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.
 
 
 
 
 
Sole Book Running Manager
 
 
 
 
 
The date of this prospectus is ____________, 2018
 
 
 
 
 
 
 
 
TAB L E OF CONTENTS
 
 
Page
 
 
1
1
2
12
13
15
30
31
32
32
33
49
62
63
65
68
70
71
74
80
80
80
80
81
II-1
 
 
  
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:
 
Nutritional supplements
Gourmet coffee
Weight management
Skincare and cosmetics
Health and wellness
Packaged foods
Lifestyle products (spa, bath, home and garden)
Pet care
Digital products including scrap and memory books
Telecare health services
Apparel and fashion accessories
Business lending
 
Since 2010 we have expanded our operations through a series of acquisitions of the assets of other direct selling companies including their product lines and sales forces. We have 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
 
 
Product 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
 
 
Health and wellness 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
 
 
 
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
 
Issuer
Youngevity International, Inc.
 
 
 
Securities offered
This prospectus covers the sale of up to $10,000,000 of Series B Convertible Preferred Stock and the shares of Common Stock into which the Series B Convertible Preferred Stock is convertible (the “Offering”).
 
 
Common stock outstanding as of December 31, 2017 (1)
19,723,285 shares
 
 
Use of Proceeds
We intend to use the proceeds of this Offering for general working capital purposes. See “Use of Proceeds”.
 
 
Risk Factors
You should carefully read and consider the information set forth under “Risk Factors,” together with all of the other information set forth in this prospectus, before deciding to invest in shares of our Series B Convertible Preferred Stock.
 
 
 
 
NASDAQ trading symbol
 
The Common Stock is listed on the NASDAQ Capital Market under the symbol “YGYI”. The Series B Convertible Preferred Stock will not be listed on a national securities exchange.
 
Conversion Rights
Each outstanding share of Series B Convertible Preferred Stock is 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 to 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 subject to adjustment in the case of stock splits and stock dividends and other similar transactions.
 
Dividends
Holders of the Series B Preferred  Stock shall receive a quarterly cash dividend 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 . 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.
 
Liquidation
The Series B Convertible Preferred Stock will rank senior to our outstanding Series A Preferred Stock and our Common Stock with respect to dividend rights and rights upon our liquidation, dissolution or winding up.
 
Merchandise Credit
Holders of the 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.
 
Voting Rights
Holders of the Series B Convertible Preferred Stock shall have limited voting rights.
 
 
 
(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”.
 
 
 
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:
 
the possibility that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
the lack of well-established or reliable legal systems in certain areas;
the presence of high inflation in the economies of international markets;
the possibility that a foreign government authority might impose legal, tax or other financial burdens on us or our coffee operations, or sales force, due, for example, to the structure of our operations in various markets;
the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
 
Currency exchange rate fluctuations could reduce our overall profits.
 
For the year ended December 31, 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:
 
General business and economic conditions;
Adverse publicity or negative misinformation about us or our products;
Public perceptions about network marketing programs;
High-visibility investigations or legal proceedings against network marketing companies by federal or state authorities or private citizens;
Public perceptions about the value and efficacy of nutritional, personal care, or weight management products generally;
Other competing network marketing organizations entering into the marketplace that may recruit our existing distributors or reduce the potential pool of new distributors; and
Changes to our compensation plan required by law or implemented for business reasons that make attracting and retaining distributors more difficult.
 
There can be no assurance that we will be able to continue to attract and retain distributors in sufficient numbers to sustain future growth or to maintain our present growth levels, which could have a material adverse effect on our business, financial condition, or results of operations.
 
 
 
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
 
Some of our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Other products contain innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or sponsored only limited clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.
 
Our manufacturers are subject to certain risks.
 
We are dependent upon the uninterrupted and efficient operation of our manufacturers and suppliers of products. Those operations are subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or results of operations.
 
Challenges by private parties to the direct selling system could harm our business.
 
Direct selling companies have historically been subject to legal challenges regarding their method of operation or other elements of their business by private parties, including their own representatives, in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire in the future.
 
RISKS RELATED TO OUR 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:
 
variations in our quarterly operating results;
 ●
announcements that our revenue or income/loss levels are below analysts’ expectations;
 ●
general economic slowdowns;
 ●
changes in market valuations of similar companies;
 ●
announcements by us or our competitors of significant contracts; or
 ●
acquisitions, strategic partnerships, joint ventures or capital commitments.
 
We are subject to the reporting requirements of Federal Securities Laws, which can be expensive.
 
We are subject to the information and reporting requirements under the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports and other information with the SEC has and will continue to cause our expenses to be higher than they would be if we were a privately-held company.
 
Sales by our shareholders of a substantial number of shares of our Common Stock in the public market could adversely affect the market price of our Common Stock.
 
A large number of outstanding shares of Common Stock are held by two of our principal shareholders. If any of these principal shareholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of the Common Stock to decline.
 
Our stock price has been volatile and subject to various market conditions.
 
 
The trading price of the Common Stock has been subject to wide fluctuations. The price of the Common Stock may fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action, conditions in the nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of the Common Stock would likely decline, perhaps substantially.
 
We may issue preferred stock with rights senior to the 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:
 
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):
 
 
 
Three months ended
 
 
  Nine months ended
 
 
 
September 30,
 
 
  September 30,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
    Direct selling
  $ 37,954  
  $ 38,576  
  $ 106,734  
  $ 110,393  
As a % of Revenue
    85 %
    89 %
    86 %
    89 %
    Commercial coffee
    6,441  
    4,986  
    17,921  
    13,871  
As a % of Revenue
    15 %
    11 %
    14 %
    11 %
        Total revenues
  $ 44,395  
  $ 43,562  
  $ 124,655  
  $ 124,264  
 
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:
 
 
 
For the three months
ended September 30,
 
 
  Percentage 
 
Segment Gross Profit
 
2017
 
 
2016
 
 
change
 
Direct selling
  $ 25,472  
  $ 26,233  
    (2.9 )%
  Gross Profit % of Revenues
    67.1 %
    68.0 %
    (0.9 )%
Commercial coffee
    292  
    135  
    116.3 %
  Gross Profit % of Revenues
    4.5 %
    2.7 %
    1.8 %
Total
  $ 25,764  
  $ 26,368  
    (2.3 )%
  Gross Profit % of Revenues
    58.0 %
    60.5 %
    (2.5 )%
 
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:
 
 
 
For the nine months
ended September 30,
 
 
  Percentage
 
Segment Gross Profit
 
2017
 
 
2016
 
 
 change
 
Direct selling
  $ 71,522  
  $ 74,690  
    (4.2 )%
  Gross Profit % of Revenues
    67.0 %
    67.7 %
    (0.7 )%
Commercial coffee
    210  
    472  
    (55.5 )%
  Gross Profit % of Revenues
    1.2 %
    3.4 %
    (2.2 )%
Total
  $ 71,732  
  $ 75,162  
    (4.6 )%
  Gross Profit % of Revenues
    57.5 %
    60.5 %
    (3.0 )%
 
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):
 
 
 
Three months ended
 
 
  Nine months ended
 
 
 
September 30,
 
 
  September 30,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
  $ (1,068 )
  $ 67  
  $ (5,857 )
  $ 109  
Add/Subtract:
       
       
       
       
Interest, net
    1,752  
    946  
    4,207  
    3,139  
Income taxes (benefit) provision
    (1,290 )
    (68 )
    (2,763 )
    550  
Depreciation
    419  
    341  
    1,183  
    1,119  
Amortization
    712  
    537  
    2,047  
    1,746  
EBITDA
    525  
    1,823  
    (1,183 )
    6,663  
Add/Subtract:
       
       
       
       
Stock based compensation – options and warrant issuance
    327  
    166  
    812  
    292  
Change in the fair value of warrant derivative
    (1,519 )
    (369 )
    (788 )
    (535 )
Extinguishment loss on debt
    308  
    -  
    308  
    -  
Adjusted EBITDA
  $ (359 )
  $ 1,620  
  $ (851 )
  $ 6,420  
 
 
 
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:
 
 
 
For the years ended December 31,
 
 
Percentage
 
Segment Gross Profit (Loss)
 
2016
 
 
2015
 
 
change
 
Direct selling
  $ 97,219  
  $ 93,613  
    3.9 %
  Gross Profit % of Revenues
    66.9 %
    67.4 %
    (0.5 )%
Commercial coffee
    918  
    (644 )
    243.5 %
  Gross Profit % of Revenues
    5.3 %
    (3.6 )%
    9.0 %
Total
  $ 98,137  
  $ 92,969  
    5.6 %
  Gross Profit % of Revenues
    60.3 %
    59.4 %
    0.9 %
 
 
 
 
Operating Expenses
 
For the year ended December 31, 2016, our operating expenses increased approximately 9.2% to $95,622,000 as compared to $87,563,000 for the year ended December 31, 2015. Included in operating expense is distributor compensation paid to our independent distributors in the direct selling segment. For the year ended December 31, 2016, distributor compensation increased 6.1% to $67,148,000 from $63,276,000 for the year ended December 31, 2015. This increase was primarily attributable to the increase in revenues. Distributor compensation as a percentage of direct selling revenues increased to 46.2% for the year ended December 31, 2016 as compared to 45.5% for the year ended December 31, 2015. This increase was primarily attributable to added incentive payouts and higher level achievements by distributors.
 
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