-20
reverse stock split, which was effective on June 7, 2017.
See
accompanying notes to condensed consolidated financial
statements.
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of
O
perations
(In
thousands, except share and per share amounts)
(Unaudited)
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
Revenues
|
$
44,395
|
$
43,562
|
$
124,655
|
$
124,264
|
|
Cost
of revenues
|
18,631
|
17,194
|
52,923
|
49,102
|
|
Gross
profit
|
25,764
|
26,368
|
71,732
|
75,162
|
|
Operating
expenses
|
|
|
|
|
|
Distributor
compensation
|
17,391
|
18,101
|
49,496
|
50,871
|
|
Sales
and marketing
|
4,074
|
3,181
|
10,650
|
7,619
|
|
General
and administrative
|
6,116
|
4,510
|
16,479
|
13,409
|
|
Total
operating expenses
|
27,581
|
25,792
|
76,625
|
71,899
|
|
Operating
(loss) income
|
(1,817
)
|
576
|
(4,893
)
|
3,263
|
|
Interest
expense, net
|
(1,752
)
|
(946
)
|
(4,207
)
|
(3,139
)
|
|
Change
in fair value of warrant derivative liability
|
1,519
|
369
|
788
|
535
|
|
Extinguishment
loss on debt
|
(308
)
|
-
|
(308
)
|
-
|
|
Total
other expense
|
(541
)
|
(577
)
|
(3,727
)
|
(2,604
)
|
|
(Loss)
income before income taxes
|
(2,358
)
|
(1
)
|
(8,620
)
|
659
|
|
Income
tax (benefit) provision
|
(1,290
)
|
(68
)
|
(2,763
)
|
550
|
|
Net
(loss) income
|
(1,068
)
|
67
|
(5,857
)
|
109
|
|
Preferred
stock dividends
|
(3
)
|
(3
)
|
(9
)
|
(9
)
|
|
Net
(loss) income available to common stockholders
|
$
(1,071
)
|
$
64
|
$
(5,866
)
|
$
100
|
|
|
|
|
|
|
|
Net
loss per share, basic
(1)
|
$
(0.05
)
|
$
0.00
|
$
(0.30
)
|
$
0.00
|
|
Net
loss per share, diluted
(1)
|
$
(0.05
)
|
$
0.00
|
$
(0.30
)
|
$
0.00
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic
(1)
|
19,678,577
|
19,633,731
|
19,655,312
|
19,631,195
|
|
Weighted
average shares outstanding, diluted
(1)
|
19,678,577
|
20,026,001
|
19,655,312
|
20,005,758
|
(1)
See Note 1, “Reverse Stock Split.” All share
data have been retroactively adjusted to reflect Youngevity’s
1-for-20 reverse stock split, which was effective on June 7,
2017.
See
accompanying notes to condensed consolidated financial
statements.
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss)
I
ncome
(In
thousands)
(Unaudited)
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
|
|
Net
(loss) income
|
$
(1,068
)
|
$
67
|
$
(5,857
)
|
$
109
|
|
Foreign
currency translation
|
(16
)
|
(28
)
|
(2
)
|
(174
)
|
|
Total
other comprehensive loss
|
(16
)
|
(28
)
|
(2
)
|
(174
)
|
|
Comprehensive
(loss) income
|
$
(1,084
)
|
$
39
|
$
(5,859
)
|
$
(65
)
|
See
accompanying notes to condensed consolidated financial
statements.
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of
C
ash Flows
(In
thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
2016
|
|
Cash Flows from Operating Activities:
|
|
(As
Restated)
|
|
Net
(loss) income
|
$
(5,857
)
|
$
109
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
3,230
|
2,865
|
|
Stock
based compensation expense
|
471
|
292
|
|
Amortization
of deferred financing costs
|
281
|
270
|
|
Amortization
of warrant issuance costs
|
172
|
96
|
|
Amortization
of debt discount
|
799
|
790
|
|
Amortization
of prepaid advisory fees
|
42
|
46
|
|
Stock
issuance for services
|
200
|
30
|
|
Stock
issuance related to debt financing
|
106
|
-
|
|
Fair value of warrant
issuance
|
341
|
-
|
|
Change
in fair value of warrant derivative liability
|
(788
)
|
(535
)
|
|
Expenses
allocated in profit sharing agreement
|
(195
)
|
(557
)
|
|
Change
in fair value of contingent acquisition debt
|
(1,020
)
|
(1,185
)
|
|
Extinguishment
loss on debt
|
308
|
-
|
|
Deferred
income taxes
|
(2,846
)
|
-
|
|
Changes in operating assets and liabilities, net of effect from
business combinations:
|
|
|
|
Accounts
receivable
|
(1,452
)
|
(1,411
)
|
|
Inventory
|
440
|
(1,925
)
|
|
Income
taxes receivable
|
-
|
173
|
|
Prepaid
expenses and other current assets
|
(282
)
|
(502
)
|
|
Accounts
payable
|
2,143
|
293
|
|
Accrued
distributor compensation
|
515
|
401
|
|
Deferred
revenues
|
129
|
(652
)
|
|
Accrued
expenses and other liabilities
|
1,480
|
705
|
|
Net Cash Used In Operating Activities
|
(1,783
)
|
(697
)
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
Acquisitions,
net
|
(175
)
|
(88
)
|
|
Purchases
of property and equipment
|
(690
)
|
(938
)
|
|
Net Cash Used in Investing Activities
|
(865
)
|
(1,026
)
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
Proceeds
from the exercise of stock options and warrants, net
|
28
|
39
|
|
Proceeds
from factoring company
|
1,723
|
1,131
|
|
Proceeds
from issuance of convertible notes, net of offering
cost
|
2,720
|
-
|
|
Payments
of notes payable, net
|
(159
)
|
(411
)
|
|
Payments
of contingent acquisition debt
|
(440
)
|
(708
)
|
|
Proceeds
(payments) of capital leases
|
(718
)
|
19
|
|
Repurchase
of common stock
|
-
|
(36
)
|
|
Net Cash Provided by Financing Activities
|
3,154
|
34
|
|
Foreign Currency Effect on Cash
|
(2
)
|
(174
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
504
|
(1,863
)
|
|
Cash and Cash Equivalents, Beginning of Period
|
869
|
3,875
|
|
Cash and Cash Equivalents, End of Period
|
$
1,373
|
$
2,012
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
2,773
|
$
1,987
|
|
Income
taxes
|
$
31
|
$
192
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
Purchases
of property and equipment funded by capital leases
|
$
398
|
$
1,416
|
|
Acquisitions
of net assets in exchange for contingent acquisition debt (see Note
4)
|
$
5,920
|
$
4,876
|
|
Fair
value of the bifurcated embedded conversion option recorded as a
derivative liability (see Notes 6 & 7)
|
$
330
|
$
-
|
|
Fair value of the warrants issued in connection
with financing recorded as a derivative liability (see Notes 6
& 7)
|
$
2,334
|
$
-
|
During
the third quarter ended September 30, 2017, the purchase accounting
was finalized for the Company’s Legacy for Life, LLC,
Nature’s Pearl Corporation and Renew Interest, LLC
acquisitions and reduced the initial purchase of the intangibles
acquired and the contingent debt by $92,000, $266,000 and $30,000,
respectively (see Note 4).
See
accompanying notes to condensed consolidated financial
statements.
Youngevity International, Inc. and Subsidiaries
N
otes to Condensed Consolidated Financial
Statements
(Unaudited)
September
30, 2017
Note 1. Basis of Presentation and Description of
Business
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for interim financial
information. Accordingly, certain information and footnote
disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and
regulations.
The
statements presented as of September 30, 2017 and for the three and
nine months ended September 30, 2017 and 2016 are unaudited. In the
opinion of management, these financial statements reflect all
normal recurring and other adjustments necessary for a fair
presentation, and to make the financial statements not misleading.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
included in the Company’s Form 10-K/A for the year ended
December 31, 2016. The results for interim periods are not
necessarily indicative of the results for the entire
year.
Youngevity
International, Inc. (the “Company”) consolidates all
wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to
conform to the current year presentations including the
Company’s adoption of Accounting Standards Update
(“ASU”) 2015-17 pertaining to the presentation
of
deferred tax assets
and liabilities as noncurrent
with retrospective application effective January
1, 2017. This resulted in a reclassification
from deferred tax
assets, net current to deferred tax assets, net
long-term
. These
reclassifications did not affect revenue, total costs and expenses,
income (loss) from operations, or net income (loss).
The adoption of ASU No. 2015-17
resulted in a reclassification of deferred tax assets, net current
of $565,000 to
deferred tax assets,
net long-term
on the
Company’s consolidated financial statements as of December
31, 2016.
As previously
reported on the Annual Report on Form 10-K/A for the year ended
December 31, 2016 filed with the Securities and Exchange Commission
on August 14, 2017, the Company restated the interim Consolidated
Statement of Cash Flows for the quarter ended September 30, 2016
previously filed by the Company in its quarterly report on Form
10-Q for the same period. This was due to an error in the
presentation of cash flow activity under the Company’s
factoring facility. This quarterly report for the quarter ended
September 30, 2017 reflects the restated numbers for the nine
months ended September 30, 2016.
Nature of Business
The
Company, founded in 1996, develops and distributes health and
nutrition related products through its global independent direct
selling network, also known as multi-level marketing, and sells
coffee products to commercial customers. The Company
operates in two business segments, its direct selling segment where
products are offered through a global distribution network of
preferred customers and distributors and its commercial coffee
segment where products are sold directly to businesses. In the
following text, the terms “we,” “our,” and
“us” may refer, as the context requires, to the Company
or collectively to the Company and its subsidiaries.
The
Company operates through the following domestic wholly-owned
subsidiaries: AL Global Corporation, which operates its direct
selling networks, CLR Roasters, LLC (“CLR”), its
commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC,
Youngevity Global LLC and the wholly-owned foreign subsidiaries
Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles
Plantation Family Group S.A. (“Siles”), located in
Nicaragua, Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd.,
Youngevity Russia, LLC, Youngevity Colombia S.A.S, Youngevity
International Singapore Pte. Ltd., Mialisia Canada, Inc., Legacy
for Life Limited (Hong Kong). The Company also operates through the
BellaVita Group LLC, with operations in; Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Japan.
The
Company also operates subsidiary branches of Youngevity Global LLC
in the Philippines and Taiwan.
Reverse Stock Split
On
June 5, 2017, the Company filed a certificate to amend its Articles
of Incorporation to effect a reverse split on a one-for-twenty
basis (the “Reverse Split”), whereby, every twenty
shares of the Company’s common stock, par value $0.001 per
share (the “Common Stock or “common stock”), were
exchanged for one share of its common stock. The Reverse Split
became effective on June 7, 2017. All common stock share and per
share amounts have been adjusted to reflect retrospective
application of the Reverse Split, unless otherwise indicated. The
Common Stock began trading on a reverse split basis at the market
opening on June 8, 2017.
NASDAQ Listing
Effective
June 21, 2017, the Common Stock began trading on the NASDAQ Stock
Market LLC’s NASDAQ Capital Market, under the symbol
“YGYI”. Prior to the Company’s uplisting to
NASDAQ, the Company’s common stock had been traded on the
OTCQX market.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“GAAP”) requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense for each reporting period. Estimates are
used in accounting for, among other things, allowances for doubtful
accounts, deferred taxes, and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under 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.
Actual
results may differ from previously estimated amounts and such
differences may be material to the condensed consolidated financial
statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected
prospectively in the period they occur.
Liquidity
The accompanying
condensed consolidated financial statements have been prepared and
presented on a basis assuming the Company will continue as a going
concern. The Company has sustained significant operating losses for
the nine months ended September 30, 2017 of $4,893,000, compared to
operating income in the prior year of $3,263,000. The losses in the
current year were primarily due to lower than anticipated revenues,
increases in legal fees, distributor events and sales and marketing
costs. Net cash used in operating activities was $1,783,000 in the
current year. Based on its current cash levels and its current rate
of cash requirements, the Company will need to raise additional
capital and will need to significantly reduce its expenses from
current levels to be able to continue as a going
concern.
The Company has
already commenced the process to increase its Crestmark line of
credit during the fourth quarter of this year and the Company is
considering multiple alternatives, including, but not limited to,
additional equity financings and debt financings. Depending on
market conditions, we cannot be sure that additional capital will
be available when needed or that, if available, it will be obtained
on terms favorable to us or to our stockholders.
The Company
believes that legal fees will decrease in the future from the
levels spent in the current year. Furthermore, the Company expects
to get reimbursements from its insurance company for legal fees
already incurred. The Company expects costs related to distributor
events will decrease next year from current year levels as its
costs in the current year were unusually high due to the twentieth
anniversary
convention
held in
Dallas in August and one-time events held at the beginning of the
year to stabilize the sales force due to the departure of the
previous president and high-level sales management and
distributors. The Company anticipates revenues to start growing
again and it intends to make necessary cost reductions related to
international programs that are not performing and also reduce
non-essential expenses.
Failure to raise
additional funds from the issuance of equity securities and failure
to implement cost reductions could adversely affect the
Company’s ability to operate as a going concern. The
financial statements do not include any adjustments that might be
necessary from the outcome of this uncertainty.
Cash and Cash Equivalents
The
Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
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 and common stock associated with
the Company's convertible notes based on the average stock price
for each period using the treasury stock method.
Since
the Company incurred a loss for the three and nine months ended
September 30, 2017, 7,506,283 common share equivalents were not
included in the weighted-average calculations since their effect
would have been anti-dilutive.
T
he
incremental dilutive common share equivalents for the three and
nine months ended September 30, 2016 were 392,720 and 374,563,
respectively.
Income
and loss per share amounts and weighted average shares outstanding
for all periods have been retroactively adjusted to reflect the
Company’s 1-for-20 Reverse Split, which was effective June 7,
2017.
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.
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. Additionally, the
Agreement expands the factoring facility to include advanced
borrowings against eligible inventory up to 50% of landed cost of
finished goods inventory that meet certain criteria, not to exceed
the lesser of $1,000,000 or 85% of the value of the accounts
receivables already advanced with a maximum overall borrowing of
$3,000,000. Interest 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
guaranteeing payments in the event that CLR were to default. This
Agreement 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
condensed consolidated balance sheets in the amount of
approximately $3,088,000 and $1,078,000 as of September 30,
2017 and December 31, 2016, respectively, reflects the related
collateralized accounts.
The
Company's outstanding liability related to the Factoring Agreement
was approximately $3,014,000 and $1,290,000 as of September 30,
2017 and December 31, 2016, respectively, and is included in other
current liabilities on the condensed consolidated balance
sheets.
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 condensed
consolidated balance sheets. Once the harvest is complete, the
harvest cost is then recognized as the inventory
value.
As
of December 31, 2016, the inventory related to the 2016 harvest was
$112,000. As of September 30, 2017, all previously harvested coffee
from the 2016 harvest had been sold.
In
April 2017, the Company completed the 2017 harvest in Nicaragua and
approximately $552,000 of deferred harvest costs were reclassified
as inventory during the quarter ended June 30, 2017. The remaining
inventory as of September 30, 2017 is $361,000.
Costs
associated with the 2018 harvest as of September 30, 2017 total
approximately $200,000 and are included in prepaid expenses and
other current assets as deferred harvest costs on the
Company’s condensed consolidated balance sheets.
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 $61,000 and $33,000 from
Northwest Nutraceuticals Inc., for the three months ended September
30, 2017 and 2016, respectively, and $142,000 and $83,000 for the
nine months ended September 30, 2017 and 2016, respectively. In
addition, Mr. Renton and his wife are distributors of the Company
and can earn commissions on product sales.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company
The
Company’s coffee segment, CLR, is associated with Hernandez,
Hernandez, Export Y Company (“H&H”), a Nicaragua
company, through sourcing arrangements to procure Nicaraguan green
coffee beans and in March 2014 as part of the Siles
acquisition, CLR engaged the owners of H&H as employees to
manage Siles. The Company made purchases of approximately
$3,533,000 and $2,700,000 from this supplier for the three months
ended September 30, 2017 and 2016, respectively and $8,707,000 and
$7,400,000 for the nine months ended September 30, 2017 and 2016,
respectively.
In
addition, CLR sold approximately $2,387,000 and $0 for the three
months ended September 30, 2017 and 2016, respectively and
$3,934,000 and $2,200,000 for the nine months ended September 30,
2017 and 2016, respectively, of green coffee beans to H&H
Coffee Group Export, a Florida based company which is affiliated
with H&H.
In
March 2017, the Company entered a settlement agreement and release
with H&H Coffee Group Export pursuant to which it was agreed
that $150,000 owed to H&H Coffee Group Export for services that
had been rendered would be settled by the issuance of Common Stock.
In May 2017, the Company issued to H&H Coffee Group Export
27,500 shares of Common Stock in accordance with this
agreement.
In
May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s Common Stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the three months
ended September 30, 2017 the Company replaced the non-qualified
stock option and issued a warrant agreement with the same terms.
There was no financial impact related to the cancellation of the
option and the issuance of the warrant. As of September 30, 2017
the warrant remains outstanding.
Revenue Recognition
The
Company recognizes revenue from product sales when the following
four criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable, and collectability is
reasonably assured. The Company ships the majority of its direct
selling segment products directly to the distributors primarily via
UPS, USPS or FedEx and receives substantially all payments for
these sales in the form of credit card transactions. The Company
regularly monitors its use of credit card or merchant services to
ensure that its financial risk related to credit quality and credit
concentrations is actively managed. Revenue is recognized upon
passage of title and risk of loss to customers when product is
shipped from the fulfillment facility. The Company ships the
majority of its coffee segment products via common carrier and
invoices its customer for the products. Revenue is recognized when
the title and risk of loss is passed to the customer under the
terms of the shipping arrangement, typically, FOB shipping
point.
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 September 30, 2017 and December 31, 2016, the
balance in deferred revenues was approximately $1,999,000 and
$1,870,000 respectively, of which the portion attributable to
Heritage Makers was approximately $1,800,000 and $1,662,000,
respectively. The remaining balance of approximately
$199,000 and $208,000 as of September 30, 2017 and December
31, 2016, related primarily to the Company’s 2018 and 2017
conventions, respectively, whereby attendees pre-enroll in the
events and the Company does not recognize this revenue until the
conventions occur.
Deferred
costs relate to Heritage Makers prepaid commissions that are
recognized in expense at the time the related revenue is
recognized. As of September 30, 2017 and December 31, 2016, the
balance in deferred costs was approximately $414,000 and $415,000
respectively, and was included in prepaid expenses and current
assets.
Commitments and Contingencies
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,
current legal proceedings are having an adverse impact on us
because of litigation costs, diversion of management resources and
other factors.
Recently Issued Accounting Pronouncements
In January 2017,
the FASB issued
Accounting Standard
Update (“
ASU”) No. 2017-04,
Intangibles — Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment
. This ASU
simplifies the test for goodwill impairment by removing Step 2 from
the goodwill impairment test. Companies will now perform the
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount, recognizing an impairment charge for
the amount by which the carrying amount exceeds the reporting
unit’s fair value not to exceed the total amount of goodwill
allocated to that reporting unit. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The
amendments in this update are effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019, with early
adoption permitted for goodwill impairment tests performed after
January 1, 2017. The Company is evaluating the potential impact of
this adoption on its consolidated financial
statements.
In October 2016, the FASB issued ASU
2016-17,
Consolidation
(Topic 810): Interests Held through
Related Parties That Are under Common Control. This standard amends
the guidance issued with ASU 2015-02, Consolidation (Topic 810):
Amendments to the Consolidation Analysis in order to make it less
likely that a single decision maker would individually meet the
characteristics to be the primary beneficiary of a Variable
Interest Entity ("VIE"). When a decision maker or service provider
considers indirect interests held through related parties under
common control, they perform two steps. The second step was amended
with this ASU to say that the decision maker should consider
interests held by these related parties on a proportionate basis
when determining the primary beneficiary of the VIE rather than in
their entirety as was called for in the previous guidance. This ASU
was effective for fiscal years beginning after December 15, 2016,
and early adoption was not permitted. The Company adopted ASU
2016-17 effective the quarter ended March 31, 2017. The adoption of
ASU 2016-17 did not have a significant impact on its consolidated
financial statements.
In February 2016, the FASB issued ASU
2016-02,
Leases
(Topic 842). The standard requires lessees to
recognize lease assets and lease liabilities on the balance sheet
and requires expanded disclosures about leasing arrangements. The
Company expects to adopt the standard no later than January 1,
2019. The Company is currently assessing the impact that the new
standard will have on the Company’s consolidated financial
statements, which will consist primarily of a balance sheet gross
up of our operating leases. The Company has not evaluated the
impact that this new standard will have on its consolidated
financial statements; however, it is expected to gross-up the
consolidated balance sheet as a result of recognizing a lease asset
along with a similar lease liability.
In November 2015, the FASB issued ASU
2015-17,
Income Taxes
(Topic 740): Balance Sheet
Classification of Deferred Taxes. This guidance requires that
entities with a classified statement of financial position present
all deferred tax assets and liabilities as noncurrent. This update
is effective for annual and interim periods for fiscal years
beginning after December 15, 2016, which required the Company to
adopt the new guidance in the first quarter of fiscal 2017. Early
adoption was permitted for financial statements that have not been
previously issued and may be applied on either a prospective or
retrospective basis. The Company adopted
ASU 2015-17
effective the quarter ended March 31, 2017. The adoption of ASU
2015-17 did not have a significant impact on its consolidated
financial statements o
ther than
the netting of current and long-term deferred tax assets and
liabilities in the non-current section of the balance sheet and
footnote disclosures.
In
July 2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory (Topic 330): Simplifying the Measurement
of Inventory.” The amendments in ASU 2015-11
require an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments do not apply to inventory that is measured using
last-in, first out (LIFO) or the retail inventory
method. The amendments apply to all other inventory,
which includes inventory that is measured using first-in, first-out
(FIFO) or average cost. The amendments should be applied
prospectively with earlier application permitted as of the
beginning of an interim or annual reporting
period. Management is currently assessing the effect
that ASU 2015-11 will have on the Company’s condensed
consolidated financial statements and related
disclosures. Included in management’s assessment
is the determination of an effective adoption date and transition
method for adoption. The Company expects to complete the
initial assessment process, including the selection of an effective
adoption date and transition method for adoption, by December 31,
2017.
In May 2014, the
FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
. The new revenue recognition standard provides a
five-step analysis of contracts to determine when and how revenue
is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. In August 2015, the FASB deferred the effective
date of ASU No. 2014-09 for all entities by one year to annual
reporting periods beginning after December 15, 2017. The FASB has
issued several updates subsequently including implementation
guidance on principal versus agent considerations, on how an entity
should account for licensing arrangements with customers, and to
improve guidance on assessing collectability, presentation of sales
taxes, noncash consideration, and contract modifications and
completed contracts at transition. The amendments in this series of
updates shall be applied either retrospectively to each period
presented or as a cumulative-effect adjustment as of the date of
adoption. Early adoption is permitted. The Company continues to
assess the impact of this ASU, and related subsequent updates, will
have on its consolidated financial statements. As of September 30,
2017, the Company is in the process of reviewing the guidance to
identify how this ASU will apply to the Company’s revenue
reporting process. The final impact of this ASU on the
Company’s financial statements will not be known until the
assessment is complete. The Company will update its disclosure in
future periods as the analysis is completed.
In August 2014, the
FASB issued ASU No. 2014-15 regarding ASC topic No. 205,
Presentation of Financial Statements - Going Concern. The standard
requires all companies to evaluate if conditions or events raise
substantial doubt about an entity’s ability to continue as a
going concern and requires different disclosure of items that raise
substantial doubt that are, or are not, alleviated as a result of
consideration of management’s plans. The new guidance is
effective for annual periods ending after December 15, 2016.
The adoption of ASU No. 2014-15 did
not have a significant impact on the Company’s consolidated
financial statements.
Note 2.
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 condensed consolidated financial
statements. Under this approach, deferred taxes are recorded for
the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable
for the current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
statement and tax basis of assets and liabilities, and are adjusted
for changes in tax rates and tax laws when changes are enacted. The
effects of future changes in income tax laws or rates are not
anticipated.
Income
taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year, as
adjusted for any discrete taxable events that occur during the
period.
The
Company files income tax returns in the United States
(“U.S.”) on a federal basis and in many U.S. state and
foreign jurisdictions. Certain tax years remain open to examination
by the major taxing jurisdictions to which the Company is
subject.
Note 3.
Inventory
and Costs 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):
Cost
of revenues includes the cost of inventory, shipping and handling
costs, royalties associated with certain products, transaction
banking costs, warehouse labor costs and depreciation on certain
assets.
Note 4. Acquisitions and Business Combinations
The
Company accounts for business combinations under the acquisition
method and allocates the total purchase price for acquired
businesses to the tangible and identified intangible assets
acquired and liabilities assumed, based on their estimated fair
values. When a business combination includes the exchange of the
Company’s Common Stock, the value of the Common Stock is
determined using the closing market price as of the date such
shares were tendered to the selling parties. The fair values
assigned to tangible and identified intangible assets acquired and
liabilities assumed are based on management or third-party
estimates and assumptions that utilize established valuation
techniques appropriate for the Company’s industry and each
acquired business. Goodwill is recorded as the excess, if any, of
the aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and 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.
During
the nine months ended September 30, 2017, the Company entered into
three 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.
F-10
Sorvana International, LLC
Effective
July 1, 2017, the Company acquired certain assets and assumed
certain liabilities of Sorvana International, LLC
“Sorvana”. Sorvana was the result of the unification of
the two companies FreeLife International, Inc.
“FreeLife”, and L’dara. Sorvana offers a variety
of products with the addition of the FreeLife and L’dara
product lines. Sorvana offers an extensive line of health and
wellness product solutions including healthy weight loss
supplements, energy and performance products and skin care product
lines as well as organic product options. As a result of this
business combination, the Company’s distributors and
customers will have access to Sorvana’s unique line of
products and Sorvana’s distributors and clients will gain
access to products offered by the Company.
The
contingent consideration’s estimated fair value at the date
of acquisition was $3,487,000 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. In addition, the Company has assumed certain
liabilities in accordance with the agreement.
The
Company is obligated to make monthly payments based on a percentage
of the Sorvana distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of Sorvana’s products until the earlier of
the date that is twelve (12) years from the closing date or such
time as the Company has paid to Sorvana aggregate cash payments of
the Sorvana distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
The
assets acquired were recorded at estimated fair values as of the
date of the acquisition. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation is as follows (in
thousands):
|
Distributor
organization
|
$
1,187
|
|
Customer-related
intangible
|
1,300
|
|
Trademarks
and trade name
|
1,000
|
|
Total
purchase price
|
$
3,487
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuations within one (1) year from
the acquisition date.
The
revenue impact from the Sorvana acquisition, included in the
condensed consolidated statements of operations for the three and
nine months ended September 30, 2017 was approximately
$2,082,000.
The
pro-forma effect assuming the business combination with Sorvana
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
BellaVita Group, LLC
Effective March 1,
2017, the Company acquired certain assets of BellaVita Group, LLC
“BellaVita” a direct sales company and producer of
health and beauty products with locations and customers primarily
in the Asian market.
The
contingent consideration’s estimated fair value at the date
of acquisition was $1,750,000 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. In addition, the Company has assumed certain
liabilities in accordance with the agreement.
During
the three months ended September 30, 2017 the Company determined
that the initial estimated fair value of the acquisition should be
reduced by $15,000 from $1,750,000 to $1,735,000.
The
Company is obligated to make monthly payments based on a percentage
of the BellaVita distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of BellaVita products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to BellaVita aggregate cash payments of the
BellaVita distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
F-11
The
fair values of the acquired assets have not been finalized pending
further information that may impact the valuation of certain assets
or liabilities. The preliminary purchase price allocation is as
follows (in thousands):
|
Distributor
organization
|
$
810
|
|
Customer-related
intangible
|
525
|
|
Trademarks
and trade name
|
400
|
|
Total
purchase price
|
$
1,735
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuations within one (1) year from
the acquisition date.
The
revenue impact from the BellaVita acquisition, included in the
condensed consolidated statements of operations for the three and
nine months ended September 30, 2017 was approximately $736,000 and
$1,608,000, respectively.
The
pro-forma effect assuming the business combination with BellaVita
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
Ricolife, LLC
Effective March 1,
2017, the Company acquired certain assets of Ricolife, LLC
“Ricolife” a direct sales company and producer of teas
with health benefits contained within its tea
formulas.
The
contingent consideration’s estimated fair value at the date
of acquisition was $920,000 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. In addition, the Company has assumed certain
liabilities in accordance with the agreement.
During
the three months ended September 30, 2017 the Company determined
that the initial estimated fair value of the acquisition should be
reduced by $222,000 from $920,000 to $698,000.
The
Company is obligated to make monthly payments based on a percentage
of the Ricolife distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of Ricolife products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to Ricolife aggregate cash payments of the
Ricolife distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
The
fair values of the acquired assets have not been finalized pending
further information that may impact the valuation of certain assets
or liabilities. The preliminary purchase price allocation is as
follows (in thousands):
|
Distributor
organization
|
$
218
|
|
Customer-related
intangible
|
280
|
|
Trademarks
and trade name
|
200
|
|
Total
purchase price
|
$
698
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuations within one (1) year from
the acquisition date.
The
revenue impact from the Ricolife acquisition, included in the
condensed consolidated statements of operations for the three and
nine months ended September 30, 2017 was approximately $268,000 and
$683,000, respectively.
The
pro-forma effect assuming the business combination with Ricolife
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
2016 Acquisitions
Legacy for Life, LLC
On
August 18, 2016, with an effective date of September 1, 2016 the
Company entered into an agreement to acquire certain assets of
Legacy for Life, LLC, an Oklahoma based direct-sales company and
entered into an agreement to acquire the equity of two wholly owned
subsidiaries of Legacy for Life, LLC; Legacy for Life Taiwan and
Legacy for Life Limited (Hong Kong) collectively referred to as
(“Legacy for Life”).
F-12
Legacy for Life is a
science-based direct
seller of i26, a product made from the patented IgY Max formula or
hyperimmune whole dried egg, which is the key ingredient in Legacy
for Life products. Additionally, the Company has entered into an
Ingredient Supply Agreement to market i26 worldwide. IgY Max
promotes healthy gut flora and healthy digestion and was created by
exposing a specially selected flock of chickens to natural elements
from the human world, whereby the chickens develop immunity to
these elements. In a highly patented process, these special eggs
are harvested as a whole food and are processed as a whole food
into i26 egg powder, an all-natural product. Nothing is added to
the egg nor does any chemical extraction take place.
As
a result of this acquisition, the Company’s distributors and
customers have access to the unique line of the Legacy for Life
products and the Legacy for Life distributors and customers have
gained access to products offered by the Company. The Company
purchased certain inventories and assumed certain liabilities. The
Company is obligated to make monthly payments based on a percentage
of the Legacy for Life distributor revenue derived from sales of
the Company’s products and a percentage of royalty revenue
derived from sales of the Legacy for Life products until the
earlier of the date that is fifteen (15) years from the closing
date or such time as the Company has paid to Legacy for Life
aggregate cash payments of Legacy for Life distributor revenue and
royalty revenue equal to 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 acquisition
related costs, such as legal costs and other professional fees were
minimal and expensed as incurred.
During
the three months ended September 30, 2017 the purchase accounting
was finalized and the Company determined that the initial purchase
price for the related intangibles should be reduced by $92,000 from
$825,000 to $733,000. The final purchase price allocation for the
acquisition of Legacy for Life (in thousands) is as
follows:
|
Cash
paid for the equity in Legacy for Life Taiwan and Legacy for Life
Limited (Hong Kong)
|
$
26
|
|
Cash
paid for inventory
|
195
|
|
Total
cash consideration
|
221
|
|
Trademarks
and trade name
|
185
|
|
Customer-related
intangible
|
250
|
|
Distributor
organization
|
298
|
|
Total
intangible assets acquired, non-cash
|
733
|
|
Total
purchase price
|
$
954
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The trademarks and trade
name, customer-related intangible and distributor organization
intangible are being amortized over their estimated useful life of
ten (10) years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
The
revenue impact from the Legacy for Life acquisition, included in
the consolidated statement of operations for the three and nine
months ended September 30, 2017 was approximately $505,000 and
$1,501,000, respectively.
The
revenue impact from the Legacy for Life acquisition, included in
the consolidated statement of operations for the three and nine
months ended September 30, 2016 was approximately
$137,000.
The
pro-forma effect assuming the business combination with Legacy for
Life discussed above had occurred at the beginning of 2016 is not
presented as the information was not available.
Nature’s Pearl Corporation
On
August 1, 2016, the Company entered into an agreement to acquire
certain assets of Nature’s Pearl Corporation,
(“Nature’s Pearl”) with an effective date of
September 1, 2016. Nature’s Pearl is a direct-sales company
that produces nutritional supplements and skin and personal care
products using the muscadine grape grown in the southeastern region
of the United States that are deemed to be rich in antioxidants. As
a result of this acquisition, the Company’s distributors and
customers have access to the unique line of Nature’s Pearl
products and Nature’s Pearl distributors and customers have
gained access to products offered by the Company. The Company is
obligated to make monthly payments based on a percentage of
Nature’s Pearl distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of Nature’s Pearl products until the
earlier of the date that is ten (10) years from the closing date or
such time as the Company has paid to Nature’s Pearl aggregate
cash payments of Nature’s Pearl distributor revenue and
royalty revenue equal to 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.
F-13
The
acquisition of Nature’s Pearl 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 acquisition
related costs, such as legal costs and other professional fees were
minimal and expensed as incurred.
During
the three months ended December 31, 2016, the Company determined
that the initial estimated fair value of the acquisition should be
reduced $1,290,000 from the initial purchase price of $2,765,000 to
$1,475,000. During the three months ended September 30, 2017 the
purchase accounting was finalized and the Company determined that
the purchase price should be reduced by $266,000 to
$1,209,000.
The
final purchase price allocation for the acquisition of
Nature’s Pearl (in thousands) is as follows:
|
Distributor
organization
|
$
559
|
|
Customer-related
intangible
|
400
|
|
Trademarks
and trade name
|
250
|
|
Total
purchase price
|
$
1,209
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The trademarks and trade
name, customer-related intangible and distributor organization
intangible are being amortized over their estimated useful life of
ten (10) years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
The
revenue impact from the Nature’s Pearl acquisition, included
in the consolidated statement of operations for the three and nine
months ended September 30, 2017 was approximately $939,000 and
$3,014,000, respectively.
The
revenue impact from the Nature’s Pearl acquisition, included
in the consolidated statement of operations for the three and nine
months ended September 30, 2016 was approximately
$452,000.
The
pro-forma effect assuming the business combination with
Nature’s Pearl discussed above had occurred at the beginning
of 2016 is not presented as the information was not
available.
Renew Interest, LLC (SOZO Global, Inc.)
On
July 29, 2016, the Company acquired certain assets of Renew
Interest, LLC (“Renew”) formerly owned by SOZO Global,
Inc. (“SOZO”), a direct-sales company that produces
nutritional supplements, skin and personal care products, weight
loss products and coffee products. The SOZO brand of products
contains CoffeeBerry a fruit extract known for its high level of
antioxidant properties. As a result of this business combination,
the Company’s distributors and customers have access to the
unique line of the Renew products and Renew distributors and
customers have gained access to products offered by the
Company. The Company is obligated to make monthly payments
based on a percentage of Renew distributor revenue derived from
sales of the Company’s products and a percentage of royalty
revenue until the earlier of the date that is twelve (12) years
from the closing date or such time as the Company has paid to
Renew, aggregate cash payments of Renew distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price. The Company paid approximately $300,000 for certain
inventories and assumed liabilities, which payment was applied to
the maximum aggregate purchase price.
The
acquisition of Renew 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 acquisition related costs, such as legal
costs and other professional fees were minimal and expensed as
incurred.
During
the three months ended September 30, 2017 the purchase accounting
was finalized and the Company determined that the initial purchase
price should be reduced by $30,000 from $465,000 to $435,000. The
final purchase price allocation for the acquisition of Renew (in
thousands) is as follows:
|
Distributor
organization
|
$
170
|
|
Customer-related
intangible
|
155
|
|
Trademarks
and trade name
|
110
|
|
Total
purchase price
|
$
435
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The trademarks and trade
name, customer-related intangible and distributor organization
intangible are being amortized over their estimated useful life of
ten (10) years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
The
revenue impact from the Renew acquisition, included in the
consolidated statement of operations for the three and nine months
ended September 30, 2017 was approximately $214,000 and $695,000,
respectively.
F-14
The
revenue impact from the Renew acquisition, included in the
consolidated statement of operations for the three and nine months
ended September 30, 2016 was approximately $198,000.
The
pro-forma effect assuming the business combination with Renew
discussed above had occurred at the beginning of 2016 is not
presented as the information was not available.
Note 5. Intangible Assets and Goodwill
Intangible Assets
Intangible
assets are comprised of distributor organizations, trademarks and
tradenames, customer relationships and internally developed
software. The Company's acquired intangible assets,
which are subject to amortization over their estimated useful
lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an intangible
asset may not be recoverable. An impairment loss is recognized when
the carrying amount of an intangible asset exceeds its fair
value.
Intangible
assets consist of the following (in thousands):
Amortization
expense related to intangible assets was approximately $712,000 and
$537,000 for the three months ended September 30, 2017 and 2016,
respectively. Amortization expense related to intangible assets was
approximately $2,047,000 and $1,746,000 for the nine months ended
September 30, 2017 and 2016, respectively.
Trade
names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Approximately $2,267,000 in
trademarks from business combinations have been identified as
having indefinite lives.
Goodwill
Goodwill is recorded as the excess, if any, of the
aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. In
accordance with Financial Accounting Standards Board
(“FASB”) 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 September 30, 2017 and December
31, 2016 was $6,323,000. There were no triggering events indicating
impairment of goodwill or intangible assets during the three and
nine months ended September 30, 2017 and 2016.
F-15
Goodwill
intangible assets consist of the following (in
thousands):
|
|
September 30,
2017
|
December 31,
2016
|
|
Goodwill,
commercial coffee
|
$
3,314
|
$
3,314
|
|
Goodwill,
direct selling
|
3,009
|
3,009
|
|
Total
goodwill
|
$
6,323
|
$
6,323
|
Note 6. Debt
Convertible Notes Payable
Our
total convertible notes payable as of September 30, 2017 and
December 31, 2016, net of debt discount outstanding consisted of
the amount set forth in the following table (in
thousands):
|
|
September 30,
2017
|
December 31,
2016
|
|
8%
Convertible Notes due July and August 2019 (2014
Notes)
|
$
4,750
|
$
4,750
|
|
Debt
discount
|
(1,921
)
|
(2,707
)
|
|
Carrying
value of 2014 Notes
|
2,829
|
2,043
|
|
|
|
|
|
8%
Convertible Notes due October and November 2018 (2015
Notes)
|
3,000
|
7,188
|
|
Debt
discount
|
(224
)
|
(904
)
|
|
Carrying
value of 2015 Notes
|
2,776
|
6,284
|
|
|
|
|
|
8%
Convertible Notes due July and August 2020 (2017
Notes)
|
7,254
|
-
|
|
Fair
value of bifurcated embedded conversion option of 2017
Notes
|
330
|
-
|
|
Debt
discount
|
(2,423
)
|
-
|
|
Carrying
value of 2017 Notes
|
5,161
|
-
|
|
|
|
|
|
Total
long-term carrying value of convertible notes payable
|
$
10,766
|
$
8,327
|
July 2014 Private Placement
Between
July 31, 2014 and September 10, 2014 the Company entered into Note
Purchase Agreements (the “Note” or “Notes”)
related to its private placement offering (“2014 Private
Placement”) with seven accredited investors pursuant to which
the Company raised aggregate gross proceeds of $4,750,000 and sold
units consisting of five (5) year senior secured convertible Notes
in the aggregate principal amount of $4,750,000 that are
convertible into 678,568 shares of our Common Stock, at a
conversion price of $7.00 per share, and warrants to purchase
929,346 shares of Common Stock at an exercise price of $4.60 per
share. The Notes bear interest at a rate of eight percent (8%) per
annum and interest is paid quarterly in arrears with all principal
and unpaid interest due between July and September 2019. As of
September 30, 2017 and December 31, 2016 the principal amount of
$4,750,000 remains outstanding.
F-16
The
Company recorded debt discounts of $4,750,000 related to the
beneficial conversion feature of $1,053,000 and $3,697,000 related
to the detachable warrants. The beneficial conversion feature
discount and the detachable warrants discount are amortized to
interest expense over the life of the Notes. As of September 30,
2017 and December 31, 2016 the remaining balance of the debt
discounts is approximately $1,741,000 and $2,454,000, respectively.
The quarterly amortization of the debt discounts is approximately
$238,000 and is recorded as interest expense.
With
respect to the aggregate offering, the Company paid $490,000 in
expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes. As of
September 30, 2017 and December 31, 2016 the remaining balance of
the issuance costs is approximately $180,000 and $253,000,
respectively. The quarterly amortization of the issuance costs is
approximately $25,000 and is recorded as interest
expense.
Unamortized
debt discounts and issuance costs are included with convertible
notes payable, net of debt discount on the condensed consolidated
balance sheets.
November 2015 Private Placement
Between
October 13, 2015 and November 25, 2015 the Company entered into
Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“November 2015 Private Placement”) with three (3)
accredited investors pursuant to which the Company raised cash
proceeds of $3,187,500 in the offering and converted $4,000,000 of
debt from the Company’s January 2015 Private Placement to
this offering in consideration of the sale of aggregate units
consisting of three-year senior secured convertible Notes in the
aggregate principal amount of $7,187,500, convertible into
1,026,784 shares of Common Stock, at a conversion price of $7.00
per share, subject to adjustment as provided therein; and five-year
Warrants exercisable to purchase 479,166 shares of the
Company’s common stock at a price per share of $9.00. The
Notes bear interest at a rate of eight percent (8%) per annum and
interest is paid quarterly in arrears with all principal and unpaid
interest due at maturity on October 12, 2018.
In connection with the July 2017 Private
Placement, whereby three (3) investors from the November 2015
Private Placement, the Prior Investors, as discussed in the
previous paragraph converted their 2015 Notes in
aggregate
principal amount of $4,200,349 together with accrued interest
thereon into new convertible notes for an equal principal amount to
the 2017 Private Placement as discussed below. The remaining
principal balance in the 2015 Notes is $3,000,000 and related
warrants remain outstanding as of September 30, 2017. The Company
accounted for the conversion of the notes as an extinguishment in
accordance with ASC 470-20 and ASC 470-50.
The
Company recorded debt discounts of $309,000 related to the
beneficial conversion feature of $15,000 and $294,000 related to
the detachable warrants. The beneficial conversion feature discount
and the detachable warrants discount are amortized to interest
expense over the life of the Notes. During the three and nine
months ended September 30, 2017 the Company allocated approximately
$75,000 for the remaining proportionate share of the unamortized
debt discounts to the extinguished portion of the
debt.
As
of September 30, 2017 and December 31, 2016 the remaining balances
of the debt discounts is approximately $47,000 and $189,000
respectively. The quarterly amortization of the remaining debt
discount is approximately $12,000 and is recorded as interest
expense.
With
respect to the aggregate offering, the Company paid $786,000 in
expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes.
During the three and nine months ended September 30, 2017 the
Company allocated approximately $190,000 for the remaining
proportionate share of the unamortized issuance costs to the
extinguished portion of the debt.
As
of September 30, 2017 and December 31, 2016 the remaining balances
of the issuance cost is approximately $119,000 and $480,000,
respectively. The quarterly amortization of the remaining issuance
costs is approximately $30,000 and is recorded as interest
expense.
In
addition the Company issued warrants to the placement agent in
connection with the Notes which were valued at approximately
$384,000. These warrants were not protected against down-round
financing and accordingly, were classified as equity instruments
and the corresponding deferred issuance costs are amortized over
the term of the Notes. During the three and nine months ended
September 30, 2017 the Company allocated approximately $93,000 for
the remaining proportionate share of the unamortized issuance costs
to the extinguished portion of the debt.
As
of September 30, 2017 and December 31, 2016, the remaining balance
of the warrant issuance cost is approximately $58,000 and $235,000,
respectively. The quarterly amortization of the remaining warrant
issuance costs is approximately $15,000 and is recorded as interest
expense.
The
Company recorded a non-cash extinguishment loss on debt of $308,000
in the current quarter ended September 30, 2017 as a result of the
repayment of $4,200,349 in notes including accrued interest to the
three investors from the November 2015 Private Placement through
issuance of a new July 2017 Note. This loss represents the
difference between the reacquisition value of the new debt to the
holders of the notes and the carrying amount of the holders’
extinguished debt.
F-17
July 2017 Private Placement
During July and August 2017,
the Company
entered into note purchase agreements with accredited investors in
a private placement offering (the “2017 Private
Placement”) pursuant to which the Company sold notes in the
aggregate principal amount of $3,054,000, convertible into 663,913
shares of the Company’s common stock, at a conversion price
of $4.60 per share, subject to adjustment (the “2017 Notes),
and three-year warrants to purchase 331,957 shares of the
Company’s common stock at an exercise price of $5.56
(“2017 Warrants”), for gross cash proceeds of
$3,054,000.
In addition,
concurrent with the 2017 Private Placement, three investors in the
Company’s 2015 Private Placement, exchanged their notes
purchased in that offering, in the aggregate principal amount of
$4,200,349, together with accrued interest thereon, and warrants to
purchase an aggregate of 279,166 shares of the Company’s
common stock at $9.00 per share for 2017 Notes in the aggregate
principal amount of $4,200,349 and 2017 Warrants to purchase an
aggregate of 638,625 shares of the Company’s common stock at
$5.56 per share.
The 2017 Notes
mature on July 28, 2020 and bear interest at a rate of eight
percent (8%) per annum. The Company has the right to prepay the
2017 Notes at any time after the one-year anniversary date of the
issuance of the 2017 Notes at a rate equal to 110% of the then
outstanding principal balance and accrued interest. The 2017 Notes
automatically convert to common stock if, prior to the maturity
date, the Company sells common stock, preferred stock or other
equity-linked securities with aggregate gross proceeds of no less
than $3,000,000 for the purpose of raising capital. The 2017 Notes
provide for full ratchet price protection on the conversion price
for a period of nine months after their issuance and subject to
adjustments.
The Company's use
of the proceeds from the 2017 Private Placement was for working
capital purposes.
As of September 30,
2017 the aggregate principal amount of $7,254,000 remains
outstanding.
For twelve (12)
months following the closing, the investors in the 2017 Private
Placement have the right to participate in any future equity
financings by the Company including the Offering, up to their pro
rata share of the maximum Offering amount in the
aggregate.
The Company paid a
placement fee of $321,248, issued the placement agent three-year
warrants to purchase 179,131 shares of the Company’s common
stock at an exercise price of $5.56 per share, and issued the
placement agent 22,680 shares of the Company’s common
stock.
Upon
issuance of the 2017 Notes, the Company recognized an aggregate
debt discount of approximately $2,565,000, resulting from the
allocated portion of issuance costs to the 2017 Notes and to the
allocation of offering proceeds to the separable warrant
liabilities, and to the bifurcated embedded conversion option. See
Notes 7 & 8 below.
The
Company recorded $1,931,000 of debt discounts which included an
embedded conversion feature of $330,000 and $1,601,000 related to
the detachable warrants. The embedded conversion feature discount
and the detachable warrants discount are amortized to interest
expense over the life of the Notes. During the three and nine
months ended September 30, 2017 the Company recorded $107,000 of
amortization related to the debt discounts. The quarterly
amortization of the debt discounts is approximately $160,000. As of
September 30, 2017 the remaining balance of the unamortized debt
discount is approximately $1,824,000
With
respect to the aggregate offering, the Company paid $634,000 in
issuance costs. The issuance costs are amortized to interest
expense over the term of the Notes. During the three and nine
months ended September 30, 2017 the Company recorded $36,000
amortization related to the issuance costs. The quarterly
amortization of the issuance costs is approximately $53,000 and is
recorded as interest expense. As of September 30, 2017 the
remaining balance of the unamortized issuance cost is approximately
$599,000.
In
connection with the 2017 Private Placement, the Company also
entered into the “Registration Rights Agreement” with
the investors in the 2017 Private Placement. The Registration
Rights Agreement requires that we file a registration statement
(the “Registration Statement”) with the Securities and
Exchange Commission within ninety (90) days of the final closing
date of the Private Placement for the resale by the investors of
all of the shares Common Stock underlying the senior convertible
notes and warrants and all shares of Common Stock issuable upon any
stock split, dividend or other distribution, recapitalization or
similar event with respect thereto (the “Registrable
Securities”) and that the Initial Registration Statement be
declared effective by the SEC within 180 days of the final closing
date of the 2017 Private Placement or if the registration statement
is reviewed by the SEC 210 days after the final closing date or the
2017 Private Placement. Upon the occurrence of certain events (each
an “Event”), the Company will be required to pay to the
investors liquidated damages of 1.0% of their respective aggregate
purchase price upon the date of the Event and then monthly
thereafter until the Event is cured. In no event may the aggregate
amount of liquidated damages payable to each of the investors
exceed in the aggregate 10% of the aggregate purchase price paid by
such investor for the Registrable Securities. The Registration
Statement was declared effective on September 27,
2017.
F-18
Note 7. Derivative Liability
The Company recognizes and measures the
warrants and the embedded conversion features issued in conjunction
with our July 2017, November 2015, and July 2014 Private Placements
in accordance with ASC Topic 815,
Derivatives and
Hedging
. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both
(i) indexed to the entity’s own stock and
(ii) classified in the stockholders’ equity section of
the entity’s balance sheet. The Company determined
that certain warrants and embedded conversion features issued in
our private placements are ineligible for equity classification due
to anti-dilution provisions set forth therein.
Derivative
liabilities are recorded at their estimated fair value (see Note 8,
below) at the issuance date and are revalued at each subsequent
reporting date. The Company will continue to revalue the derivative
liability on each subsequent balance sheet date until the
securities to which the derivative liabilities relate are exercised
or expire.
Various
factors are considered in the pricing models the Company uses to
value the derivative liabilities, including its current stock
price, the remaining life, the volatility of its stock price, and
the risk free interest rate. Future changes in these factors may
have a significant impact on the computed fair value of the
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on our working capital, liquidity or
business operations.
Warrants
In
July and August of 2017, the Company issued 1,149,712 three-year
warrants to investors and the placement agent in the 2017 Private
Placement. The exercise price of the warrants is protected against
down-round financing throughout the term of the warrant. Pursuant
to ASC Topic 815, the fair value of the warrants of approximately
$2,334,000 was recorded as a derivative liability on the issuance
dates. The estimated fair values of the warrants were
computed at issuance using a Monte Carlo option pricing model, with
the following assumptions: stock price volatility 63.32%, risk-free
rate 1.51%, annual dividend yield 0% and expected life 3.0
years.
Increases
or decreases in fair value of the derivative liability are included
as a component of total other expense in the accompanying
condensed consolidated statements of operations for the
respective period. The changes to the derivative liability for
warrants resulted in a decrease to the liability of approximately
$1,519,000 for the three months ended September 30, 2017 compared
to decrease in the liability of approximately $369,000 for the
three months ended September 30, 2016. For the nine months ended
September 30, 2017 the liability decreased by approximately
$788,000 compared to a decrease of approximately $535,000 for
the nine months ended September 30, 2016.
The
estimated fair value of the outstanding warrant liabilities was
$4,128,000 and $3,345,000 as of September 30, 2017 and
December 31, 2016,
respectively.
The
Company did not revalue the warrants associated with the July 2017
Private Placement as of September 30, 2017 as the change in the
fair value would be insignificant.
The
estimated fair value of the warrants were computed as
of September 30, 2017 and as of December 31, 2016 using
Black-Scholes and Monte Carlo option pricing models, using the
following assumptions:
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
||
|
Stock
price volatility
|
|
|
63.32
|
%
|
|
|
60%
- 65
|
%
|
|
|
Risk-free
interest rates
|
|
|
1.38%-1.51
|
%
|
|
|
1.34%-1.70
|
%
|
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
Expected
life
|
|
1.7-3.0
years
|
|
|
2.6-3.9
years
|
|
|||
In
addition, management assessed the probabilities of future
financing assumptions in the valuation models.
F-19
Embedded Conversion Derivatives
Upon
issuance of the 2017 Notes, the Company recorded a derivative for
the embedded conversion option. The Company estimated the fair
value of the embedded conversion option, as of the issuance date
using a Monte Carlo simulation. The analysis utilized in
calculating the embedded derivative upon issuance was calculated
using the following assumptions:
|
Stock
price
|
$
4.63
|
|
Stock
price volatility
|
63.32
%
|
|
Risk-free
interest rate
|
0.92
%
|
The
fair value estimate of the embedded conversion option is a Level 3
measurement. The roll-forward of the Level 3 fair value
measurement, for the nine months ended September 30, 2017, is as
follows (in thousands):
|
Balance
at
Issuance
|
Net
unrealized (gain)/loss
|
Balance
at
September
30, 2017
|
|
$
330,000
|
$
0.00
|
$
330,000
|
The
Company did not revalue the embedded conversion liability
associated with the July 2017 Private Placement as of September 30,
2017 as the change in the fair value would be
insignificant.
Note 8. Fair Value of Financial
Instruments
Fair value measurements are performed in
accordance with the guidance provided by ASC Topic 820,
“Fair Value
Measurements and Disclosures.”
ASC Topic 820 defines fair value as the price that
would be received from selling an asset, or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. Where available, fair value is based on
observable market prices or parameters or derived from such prices
or parameters. Where observable prices or parameters are not
available, valuation models are applied.
ASC
Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level
1 – Quoted prices in active markets for identical assets or
liabilities that an entity has the ability to access.
Level
2 – Observable inputs other than quoted prices included in
Level 1, such as quoted prices for similar assets and liabilities
in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; or other inputs
that are observable or can be corroborated by observable market
data.
Level
3 – Unobservable inputs that are supportable by little or no
market activity and that are significant to the fair value of the
asset or liability.
The
carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, capital lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s long
term notes payable approximates its fair value based on interest
rates available to the Company for similar debt instruments and
similar remaining maturities.
The
estimated fair value of the contingent consideration related to the
Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
In
connection with the Company’s Private Placements, the Company
issued warrants to purchase shares of its Common Stock and recorded
embedded conversion features which are accounted for as derivative
liabilities (see Note 7 above.) The estimated fair value of the
derivatives is recorded using significant unobservable measures and
other fair value inputs and is therefore classified as a Level 3
financial instrument.
F-20
The
following table details the fair value measurement within the fair
value hierarchy of the Company’s financial instruments, which
includes the Level 3 liabilities (in thousands):
|
|
Fair
Value at September 30, 2017
|
|||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
422
|
$
-
|
$
-
|
$
422
|
|
Contingent
acquisition debt, less current portion
|
11,405
|
-
|
-
|
11,405
|
|
Warrant
derivative liability
|
4,128
|
-
|
-
|
4,128
|
|
Embedded
conversion option derivative
|
330
|
|
|
330
|
|
Total
liabilities
|
$
16,255
|
$
-
|
$
-
|
$
16,255
|
|
|
Fair
Value at December 31, 2016
|
|||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
628
|
$
-
|
$
-
|
$
628
|
|
Contingent
acquisition debt, less current portion
|
7,373
|
-
|
-
|
7,373
|
|
Warrant
derivative liability
|
3,345
|
-
|
-
|
3,345
|
|
Total
liabilities
|
$
11,346
|
$
-
|
$
-
|
$
11,346
|
The
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 three and nine
months ended September 30, 2017 the net adjustment to the fair
value of the contingent acquisition debt was a decrease of $340,000
and $1,020,000, respectively. During the three and nine months
ended September 30, 2016 the net adjustment to the fair value of
the contingent acquisition debt was a decrease of $315,000 and a
decrease of $1,185,000, respectively.
Note 9. Stockholders’ Equity
The
Company’s Articles of Incorporation, as amended, authorize
the issuance of two classes of stock to be designated “Common
Stock” and “Preferred Stock”.
Common Stock
On
May 31, 2017, the Board of Directors of the Company authorized a
reverse stock split in order to meet certain criteria in
preparation for the Company’s uplisting on the NASDAQ Capital
Market.
On
June 5, 2017, the Company filed a certificate of amendment to the
Company’s Articles of Incorporation with the Secretary of
State of the State of Delaware to effect a one-for-twenty reverse
stock split of the Company’s issued and outstanding common
stock. As a result of the Reverse Split, every twenty shares of the
Company issued and outstanding common stock were automatically
combined and reclassified into one share of the Company’s
common stock. The Reverse Split affected all issued and outstanding
shares of common stock, as well as common stock underlying stock
options, warrants outstanding, including common stock equivalents
issuable under convertible notes and preferred shares. No
fractional shares were issued in connection with the Reverse Split.
Stockholders who would otherwise hold a fractional share of common
stock will receive cash payment for the fractional
share.
F-21
The
Reverse Split became effective on June 7, 2017. All disclosures of
shares and per share data in these condensed consolidated financial
statements and related notes have been retroactively adjusted to
reflect the Reverse Split for all periods presented.
The total number of authorized shares of common
stock was reduced from 600,000,000 to 50,000,000.
The total
number of shares of stock which the Company has authority to issue
is 50,000,000 shares of common stock, par value $.001 per share and
5,000,000 shares of preferred stock, par value $.001 per share, of
which 161,135 shares have been designated as Series A convertible
preferred stock, par value $.001 per share (“Series A
Convertible Preferred”).
As of September 30, 2017, and December 31, 2016
there were 19,723,285 and 19,634,345 shares of Common Stock
outstanding, respectively.
The holders of the Common Stock
are entitled to one vote for each share held at all meetings of
stockholders (and written actions in lieu of
meetings).
Convertible Preferred Stock
The
Company had 161,135 shares of Series A Convertible Preferred Stock
outstanding as of September 30, 2017 and December 31, 2016, and
accrued dividends of approximately $121,000 and $112,000,
respectively. The holders of the Series A Convertible Preferred
Stock are entitled to receive a cumulative dividend at a rate of
8.0% per year, payable annually either in cash or shares of the
Company's Common Stock at the Company's election. Shares
of Common Stock paid as accrued dividends are valued at $10.00 per
share. Each share of Series A Convertible Preferred is
convertible into two shares of the Company's Common Stock. The
holders of Series A Convertible Preferred are entitled to receive
payments upon liquidation, dissolution or winding up of the Company
before any amount is paid to the holders of Common Stock. The
holders of Series A Convertible Preferred have no voting rights,
except as required by law.
Repurchase of Common Stock
On
December 11, 2012, the Company authorized a share repurchase
program to repurchase up to 750,000 of the Company's issued and
outstanding shares of Common Stock from time to time on the open
market or via private transactions through block
trades. A total of 196,594 shares have been repurchased
to-date as of September 30, 2017 at a weighted-average cost of
$5.30. There were no repurchases during the nine months ended
September 30, 2017. The remaining number of shares authorized for
repurchase under the plan as of September 30, 2017 is
553,406.
Advisory Agreements
ProActive Capital Resources
Group, LLC.
On September 1, 2015, the Company entered into
an agreement with
ProActive
Capital
Resources
Group, LLC
(“PCG”), pursuant to which PCG agreed
to provide investor relations services for six (6) months in
exchange for fees paid in cash of $6,000 per month and 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to September 1, 2015 this agreement has been extended under the
same terms with the monthly cash payment remaining at $6,000 per
month and 5,000 shares of restricted common stock for every six (6)
months of service performed.
As of September 30, 2017, t
he Company has
issued 15,000 shares of restricted common stock i
n connection with this agreement and accrued for
the estimated per share value on each subsequent six (6) month
periods based on the price of Company’s common stock at each
respective date. As of September 30, 2017, the Company has accrued
for 10,000 shares of restricted stock that have been earned and not
issued. The fair value of the shares to be issued are recorded as
prepaid advisory fees and are included in prepaid expenses and
other current assets on the Company’s condensed consolidated
balance sheets and is amortized on a pro-rata basis over the term
of the respective periods. During the three months ended
September 30, 2017 and 2016, the Company recorded expense
of approximately $14,000 and $15,000, respectively and $42,000 and
$46,000, during the nine months ended September 30, 2017 and 2016,
respectively, in connection with amortization of the stock
issuance.
Warrants
As
of September 30, 2017, warrants to purchase 2,710,066 shares
of the Company's common stock at prices ranging from
$2.00 to $10.00 were outstanding. All warrants are exercisable as
of September 30, 2017 and expire at various dates through November
2020 and have a weighted average remaining term of approximately
2.37 years and are included in the table below as of September 30,
2017.
Warrants – Private Placement
During
the three months ended September 30, 2017, the Company issued
warrants through a Private Placement, to purchase 1,149,712 shares
of its common stock, exercisable at $5.56 per share, respectively,
and expire between July 2020 and August 2020. (See Note 6,
above.)
F-22
Warrants – Other Issuance
In
May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s Common Stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the three months
ended September 30, 2017 the Company cancelled the non-qualified
stock option and issued a warrant agreement with the same terms.
The fair value of the warrant was $232,000 and was recorded in
general and administrative in the condensed consolidated statements
of operations.
There
was no financial impact change in the valuation related to the
cancellation of the option and the issuance of the warrant. As of
September 30, 2017 the warrant remains outstanding.
During
the nine months ended September 30, 2017, the Company issued a
warrant as compensation to an associated Youngevity distributor to
purchase 37,500 shares of the Company’s Common Stock at a
price of $4.66 with an expiration date of three years. The warrant
was exercised on a cashless basis and 21,875 shares of common stock
were issued during the three months ended September 30, 2017. The
fair value of the warrant was $109,000 and was recorded in
distributor compensation in the condensed consolidated statements
of operations.
The Company uses the Black-Scholes option-pricing
model (“Black-Scholes model”) to estimate the fair
value of the warrants.
A
summary of the warrant activity for the nine months ended September
30, 2017 is presented in the following table:
|
Balance
at December 31, 2016
|
1,899,385
|
|
Issued
|
1,262,212
|
|
Expired
/ cancelled
|
(414,031
)
|
|
Exercised
|
(37,500
)
|
|
Balance
at September 30, 2017
|
2,710,066
|
Stock Options
On
May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
2,000,000 shares of Common Stock. On February 23, 2017, the
Company’s board of directors received the approval of our
stockholders, to amend the 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
increased the number of authorized shares of the Company’s
common stock that may be delivered pursuant to awards granted
during the life of the plan from 2,000,000 to 4,000,000
shares.
The
purpose of the Plan is to promote the long-term growth and
profitability of the Company by (i) providing key people and
consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
Plan allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At September 30, 2017, the Company had
1,874,380 shares of Common Stock available for issuance under the
Plan.
A
summary of the Plan stock option activity for the nine months ended
September 30, 2017 is presented in the following
table:
|
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding
December 31, 2016
|
1,660,964
|
$
4.74
|
$
1,346
|
|
Issued
|
21,624
|
4.53
|
|
|
Canceled
/ expired
|
(79,711
)
|
4.35
|
|
|
Exercised
|
(6,885
)
|
4.28
|
-
|
|
Outstanding
September 30, 2017
|
1,595,932
|
$
4.76
|
$
503
|
|
Exercisable
September 30, 2017
|
878,657
|
$
4.55
|
$
339
|
F-23
The
weighted-average fair value per share of the granted options for
the nine months ended September 30, 2017 and 2016 was approximately
$3.05 and $1.80, respectively.
Stock
based compensation expense included in the condensed consolidated
statements of operations was a credit of $46,000 and $166,000 for
the three months ended September 30, 2017 and 2016, respectively,
and $440,000 and $292,000 for the nine months ended September 30,
2017 and 2016, respectively.
As
of September 30, 2017, there was approximately $1,702,000 of total
unrecognized compensation expense related to unvested stock options
granted under the Plan. The expense is expected to be recognized
over a weighted-average period of 3.68 years.
The
Company uses the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
Restricted Stock Units
On
August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees,
board members and consultants. These shares of common stock will be
issued upon vesting of the restricted stock units. Vesting occurs
on the sixth year anniversary of the grant date, over a six-year
period, with 10% vesting on the third-year, 15% on the fourth-year,
50% on the fifth-year and 25% on the sixth-year anniversary of the
vesting commencement date.
The
fair value of each restricted stock unit is based on the closing
price on the grant date, and is recognized as stock based
compensation expense over the vesting term of the award. Restricted
stock based compensation expense included in the condensed
consolidated statements of operations was $32,000 for the three and
nine months ended September 30, 2017.
As
of September 30, 2017, total unrecognized stock-based compensation
expense related to restricted stock units was approximately
$1,309,000 which will be recognized over a weighted average period
of 5.86 years.
Note 10. Segment and Geographical
Information
The Company is a
leading omni-direct lifestyle company offering a hybrid of the
direct selling business model that also offers e-commerce and the
power of social selling. Assembling a virtual Main Street of
products and services under one corporate entity, Youngevity offers
products from top selling retail categories: health/nutrition,
home/family, food/beverage (including coffee), spa/beauty,
apparel/jewelry, as well as innovative services. The Company
operates in two segments: the direct
selling segment where products are offered through a global
distribution network of preferred customers and distributors and
the commercial coffee segment where roasted and green coffee bean
products are sold directly to businesses.
The
Company’s segments reflect the manner in which the business
is managed and how the Company allocates resources and assesses
performance. The Company’s chief operating decision maker is
the Chief Executive Officer. The Company’s chief operating
decision maker evaluates segment performance primarily based on
revenue and segment operating income. The principal measures and
factors the Company considered in determining the number of
reportable segments were revenue, gross margin percentage, sales
channel, customer type and competitive risks. In addition, each
reporting segment has similar products and customers, similar
methods of marketing and distribution and a similar regulatory
environment.
F-24
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):
|
|
As
of
|
|
|
|
September
30, 2017
|
December
31, 2016
|
|
Total
assets
|
|
|
|
Direct selling
|
$
47,020
|
$
40,127
|
|
Commercial coffee
|
26,977
|
25,881
|
|
Total assets
|
$
73,997
|
$
66,008
|
Total
tangible assets, net located outside the United States were
approximately $5.3 million and $5.4 million as of September 30,
2017 and December 31, 2016, respectively.
The
Company conducts its operations primarily in the United States. For
the three months ended September 30, 2017 and 2016 approximately
12% and 9%, respectively, of the Company’s sales were derived
from sales outside the United States. For the nine months ended
September 30, 2017 and 2016 approximately 11% and 9%, respectively,
of the Company’s sales were derived from sales outside the
United States.
The
following table displays revenues attributable to the geographic
location of the customer (in thousands):
Note 11. Subsequent Events
None.
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.
As discussed in
Note 13 to the consolidated financial statements, the 2016
consolidated statement of cash flows has been restated to correct
an error in the presentation of proceeds and repayments under the
Company's factoring facility.
/s/
Mayer Hoffman McCann P.C.
San
Diego, California
March
30, 2017, except as it relates to the matter discussed in Note 13,
as to which the date is August 14, 2017.
F-26
|
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.
F-27
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.
F-28
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.
F-29
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.
F-30
Consolidated Statements of Cash Flows
(In
thousands, except share amounts)
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Cash Flows from Operating Activities:
|
(As
Restated)*
|
|
|
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
|
1,063
|
1,278
|
|
Income
taxes receivable
|
(138
)
|
136
|
|
Net Cash (Used In) Provided by Operating Activities
|
(1,827
)
|
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
|
|
Proceeds
from 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 Provided by Financing Activities
|
158
|
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.
* Consolidated
Statement of Cash Flows as of December 31, 2016 has been restated.
See Note 13.
See
accompanying notes.
F-31
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.
F-32
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
|
F-33
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.
F-34
Property
and equipment consist of the following (in thousands):
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):
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.
F-35
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):
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.
F-36
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.
F-37
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.
F-38
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.
F-39
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.
F-40
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.
F-41
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.
F-42
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.
F-43
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.
F-44
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.
F-45
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.
F-46
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.
F-47
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.
F-48
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.
F-49
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%.
F-50
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.
F-51
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
|
F-52
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.
F-53
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
.
F-54
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
|
F-55
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:
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.
F-56
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):
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.
F-57
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:
Significant
components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
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.
F-58
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):
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Total
assets
|
|
|
|
Direct
selling
|
$
40,127
|
$
36,907
|
|
Commercial
coffee
|
25,881
|
24,422
|
|
Total
assets
|
$
66,008
|
$
61,329
|
F-59
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.
Note 13. Restatement
The Company identified the
following errors impacting the Company’s audited consolidated
statement of cash flows as of December 31, 2016 and unaudited
condensed consolidated statements of cash flows for the three
months ended March 31, 2016, six months ended June 30, 2016 and the
nine months ended September 30, 2016.
The restatement adjustments,
correct an error in the presentation of cash flow activity under
the Company’s factoring facility to properly reflect net
borrowings and net payments. There was no impact to the net
increase or decrease in cash or cash
balances.
The correction of the errors did
not result in a change to net cash for the periods. There were no
changes to Supplemental Disclosures of Noncash Investing and
Financing Activities.
|
|
||||||
|
Youngevity International, Inc.
and Subsidiaries
|
||||||
|
Consolidated Statement of Cash
Flows
|
||||||
|
(In thousands)
|
||||||
|
Youngevity
International, Inc. and Subsidiaries
|
||||||
|
Condensed
Consolidated Statement of Cash Flows
|
||||||
|
(In
thousands)
|
||||||
|
(Unaudited)
|
|
|
Three Months
Ended March 31, 2016
|
||
|
|
Previously
Reported
|
Adjustment
|
As
Restated
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
Net income
|
$
151
|
$
-
|
$
151
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
||
|
Depreciation and
amortization
|
1,003
|
-
|
1,003
|
|
Stock based compensation
expense
|
70
|
-
|
70
|
|
Amortization of deferred financing
costs
|
90
|
-
|
90
|
|
Amortization of prepaid advisory
fees
|
15
|
-
|
15
|
|
Change in fair value of warrant
derivative liability
|
(650
)
|
-
|
(650
)
|
|
Amortization of debt
discount
|
264
|
-
|
264
|
|
Amortization of warrant issuance
costs
|
32
|
-
|
32
|
|
Expenses allocated in profit sharing
agreement
|
(147
)
|
-
|
(147
)
|
|
Change in fair value of contingent
acquisition debt
|
(391
)
|
-
|
(391
)
|
|
Changes in operating assets and
liabilities, net of effect from business combinations:
|
-
|
||
|
Accounts
receivable
|
281
|
-
|
281
|
|
Inventory
|
(1,997
)
|
-
|
(1,997
)
|
|
Prepaid expenses and other current
assets
|
(835
)
|
-
|
(835
)
|
|
Accounts payable
|
1,183
|
-
|
1,183
|
|
Accrued distributor
compensation
|
704
|
-
|
704
|
|
Deferred revenues
|
(155
)
|
-
|
(155
)
|
|
Accrued expenses and other
liabilities
|
250
|
420
|
670
|
|
Income taxes
receivable
|
173
|
-
|
173
|
|
Net Cash Provided by Operating
Activities
|
41
|
420
|
461
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
Purchases of property and
equipment
|
(611
)
|
-
|
(611
)
|
|
Net Cash Used in Investing
Activities
|
(611
)
|
|
(611
)
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
Proceeds (Payments) from/to factoring
company, net
|
210
|
(420
)
|
(210
)
|
|
Payments of notes payable,
net
|
(306
)
|
-
|
(306
)
|
|
Payments of contingent acquisition
debt
|
(328
)
|
-
|
(328
)
|
|
Payments of capital
leases
|
(41
)
|
-
|
(41
)
|
|
Repurchase of common
stock
|
(4
)
|
-
|
(4
)
|
|
Net Cash Used in Financing
Activities
|
(469
)
|
(420
)
|
(889
)
|
|
Foreign Currency Effect on
Cash
|
(109
)
|
-
|
(109
)
|
|
Net decrease in cash and cash
equivalents
|
(1,148
)
|
-
|
(1,148
)
|
|
Cash and Cash Equivalents,
Beginning of Period
|
3,875
|
-
|
3,875
|
|
Cash and Cash Equivalents, End
of Period
|
$
2,727
|
$
-
|
$
2,727
|
|
|
|
|
|
|
Youngevity
I
nternational, Inc. and Subsidiaries
|
||||||
|
Condensed
Consolidated Statement of Cash Flows
|
||||||
|
(In
thousands)
|
||||||
|
(Unaudited)
|
|
|
Six
Months Ended June 30, 2016
|
||
|
|
Previously
Reported
|
Adjustment
|
As
Restated
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
Net
income
|
$
42
|
$
-
|
$
42
|
|
Adjustments to
reconcile net income to net cash provided by (used in) operating
activities:
|
|||
|
Depreciation
and amortization
|
1,987
|
-
|
1,987
|
|
Stock
based compensation expense
|
126
|
-
|
126
|
|
Amortization
of deferred financing costs
|
180
|
-
|
180
|
|
Amortization
of prepaid advisory fees
|
31
|
-
|
31
|
|
Stock
issuance for services
|
30
|
-
|
30
|
|
Change
in fair value of warrant derivative liability
|
(166
)
|
-
|
(166
)
|
|
Amortization
of debt discount
|
527
|
-
|
527
|
|
Amortization
of warrant issuance costs
|
64
|
-
|
64
|
|
Expenses
allocated in profit sharing agreement
|
(382
)
|
-
|
(382
)
|
|
Change
in fair value of contingent acquisition debt
|
(871
)
|
-
|
(871
)
|
|
Changes in
operating assets and liabilities, net of effect from business
combinations:
|
-
|
||
|
Accounts
receivable
|
(391
)
|
|
(391
)
|
|
Inventory
|
(2,301
)
|
-
|
(2,301
)
|
|
Prepaid
expenses and other current assets
|
(67
)
|
-
|
(67
)
|
|
Accounts
payable
|
458
|
-
|
458
|
|
Accrued
distributor compensation
|
738
|
-
|
738
|
|
Deferred
revenues
|
(465
)
|
-
|
(465
)
|
|
Accrued
expenses and other liabilities
|
635
|
(1,662
)
|
(1,027
)
|
|
Income
taxes receivable
|
173
|
-
|
173
|
|
Net
Cash Provided by (Used in) Operating Activities
|
348
|
(1,662
) |
(1,314
)
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
Purchases
of property and equipment
|
(461
)
|
-
|
(461
)
|
|
Net
Cash Used in Investing Activities
|
(461
)
|
-
|
(461
)
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
Proceeds
from the exercise of stock options and warrants,
net
|
12
|
-
|
12
|
|
Proceeds
(Payments) from/to factoring company, net
|
(831
)
|
1,662
|
831
|
|
Payments
of notes payable, net
|
(358
)
|
-
|
(358
)
|
|
Payments
of contingent acquisition debt
|
(462
)
|
-
|
(462
)
|
|
Proceeds
of capital leases
|
(132
)
|
-
|
(132
)
|
|
Repurchase
of common stock
|
(20
)
|
-
|
(20
)
|
|
Net
Cash Used in Financing Activities
|
(1,791
)
|
1,662
|
(129
)
|
|
Foreign
Currency Effect on Cash
|
(146
)
|
-
|
(146
)
|
|
Net decrease in
cash and cash equivalents
|
(2,050
)
|
-
|
(2,050
)
|
|
Cash
and Cash Equivalents, Beginning of Period
|
3,875
|
-
|
3,875
|
|
Cash
and Cash Equivalents, End of Period
|
$
1,825
|
$
-
|
$
1,825
|
|
|
|
|
|
|
Youngevity
International, Inc. and Subsidiaries
|
||||||
|
Condensed
Consolidated Statement of Cash Flows
|
||||||
|
(In
thousands)
|
||||||
|
(Unaudited)
|
F-63
1,052,631
shares of Series B Convertible Preferred Stock
Convertible
into 2,105,262 Shares of Common Stock
PROSPECTUS
____________,
2018
Neither we nor the
selling agent have authorized any dealer, salesperson or other
person to give any information or to make any representations not
contained in this prospectus or any prospectus supplement. You must
not rely on any unauthorized information. This prospectus is not an
offer to sell these securities in any jurisdiction where an offer
or sale is not permitted. The information in this prospectus is
current as of the date of this prospectus. You should not assume
that this prospectus is accurate as of any other date.
Until
, 2018, all dealers that effect transactions in these securities,
regardless of whether they are participating in this offering. This
is in addition to the dealer’s obligation to deliver a
prospectus when acting as selling agents and with respect to their
unsold allotments or subscriptions.
P
ART II - INFORMATION NOT REQUIRED IN
PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We estimate that
expenses in connection with the distribution described in this
registration statement (other than brokerage commissions, discounts
or other expenses relating to the sale of the shares of Common
Stock underlying the Warrants by the selling security holders) will
be as set forth below. We will pay all of the expenses with respect
to the distribution, and such amounts, with the exception of the
SEC registration fee, are estimates.
|
SEC
registration fee
|
$
1,320
|
|
Accounting
fees and expenses
|
50,000
|
|
Legal
fees and expenses
|
150,000
|
|
Transfer
agent fees and expenses
|
5,000
|
|
Miscellaneous
including merchandise credit
|
393,680
|
|
Total
|
$
600,000
|
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the
Delaware General Corporation Law authorizes a court to award, or a
corporation’s board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities,
including reimbursement for expenses incurred, arising under the
Securities Act of 1933, as amended, or the Securities
Act.
Our amended and
restated certificate of incorporation provides for indemnification
of our directors and executive officers to the maximum extent
permitted by the Delaware General Corporation Law, and our amended
and restated bylaws provide for indemnification of our directors
and executive officers to the maximum extent permitted by the
Delaware General Corporation Law.
In any selling
agency or similar agreement we enter into in connection with the
sale of the securities being registered hereby, the selling agent
will agree to indemnify, under certain conditions, us, our
directors, our officers and persons who control us, within the
meaning of the Securities Act, against certain
liabilities.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
The following
information sets forth certain information with respect to all
securities which we have sold during the last three years. We did
not pay any commissions in connection with any of these
sales.
During July, August
and September 2014,
we completed a
private placement and entered into Note Purchase Agreements with
seven (7)
accredited investors
pursuant to which we sold
five year senior secured
convertible notes in the aggregate principal amount of $4,750,000
convertible into an aggregate of 678,568 shares of common stock at
a conversion price of $7.00 per share, 1,022,279 are shares of
common stock issuable upon exercise of warrants at $4.60 per share
and 67,857 are shares of common stock issuable upon exercise of
warrants at $7.00 per share.
We also
issued 160,791 warrants to the placement agent and its designees,
of which 92,934 have an exercise price of $4.60 per share and
67,857 have an exercise price of $7.00 per share.
The
warrants expire five years from the date of issuance.
The 2014 Notes are due between July and September
2019 if the option to convert has not been
exercised.
During January
2015,
we completed a private placement
and entered into Note Purchase Agreements with three (3) accredited
investors pursuant to which we sold one
year secured
convertible note in the aggregate principal amount
of $5,250,000
convertible into an aggregate
of 678,571
and 78,750 shares of common
stock.
In addition, these investors had the necessary
investment intent as required by Section 4(2) under the Securities
Act since they agreed to, and received, securities bearing a legend
stating that such securities are restricted.
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
(which
includes $4,000,000 owed on a prior debt that was applied to the
purchase of units in this offering)
,
that are convertible into 1,026,784 shares of common stock at a
conversion price of $7.00 per share and warrants exercisable to
purchase an aggregate of 479,166 shares of common stock from us at
a price per share of $9.00. We also issued 150,595 warrants to the
placement agent and its designees, of which 102,679 have an
exercise price of $7.00 per share and 47,917 have an exercise price
of $9.00 per share. The 2015 Notes are due in October 2018 if the
option to convert has not been exercised.
In August 2017 we
completed the 2017 Private Placement and entered into Note Purchase
Agreements with 27 accredited investors pursuant to which we sold
senior secured convertible notes in the aggregate principal amount
of $7,254,349 initially convertible into 1,577,033 shares of common
stock, at $4.60 per share (subject to adjustment); and (ii) 2017
$5.56 warrants to purchase 1,149,712 shares issuable upon
conversion of the 2017 Note at an exercise price equal to $5.56. As
part of the 2017 Private Placement, three (3) investors in our 2015
Private Placement (the “Prior Investors”), converted
their 2015 Notes in the aggregate principal amount of $4,200,349
together with accrued interest thereon into new convertible notes
for an equal principal amount (included in the notes referred to
above), convertible into 913,119 2017 $5.56 warrants to purchase an
aggregate of 456,560 shares of common stock. The new note will
carry the same interest rate as the prior note. The Prior Investors
exchanged their 2015 $7.00 warrants to purchase an aggregate of
279,166 shares of common stock for a new warrant to purchase an
aggregate of 182,065 shares of common stock. For twelve (12)
months following the closing, the investors in the 2017 Private
Placement have the right to participate in any future equity
financings by us up to their pro rata share of the maximum offering
amount in the aggregate. We also issued the placement agent and its
designees three year warrants to purchase 179,131 shares of Common
Stock at an exercise price of $5.56 and we issued 22,680 shares of
Common Stock.
The 2017 Notes are due
in July and August 2020 if the option to convert has not been
exercised.
In
March 2017, we entered a settlement agreement and release with
H&H Coffee Group Export pursuant to which it was agreed that
$150,000 owed to H&H Coffee Group Export for services that had
been rendered would be settled by the issuance of Common Stock.
During the three months ended June 30, 2017, we issued to H&H
Coffee Group Export 27,500 shares of Common Stock in accordance
with this agreement.
In
September 2015, we entered into an
agreement with
ProActive Capital Group,
LLC
or 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
5,000 shares of restricted common stock to be issued upon
successfully meeting certain criteria in accordance with the
agreement. Subsequent to September 1, 2015 this agreement has
been extended under the same terms with the monthly cash payment
remaining at $6,000 per month and 5,000 shares of restricted common
stock for every six (6) months of service performed.
As of September 30, 2017, we
issued 15,000
shares of restricted common stock i
n
connection with this agreement and accrued for the estimated per
share value on each subsequent six (6) month periods based on the
price of our common stock at each respective
date.
In
May 2017, we issued a warrant as compensation to an associated
Youngevity distributor to purchase 37,500 shares of our Common
Stock at a price of $4.66 with an expiration date of three years.
The warrant was exercised on a cashless basis and 21,875 shares of
common stock were issued during the three months ended September
30, 2017.
The offers, sales
and issuances of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance on
Section 4(a)(2) of the Securities Act and Rule 506 promulgated
under Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. The recipients of
securities in each of these transactions acquired the securities
for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends
were affixed to the securities issued in these transactions. Each
of the recipients of securities in these transactions was an
accredited investor within the meaning of Rule 501 of Regulation D
under the Securities Act and had adequate access, through
employment, business or other relationships, to information about
the Registrant.
ITEM
16. EXHIBITS
|
Exhibit
No.
|
|
Title
of Document
|
|
1.1
|
|
Form of Selling
Agent Agreement*
|
|
1.2
|
|
Form of Selling
Agent Agreement (Amendment)**
|
|
1.3
|
|
Form of Selling Agency Agreement between Youngevity International, Inc. and Tripoint Global Equities, LLC* |
|
|
Certificate of
Incorporation Dated July 15, 2011 (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Bylaws
(Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
|
|
|
|
Certificate of
Amendment to the Certificate of Incorporation dated June 5, 2017
(Incorporated by reference to the Company’s Form 8-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
June 7, 2017)
|
|
|
|
Certificate of
Designations for Series B Convertible Preferred Stock*
|
|
|
|
Specimen Common
Stock certificate (Incorporated by reference to the Company’s
Form 10-12G, File No. 000-54900, filed with the Securities and
Exchange Commission on February 12, 2013)
|
|
|
|
Warrant for Common
Stock issued to David Briskie (Incorporated by reference to the
Company’s Form 1012G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Stock Option issued
to Stephan Wallach (Incorporated by reference to the
Company’s Form 1012G, File No. 000-54900, Filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Stock Option issued
to Michelle Wallach (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, Filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Stock Option issued
to David Briskie (Incorporated by reference to the Company’s
Form 10-12G, File No. 000-54900, Filed with the Securities and
Exchange Commission on February 12, 2013)
|
|
|
|
Stock Option issued
to William Andreoli (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, Filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Stock Option issued
to Richard Renton (Incorporated by reference to the Company’s
Form 10-12G, File No. 000-54900, Filed with the Securities and
Exchange Commission on February 12, 2013)
|
|
|
|
Stock Option issued
to John Rochon (Incorporated by reference to the Company’s
Form 10-12G,
File No. 000-54900,
Filed with the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Form of Purchase
Note Agreement (Incorporated by reference to the Company’s
8-K, File No. 000-54900, filed with the Securities and Exchange
Commission on August 5, 2014)
|
|
|
|
Form of Secured
Convertible Notes (Incorporated by reference to the Company’s
8-K, File No. 000-54900, filed with the Securities and Exchange
Commission on August 5, 2014)
|
|
|
|
Form of Series A
Warrants (Incorporated by reference to the Company’s 8-K,
File No. 000-54900, filed with the Securities and Exchange
Commission on August 5, 2014)
|
|
|
|
Form of
Registration Rights Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
|
|
|
Form of Note
Purchase Agreement (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on January 7, 2015)
|
|
|
|
Form of Secured
Note (Incorporated by reference to the Company’s 8-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
January 7, 2015)
|
|
|
|
Form of Purchase
Note Agreement (Incorporated by reference to the Company’s
8-K, File No. 000-54900, filed with the Securities and Exchange
Commission on October 16, 2015)
|
|
|
|
Form of Secured
Note (Incorporated by reference to the Company’s 8-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
October 16, 2015)
|
|
|
|
Form of Warrant
(Incorporated by reference to the Company’s 8-K, File No.
000-54900, filed with the Securities and Exchange Commission on
October 16, 2015)
|
|
|
|
Form of Notice of
Award of Restricted Stock Units (Incorporated by reference to the
Company’s Form S-8 Registration Statement, File No.
333-219027 filed with the Securities and Exchange Commission on
June 29, 2017)
|
|
|
|
Form of Restricted
Stock Unit Award Agreement (Incorporated by reference to the
Company’s Form S-8 Registration Statement, File No.
333-219027 filed with the Securities and Exchange Commission on
June 29, 2017)
|
|
|
|
Form of Note
Purchase Agreement (Incorporated by reference to the
Company’s Current Report on Form 8-K, File No. 000-54900,
filed with the Securities and Exchange Commission on August 3,
2017)
|
|
|
|
Form of Convertible
Note (Incorporated by reference to the Company’s Current
Report on Form 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 3, 2017)
|
|
|
|
Form of Series D
Warrant (Incorporated by reference to the Company’s Current
Report on Form 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 3, 2017)
|
|
|
|
Form of Selling
Agent’s Warrant**
|
|
|
|
Form of First
Amendment to Series D Warrant Agreement (Incorporated by reference
to the Company’s Current Report on Form 8-K, File No.
000-54900, filed with the Securities and Exchange Commission on
January 23, 2018)
|
|
|
|
Legal opinion of
Gracin & Marlow, LLP**
|
|
|
Purchase Agreement
with M2C Global, Inc. dated March 9, 2007 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
First Amendment to
Purchase Agreement with M2C Global, Inc. dated September 7, 2008
(Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
|
|
|
|
Asset Purchase
Agreement with MLM Holdings, Inc. dated June 10, 2010 (Incorporated
by reference to the Company’s Form 10-12G, File No.
000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
|
|
|
|
Agreement of
Purchase and Sale with Price Plus, Inc. dated September 21, 2010
(Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
|
|
|
|
Amended and
Restated Agreement and Plan of Reorganization Javalution Coffee
Company, YGY Merge, Inc. dated July 11, 2011 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Asset Purchase
Agreement with R-Garden Inc. dated July 1, 2011 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Re-Purchase
Agreement with R-Garden dated September 12, 2012 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Agreement and Plan
of Reorganization with Javalution dated July 18, 2011 (Incorporated
by reference to the Company’s Form 10-12G, File No.
000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
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|
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Asset Purchase
Agreement with Adaptogenix, LLC dated August 22, 2011 (Incorporated
by reference to the Company’s Form 10-12G, File No.
000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
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|
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|
Amended Asset
Purchase Agreement with Adaptogenix, LLC dated January 27, 2012
(Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
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|
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Asset Purchase
Agreement with Prosperity Group, Inc. dated October 10, 2011
(Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
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|
|
|
Amended and
Restated Equity Purchase Agreement with Financial Destination,
Inc., FDI Management Co, Inc., FDI Realty, LLC, and MoneyTRAX, LLC
dated October 25, 2011 (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
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|
Exclusive
License/Marketing Agreement with GLIE, LLC dba True2Life dated
March 20, 2012 (Incorporated by reference to the Company’s
Form 10-12G, File No. 000-54900, filed with the Securities and
Exchange Commission on February 12, 2013)
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|
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|
Bill of Sale with
Livinity, Inc. dated July 10, 2012 (Incorporated by reference to
the Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
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|
Consulting
Agreement with Livinity, Inc. dated July 10, 2012 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
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|
Employment
Agreement with William Andreoli dated October 25, 2011
(Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities and Exchange Commission on
February 12, 2013)
|
|
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|
Promissory Note
with 2400 Boswell LLC dated July 15, 2012 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
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|
Promissory Note
with William Andreoli dated July 1, 2012 (Incorporated by reference
to the Company’s Form 10-12G, File No. 000-54900, filed with
the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
2012 Stock Option
Plan (Incorporated by reference to the Company’s Form 10-12G,
File No. 000-54900, filed with the Securities and Exchange
Commission on February 12, 2013)
|
|
|
Form of Stock
Option (Incorporated by reference to the Company’s Form
10-12G, File No. 000-54900, filed with the Securities and Exchange
Commission on February 12, 2013)
|
|
|
|
Lease with 2400
Boswell LLC dated May 1, 2001 (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
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|
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Lease with FDI
Realty LLC dated July 29, 2008 (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
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|
First Amendment to
Lease with FDI Realty LLC dated October 25, 2011(Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
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|
Lease with Perc
Enterprises dated February 6, 2008 (Incorporated by reference to
the Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Lease with Perc
Enterprises dated September 25, 2012 (Incorporated by reference to
the Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Factoring Agreement
with Crestmark Bank dated February 12, 2010 (Incorporated by
reference to the Company’s Form 10-12G, File No. 000-54900,
filed with the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
First Amendment to
Factoring Agreement with Crestmark Bank dated April 6,
2011(Incorporated by reference to the Company’s Form 10-12G,
File No. 000-54900, filed with the Securities and Exchange
Commission on February 12, 2013)
|
|
|
|
Second Amendment to
Factoring Agreement with Crestmark Bank dated February 1,
2013(Incorporated by reference to the Company’s Form 10-12G,
File No. 000-54900, filed with the Securities and Exchange
Commission on February 12, 2013)
|
|
|
|
Lease with Perc
Enterprises dated March 19, 2013 (Incorporated by reference to the
Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Purchase Agreement
with Ma Lan Wallach dated March 15, 2013 (Incorporated by reference
to the Company’s Form 10-12G, File No. 000-54900, filed with
the Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Promissory Note
with Plaza Bank dated March 14, 2013 (Incorporated by reference to
the Company’s Form 10-12G, File No. 000-54900, filed with the
Securities and Exchange Commission on February 12,
2013)
|
|
|
|
Form of Security
Agreement (Incorporated by reference to the Company’s 8-K,
File No. 000-54900, filed with the Securities and Exchange
Commission on August 5, 2014)
|
|
|
|
Guaranty Agreement
made by Stephan Wallach (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on August 5, 2014)
|
|
|
|
Form of Security
Agreement (Incorporated by reference to the Company’s 8-K,
File No. 000-54900, filed with the Securities and Exchange
Commission on January 7, 2015)
|
|
|
|
Guaranty Agreement
made by Stephan Wallach (Incorporated by reference to the
Company’s 8-K, File No. 000-54900, filed with the Securities
and Exchange Commission on January 7, 2015)
|
|
|
|
Credit Agreement
with Wells Fargo Bank, National Association dated October 10, 2014
(Incorporated by reference to the Company’s Form 10-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
March 30, 2015)
|
|
|
|
Amended and
Restated 2012 Stock Incentive Plan (Previously filed with the
Company’s Current Report on Schedule 14C File No. 000-54900,
filed with the Securities and Exchange Commission on March 21,
2017)
|
|
|
|
Form of Stock
Option (Incorporated by reference to the Company’s Form 10-K,
File No. 000-54900, filed with the Securities and Exchange
Commission on March 30, 2017)
|
|
|
|
Third Amendment
with Crestmark Bank dated May 1, 2016 (Incorporated by reference to
the Company’s Form 10-K, File No. 000-54900, filed with the
Securities and Exchange Commission on March 30, 2017)
|
|
|
|
Form of
Subscription Agreement (BANQ and other
subscribers)*
|
|
|
10.41
|
|
Form of
Registration Rights Agreement (incorporated by reference to the
Company's Current Report on Form 8-K, File No. 000-54900, filed
with the Securities and Exchange Commission on August 3,
2017)
|
|
|
Form of
Subscription Agreement
(Folio
subscribers)*
|
|
|
|
Subsidiaries of
Youngevity International, Inc. (Incorporated by reference to the
Company’s Form 10-K, File No. 000-54900, filed with the
Securities and Exchange Commission on March 30, 2017)
|
*Filed
herewith
**Previously
filed
ITEM
17. UNDERTAKINGS
(a) The undersigned
registrant hereby undertakes:
(1) To file, during
any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) To include any
prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in
the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in
the effective registration statement.
(iii) To include
any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any
material change to such information in the registration
statement;
(2) That, for the
purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial
bona
fide
offering thereof.
(3) To remove from
registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination
of the offering.
(4) That, for the
purpose of determining liability under the Securities Act of 1933
to any purchaser in the initial distribution of the
securities:
The undersigned
registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such
purchaser:
(i) Any preliminary
prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424
(§230.424 of this chapter);
(ii) Any free
writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The portion
of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or
its securities provided by or on behalf of the undersigned
registrant; and
(iv) Any other
communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
(f) The undersigned
registrant hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements certificates in
such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each
purchaser.
(h) Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of
expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such
issue.
(i) The undersigned
registrant hereby undertakes that:
(1) For purposes of
determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose
of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
S
IGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on the Form S-1 and has duly
caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chula Vista, State of California,
February 6, 2018.
|
|
YOUNGEVITY
INTERNATIONAL, INC.
|
|
|
|
By:
|
/s/ Stephan
Wallach
|
|
|
|
Stephan
Wallach
|
|
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|
Chief Executive
Officer and Chairman
|
|
|
|
(Principal
Executive Officer)
|
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|
Date:
February 6, 2018
|
|
|
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|
|
|
By:
|
/s/ David
Briskie
|
|
|
|
David
Briskie
|
|
|
|
President, Chief
Financial Officer and Director
|
|
|
|
(Principal
Financial Officer and Accounting Officer)
|
|
|
|
Date:
February 6, 2018
|
Pursuant to the
requirements of the Securities Act 1933, this report has been
signed by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Stephan
Wallach
|
|
Chief Executive
Officer and Chairman of the Board (Principal Executive
Officer)
|
|
February
6
, 2018
|
|
Stephan
Wallach
|
|
|
|
|
|
|
|
|
|
|
|
/s/ David
Briskie
|
|
President, Chief
Financial Officer and Director
|
|
February
6, 2018
|
|
David
Briskie
|
|
|
|
|
|
|
|
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*
|
|
Chief Operating
Officer and Director
|
|
February
6
, 2018
|
|
Michelle
Wallach
|
|
|
|
|
|
|
|
|
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*
|
|
Director
|
|
February
6
, 2018
|
|
Richard
Renton
|
|
|
|
|
|
|
|
|
|
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*
|
|
Director
|
|
February
6
, 2018
|
|
William
Thompson
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February
6, 2018
|
|
Paul
Sallwasser
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
February
6
, 2018
|
|
Kevin
Allodi
|
|
|
|
|
|
|
|
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|
|
*By:
|
/s/ Stephan
Wallach
|
|
|
|
Stephan
Wallach
|
|
|
|
Attorney-in-Fact
|
|
