Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
[
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from______________________
to____________________________
Commission file number 000-54900
YOUNGEVITY INTERNATIONAL,
INC.
(Exact name of registrant as specified in its charter)
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Delaware
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90-0890517
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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2400 Boswell Road,
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91914
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Chula Vista, CA
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(Zip Code)
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(Address of principal executive offices)
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(619) 934-3980
(Registrant’s telephone number, including area
code)
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Securities registered pursuant
to Section 12(b) of the Act:
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Name of each exchange on which registered
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None
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Securities registered pursuant to Section 12(g) of the
Act:
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Common stock $0.001 par value
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [
] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definition of
“accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of Act). Yes [ ] No
[X]
The aggregate market value of all of the Common Stock held by
non-affiliates of the registrant as of June 30, 2016, the last
business day of the registrant’s recently completed second
quarter, was approximately $31,618,639 based upon the closing stock
price reported on the OTCQX Market on June 30, 2016 on that
date.
The number of shares of registrant's Common Stock outstanding on
March 17, 2017 was 392,704,557.
Documents incorporated by reference: None.
YOUNGEVITY INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2016
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PART I
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5
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15
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27
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28
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28
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PART II
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29
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75
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75
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PART III
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76
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80
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82
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PART IV
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86
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| FORM 10-K SUMMARY |
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YOUNGEVITY INTERNATIONAL, INC.
Annual Report (Form 10-K)
For Year Ended December 31, 2016
PART I
Item 1. Business
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”)
contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), that involve substantial risks and
uncertainties. The forward-looking statements are contained
principally in Part I, Item 1. “Business,” Part I, Item
1A. “Risk Factors,” and Part II, Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” but are also contained
elsewhere in this Annual Report. In some cases you can identify
forward-looking statements by terminology such as
“may,” “should,” “potential,”
“continue,” “expects,”
“anticipates,” “intends,”
“plans,” “believes,”
“estimates,” and similar expressions. These statements
are based on our current beliefs, expectations, and assumptions and
are subject to a number of risks and uncertainties, many of which
are difficult to predict and generally beyond our control, that
could cause actual results to differ materially from those
expressed, projected or implied in or by the forward-looking
statements.
You should refer to Item 1A. “Risk Factors.” section of
this Annual Report for a discussion of important factors that may
cause our actual results to differ materially from those expressed
or implied by our forward-looking statements. As a result of these
factors, we cannot assure you that the forward-looking statements
in this Annual Report will prove to be accurate. Furthermore, if
our forward-looking statements prove to be inaccurate, the
inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, you should not
regard these statements as a representation or warranty by us or
any other person that we will achieve our objectives and plans in
any specified time frame, or at all. We do not undertake any
obligation to update any forward-looking statements.
Unless the context requires otherwise, references to
“we,” “us,” “our,” and
“Youngevity,” refer to Youngevity International, Inc.
and its subsidiaries.
Item 1. Business
We are
a leading omni-direct lifestyle company offering a hybrid of the
direct selling business model that also offers e-commerce and the
power of social selling. Assembling a virtual Main Street of
products and services under one corporate entity, Youngevity offers
products from the six top selling retail categories:
health/nutrition, home/family, food/beverage (including coffee),
spa/beauty, apparel/jewelry, as well as innovative
services.
We
operate in two segments: the direct selling segment where products
are offered through a global distribution network of preferred
customers and distributors and the commercial coffee segment where
products are sold directly to businesses. During the year ended
December 31, 2016, we derived approximately 89% of our revenue from
our direct sales and approximately 11% of our revenue from our
commercial coffee sales, respectively.
Direct
Selling Segment - In the direct
selling segment we sell health and wellness, beauty product and
skin care, scrap booking and story booking items, packaged food
products and other service based products on a global basis and
offer a wide range of products through an international direct
selling network. Our direct sales are made through our network,
which is a web-based global network of customers and
distributors. Our multiple independent sales force
markets a variety of products to an array of customers, through
friend-to-friend marketing and social networking. We consider our
company to be an e-commerce company whereby personal interaction is
provided to customers by our independent sales
network. Initially, our focus was solely on the sale of
products in the health, beauty and home care market through our
marketing network; however, we have since expanded our selling
efforts to include a variety of other products in other markets.
Our direct selling segment offers more than 5,000 products to
support a healthy lifestyle including:
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Nutritional supplements
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Gourmet coffee
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Weight management
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Skincare and cosmetics
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Health and wellness
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Packaged foods
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Lifestyle products (spa, bath, home and garden)
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Pet care
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Digital products including scrap and memory books
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Telecare health services
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Apparel and fashion accessories
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Business lending
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Since
2010 we have expanded our operations through a
series of acquisitions of the assets of other direct selling
companies including their product lines and sales forces, we have
substantially expanded our distributor base by merging the
companies that we have acquired under our web-based independent
distributor network, as well as providing our distributors with
additional new products to add to their product
offerings.
Set forth below is information regarding each of our 2016 and 2015
acquisitions.
Legacy for Life, LLC
Effective September 1, 2016, we
acquired certain assets of Legacy for Life, LLC, an Oklahoma based
direct sales company and acquired the equity of two wholly owned
subsidiaries of Legacy for Life, LLC. Legacy for Life Taiwan and
Legacy for Life Limited (Hong Kong) collectively referred to
as (“Legacy for Life”). Legacy for Life is a science
based direct seller of i26, a product made from the IgY Max formula
or hyperimmune whole dried egg, which is the key ingredient in
Legacy for Life products. Additionally, we entered into an
Ingredient Supply Agreement to market i26 worldwide. The contingent
consideration’s estimated fair value at the date of
acquisition was $825,000. In addition we agreed to pay $221,000
over a stated term in accordance with
the agreement for the net assets of the Taiwan and Hong Kong
entities and certain inventories from Legacy for Life.
Nature’s Pearl Corporation
Effective September
1, 2016, we acquired certain assets of Nature’s Pearl
Corporation, (“Nature’s Pearl”) a direct sales
company that produces nutritional supplements and skin and personal
care products using the muscadine grape grown in the southeastern
region of the United States that are deemed to be rich in
antioxidants. The contingent consideration’s estimated fair
value at the date of acquisition was $1,475,000. We paid $200,000 for the purchase of certain
inventories, which has been applied against and reduced
the maximum aggregate purchase price.
Renew Interest, LLC (SOZO Global, Inc.)
On July
29, 2016, we acquired certain assets of Renew Interest, LLC
(“Renew”) formerly owned by SOZO Global, Inc.
(“SOZO”), a direct sales company that offers
nutritional supplements, skin and personal care products, weight
loss products and coffee products. The SOZO brand of products
contains CoffeeBerry a fruit extract known for its high level of
antioxidant properties. The contingent consideration’s
estimated fair value at the date of acquisition was $465,000.
We agreed to pay $300,000 for the
purchase of certain inventories and assumed liabilities over a
stated term in accordance with the agreement, which has been
applied against and reduced the maximum aggregate purchase price.
We also received additional inventories on a consignment
basis.
South Hill Designs Inc.
On
January 20, 2016, we acquired certain assets of South Hill Designs
Inc., (“South Hill”) a direct sales and proprietary
jewelry company that specializes
in customized lockets and charms. The purchase price allocation of the
intangible assets acquired for South Hill was $839,000 as of
December 31, 2016.
Additionally, we entered into an Exclusive, Licensing and Source
Agreement with two of the founders of South Hill for services and
the use of certain intellectual property.
Paws Group, LLC
Effective
July 1, 2015, we acquired certain assets of Paws Group, LLC,
(“PAWS”) a direct sales company for pet lovers that
offers an exclusive pet boutique carrying treats for dogs and cats
as well as grooming and bath products. The purchase
price consisted of a maximum aggregate purchase price of $150,000.
We paid approximately $61,000 for the purchase of certain
inventories, which has been applied against and reduced
the maximum aggregate purchase price.
Mialisia & Co., LLC
On
June 1, 2015, we acquired certain assets of Mialisia & Co.,
LLC, (“Mialisia”) a direct sales jewelry company that
specializes in interchangeable jewelry. As a result of this
business combination, our distributors and customers obtained
access to the unique line of Mialisia’s patent-pending
“VersaStyle™” jewelry and the Mialisia
distributors and customers obtained access to products offered by
us. The purchase price consisted of a maximum aggregate
purchase price of $1,900,000. We paid approximately $119,000 for
the purchase of certain inventories, which has
been applied against and reduced the maximum aggregate
purchase price.
JD Premium LLC
On
March 4, 2015, we acquired certain assets of JD Premium, LLC
(“JD Premium”) a dietary supplement company. As a
result of this business combination, our distributors and customers
obtained access to JD Premium’s unique line of products and
JD Premium’s distributors and clients obtained access to
products offered by us. The purchase price consisted of a
maximum aggregate purchase price of $500,000. We paid $50,000
for the purchase of certain inventories, which has
been applied against and reduced the maximum aggregate
purchase price.
Sta-Natural, LLC
On
February 23, 2015, we acquired certain assets and assumed certain
liabilities of Sta-Natural, LLC, (“Sta-Natural”) a
dietary supplement company and provider of vitamins, minerals and
supplements for families and their pets. As a result of this
business combination, our distributors and customers obtained
access to Sta-Natural’s unique line of products and
Sta-Natural’s distributors and clients obtained access to
products offered by us. The purchase price consisted of a
maximum aggregate purchase price of $500,000. We paid $25,000 for
the purchase of certain inventories, which has
been applied against and reduced the maximum aggregate
purchase price.
Set forth below is information regarding each of our other
acquisitions during 2013 and 2014.
On
October 1, 2014, we acquired certain assets and assumed certain
liabilities of Restart Your Life, LLC, a dietary supplement company
and provider of immune system support products and therapeutic skin
lotions. In May 2014, we acquired certain assets and certain
liabilities of Beyond Organics, LLC, a vertically integrated
organic food and beverage company marketing its organic products
through a network of independent sales distributors. In April 2014,
we acquired certain assets and certain liabilities of Good Herbs,
Inc., a traditional herbal company with pure, unaltered,
chemical-free natural herbal supplements marketing its organic
products through a network of independent sales
distributors.
In
November of 2013, we acquired certain assets and certain
liabilities of Biometics International, Inc., a developer and
distributor of a line of liquid supplements marketed through a
network of independent sales distributors. In October 2013, we
acquired certain assets and liabilities of GoFoods Global, LLC, a
developer and distributor of a complete line of packaged foods
including breads and desserts, soups and entrees. In August 2013,
we acquired certain assets and certain liabilities of Heritage
Markers, LLC, a developer and distributor of a line of digital
products including scrap books, memory books and greeting cards
marketed through a network of independent sales distributors and
the product line is sold through an e-commerce platform. In July
2012, we acquired certain assets of Livinity, Inc., a developer and
distributor of nutritional products through a network of
distributors. In April 2012, we acquired certain assets of GLIE,
LLC, a developer and distributor of nutritional supplements,
including vitamins and mineral
supplements.
Coffee
Segment - We engage in the
commercial sale of one of our products, our coffee through our
subsidiary CLR Roasters, LLC (“CLR”) and its
subsidiary. We own a traditional coffee roasting
business that produces coffee under its own Café La Rica
brand, Josie’s Java House Brand and Javalution brands. CLR
produces a variety of private labels through major national sales
outlets and to major customers including cruise lines and office
coffee service operators, as well as through our distributor
network. Our coffee manufacturing division, CLR, was
established in 2001 and is a wholly-owned subsidiary. CLR produces
and markets a unique line of coffees with health benefits under the
JavaFit® brand which is sold directly to
consumers.
Our
CLR Miami Roasting facility is 50,000 square foot and is SQF Level
2 certified, which is a stringent food safety auditing process
that verifies the coffee bean processing plant and
distribution facility is in compliance with Certified HACCP (Hazard
Analysis, Critical Control Points) food safety plans.
In
March 2014, we expanded our coffee segment and started our new
green coffee business with CLR’s acquisition of Siles
Plantation Family Group, which is now a wholly-owned subsidiary of
CLR located in Matagalpa, Nicaragua. Siles Plantation Family Group
includes “La Pita,” a dry-processing facility on
approximately 26 acres of land and “El Paraiso,” a
coffee plantation consisting of approximately 500 acres of land and
thousands of coffee plants which produces 100 percent Arabica
coffee beans that are shade grown, Organic, Rainforest Alliance
Certified™ and Fair Trade Certified™.
The
plantation and dry-processing facility allows CLR to control the
coffee production process from field to cup. The dry-processing
plant allows CLR to produce and sell green coffee to major coffee
suppliers in the United States and around the world. CLR has
engaged a husband and wife team to operate the Siles Plantation
Family Group by way of an operating agreement. The agreement
provides for the sharing of profits and losses generated by the
Siles Plantation Family Group after certain conditions are met. CLR
has made substantial improvements to the land and facilities since
2014. The 2017 harvest season started in November 2016 and will
continue through April of 2017.
Products
Direct Selling Segment - Youngevity®
We
offer more than 5,000 products to support a healthy lifestyle. All
of these products, which are sold through our direct selling
network, can be categorized into six verticals. (Health &
Nutrition, Home & Family, Food & Beverage, Spa &
Beauty, Apparel & Jewelry, and Services.)
Our
flagship Health & Nutrition products include our Healthy Body
Start Pak™, which includes Beyond Tangy Tangerine® (a
multivitamin/mineral/amino acid supplement), Ultimate EFA
Plus™ (an essential fatty acid supplement), and Beyond
Osteo-fx™ (a bone and joint health supplement). This product
category is continually evaluated and updated where and when
necessary. New products are introduced to take advantage
of new opportunities that may become available based on scientific
research and or marketing trends. Beyond Tangy
Tangerine® 2.0 was added to the line to offer a second flavor
and a non-GMO option to our number one selling product. The
Healthy Body Start Pak™ comes in a variety of options and
Paks to target specific health concerns or goals.
Our
Food & Beverage includes nutrient-rich energy drinks, healthy
probiotic chocolates, and organic gourmet coffee. Our Be The Change
Coffee is grown and processed at our very own green coffee
plantation in the Nicaraguan rainforest. Our flagship Weight
Management program is marketed as the Healthy Body Challenge, a
program that involves three phases: detoxification, transformation
and the healthy lifestyle phase. Each phase includes
recommended products. During the transformation phase, we recommend
the Ketogenic 30-Day Burst, consisting of the Slender FX™
Keto products to support fat loss. Our Spa & Beauty products
include Youngevity® Mineral Makeup™, Botanical Spa and
Essential Oils. Our Home and Garden products include our For Tails
Only™ line of pet products, Hydrowash™, an
environmentally safe cleaner, and Bloomin Minerals™, a line
of plant and soil revitalizers.
Our acquisition of Heritage Makers in August of
2013 allowed customers and distributors to create and publish a
number of products utilizing their personal photos. Soon
after, we introduced Our Memories For Life, a scrapbooking and
memory keeping line of products, and Anthology DIY by Lisa
Bearnson, a creative new approach to start-to-finish DIY projects.
Heritage Makers account provides ongoing access to Studio, a user
friendly, online program, where a person can make one-of-a-kind
keepsakes, storybooks, photo gifts and more, using Heritage Makers
rich library of digital art and product templates. Products
available include Storybooks, Digital Scrapbooking, Cards, and
Photo Gifts. The full offering can be viewed at www.heritagemakers.com.
Information contained on our websites are not incorporated by
reference, and do not form any part of, this Annual Report on Form
10-K. We have included the website address as a factual reference
and do not intend it to be an active link to the
website.
In
2014 we introduced our MK Collaboration line of fashion and jewelry
accessories to complement our nutritional and makeup products and
with the acquisition of Mialisia in 2015 and the licensing
agreement we entered into with South Hill Designs which was
effective January 13, 2016 (a proprietary jewelry company that
sells customized lockets and charms), we have further expanded our
jewelry line that our distributors have access to offering more
variety and appealing to a broader consumer base.
Coffee Segment - CLR
On
July 11, 2011, our AL Global Corporation, a privately held
California corporation (“AL Global”), merged with
and into a wholly-owned subsidiary of Javalution Coffee Company, a
publicly traded Florida corporation (“Javalution”).
After the merger, Javalution reincorporated in Delaware and changed
its name to AL International, Inc. On July 23, 2013 AL
International, Inc. changed its name to Youngevity International,
Inc.
In
connection with this merger, CLR, which had been a wholly-owned
subsidiary of Javalution prior to the merger, continued to be a
wholly-owned subsidiary of the Company. CLR operates a
traditional coffee roasting business, and through the merger we
were provided access to additional distributors, as well as added
the JavaFit® product line to our network of direct marketers.
Javalution, through its JavaFit Brand, develops products in the
relatively new category of fortified coffee. JavaFit
fortified coffee is a blend of roasted ground coffee and various
nutrients and supplements.
Our
JavaFit line of coffee is only sold through our direct selling
network. CLR produces coffee under its own brands, as well as under
a variety of private labels through major national retailers,
various office coffee and convenience store distributors, to
wellness and retirement centers, to a number of cruise lines and
cruise line distributors, and direct to the consumer through sales
of the JavaFit Brand to our direct selling division.
In
addition, CLR produces coffee under several company owned brands
including: Café La Rica, Café Alma, Josie’s Java
House, Javalution Urban Grind, Javalution Daily Grind, and
Javalution Royal Roast. These brands are sold to various
internet and traditional brick and mortar retailers including
Wal-Mart, Winn-Dixie, Jetro, American Grocers, Publix, Home Goods,
Marshalls and TJ Maxx.
During
2015 CLR invested in the K-Cup® coffee equipment and
capabilities and began the production of the K-Cup® line of
single-serve coffee products. In addition, we registered our own
Y-Cup® trademark for Youngevity identification to expand the
business brand name.
CLR’s
green coffee business provides for the sale of green coffee beans
to other roasters and distributors, primarily from the distribution
of coffee beans from Nicaragua.
Our
CLR products offered include:
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100% Colombian Premium Blend;
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Italian Espresso;
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House Blend;
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Decaffeinated Coffee;
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Dark Roast;
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Half-caff 50/50 blend Espresso;
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Donut Shop;
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Green Coffee Beans;
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Flavored Coffees;
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Organic Coffees; and
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Espresso;
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Select Water Decaffeinated.
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Distribution
Direct Selling
Segment - We presently sell
products domestically in 50 states and internationally, with
operations in the U.S. and currently eight international
distribution centers. For the year ended December 31,
2016 approximately 9% of our sales were derived from sales
outside the U.S. We primarily sell our products to the
ultimate consumer through the direct selling channel. Our
distributors are required to pay a one-time enrollment fee and
receive a welcome kit specific to that country region that consists
of forms, policy and procedures, selling aids, and access to our
distributor website, prior to commencing services for us as a
distributor. Distributors are independent contractors and not our
employees. Distributors earn a profit by purchasing products
directly from us at a discount from a published brochure price and
selling them to their customers, the ultimate consumer of our
products. We generally have no arrangements with end users of our
products beyond the distributors, except as described
below.
A
distributor contacts customers directly, selling primarily through
our online or printed brochures, which highlight new products and
special promotions for each of our sales campaigns. In
this sense, the distributor, together with the brochure, is the
“store” through which our products are sold. A brochure
introducing new sales campaigns is frequently produced and our
websites and social networking activity take place on a continuous
basis. Generally, distributors and customer’s
forward orders using the internet, mail, telephone, or fax and
payments are processed via credit card or other acceptable forms of
payment at the time an order is placed. Orders are
processed and the products are assembled primarily at our
distribution center in Chula Vista, California and delivered to
distributors, distribution centers and customers through a variety
of local, national and international delivery
companies.
We
employ certain web enabled systems to increase distributor support,
which allows distributors to run their business more efficiently
and also allows us to improve our order-processing
accuracy. In many countries, distributors can utilize
the internet to manage their business electronically, including
order submission, order tracking, payment and two-way
communications. In addition, distributors can further build their
own business through personalized web pages provided by us,
enabling them to sell a complete line of our products online.
Self-paced online training is also available in certain
markets, as well as up-to-the-minute news, about us.
In
the U.S. and selected other markets, we also market our products
through the following consumer websites, below is a list of some of
our websites:
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● www.youngevity.com
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● www.clrroasters.com
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● www.ygyi.com
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● www.cafelarica.com
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● www.youngofficial.com
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● www.javalution.com
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● www.heritagemakers.com
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● www.mialisia.com
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● www.mkcollab.com
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● www.mybeyondorganic.com
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Information
contained on our websites are not incorporated by reference into,
and do not form any part of, this Annual Report on Form 10-K. We
have included the website address as a factual reference and do not
intend it to be an active link to the website.
Introducing
new distributors and the training of the new distributors are the
primary responsibilities of key independent distributors supported
by our marketing home office staff. The independent distributors
are independent contractors compensated exclusively based on total
sales of products achieved by their down-line distributors and
customers. Although the independent distributors are not paid a fee
for recruiting introducing additional distributors, they have the
incentive to recruit onboard additional distributors to increase
their opportunities for increasing their total product sales and
related sales commissions. Acquisitions of other direct selling
businesses and personal contacts, including recommendations from
current distributors, and local market advertising constitute the
primary means of obtaining new distributors and customers.
Distributors also have the opportunity to earn bonuses based on the
net sales of products made by distributors they have recruited
introduced and trained in addition to discounts earned on their own
sales of our products. This program can be unlimited based on the
level achieved in accordance with the compensation plan that can
change from time to time at our discretion. The primary
responsibilities of sales leaders are the prospecting, appointing,
training and development of their down-line distributors and
customers while maintaining a certain level of their own
sales.
Coffee Segment
– Our
coffee segment is operated by CLR. The segment operates
a coffee roasting plant and distribution facility located in Miami,
Florida. The 50,000 square foot plant contains two
commercial grade roasters and four commercial grade grinders
capable of roasting 10 million pounds of coffee
annually. The plant contains a variety of packaging
equipment capable of producing two ounce fractional packs, vacuum
sealed brick packaging for espresso, various bag packaging
configurations ranging from eight ounces up to a five pound bag
package, as well as Super Sack packaging that holds bulk coffee up
to 1,100 pounds. The coffee segment’s single-serve K-Cup
filling equipment is capable of producing 35 million K-Cups
annually of our own brands and private label
orders.
The
versatility of the plant supports a diverse customer
base. The coffee segment is a large supplier to the
hospitality market with a great focus on serving the cruise line
industry. A major revenue producing area is the private
label market where the company produces coffee for various retailer
owned private brands. The segment supplies coffee and
equipment to retirement communities, services the office coffee
service segment, and markets through distributors to the convenient
store market; CLR also markets its own brands of coffee to various
retailers. Our Company owned brands that are currently
on retail shelves includes Café La Rica and the Josie’s
Java House of brands.
The
coffee segment also includes our green coffee business. CLR sources
green coffee from Nicaragua in Central America and sells procured
coffee to other coffee distributors. With the addition of the
Nicaragua plantation and dry-processing facility we have further
expanded our coffee segment with the ability to process green
coffee not only for our own use but also provide this service to
other coffee growers.
Seasonality and Back Orders
Our
business in both the direct selling and coffee segment can
experience weaker sales during the summer months; however, based on
recent experience, seasonality has not been material to our
operating results. We have not experienced significant back
orders.
Promotion and Marketing
Direct Selling Segment -
Sales
promotion and sales development activities are directed at
assisting distributors through sales aids such as brochures,
product samples, demonstration product videos and live training
sessions. In order to support the efforts of distributors to reach
new customers, specially designed sales aids, promotional pieces,
customer flyers, radio and print advertising are used. In addition,
we seek to motivate our distributors through the use of special
incentive programs that reward superior sales performance. Periodic
sales meetings with our independent distributors are conducted by
our home office staff. The meetings
are designed to keep distributors abreast of product line changes,
explain sales techniques and provide recognition for sales
performance.
A
number of merchandising techniques are used, including the
introduction of new products, the use of combination offers, the
use of trial sizes and samples, and the promotion of products
packaged as gift items. In general, for each sales campaign, a
distinctive brochure or flyer is published, in which new products
are introduced and selected items are offered as special promotions
or are given particular prominence in the brochure. A key current
priority for our merchandising is to continue the use of pricing
and promotional models to enable a deeper, fact-based understanding
of the role and impact of pricing within our product
portfolio.
Coffee Segment
– Sales promotion and sales
development primarily take place via the CLR in-house
team. CLR works diligently to be sure that CLR is invited to
participate in the request for proposal (“RFP”) process
that comes up each year on major coffee contracts. CLR's
in-house sales team consists of five people that devote the
majority of their time to obtaining new business. CLR
has established a direct store distribution (“DSD”)
route that it utilizes to market, promote and ship its Café La
Rica and Josie’s Java House brands. Various
promotion strategies and advertisements in retail circulars are
utilized to support the brands being marketed through
DSD.
Suppliers
We
purchase our inventory from multiple third-party suppliers at
competitive prices. For the year ended December 31, 2016 we
made purchases from three vendors that individually comprised more
than 10% of total purchases and in aggregate approximated
54% of total purchases for the two
segments.
Direct Selling
Segment - We purchase raw
materials from numerous domestic and international suppliers. Other
than the coffee products produced through CLR, all of our products
are manufactured by independent suppliers. To achieve certain
economies of scale, best pricing and uniform quality, we rely
primarily on a few principal suppliers, namely: Global Health Labs,
Inc., Pacific Nutritional, Inc. and Nutritional Engineering,
Inc.
Sufficient
raw materials were available during the year ended December 31,
2016 and we believe they will continue to be. We monitor the
financial condition of certain suppliers, their ability to supply
our needs, and the market conditions for these raw materials. We
believe we will be able to negotiate similar market terms with
alternative suppliers if needed.
Coffee Segment
- We currently source green coffee
from Nicaragua. We utilize a combination of
outside brokers
and direct relationships with farms for our supply of green coffee.
Outside brokers provide the largest supply of our green coffee.
For large contracts, CLR works to
negotiate a price lock with its suppliers to protect CLR and its
customers from price fluctuations that take place in the
commodities market.
We produce green coffee from
CLR’s own plantation it acquired in Nicaragua in 2014. We do
not believe that CLR is substantially dependent upon nor exposed to
any significant concentration risk related to purchases from any
single vendor, given the availability of alternative sources from
which we may purchase inventory. The
supply and price of coffee are subject to high volatility. Supply
and price of all coffee grades are affected by multiple factors,
such as weather, pest damage, politics, competitive pressures, the
relative value of the United States currency and economics in the
producing countries.
Intellectual Property
We
have developed and we use registered trademarks in our business,
particularly relating to our corporate and product names. We own
several trademarks that are registered with the U.S. Patent and
Trademark Office and we also own trademarks in Canada, Australia,
New Zealand, Singapore, Mexico, and Russia. Registration of a
trademark enables the registered owner of the mark to bar the
unauthorized use of the registered trademark in connection with a
similar product in the same channels of trade by any third-party in
the respective country of registration, regardless of whether the
registered owner has ever used the trademark in the area where the
unauthorized use occurs.
We
also claim ownership and protection of certain product names,
unregistered trademarks, and service marks under common law. Common
law trademark rights do not provide the same level of protection
that is afforded by the registration of a trademark. In addition,
common law trademark rights are limited to the geographic area in
which the trademark is actually used. We believe these trademarks,
whether registered or claimed under common law, constitute valuable
assets, adding to recognition of our brands and the effective
marketing of our products. We intend to maintain and keep current
all of our trademark registrations and to pay all applicable
renewal fees as they become due. The right of a trademark owner to
use its trademarks, however, is based on a number of factors,
including their first use in commerce, and trademark owners can
lose trademark rights despite trademark registration and payment of
renewal fees. We therefore believe that these proprietary rights
have been and will continue to be important in enabling us to
compete, and if for any reason we were unable to maintain our
trademarks, our sales of the related products bearing such
trademarks could be materially and negatively affected. See
“Risk Factors”.
We
own certain intellectual property, including trade secrets that we
seek to protect, in part, through confidentiality agreements with
employees and other parties. Most of our products are not protected
by patents and therefore such agreements are often our only form of
protection. Even where these agreements exist, there can
be no assurance that these agreements will not be breached, that we
will have adequate remedies for any breach, or that our trade
secrets will not otherwise become known to or independently
developed by competitors. Our proprietary product formulations are
generally considered trade secrets, but are not otherwise protected
under intellectual property laws.
We
intend to protect our legal rights concerning intellectual property
by all appropriate legal action. Consequently, we may become
involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing
proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical
personnel.
Industry Overview
We
are engaged in two industries, the direct selling industry and the
sale of coffee industry.
Direct Selling Industry
Direct
selling is a business distribution model that allows a company to
market its products directly to consumers by means of independent
contractors and relationship referrals. Independent,
unsalaried salespeople, referred to as distributors, represent us
and are awarded a commission based upon the volume of product sold
through each of their independent business operations.
According
to the World Federation of Direct Selling Association 2016 annual
report, the United States is the world’s largest direct
selling market, representing 20% worldwide based on 2015
statistical data. Driving industry growth is the increase in the
number of people involved in direct selling, on global level over
103 million people are direct sellers as reported in 2015, an
increase of 4.4% from 99 million people in 2014.
In
the United States retail sales for the direct selling channel
increased 4.8% to $36.1 billion in 2015 from $34.7 billion in 2014.
Compounded annual growth rate from 2012-2015 was 4.5%. And on a
global level retail sales for the direct selling channel increased
7.7% to $183.7 billion in 2015 from $170.6 billion in 2014.
Compounded annual growth rate from 2012-2015 was 7.2%.
The
Direct Selling Association (“DSA”) reported in its 2015
Overview sales by major product group in the United States that the
fastest growing product was Wellness followed by Services &
Other, the two categories alone representing $19 billion in sales
in 2015. Top product categories continue to gain market share: home
and family care/durables, personal care, jewelry, clothing,
leisure/educations. Wellness products include weight-loss products
and dietary supplements. Source: 2016 Growth & Outlook Report:
U.S. Selling in 2015.
Coffee Selling Industry
According to IBISWorld industry March 2016 reports 51121c. “Coffee
Production and Demand in the U.S.”, during the past five
years, the coffee production industry fared well, exhibiting
revenue growth due to increases in input commodity prices that were
passed on to customers. Moreover, in the next five years, the
industry is expected to benefit from consumer demand for
premium-coffee products. As the world price of coffee is expected
to grow, coffee producers are expected to benefit from less
volatile input commodity prices, compared with the previous period.
As a result, we anticipate that coffee producers will be able
to efficiently reflect input commodity pricing in their coffee
prices. The strong demand projection comes at a time of squeezed
global coffee supplies, which pushed prices to multiyear highs last
year following a historic drought in Brazil, the world’s
largest grower.
Competition
Direct Selling
Segment – The diet
fitness and health food industries, as well as the food and drink
industries in general, are highly competitive, rapidly evolving and
subject to constant change. The number of competitors in
the overall diet, fitness, health food, and nutraceutical
industries is virtually endless. We believe that
existing industry competitors are likely to continue to expand
their product offerings. Moreover, because there are few, if any,
substantial barriers to entry, we expect that new competitors are
likely to enter the “functional foods” and
nutraceutical markets and attempt to market “functional
food” or nutraceutical coffee products similar to our
products, which would result in greater competition. We
cannot be certain that we will be able to compete successfully in
this extremely competitive market.
We
face competition from competing products in each of our lines of
business, in both the domestic and international markets.
Worldwide, we compete against products sold to consumers by other
direct selling and direct sales companies and through the Internet,
and against products sold through the mass market and prestige
retail channels. We also face increasing competition in our
developing and emerging markets.
Within
the direct selling channel, we compete on a regional and often
country-by-country basis, with our direct selling competitors.
There are also a number of direct selling companies that sell
product lines similar to ours, some of which also have worldwide
operations and compete with us globally. We compete against large
and well-known companies that manufacture and sell broad product
lines through various types of retail establishments such as
General Foods and Nestle. In addition, we compete against many
other companies that manufacture and sell in narrower product lines
sold through retail establishments. This industry is highly
competitive, and some of our principal competitors in the industry
are larger than we are and have greater resources than we do.
Competitive activities on their part could cause our sales to
suffer. We have many competitors in the highly competitive energy
drink, skin care and cosmetic, coffee, pet line and pharmacy card
industries globally, including retail establishments, principally
department stores, and specialty retailers, and direct-mail
companies specializing in these products. Our largest direct sales
competitors are Herbalife, Amway, USANA and NuSkin. In
the energy drink market we compete with companies such as Red Bull,
Gatorade and Rock Star. Our beauty, skin care and
cosmetic products compete with Avon and Bare
Essentials. From time to time, we need to reduce the
prices for some of our products to respond to competitive and
customer pressures or to maintain our position in the marketplace.
Such pressures also may restrict our ability to increase prices in
response to raw material and other cost increases. Any reduction in
prices as a result of competitive pressures, or any failure to
increase prices when raw material costs increase, would harm profit
margins and, if our sales volumes fail to grow sufficiently to
offset any reduction in margins, our results of operations would
suffer.
We
are also subject to significant competition from other network
marketing organizations for the time, attention, and commitment of
new and existing distributors. Our ability to remain competitive
depends, in significant part, on our success in recruiting and
retaining distributors. There can be no assurance that our programs
for recruiting and retaining distributors will be successful. The
pool of individuals who may be interested in network marketing is
limited in each market and it is reduced to the extent other
network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive
opportunity for distributors, there can be no assurance that other
network marketing companies will not be able to recruit our
existing distributors or deplete the pool of potential distributors
in a given market.
Coffee Segment
– With respect to our coffee
products, we compete not only with other widely advertised branded
products, but also with private label or generic products that
generally are sold at lower prices. Consumers’ willingness to
purchase our products will depend upon our ability to maintain
consumer confidence that our products are of a higher quality and
provide greater value than less expensive alternatives. If the
difference in quality between our brands and private label products
narrows, or if there is a perception of such a narrowing, then
consumers may choose not to buy our products at prices that are
profitable for us. If we do not succeed in effectively
differentiating ourselves from our competitors in specialty coffee,
including by developing and maintaining our brands, or our
competitors adopt our strategies, then our competitive position may
be weakened and our sales of specialty coffee, and accordingly our
profitability, may be materially adversely
affected.
Government Regulations
The
processing, formulation, manufacturing, packaging, labeling,
advertising, and distribution of our products are subject to
federal laws and regulation by one or more federal agencies,
including the FDA, the FTC, the Consumer Product Safety Commission,
the U.S. Department of Agriculture, and the Environmental
Protection Agency. These activities are also regulated by various
state, local, and international laws and agencies of the states and
localities in which our products are sold. Government regulations
may prevent or delay the introduction or require the reformulation,
of our products, which could result in lost revenues and increased
costs to us. For instance, the FDA regulates, among other things,
the composition, safety, labeling, and marketing of dietary
supplements (including vitamins, minerals, herbs, and other dietary
ingredients for human use). The FDA may not accept the evidence of
safety for any new dietary ingredient that we may wish to market,
may determine that a particular dietary supplement or ingredient
presents an unacceptable health risk, and may determine that a
particular claim or statement of nutritional value that we use to
support the marketing of a dietary supplement is an impermissible
drug claim, is not substantiated, or is an unauthorized version of
a “health claim.” Any of these actions could prevent us
from marketing particular dietary supplement products or making
certain claims or statements of nutritional support for them. The
FDA could also require us to remove a particular product from the
market. Any future recall or removal would result in additional
costs to us, including lost revenues from any additional products
that we are required to remove from the market, any of which could
be material. Any product recalls or removals could also lead to
liability, substantial costs, and reduced growth prospects. With
respect to FTC matters, if the FTC has reason to believe the law is
being violated (e.g. failure to possess adequate
substantiation for product claims), it can initiate an enforcement
action. The FTC has a variety of processes and remedies available
to it for enforcement, both administratively and judicially,
including compulsory process authority, cease and desist orders,
and injunctions. FTC enforcement could result in orders requiring,
among other things, limits on advertising, consumer redress,
divestiture of assets, rescission of contracts, or such other
relief as may be deemed necessary. Violation of these orders could
result in substantial financial or other penalties. Any action
against us by the FTC could materially and adversely affect our
ability to successfully market our products.
Additional
or more stringent regulations of dietary supplements and other
products have been considered from time to time. These developments
could require reformulation of some products to meet new standards,
recalls or discontinuance of some products not able to be
reformulated, additional record-keeping requirements, increased
documentation of the properties of some products, additional or
different labeling, additional scientific substantiation, adverse
event reporting, or other new requirements. Any of these
developments could increase our costs significantly. For example,
the Dietary Supplement and Nonprescription Drug Consumer Protection
Act (§3546), which was passed by Congress in December 2006,
impose significant regulatory requirements on dietary supplements
including reporting of “serious adverse events” to FDA
and recordkeeping requirements. This legislation could raise our
costs and negatively impact our business. In June 2007, the FDA
adopted final regulations on GMPs in manufacturing, packaging, or
holding dietary ingredients and dietary supplements, which apply to
the products we manufacture and sell.
These
regulations require dietary supplements to be prepared, packaged,
and held in compliance with certain rules. These regulations could
raise our costs and negatively impact our business. Additionally,
our third-party suppliers or vendors may not be able to comply with
these rules without incurring substantial expenses. If our
third-party suppliers or vendors are not able to timely comply with
these new rules, we may experience increased cost or delays in
obtaining certain raw materials and third-party products. Also, the
FDA has announced that it plans to publish guidance governing the
notification of new dietary ingredients. Although FDA guidance is
not mandatory, it is a strong indication of the FDA’s current
views on the topic discussed in the guidance, including its
position on enforcement.
In
addition, there are an increasing number of laws and regulations
being promulgated by the U.S. government, governments of individual
states and governments overseas that pertain to the Internet and
doing business online. In addition, a number of legislative and
regulatory proposals are under consideration by federal, state,
local, and foreign governments and agencies. Laws or regulations
have been or may be adopted with respect to the Internet relating
to:
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liability for information retrieved from or transmitted over the
Internet;
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online content regulation;
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commercial e-mail;
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visitor privacy; and
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taxation and quality of products and services.
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Moreover,
the applicability to the Internet of existing laws governing issues
such as:
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intellectual property ownership and infringement;
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consumer protection;
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obscenity;
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defamation;
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employment and labor;
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the protection of minors;
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health information; and
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personal privacy and the use of personally identifiable
information.
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This
area is uncertain and developing. Any new legislation or regulation
or the application or interpretation of existing laws may have an
adverse effect on our business. Even if our activities are not
restricted by any new legislation, the cost of compliance may
become burdensome, especially as different jurisdictions adopt
different approaches to regulation.
We
are also subject to laws and regulations, both in the U.S. and
internationally, that are directed at ensuring that product sales
are made to consumers of the products and that compensation,
recognition, and advancement within the marketing organization are
based on the sale of products rather than on investment in the
sponsoring company. These laws and regulations are generally
intended to prevent fraudulent or deceptive schemes, often referred
to as “pyramid” schemes, which compensate participants
for recruiting additional participants irrespective of product
sales, use high pressure recruiting methods and or do not involve
legitimate products. Complying with these rules and regulations can
be difficult and requires the devotion of significant resources on
our part.
Management Information, Internet and Telecommunication
Systems
The
ability to efficiently manage distribution, compensation, inventory
control, and communication functions through the use of
sophisticated and dependable information processing systems is
critical to our success.
We
continue to upgrade systems and introduce new technologies to
facilitate our continued growth and support of independent
distributor activities. These systems include: (1) an internal
network server that manages user accounts, print and file sharing,
firewall management, and wide area network connectivity; (2) a
leading brand database server to manage sensitive transactional
data, corporate accounting and sales information; (3) a
centralized host computer supporting our customized order
processing, fulfillment, and independent distributor management
software; (4) a standardized telecommunication switch and
system; (5) a hosted independent distributor website system
designed specifically for network marketing and direct selling
companies; and (6) procedures to perform daily and weekly
backups with both onsite and offsite storage of
backups.
Our
technology systems provide key financial and operating data for
management, timely and accurate product ordering, commission
payment processing, inventory management and detailed independent
distributor records. Additionally, these systems deliver real-time
business management, reporting and communications tools to assist
in retaining and developing our sales leaders and independent
distributors. We intend to continue to invest in our technology
systems in order to strengthen our operating platform.
Product Returns
Our
return policy in the direct selling segment provides that customers
and distributors may return to us any products purchased within 30
days of their initial order for a full refund. Product damaged
during shipment is replaced. Product returns as a percentage of our
net sales have been approximately 2% of our monthly net sales over
the last two years. Commercial coffee segment sales are only
returnable if defective.
Employees
As
of March 17, 2017, we had 362 employees
worldwide. We believe that our current personnel are
capable of meeting our operating requirements in the near
term. We expect that as our business grows we may hire
additional personnel to handle the increased demands on our
operations and to handle some of the services that are currently
being outsourced, such as brand management and sales
efforts.
Our Corporate History
Youngevity
International, Inc., formerly AL International, Inc., founded in
1996, operates through the following domestic wholly-owned
subsidiaries: AL Global Corporation, which operates our direct
selling networks, CLR Roasters, LLC (“CLR”), our
commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC,
Youngevity Global LLC and the wholly-owned foreign subsidiaries
Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles
Plantation Family Group S.A. located in Nicaragua, Youngevity
Mexico S.A. de CV, Youngevity Israel, Ltd., Youngevity Russia LLC,
Youngevity Colombia S.A.S., Youngevity International Singapore Pte.
Ltd., Mialisia Canada, Inc., and Legacy for Life Limited (Hong
Kong).
The
Company also operates subsidiary branches of Youngevity Global LLC
in the Republic of the Philippines, Taiwan Province the
People’s Republic of China.
On
July 11, 2011, AL Global Corporation, a privately held California
corporation (“AL Global”), merged with and into a
wholly-owned subsidiary of Javalution Coffee Company, a publicly
traded Florida corporation (“Javalution”). After the
merger, Javalution reincorporated in Delaware and changed its name
to AL International, Inc. In connection with this merger, CLR,
which had been a wholly-owned subsidiary of Javalution prior to the
merger, continued to be a wholly-owned subsidiary of the
Company. CLR operates a traditional coffee roasting
business, and through the merger we were provided access to
additional distributors, as well as added the JavaFit® product
line to our network of direct marketers.
Effective
July 23, 2013, we changed our name from AL International,
Inc. to Youngevity International, Inc.
On February 23, 2017, our Board of Directors and
holders of in excess of a majority of our voting stock
approved an amendment to our Certificate of Incorporation to
effectuate: (i) a reverse stock split (the “Reverse
Split”) of the issued and outstanding shares of common stock
at a ratio to be determined in the discretion of our board of
directors within a range of one share of common stock for every
fifteen (15) to twenty-five (25) shares of common stock; (ii) a
decrease in the number of shares of (a) common stock authorized
from 600,000,000 to 50,000,000 and (b) preferred stock authorized
from 100,000,000 to 5,000,000 (the “Decrease”);
concurrently with the Reverse Split; and an amendment to our 2012
Stock Option Plan (the “Plan”) to increase the number
of shares of common stock available for grant and to expand the
types of awards available for grant (the “Plan
Amendments”).
Emerging Growth Company
We
are an emerging growth company under the Jumpstart Our Business
Startups Act (the “JOBS Act”), which was enacted in
April 2012. We shall continue to be deemed an emerging growth
company until the earliest of:
(a)
the last day of the fiscal year in which we have total annual gross
revenues of $1 billion or more;
(b)
the last day of the fiscal year of the issuer following the fifth
anniversary of the date of the first sale of common equity
securities of the issuer pursuant to an effective registration
statement;
(c)
the date on which we have issued more than $1 billion in
non-convertible debt, during the previous 3-year period, issued;
or.
(d)
the date on which we are deemed to be a large accelerated
filer.
As
an emerging growth company we will be subject to reduced public
company reporting requirements and are exempt from Section 404(b)
of Sarbanes Oxley. Section 404(a) requires issuers to publish
information in their annual reports concerning the scope and
adequacy of the internal control structure and procedures for
financial reporting. This statement shall also assess the
effectiveness of such internal controls and procedures. Section
404(b) requires that the registered accounting firm shall, in the
same report, attest to and report on the assessment on the
effectiveness of the internal control structure and procedures for
financial reporting.
As
an emerging growth company we are also exempt from Section 14A (a)
and (b) of the Securities Exchange Act of 1934 which require the
shareholder approval, on an advisory basis, of executive
compensation and golden parachutes.
We
have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(2) of
the Jobs Act, that allows us to delay the adoption of new or
revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Our Corporate Headquarters
Our corporate headquarters are located at 2400
Boswell Road, Chula Vista, California 91914. This is also the
location of our operations and distribution
center. The facility consists of a 59,000 square foot
Class A single use building that is comprised 40% of office space
and the balance is used for distribution.
Available Information
Our
common stock is traded on the OTCQX Marketplace, operated by the
OTC Markets Group, under the symbol
“YGYI”.
Additional
information about our company is contained at our website,
http://www.youngevity.com. Information contained on our website is
not incorporated by reference into, and does not form any part of,
this Annual Report on Form 10-K. We have included our website
address as a factual reference and do not intend it to be an active
link to our website. Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act are available free of charge through the
investor relations page of our internet website as soon as
reasonably practicable after those reports are electronically filed
with, or furnished to, the SEC. The following Corporate Governance
documents are also posted on our website: Code of Business Conduct
and Ethics and the Charters for the Audit Committee and
Compensation Committee Our phone number is (619)934-3980 and our
facsimile number is (619)934-5009.
RISK
FACTORS
Investing in our common stock involves a high degree of risk, and
you should be able to bear the complete loss of your investment.
You should carefully consider the risks described below and, the
other information in the documents incorporated by reference herein
when evaluating our company and our business. If any of the
following risks actually occur, our business could be harmed. In
such case, the trading price of our common stock could decline and
investors could lose all or a part of the money paid to buy our
common stock.
RISKS RELATING TO OUR BUSINESS
Because we have recently acquired several businesses and
significantly increased our investment in our green coffee
business, it is difficult to predict to what extent we will be able
to maintain or improve our current level of revenues and
profitability.
No
assurances can be given as to the amount of future revenue or
profits that we may generate. Until recently, our business was
comprised primarily of the direct sales of Youngevity® health
products. In the last four years, we completed 21 business
acquisitions of companies in the direct selling line of business,
substantially increasing our Youngevity health and wellness product
lines. It is too early to predict whether consumers will accept,
and continue to use on a regular basis, the products we added from
these new acquisitions since we have had limited recent
operating history as a combined entity. In addition, we continue to
expand our coffee business product line with the single-serve
K-Cup® manufacturing capabilities and our investment in the
green coffee business. It is too early to predict the results of
these investments. In addition, since each acquisition involves the
addition of new distributors and new products, it is difficult to
assess whether initial product sales of any new product acquired
will be maintained, and if sales by new distributors will be
maintained.
Our business is difficult to evaluate because we have recently
expanded our product offering and customer base.
We have
recently expanded our operations, engaging in the sale of new
products through new distributors. There is a risk that we will be
unable to successfully integrate the newly acquired businesses with
our current management and structure. Although we are based in
California, several of the businesses we acquired are based in
other places such as Utah and Florida, making the integration of
our newly acquired businesses difficult. In addition, our
dry-processing plant and coffee plantation is located overseas in
the country of Nicaragua. Our estimates of capital, personnel and
equipment required for our newly acquired businesses are based on
the historical experience of management and businesses they are
familiar with. Our management has limited direct experience in
operating a business of our current size as well as one that is
publicly traded.
Our ability to generate profit will be impacted by payments we are
required to make under the terms of our acquisition agreements, the
extent of which is uncertain.
Since
many of our acquisition agreements are based on future
consideration, we could be obligated to make payments that exceed
expectations. Many of our acquisition agreements require us to make
future payments to the sellers based upon a percentage of sales of
products. The carrying value of the contingent acquisition
debt, which requires re-measurement each reporting period, is based
on our estimates of future sales and therefore is difficult to
accurately predict. Profits could be adversely impacted in
future periods if adjustment of the carrying value of the
contingent acquisition debt is required.
We may have difficulty managing our future growth.
Since
we initiated our network marketing sales channel in fiscal 1997,
our business has grown significantly. This growth has placed
substantial strain on our management, operational, financial and
other resources. If we are able to continue to expand our
operations, we may experience periods of rapid growth, including
increased resource requirements. Any such growth could place
increased strain on our management, operational, financial and
other resources, and we may need to train, motivate, and manage
employees, as well as attract management, sales, finance and
accounting, international, technical, and other professionals. Any
failure to expand these areas and implement appropriate procedures
and controls in an efficient manner and at a pace consistent with
our business objectives could have a material adverse effect on our
business and results of operations. In addition, the financing for
any of future acquisitions could dilute the interests of our
stockholders; resulting in an increase in our indebtedness or both.
Future acquisitions may entail numerous risks,
including:
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difficulties
in assimilating acquired operations or products, including the loss
of key employees from acquired businesses
and
disruption to our direct selling channel;
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diversion of management's attention from our core
business;
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adverse effects on existing business relationships with suppliers
and customers; and
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risks of entering markets in which we have limited or no prior
experience.
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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.
The failure to comply with the terms of our outstanding Notes could
result in a default under the terms of the notes and, if uncured,
it could potentially result in action against the pledged assets of
CLR.
We
have issued $7,187,500 of convertible notes (the “November
2015 Notes) to investors in November 2015 (the “November 2015
Offering”) that are secured by certain of our assets and
those of CLR other than its inventory and accounts
receivable. We have also issued an additional $4,750,000 in
principal amount of notes (the “September 2014 Notes”)
in September 2014 Offering (the “September 2014
Offering”) secured by CLR’s pledge of the
Nicaragua green coffee beans acquired with the proceeds, the
contract rights under a letter of intent and all proceeds of the
foregoing (which lien is junior to CLR’s factoring agreement
and equipment lease but senior to all of its other obligations),
Stephan Wallach, our Chief Executive Officer, has also personally
guaranteed the repayment of the notes, and has agreed not to sell,
transfer or pledge 30 million shares of our common stock that he
owns so long as his personal guaranty is in effect. The November
2015 Notes mature in 2018, and the September 2014 Notes mature in
2019 and require us, among other things, to maintain the security
interest given by CLR for the notes, make quarterly installments of
interest, reserve a sufficient number of our shares of common stock
for conversion requests and honor any conversion requests made by
the investors to convert their notes into shares of our common
stock. If we fail to comply with the terms of the notes, the note
holders could declare a default under the notes and if the default
were to remain uncured, as secured creditors they would have the
right to proceed against the collateral secured by the loans. Any
action by secured creditors to proceed against CLR assets or our
assets would likely have a serious disruptive effect on our
coffee and direct selling operations.
We generate a substantial portion of our revenue from the sale of
The Beyond Tangy Tangerine line, Osteo-fx line and, Ultimate EFA
line of products. A decrease in sales of these products could
seriously harm our business.
A
significant portion of our revenue during the year ended December
31, 2016, approximately 50%, was derived from sales of our Beyond
Tangy Tangerine line, Osteo-fx line and Ultimate EFA line of
products. Any disruption in the supply of the raw materials used
for these problems, any negative press associated with these
products or manufacture and sale of competitive products, could
have a material adverse effect on our business.
Our business is subject to strict government
regulations.
The
processing, formulation, manufacturing, packaging, labeling,
advertising, and distribution of our products are subject to
federal laws and regulation by one or more federal agencies,
including the FDA, the FTC, the Consumer Product Safety Commission,
the U.S. Department of Agriculture, and the Environmental
Protection Agency. These activities are also regulated by various
state, local, and international laws and agencies of the states and
localities in which our products are sold. Government regulations
may prevent or delay the introduction, or require the
reformulation, of our products, which could result in lost revenues
and increased costs to us. For instance, the FDA regulates, among
other things, the composition, safety, labeling, and marketing of
dietary supplements (including vitamins, minerals, herbs, and other
dietary ingredients for human use). The FDA may not accept the
evidence of safety for any new dietary ingredient that we may wish
to market, may determine that a particular dietary supplement or
ingredient presents an unacceptable health risk, and may determine
that a particular claim or statement of nutritional value that we
use to support the marketing of a dietary supplement is an
impermissible drug claim, is not substantiated, or is an
unauthorized version of a “health claim.”
Any
of these actions could prevent us from marketing particular dietary
supplement products or making certain claims or statements of
nutritional support for them. The FDA could also require us to
remove a particular product from the market. Any future recall or
removal would result in additional costs to us, including lost
revenues from any additional products that we are required to
remove from the market, any of which could be material. Any product
recalls or removals could also lead to liability, substantial
costs, and reduced growth prospects. With respect to FTC matters,
if the FTC has reason to believe the law is being violated
(e.g. failure to possess adequate substantiation for product
claims), it can initiate an enforcement action. The FTC has a
variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process
authority, cease and desist orders, and injunctions. FTC
enforcement could result in orders requiring, among other things,
limits on advertising, consumer redress, and divestiture of assets,
rescission of contracts, or such other relief as may be deemed
necessary. Violation of these orders could result in substantial
financial or other penalties. Any action against us by the FTC
could materially and adversely affect our ability to successfully
market our products.
Additional
or more stringent regulations of dietary supplements and other
products have been considered from time to time. These developments
could require reformulation of some products to meet new standards,
recalls or discontinuance of some products not able to be
reformulated, additional record-keeping requirements, increased
documentation of the properties of some products, additional or
different labeling, additional scientific substantiation, adverse
event reporting, or other new requirements. Any of these
developments could increase our costs significantly. For example,
the Dietary Supplement and Nonprescription Drug Consumer Protection
Act (S.3546), which was passed by Congress in December 2006,
imposes significant regulatory requirements on dietary supplements
including reporting of “serious adverse events” to FDA
and recordkeeping requirements. This legislation could raise our
costs and negatively impact our business. In June 2007, the FDA
adopted final regulations on GMPs in manufacturing, packaging, or
holding dietary ingredients and dietary supplements, which apply to
the products we manufacture and sell. These regulations require
dietary supplements to be prepared, packaged, and held in
compliance with certain rules. These regulations could raise our
costs and negatively impact our business. Additionally, our
third-party suppliers or vendors may not be able to comply with
these rules without incurring substantial expenses. If our
third-party suppliers or vendors are not able to timely comply with
these new rules, we may experience increased cost or delays in
obtaining certain raw materials and third-party products. Also, the
FDA has announced that it plans to publish guidance governing the
notification of new dietary ingredients. Although FDA guidance is
not mandatory, it is a strong indication of the FDA’s current
views on the topic discussed in the guidance, including its
position on enforcement.
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 Escentuals. In addition, we compete against many other
companies that manufacture and sell in narrower product lines sold
through retail establishments. This industry is highly competitive
and some of our principal competitors in the industry are larger
than we are and have greater resources than we do. Competitive
activities on their part could cause our sales to
suffer. From time to time, we need to reduce the prices
for some of our products to respond to competitive and customer
pressures or to maintain our position in the marketplace. Such
pressures also may restrict our ability to increase prices in
response to raw material and other cost increases. Any reduction in
prices as a result of competitive pressures, or any failure to
increase prices when raw material costs increase, would harm profit
margins and, if our sales volumes fail to grow sufficiently to
offset any reduction in margins, our results of operations would
suffer.
If our advertising, promotional, merchandising, or
other marketing strategies are not successful, if we are unable to
deliver new products that represent technological breakthroughs, if
we do not successfully manage the timing of new product
introductions or the profitability of these efforts, or if for
other reasons our end customers perceive competitors' products as
having greater appeal, then our sales and financial results may
suffer.
If
we do not succeed in effectively differentiating ourselves from our
competitors’ products, including by developing and
maintaining our brands or our competitors adopt our strategies,
then our competitive position may be weakened and our sales, and
accordingly our profitability, may be materially adversely
affected.
We
are also subject to significant competition from other network
marketing organizations for the time, attention, and commitment of
new and existing distributors. Our ability to remain competitive
depends, in significant part, on our success in recruiting and
retaining distributors. There can be no assurance that our programs
for recruiting and retaining distributors will be successful. The
pool of individuals who may be interested in network marketing is
limited in each market, and it is reduced to the extent other
network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive
opportunity for distributors, there can be no assurance that other
network marketing companies will not be able to recruit our
existing distributors or deplete the pool of potential distributors
in a given market.
Our
coffee segment also faces strong competition. The coffee
industry is highly competitive and coffee is widely distributed and
readily available. Our competition will seek to create
advantages in many areas including better prices, more attractive
packaging, stronger marketing, more efficient production processes,
speed to market, and better quality verses value
opportunities. Many of our competitors have stronger
brand recognition and will reduce prices to keep our brands out of
the market. Our competitors may have more automation
built into their production lines allowing for more efficient
production at lower costs. We compete not only with other
widely advertised branded products, but also with private label or
generic products that generally are sold at lower prices.
Consumers’ willingness to purchase our products will depend
upon our ability to maintain consumer confidence that our products
are of a higher quality and provide greater value than less
expensive alternatives. If the difference in quality between our
brands and private label products narrows, or if there is a
perception of such a narrowing, then consumers may choose not to
buy our products at prices that are profitable for us.
Our success depends, in part, on the quality and safety of our
products.
Our
success depends, in part, on the quality and safety of our
products, including the procedures we employ to detect the
likelihood of hazard, manufacturing issues, and unforeseen product
misuse. If our products are found to be, or are perceived to be,
defective or unsafe, or if they otherwise fail to meet our
distributors' or end customers' standards, our relationship with
our distributors or end customers could suffer, we could need to
recall some of our products, our reputation or the appeal of our
brand could be diminished, and we could lose market share and or
become subject to liability claims, any of which could result in a
material adverse effect on our business, results of operations, and
financial condition.
Our ability to anticipate and respond to market trends and changes
in consumer preferences could affect our financial
results.
Our
continued success depends on our ability to anticipate, gauge, and
react in a timely and effective manner to changes in consumer
spending patterns and preferences. We must continually work to
discover and market new products, maintain and enhance the
recognition of our brands, achieve a favorable mix of products, and
refine our approach as to how and where we market and sell our
products. While we devote considerable effort and resources to
shape, analyze, and respond to consumer preferences, consumer
spending patterns and preferences cannot be predicted with
certainty and can change rapidly. If we are unable to anticipate
and respond to trends in the market for beauty and related products
and changing consumer demands, our financial results will
suffer.
Furthermore,
material shifts or decreases in market demand for our products,
including as a result of changes in consumer spending patterns and
preferences or incorrect forecasting of market demand, could result
in us carrying inventory that cannot be sold at anticipated prices
or increased product returns. Failure to maintain proper inventory
levels or increased product returns could result in a material
adverse effect on our business, results of operations and financial
condition.
If we are unable to protect our intellectual property rights,
specifically patents and trademarks, our ability to compete could
be negatively impacted.
Most
of our products are not protected by patents. The labeling
regulations governing our nutritional supplements require that the
ingredients of such products be precisely and accurately indicated
on product containers. Accordingly, patent protection for
nutritional supplements often is impractical given the large number
of manufacturers who produce nutritional supplements having many
active ingredients in common. Additionally, the nutritional
supplement industry is characterized by rapid change and frequent
reformulations of products, as the body of scientific research and
literature refines current understanding of the application and
efficacy of certain substances and the interactions among various
substances. In this respect, we maintain an active research and
development program that is devoted to developing better, purer,
and more effective formulations of our products. We protect our
investment in research, as well as the techniques we use to improve
the purity and effectiveness of our products, by relying on trade
secret laws. Notwithstanding our efforts, there can be no
assurance that our efforts to protect our trade secrets and
trademarks will be successful. We intend to maintain and keep
current all of our trademark registrations and to pay all
applicable renewal fees as they become due. The right of a
trademark owner to use its trademarks, however, is based on a
number of factors, including their first use in commerce, and
trademark owners can lose trademark rights despite trademark
registration and payment of renewal fees. We therefore believe that
these proprietary rights have been and will continue to be
important in enabling us to compete and if for any reason we were
unable to maintain our trademarks, our sales of the related
products bearing such trademarks could be materially and negatively
affected. Nor can there be any assurance that third-parties will
not assert claims against us for infringement of their intellectual
proprietary rights. If an infringement claim is asserted, we may be
required to obtain a license of such rights, pay royalties on a
retrospective or prospective basis, or terminate our manufacturing
and marketing of our infringing products. Litigation with respect
to such matters could result in substantial costs and diversion of
management and other resources and could have a material adverse
effect on our business, financial condition, or operating
results.
We
consider our roasting methods essential to the flavor and richness
of our coffee and, therefore, essential to our various brands.
Because our roasting methods cannot be patented, we would be unable
to prevent competitors from copying our roasting methods, if such
methods became known. If our competitors copy our roasting methods,
the value of our brands could be diminished and we could lose
customers to our competitors. In addition, competitors could
develop roasting methods that are more advanced than ours, which
could also harm our competitive position.
We may become involved in the future in legal proceedings that, if
adversely adjudicated or settled, could adversely affect our
financial results.
We
may be party to litigation at the present time or become party to
litigation in the future. In general, litigation claims can be
expensive and time consuming to bring or defend against and could
result in settlements or damages that could significantly affect
financial results. However, it is not possible to predict the
final resolution of any litigation to which we may be party
to, and the impact of certain of these matters on our business,
results of operations, and financial condition could be
material.
Government reviews, inquiries, investigations, and actions could
harm our business or reputation.
As
we operate in various locations around the world, our operations in
certain countries are subject to significant governmental scrutiny
and may be harmed by the results of such scrutiny. The regulatory
environment with regard to direct selling in emerging and
developing markets where we do business is evolving and officials
in such locations often exercise broad discretion in deciding how
to interpret and apply applicable regulations. From time to time,
we may receive formal and informal inquiries from various
government regulatory authorities about our business and compliance
with local laws and regulations. Any determination that our
operations or activities or the activities of our distributors, are
not in compliance with existing laws or regulations could result in
the imposition of substantial fines, interruptions of business,
loss of supplier, vendor or other third party relationships,
termination of necessary licenses and permits, or similar results,
all of which could potentially harm our business and or reputation.
Even if an inquiry does not result in these types of
determinations, it potentially could create negative publicity
which could harm our business and or reputation.
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. Our green coffee business in based in Nicaragua. We
own one plantation and intend to purchase another in Nicaragua. Our
ability to capitalize on growth in new international markets and to
maintain the current level of operations in our existing
international markets is exposed to the risks associated with
international operations, including:
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the possibility that local civil unrest, political instability or
changes in diplomatic or trade relationships might disrupt our
operations in an international market;
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the lack of well-established or reliable legal systems in certain
areas;
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the presence of high inflation in the economies of international
markets;
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the possibility that a foreign government authority might impose
legal, tax or other financial burdens on us or our coffee
operations, or sales force, due, for example, to the structure of
our operations in various markets;
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the possibility that a government authority might challenge the
status of our sales force as independent contractors or impose
employment or social taxes on our sales force; and
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the possibility that governments may impose currency remittance
restrictions limiting our ability to repatriate cash.
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Currency exchange rate fluctuations could reduce our overall
profits.
For
the year ended December 31, 2016, approximately 9% of our sales
were derived from sales outside the United States. 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.
For example, the FTC released a proposed New Business Opportunity
Rule in April 2006. As initially drafted, the proposed rule would
have required pre-sale disclosures for all business opportunities,
which may have included network marketing compensation plans such
as ours. However, in March 2008 the FTC issued a revised notice of
proposed rulemaking, which indicates that the New Business
Opportunity Rule as drafted will not apply to multi-level marketing
companies.
Our principal business segment is conducted worldwide in one
channel, direct selling and therefore any negative
perceptive of direct selling would greatly impact our
sales.
Our
principal business segment is conducted worldwide in the direct
selling channel. Sales are made to the ultimate consumer
principally through independent distributors and customers
worldwide. There is a high rate of turnover among distributors,
which is a common characteristic of the direct selling business. As
a result, in order to maintain our business and grow our business
in the future, we need to recruit, retain and service distributors
on a continuing basis and continue to innovate the direct selling
model. Consumer purchasing habits, including reducing purchases of
products generally, or reducing purchases from distributors or
buying products in channels other than in direct selling, such as
retail, could reduce our sales, impact our ability to execute our
global business strategy or have a material adverse effect on our
business, financial condition and results of operations. If our
competitors establish greater market share in the direct selling
channel, our business, financial condition and operating results
may be adversely affected. Furthermore, if any government bans or
severely restricts our business method of direct selling, our
business, financial condition and operating results may be
adversely affected.
Our
ability to attract and retain distributors and to sustain and
enhance sales through our distributors can be affected by adverse
publicity or negative public perception regarding our industry, our
competition, or our business generally. Negative public perception
may include negative publicity regarding the sales structure of
significant, pure network marketing companies which has been the
case recently with large network marketing companies, the quality
or efficacy of nutritional supplement products or ingredients in
general or our products or ingredients specifically, and regulatory
investigations, regardless of whether those investigations involve
us or our distributors or the business practices or products of our
competitors or other network marketing companies. Any
adverse publicity may also adversely impact the market price of our
stock and cause insecurity among our distributors. There can be no
assurance that we will not be subject to adverse publicity or
negative public perception in the future or that such adverse
publicity will not have a material adverse effect on our business,
financial condition, or results of operations.
As a network marketing company, we are dependent upon an
independent sales force and we do not have direct control over the
marketing of our products.
We
rely on non-employee, independent distributors to market and sell
our products and to generate our sales. Distributors typically
market and sell our products on a part-time basis and likely will
engage in other business activities, some of which may compete with
us. We have a large number of distributors and a relatively small
corporate staff to implement our marketing programs and to provide
motivational support to our distributors. We rely primarily upon
our distributors to attract, train and motivate new distributors.
Our sales are directly dependent upon the efforts of our
distributors. Our ability to maintain and increase sales in the
future will depend in large part upon our success in increasing the
number of new distributors, retaining and motivating our existing
distributors, and in improving the productivity of our
distributors.
We
can provide no assurances that the number of distributors will
increase or remain constant or that their productivity will
increase. Our distributors may terminate their services at any
time, and, like most direct selling companies, we experience a high
turnover among new distributors from year-to-year. We cannot
accurately predict any fluctuation in the number and productivity
of distributors because we primarily rely upon existing
distributors to sponsor and train new distributors and to motivate
new and existing distributors. Our operating results in other
markets could also be adversely affected if we and our existing
distributors do not generate sufficient interest in our business to
successfully retain existing distributors and attract new
distributors.
The loss of a significant Youngevity distributor could adversely
affect our business.
We
rely on the successful efforts of our distributors that become
leaders. If these downline distributors in turn sponsor
new distributors, additional business centers are created, with the
new downline distributors becoming part of the original sponsoring
distributor’s downline network. As a result of this network
marketing system, distributors develop business relationships with
other distributors. The loss of a key distributor or group of
distributors, large turnover or decreases in the size of the key
distributors force, seasonal or other decreases in purchase volume,
sales volume reduction, the costs associated with training new
distributors, and other related expenses may adversely affect our
business, financial condition, or results of operations. Moreover,
our ability to continue to attract and retain distributors can be
affected by a number of factors, some of which are beyond our
control, including:
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General business and economic conditions;
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Adverse publicity or negative misinformation about us or our
products;
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Public perceptions about network marketing programs;
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High-visibility investigations or legal proceedings against network
marketing companies by federal or state authorities or private
citizens;
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Public perceptions about the value and efficacy of nutritional,
personal care, or weight management products
generally;
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Other competing network marketing organizations entering into the
marketplace that may recruit our existing distributors or reduce
the potential pool of new distributors; and
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Changes to our compensation plan required by law or implemented for
business reasons that make attracting and retaining distributors
more difficult.
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There
can be no assurance that we will be able to continue to attract and
retain distributors in sufficient numbers to sustain future growth
or to maintain our present growth levels, which could have a
material adverse effect on our business, financial condition, or
results of operations.
Nutritional supplement products may be supported by only limited
availability of conclusive clinical
studies.
Some
of our products include nutritional supplements that are made from
vitamins, minerals, herbs, and other substances for which there is
a long history of human consumption. Other products contain
innovative ingredients or combinations of ingredients. Although we
believe that all of our products are safe when taken as directed,
there is little long-term experience with human consumption of
certain of these product ingredients or combinations of ingredients
in concentrated form. We conduct research and test the formulation
and production of our products, but we have performed or sponsored
only limited clinical studies. Furthermore, because we are highly
dependent on consumers' perception of the efficacy, safety, and
quality of our products, as well as similar products distributed by
other companies, we could be adversely affected in the event that
those products prove or are asserted to be ineffective or harmful
to consumers or in the event of adverse publicity associated with
any illness or other adverse effects resulting from consumers' use
or misuse of our products or similar products of our
competitors.
Our manufacturers are subject to certain risks.
We
are dependent upon the uninterrupted and efficient operation of our
manufacturers and suppliers of products. Those operations are
subject to power failures, the breakdown, failure, or substandard
performance of equipment, the improper installation or operation of
equipment, natural or other disasters, and the need to comply with
the requirements or directives of government agencies, including
the FDA. There can be no assurance that the occurrence of these or
any other operational problems at our facilities would not have a
material adverse effect on our business, financial condition, or
results of operations.
Challenges by private parties to the direct selling system could
harm our business.
Direct
selling companies have historically been subject to legal
challenges regarding their method of operation or other elements of
their business by private parties, including their own
representatives, in individual lawsuits and through class actions,
including lawsuits claiming the operation of illegal pyramid
schemes that reward recruiting over sales. We can provide no
assurance that we would not be harmed if any such actions were
brought against any of our current subsidiaries or any other direct
selling company we may acquire in the future.
RISKS RELATED TO OUR COFFEE BUSINESS
Increases in the cost of high-quality arabica coffee beans or other
commodities or decreases in the availability of high-quality
arabica coffee beans or other commodities could have an adverse
impact on our business and financial results.
We
purchase, roast, and sell high-quality whole bean arabica coffee
beans and related coffee products. The price of coffee is subject
to significant volatility. The high-quality arabica coffee of the
quality we seek tends to trade on a negotiated basis at a premium
above the “C” price. This premium depends upon the
supply and demand at the time of purchase and the amount of the
premium can vary significantly. Increases in the “C”
coffee commodity price do increase the price of high-quality
arabica coffee and also impact our ability to enter into
fixed-price purchase commitments. We frequently enter into supply
contracts whereby the quality, quantity, delivery period, and other
negotiated terms are agreed upon, but the date, and therefore
price, at which the base “C” coffee commodity price
component will be fixed has not yet been established.
These
are known as price-to-be-fixed contracts. We also enter into supply
contracts whereby the quality, quantity, delivery period, and price
are fixed. The supply and price of coffee we
purchase can also be affected by multiple factors in the producing
countries, including weather, natural disasters, crop disease,
general increase in farm inputs and costs of production, inventory
levels, and political and economic conditions, as well as the
actions of certain organizations and associations that have
historically attempted to influence prices of green coffee through
agreements establishing export quotas or by restricting coffee
supplies. Speculative trading in coffee commodities can also
influence coffee prices. Because of the significance of coffee
beans to our operations, combined with our ability to only
partially mitigate future price risk through purchasing practices,
increases in the cost of high-quality arabica coffee beans could
have an adverse impact on our profitability. In addition, if we are
not able to purchase sufficient quantities of green coffee due to
any of the above factors or to a worldwide or regional shortage, we
may not be able to fulfill the demand for our coffee, which could
have an adverse impact on our profitability.
Adverse public or medical opinions about the health effects of
consuming our products, as well as reports of incidents involving
food-borne illnesses, food tampering, or food contamination,
whether or not accurate, could harm our business.
Some
of our products contain caffeine and other active compounds, the
health effects of which are the subject of public scrutiny,
including the suggestion that excessive consumption of caffeine and
other active compounds can lead to a variety of adverse health
effects. In the United States, there is increasing consumer
awareness of health risks, including obesity, due in part to
increased publicity and attention from health organizations, as
well as increased consumer litigation based on alleged adverse
health impacts of consumption of various food products, frequently
including caffeine. An unfavorable report on the health effects of
caffeine or other compounds present in our products, or negative
publicity or litigation arising from certain health risks could
significantly reduce the demand for our products.
Similarly,
instances or reports, whether true or not, of food-borne illnesses,
food tampering and food contamination, either during manufacturing,
packaging or preparation, have in the past severely injured the
reputations of companies in the food processing, grocery and
quick-service restaurant sectors and could affect us as well. Any
report linking us to the use of food tampering or food
contamination could damage our brand value, severely hurt sales of
our products, and possibly lead to product liability claims,
litigation (including class actions) or damages. If consumers
become ill from food-borne illnesses, tampering or contamination,
we could also be forced to temporarily stop selling our products
and consequently could materially harm our business and results of
operations.
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
We are controlled by one principal stockholder who is also our
Chief Executive Officer and Chairman.
Through
his voting power, Mr. Stephan Wallach, our Chief Executive Officer
and Chairman, has the ability to elect a majority of our directors
and to control all other matters requiring the approval of our
stockholders, including the election of all of our directors. Mr.
Wallach owns and beneficially owns approximately 71.5% of our total
equity securities (assuming exercise of the options to purchase
common stock held by Mr. Wallach and Michelle Wallach, his wife and
Chief Operating Officer and Director). As our Chief Executive
Officer, Mr. Wallach has the ability to control our business
affairs.
We are an “emerging growth company,” and any decision
on our part to comply with certain reduced disclosure requirements
applicable to emerging growth companies could make our common stock
less attractive to investors.
We
are an “emerging growth company,” as defined in the
Jumpstart Our Business Startups Act enacted in April 2012, and, for
as long as we continue to be an emerging growth company, we may
choose to take advantage of exemptions from various reporting
requirements applicable to other public companies including, but
not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, not being required to comply with any new requirements
adopted by the Public Company Accounting Oversight Board, or the
PCAOB, requiring mandatory audit firm rotation or a supplement to
the auditor's report in which the auditor would be required to
provide additional information about the audit and the financial
statements of the issuer, not being required to comply with any new
audit rules adopted by the PCAOB after April 5, 2012 unless the SEC
determines otherwise, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously
approved.
We
could remain an emerging growth company until the earliest of: (i)
the last day of the fiscal year in which we have total annual gross
revenues of $1 billion or more; (ii) the last day of our fiscal
year following the fifth anniversary of the date of our first sale
of common equity securities pursuant to an effective registration
statement; (iii) the date on which we have issued more than $1
billion in nonconvertible debt during the previous three years; or
(iv) the date on which we are deemed to be a large accelerated
filer. We have elected to use the extended transition period for
complying with new or revised accounting standards under Section
102(b)(2) of the Jobs Act, that allows us to delay the adoption of
new or revised accounting standards that have different effective
dates for public and private companies until those standards apply
to private companies. We cannot predict if investors
will find our common stock less attractive if we choose to rely on
these exemptions. If some investors find our common stock less
attractive as a result of any choices to reduce future disclosure,
there may be a less active trading market for our common stock and
our stock price may be more volatile. Further, as a result of these
scaled regulatory requirements, our disclosure may be more limited
than that of other public companies and you may not have the same
protections afforded to shareholders of such
companies.
Our financial statements may not be comparable to companies that
comply with public company effective dates.
We
have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(2) of
the JOBS Act, that allows us to delay the adoption of new or
revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Our stock has historically had a limited market. If an
active trading market for our common stock does develop, trading
prices may be volatile.
In
the event that an active trading market develops, the market price
of our shares of common stock may be based on factors that may not
be indicative of future market performance. Consequently, the
market price of our common stock may vary greatly. If an active
market for our common stock develops, there is a significant risk
that our stock price may fluctuate dramatically in the future in
response to any of the following factors, some of which are beyond
our control:
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variations in our quarterly operating results;
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announcements that our revenue or income/loss levels are below
analysts’ expectations;
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general economic slowdowns;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts;
or
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acquisitions, strategic partnerships, joint ventures or capital
commitments.
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Because our shares are deemed “penny stocks,” an
investor may have difficulty selling them in the secondary trading
market.
The
SEC has adopted regulations which generally define a “penny
stock” to be any equity security that has a market price, as
therein defined, of less than $5.00 per share or with an exercise
price of less than $5.00 per share, subject to certain exceptions.
Additionally, if the equity security is not registered or
authorized on a national securities exchange that makes certain
reports available, the equity security may also constitute a
“penny stock.” As our common stock comes within the
definition of penny stock, these regulations require the delivery
by the broker-dealer, prior to any transaction involving our common
stock, of a risk disclosure schedule explaining the penny stock
market and the risks associated with it. The broker-dealer also
must provide the customer with bid and offer quotations for the
penny stock, the compensation of the broker-dealer and any
salesperson in the transaction, and monthly account statements
indicating the market value of each penny stock held in the
customer’s account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock not otherwise
exempt from those rules the broker-dealer must make a special
written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements
may have the effect of reducing the trading activity in the
secondary market for our common stock. The ability of
broker-dealers to sell our common stock and the ability of
shareholders to sell our common stock in the secondary market would
be limited. As a result, the market liquidity for our common
stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to
these or other regulations in the future, which would negatively
affect the market for our common stock.
We are subject to the reporting requirements of Federal Securities
Laws, which can be expensive.
We
are subject to the information and reporting requirements under the
Securities Exchange Act of 1934 and other federal securities laws,
and the compliance obligations of the Sarbanes-Oxley Act of 2002.
The costs of preparing and filing annual and quarterly reports and
other information with the SEC has and will continue to cause our
expenses to be higher than they would be if we were a
privately-held company.
Sales by our shareholders of a substantial number of shares of our
common stock in the public market could adversely affect the market
price of our common stock.
A
large number of outstanding shares of our common stock are held by
several of our principal shareholders. If any of these principal
shareholders were to decide to sell large amounts of stock over a
short period of time such sales could cause the market price of our
common stock to decline.
Our stock price has been volatile and subject to various market
conditions.
There
can be no assurance that an active market in our stock will be
sustained. The trading price of our common stock has been subject
to wide fluctuations. The price of our common stock may fluctuate
in the future in response to quarter-to-quarter variations in
operating results, material announcements by us or our competitors,
governmental regulatory action, conditions in the nutritional
supplement industry, negative publicity, or other events or
factors, many of which are beyond our control. In addition, the
stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market
prices of many dietary and nutritional supplement companies and
which have, in certain cases, not had a strong correlation to the
operating performance of these companies. Our operating results in
future quarters may be below the expectations of securities
analysts and investors. If that were to occur, the price of our
common stock would likely decline, perhaps
substantially.
We may issue preferred stock with rights senior to the common
stock, which we may issue in order to consummate a merger or other
transaction necessary to raise capital.
Our
certificate of incorporation authorizes the issuance of up to 100
million shares of preferred stock, par value $0.001 per share
(the “Preferred Stock”) without shareholder approval
and on terms established by our directors. We may issue shares
of preferred stock in order to consummate a financing or other
transaction, in lieu of the issuance of common
stock. The rights and preferences of any such class or
series of preferred stock would be established by our board of
directors in its sole discretion and may have dividend, voting,
liquidation and other rights and preferences that are senior to the
rights of the common stock.
You should not rely on an investment in our common stock for the
payment of cash dividends.
We
intend to retain future profits, if any, to expand our business. We
have never paid cash dividends on our stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our common stock if you require dividend
income. Any return on investment in our common stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
There is no public market for the notes or warrants to purchase
shares of our common stock that were issued to investors in our
Private Placements.
There
is no established public trading market for the warrants that were
issued in the September 2014 Offering and the November 2015
Offering and we do not expect a market to develop. In addition, we
do not intend to apply to list the warrants on any national
securities exchange or other nationally recognized trading system.
Without an active market, the liquidity of the warrants will be
limited.
Due to the speculative nature of warrants, there is no guarantee
that it will ever be profitable for investors who received warrants
in our private placements to exercise their warrants.
The
warrants issued in the September 2014 Offering and the
November 2015 Offering do not confer any rights of share ownership
on their holders, such as voting rights or the right to receive
dividends, but rather merely represent the right to acquire our
common stock at a fixed price for a limited period of time.
Investors in the September 2014 Offering and the November 2015
Offering may exercise their right to acquire the shares of Common
Stock underlying their warrants at any time after the date of
issuance by paying the respective exercise price per share, prior
to their expiration, after which date any unexercised warrants will
expire and have no further value. There can be no assurance that
the market price of the Common Stock will ever equal or exceed the
exercise price of the warrants, and, consequently, whether it will
ever be profitable for investors to exercise their
warrants.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Operation Properties
Our
corporate headquarters are located at 2400 Boswell, Road, Chula
Vista, California 91914. This is also the location of
Youngevity’s main operations and distribution center. The
facility consists of a 59,000 square foot Class A single use
building that is comprised 40% of office space and the balance is
used for distribution.
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Entity
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Location
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Approximate Square
Footage of Facilities
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Land in Acres |
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Own/Lease
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Approximate Rent
Expense $
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Youngevity
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Chula Vista, CA
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59,000
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-
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Own (1)
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Youngevity
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Alisio Viejo, CA
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3,288
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-
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Lease
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89,000
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CLR
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Miami, FL
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50,110
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-
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Lease (2)
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414,000
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Siles Family Group
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Matagalpa, Nicaragua
|
|
200,000
|
|
500
|
|
Own (3)
|
|
-
|
|
Heritage Makers
|
|
Orem, UT
|
|
9,300
|
|
-
|
|
Lease
|
|
121,000
|
|
Youngevity
|
|
Auckland, New Zealand
|
|
3,570
|
|
-
|
|
Lease (4)
|
|
69,000
|
|
Youngevity
|
|
Moscow, Russia
|
|
1,550
|
|
-
|
|
Lease
|
|
125,000
|
|
Youngevity
|
|
Singapore
|
|
3,222
|
|
-
|
|
Lease
|
|
269,000
|
|
Youngevity
|
|
Guadalajara, Mexico
|
|
1,500
|
|
-
|
|
Lease
|
|
23,000
|
|
Youngevity
|
|
Manila, Philippines
|
|
4,473
|
|
-
|
|
Lease
|
|
6,000
|
|
Legacy for Life
|
|
Lai Chi Kok Kin, Hong Kong
|
|
1,296
|
|
-
|
|
Lease
|
|
17,000
|
|
Legacy for Life
|
|
Taipei, Taiwan
|
|
4,722
|
|
-
|
|
Lease
|
|
7,000
|
All
the Youngevity facilities include office space, warehouse and
distribution center.
(1)
Youngevity
corporate headquarters. The building is owned by our subsidiary
2400 Boswell, LLC, a limited liability company that we acquired
from the step parent of Mr. Wallach, our Chief Executive Officer.
On March 15, 2013, we acquired 2400 Boswell, LLC for $248,000 in
cash, $334,000 of debt forgiveness and accrued interest, and a
promissory note of approximately $393,000, payable in equal
payments over five years and bears interest at
5.00%. Additionally, we assumed a long-term mortgage of
$3,625,000, payable over 25 years, interest rate of 5.75%. As of
December 31, 2016 the balance on the long-term mortgage was
$3,363,000 and the balance on the promissory note was
$108,000.
(2)
CLR
headquarters, coffee roaster, warehouse, and distribution
center.
(3)
CLR
Arabica coffee bean plantation and dry-processing facility and
mill.
(4)
Includes
distribution for Australia.
We
believe that we have adequate space for our anticipated needs and
that suitable additional space will be available at commercially
reasonable prices as needed. As of December 31, 2016 we are
considering other space needs for operations as our needs
grow.
Item 3. Legal
Proceedings
We are, from time to time, the subject of claims and suits arising
out of matters occurring during the operation of our business. We
are not presently party to any legal proceedings that, if
determined adversely to us, would individually or taken together
have a material adverse effect on our business, operating results,
financial condition or cash flows. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and
settlement costs, diversion of management resources and other
factors.
Not
applicable.
PART II
Item 5. Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Since
June 2013, our common stock has been traded on the QX tier of the
OTC Market under the symbol "YGYI". Previously, our
common stock was quoted on the OTC Markets OTC Pink Market system
under the symbol “JCOF”. On March 17, 2017, the closing
price of our common stock on the OTCQX was $0.26. The range of high
and low bid or sales prices for each of the quarters of the fiscal
years ended December 31, 2016 and 2015 is presented
below:
|
|
2016
|
2015
|
||
|
|
High
|
Low
|
High
|
Low
|
|
First
Quarter
|
$0.33
|
$0.22
|
$0.27
|
$0.22
|
|
Second
Quarter
|
$0.32
|
$0.24
|
$0.41
|
$0.24
|
|
Third
Quarter
|
$0.32
|
$0.23
|
$0.39
|
$0.23
|
|
Fourth
Quarter
|
$0.32
|
$0.26
|
$0.35
|
$0.26
|
Holders
As
of the close of business on March 17, 2017, there were 518 holders
of record of our common stock. The number of holders of
record is based on the actual number of holders registered on the
books of our transfer agent and does not reflect holders of shares
in "street name" or persons, partnerships, associations,
corporations or other entities identified in security position
listings maintained by depository trust companies.
Dividends
We
did not pay any dividends in fiscal years ended 2016 or
2015. We intend to retain future profits, if any, to
expand its business. We do not anticipate paying any cash dividends
in the foreseeable future.
Sales of Unregistered Securities
We
did not sell any unregistered shares of our common stock during the
year ended December 31, 2016 in transactions that were not
registered under the Securities Act, other than as previously
disclosed in our filings with the Securities and Exchange
Commission.
Repurchases of Equity Securities
On December 11, 2012, we authorized a share
repurchase program to repurchase up to 15 million of our issued and
outstanding common shares from time to time on the open market or
via private transactions through block trades. Under
this program, we repurchased a total of 125,708 shares at a
weighted-average cost of $0.28 per share in 2016 and 1,344,222
shares at a weighted-average cost of $0.31 per share in
2015.
Share
repurchases activity during the three months ended December 31,
2016 was as follows:
|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
||||
|
|
|
|
|
|
|
Period ending December 31, 2016
|
Total Number
of Shares Purchased (*)
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of
Publicly
Announced Plans or Programs
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans
or Programs
|
|
October
1 to October 31
|
-
|
-
|
-
|
11,068,120
|
|
November
1 to November 30
|
-
|
-
|
-
|
11,068,120
|
|
December
1 to December 31
|
-
|
-
|
-
|
11,068,120
|
|
Total
|
-
|
-
|
-
|
11,068,120
|
|
(*) On December 11, 2012, we authorized a share
repurchase program to repurchase up to 15 million of our issued and
outstanding common shares from time to time on the open market or
via private transactions through block trades. The initial
expiration date for the stock repurchase program was December 31,
2013. On October 7, 2013, the Board voted to extend the stock
repurchase program until a date is set to revoke the
program.
|
Equity Compensation Plan Information
The
2012 Stock Option Plan, or the Plan, is our only active equity
incentive plan pursuant to which options to acquire common stock
have been granted and are currently outstanding.
As
of December 31, 2016, the number of stock options and restricted
common stock outstanding under our equity compensation plans, the
weighted average exercise price of outstanding options and
restricted common stock and the number of securities remaining
available for issuance were as follows:
|
Plan category
|
Number of
securities
issued
under equity
compensation plan
|
Weighted-
average
exercise
price of
outstanding options
|
Number of securities remaining available for
future issuance under equity compensation plans
|
|
Equity
compensation plans approved by security holders
|
-
|
$-
|
-
|
|
Equity
compensation plans not approved by security holders
|
33,230,000
|
0.24
|
6,300,825
|
|
total
|
33,230,000
|
$0.24
|
6,300,825
|
On February 23, 2017, our board of
directors received the approval
of our stockholders, to amend the 2012 Stock Option Plan (the
“Plan”) to increase the number of shares of common
stock available for grant and to expand the types of awards
available for grant under the Plan. The amendment of the Plan
increases the number of shares of the Company’s common stock
that may be delivered pursuant to awards granted during the life of
the plan from 40,000,000 to 80,000,000 shares authorized. The Plan
currently provides only for the grant of options; however the Plan
amendments will allow for the grant of: (i) incentive stock
options; (ii) nonqualified stock options; (iii) stock appreciation
rights; (iv) restricted stock; and (v) other stock-based and
cash-based awards to eligible individuals. The terms of the awards
will be set forth in an award agreement, consistent with the terms
of the Plan. No stock option is exercisable later than ten years
after the date it is granted.
Item 6. Selected Financial
Data
The
following table sets forth historical financial data and should be
read in conjunction with the Company’s consolidated financial
statements and related notes set forth in Item 8 below and previous
filings. We have derived the selected historical financial data for
the years ended December 31, 2016, 2015, 2014, 2013 and 2012
from our audited financial statements and the related
notes.
|
|
Year Ended December 31,
|
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
|
|
|
|
|
|
|
Statements of Operations Data:
|
|
|
|
||
|
Revenues
|
$162,667
|
$156,597
|
$134,043
|
$85,627
|
$75,004
|
|
Cost
of revenues
|
64,530
|
63,628
|
57,718
|
34,326
|
31,179
|
|
Gross
profit
|
98,137
|
92,969
|
76,325
|
51,301
|
43,825
|
|
Distributor
compensation
|
67,148
|
63,276
|
52,646
|
32,985
|
30,526
|
|
Selling
and marketing, general and administrative expense
|
28,474
|
24,287
|
20,310
|
13,964
|
13,580
|
|
Operating
income (loss)
|
2,515
|
5,406
|
3,369
|
4,352
|
(281)
|
|
Interest
expense, net
|
(4,474)
|
(4,491)
|
(2,356)
|
(1,249)
|
(90)
|
|
Extinguishment
loss on debt
|
-
|
(1,198)
|
-
|
-
|
-
|
|
Change
in fair value of warrant derivative liability
|
1,371
|
(39)
|
(15)
|
-
|
-
|
|
Income
(loss) before income taxes
|
(3,103)
|
(322)
|
998
|
3,103
|
(368)
|
|
Income
tax (benefit) provision
|
(190)
|
1,384
|
(4,371)
|
452
|
196
|
|
Net
income (loss)
|
$(398)
|
$(1,706)
|
$5,369
|
$2,651
|
$(564)
|
|
|
|
|
|
|
|
|
Other Financial Data
|
|
|
|
|
|
|
Depreciation
and amortization
|
$3,862
|
$3,354
|
$2,686
|
$2,079
|
$1,905
|
|
Stock
based compensation
|
395
|
455
|
534
|
848
|
629
|
|
Change
in fair value of warrant derivative liability
|
(1,371)
|
39
|
15
|
-
|
-
|
|
Extinguishment
loss on debt
|
-
|
1,198
|
-
|
-
|
-
|
|
Adjusted
EBITDA (1)
|
6,772
|
9,215
|
6,589
|
7,279
|
3,170
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$869
|
$3,875
|
$2,997
|
$4,320
|
$3,025
|
|
Inventory
|
21,492
|
17,977
|
11,783
|
5,973
|
4,675
|
|
Total
assets
|
66,008
|
61,329
|
55,732
|
34,853
|
24,907
|
|
Stockholders’
Equity
|
18,998
|
18,881
|
18,589
|
11,499
|
9,879
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, diluted
|
392,641,735
|
392,075,608
|
389,795,108
|
391,953,473
|
387,392,118
|
(1) Adjusted
EBITDA is a non-GAAP financial measure. We calculate Adjusted
EBITDA by taking net income, and adding back the expenses related
to interest, taxes, depreciation, amortization, stock based
compensation expense, change in the fair value of warrant
derivative and non-cash impairment loss and debt extinguishment
gain or loss, as each of those elements are calculated in
accordance with GAAP. Adjusted EBITDA should not be construed
as a substitute for net income (loss) (as determined in accordance
with GAAP) for the purpose of analyzing our operating performance
or financial position, as Adjusted EBITDA is not defined by
GAAP. Management believes that Adjusted EBITDA, when viewed
with our results under GAAP, provides useful information about our
period-over-period growth. Adjusted EBITDA is presented because
management believes it provides additional information with respect
to the performance of our fundamental business activities and is
also frequently used by securities analysts, investors and other
interested parties in the evaluation of comparable companies. We
also rely on Adjusted EBITDA as a primary measure to review and
assess the operating performance of our company and our management
team.
ITEM
7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the audited
consolidated financial statements and related notes, which are
included elsewhere in this Annual Report on Form 10-K. In addition
to historical information, the following discussion contains
certain forward-looking statements that involve risks,
uncertainties and assumptions. Where possible, we have tried to
identify these forward looking statements by using words such as
“anticipate,” “believe,”
“intends,” or similar expressions. Our actual results
could differ materially from those anticipated expressed or implied
by the forward-looking statements due to important factors and
risks including, but not limited to, those set forth under
“Risk Factors” in Part I, Item 1A of this Annual
Report.
Overview
We
operate in two segments: the direct selling segment where products
are offered through a global distribution network of preferred
customers and distributors and the commercial coffee segment where
products are sold directly to businesses. During the years ended
December 31, 2016 and 2015, we derived approximately 89% of our
revenue from direct sales and approximately 11% of our revenue from
our commercial coffee sales, respectively.
In
the direct selling segment we sell health and wellness products on
a global basis and offer a wide range of products through an
international direct selling network of independent distributors.
Our multiple independent selling forces sell a variety of products
through friend-to-friend marketing and social
networking.
We also engage in the commercial sale of coffee. We own
a traditional coffee roasting business, CLR that sells roasted and
unroasted coffee and produces coffee under its own Café La
Rica brand, Josie’s Java House brand and Javalution brands.
CLR produces coffee under a variety of private labels through major
national sales outlets and major customers including cruise lines
and office coffee service operators. During fiscal 2014 CLR
acquired the Siles Plantation Family Group, a coffee plantation and
dry-processing facility located in Matagalpa, Nicaragua, an ideal
coffee growing region that is historically known for high quality
coffee production. The dry-processing facility is approximately 26
acres and the plantation is approximately 500 acres and produces
100 percent Arabica coffee beans that are shade grown, Rainforest
Alliance Certified™ and Fair Trade Certified™. The
plantation, dry-processing facility and existing U.S. based coffee
roaster facilities allows CLR to control the coffee production
process from field to cup.
During
the year ended December 31, 2016, we derived approximately 91% of
our revenues from sales within the United States.
Recent Events
New Acquisitions
Effective March 1,
2017, we acquired certain assets of Bellavita Group, LLC a direct
sales company and producer of health and beauty products primarily
in the Asian market and Ricolife, LLC a direct sales company and
producer of teas with health benefits contained within its tea
formulas.
2014
and 2015 Debt Offerings
On
November 25, 2015, we closed the final round of the November 2015
Offering pursuant to which we raised cash proceeds of $3,187,500
and converted $4,000,000 of debt from a previous private placement.
We issued to three (3) investors three (3) year senior secured
November 2015 Notes in the aggregate principal amount of $7,187,500
convertible into 20,535,714 shares of Common Stock at a conversion
price of $0.35 per share and warrants exercisable to purchase an
aggregate of 9,583,333 shares of Common Stock from us at a price
per share of $0.45. We also issued 3,011,904 warrants to the
placement agent and its designees, of which 2,053,571 have an
exercise price of $0.35 per share and 958,333 have an exercise
price of $0.45 per share.
The
November 2015 Notes bear interest at a rate of eight percent (8%)
per annum. We have the right to prepay the November 2015
Notes at any time after the one year anniversary date of the
issuance of the November 2015 Notes at a rate equal to 110% of the
then outstanding principal balance and accrued
interest. The November 2015 Notes rank senior to all of
our debt other than certain debt owed to Wells Fargo Bank,
Crestmark Bank, the investors in our prior private placements, a
mortgage on property, and any refinancing’s
thereof. We and CLR, have provided collateral to secure
the repayment of the November 2015 Notes and have pledged our
assets (which liens are junior to CLR’s line of credit and
equipment lease and junior to the rights of note holders in our
prior financings but senior to all of their other obligations), all
subject to the terms and conditions of a security agreement among
us, CLR and the investors. Stephan Wallach, our Chief
Executive Officer, has also personally guaranteed the repayment of
the November 2015 Notes, subject to the terms of a Guaranty
executed by him with the investors. In addition, Mr. Wallach has
agreed not to sell, transfer or pledge the 30 million shares of the
Common Stock that are currently pledged as collateral to a previous
financing so long as his personal guaranty is in
effect.
The
November 2015 Warrants contain cashless exercise provisions in the
event a registration statement registering the Common Stock
underlying the November 2015 Warrants has not been declared
effective by the Securities and Exchange Commission by specified
dates and customary anti-dilution protection and registration
rights. The November 2015 Warrants issued to investors
expire sixty (60) months from the date of issuance and have an
exercise price of $0.45 per share. The November 2015 Warrants
issued to the placement agent and its designees are exercisable for
958,333 shares of Common Stock that expire in sixty (60) months
from the date of issuance and, have an exercise price of $0.45
per share and 2,053,571 shares of Common Stock that expire in
thirty-six (36) months from issuance and have an exercise price of
$0.35 per share.
The
offering proceeds were invested in our wholly owned subsidiary, CLR
to fund working capital for its Nicaragua plantation and for the
purchase of green coffee to accelerate the growth on its green
coffee division.
In
connection with the November 2015 Offering, we also entered into
the “Registration Rights Agreement” with the investors
in the November 2015 Offering. The Registration Rights
Agreement requires that we file a registration statement (the
“Initial Registration Statement”) with the Securities
and Exchange Commission within sixty (60) days of the final closing
date of the November 2015 Offering (the “Filing Date”)
for the resale by the investors of all of the shares Common
Stock underlying the November 2015 Notes and the November 2015
Warrants and all shares of Common Stock issuable upon any stock
split, dividend or other distribution, recapitalization or similar
event with respect thereto (the “Registrable
Securities”). Upon the occurrence of certain
events (each an “Event”), we will be required to pay to
the investors liquidated damages of 1.0% of their respective
aggregate purchase price upon the date of the Event and then
monthly thereafter until the Event is cured. In no
event may the aggregate amount of liquidated damages payable to
each of the investors exceed in the aggregate 10% of the aggregate
purchase price paid by such investor for the Registrable
Securities. On February 12, 2016 we received notice from the SEC
that our registration statement was effective.
In January 2015, we raised aggregate gross
proceeds of $5,250,000 (the “January 2015 Offering”)
when we entered into note purchase agreements with three (3)
accredited investors pursuant to which we sold 52.5 units, each
unit consisting of a one (1) year secured note (the
“January 2015 Note”) in the aggregate principal amount
of $100,000 and 30,000 shares of Common Stock. We used the
net offering proceeds from the January 2015 Offering for CLR to
fund the purchase of Nicaragua green coffee to be sold under the
terms of a letter of intent for sourcing and supply. The January
2015 Notes bear interest at a rate of eight percent (8%) per
annum. We have the right to prepay the January 2015
Notes at any time at a rate equal to 100% of the then outstanding
principal balance and accrued interest. The January 2015
Notes rank pari passu to all other notes of ours other than certain
outstanding senior debt. CLR has provided collateral to
secure the repayment of the January 2015 Notes and has pledged the
Nicaragua green coffee beans acquired with the proceeds, the
contract rights under the letter of intent and all proceeds of the
foregoing (which lien is junior to CLR’s line of credit and
equipment lease but senior to all of its other obligations), all
subject to the terms and conditions of a security agreement among
us, CLR and the investors. Stephan Wallach, our Chief
Executive Officer, has also personally guaranteed the repayment of
the January 2015 Notes, subject to the terms of a Guaranty executed
by him with the investors. In addition, Mr. Wallach has
agreed not to sell, transfer or pledge 30 million shares of the
Common Stock that he owns so long as his personal guaranty is in
effect. One holder of a January 2015 Note in the principal amount
of $5,000,000 was prepaid on October 26, 2015 through a cash
payment from us to the investor of $1,000,000 and the remaining
$4,000,000 owed was applied to the investor’s purchase of a
$4,000,000 November 2015 Note in the November 2015 Offering and a
November 2015 Warrant exercisable to purchase 5,333,333 shares of
Common Stock. The remaining balance of the January 2015 Notes
as December 31, 2015 was $250,000 and was paid in January
2016.
Between
July 31, 2014 and September 10, 2014, we entered into Note
Purchase Agreements (the "2014 Note" by way of completing a private
placement offering (“2014 Private Offering”) with seven
accredited investors pursuant to which the Company raised aggregate
gross proceeds of $4,750,000 and sold units consisting of five (5)
year senior secured convertible 2014 Notes in the aggregate
principal amount of $4,750,000, that are convertible into
13,571,429 shares of our common stock, at a conversion price of
$0.35 per share, and warrants to purchase 18,586,956 shares of
common stock at an exercise price of $0.23 per share, subject to
adjustment as provided therein. As of December 31, 2016 the
principal amount of $4,750,000 remains outstanding. The outstanding
2014 Notes are secured by certain of our pledged assets, bear
interest at a rate of eight percent (8%) per annum and paid
quarterly in arrears with all principal and unpaid interest due
between July and September 2019.
Critical Accounting Policies and Estimates
Discussion
and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates; including those related to collection of
receivables, inventory obsolescence, sales returns and non-monetary
transactions such as stock and stock options issued for services,
deferred taxes and related valuation allowances, fair value of
assets and liabilities acquired in business combinations, asset
impairments, useful lives of property, equipment and intangible
assets and value of contingent acquisition debt. We base our
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.
Emerging Growth Company
We
have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(2) of
the Jobs Act, that allows us to delay the adoption of new or
revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Revenue Recognition
We
recognize revenue from product sales when the following four
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the selling
price is fixed or determinable, and collectability is reasonably
assured. We ship the majority of the direct selling segment
products directly to the distributors and customers via UPS, USPS
or FedEx and receive substantially all payments for these sales in
the form of credit card transactions. We regularly monitor the use
of credit card or merchant services to ensure that the financial
risk related to credit quality and credit concentrations is
actively managed. Revenue is recognized upon passage of title and
risk of loss to customers when product is shipped from the
fulfillment facility. We ship the majority of the coffee segment
products via common carrier and invoice our customers for the
products. Revenue is recognized when the title and risk of loss is
passed to the customer under the terms of the shipping arrangement,
typically, FOB shipping point.
Sales
revenue and a reserve for estimated returns are recorded net of
sales tax when product is shipped.
Fair Value of Financial Instruments
Certain
of our financial instruments including cash and cash equivalents,
accounts receivable, inventories, prepaid expenses, accounts
payable, accrued liabilities and deferred revenue are carried at
cost, which is considered to be representative of their respective
fair values because of the short-term nature of these instruments.
Our notes payable and derivative liability are carried at estimated
fair value (see Note 7, to the consolidated financial
statements.)
Derivative Financial Instruments
We
do not use derivative instruments to hedge exposures to cash flow,
market or foreign currency.
We
review the terms of convertible debt and equity instruments we
issue to determine whether there are derivative instruments,
including an embedded conversion option that is required to be
bifurcated and accounted for separately as a derivative financial
instrument. In circumstances where a host instrument contains more
than one embedded derivative instrument, including a conversion
option, that is required to be bifurcated, the bifurcated
derivative instruments are accounted for as a single, compound
derivative instrument. Also, in connection with the sale of
convertible debt and equity instruments, we may issue freestanding
warrants that may, depending on their terms, be accounted for as
derivative instrument liabilities, rather than as
equity.
Derivative
instruments are initially recorded at fair value and are then
revalued at each reporting date with changes in the fair value
reported as non-operating income or expense. When the convertible
debt or equity instruments contain embedded derivative instruments
that are to be bifurcated and accounted for as liabilities, the
total proceeds allocated to the convertible host instruments are
first allocated to the fair value of all the bifurcated derivative
instruments. The remaining proceeds, if any, are then allocated to
the convertible instruments themselves, usually resulting in those
instruments being recorded at a discount from their face value (see
Note 6, to the consolidated financial statements.)
The
discount from the face value of the convertible debt, together with
the stated interest on the instrument, is amortized over the life
of the instrument through periodic charges to interest
expense.
Inventory and Cost of Sales
Inventory
is stated at the lower of cost or market value. Cost is determined
using the first-in, first-out method. We record an inventory
reserve for estimated excess and obsolete inventory based upon
historical turnover, market conditions and assumptions about future
demand for its products. When applicable, expiration dates of
certain inventory items with a definite life are taken into
consideration.
Business Combinations
We
account for business combinations under the acquisition method and
allocate the total purchase price for acquired businesses to the
tangible and identified intangible assets acquired and liabilities
assumed, based on their estimated fair values. When a business
combination includes the exchange of our common stock, the value of
the common stock is determined using the closing market price as of
the date such shares were tendered to the selling parties. The fair
values assigned to tangible and identified intangible assets
acquired and liabilities assumed are based on management or third
party estimates and assumptions that utilize established valuation
techniques appropriate for our industry and each acquired business.
Goodwill is recorded as the excess, if any, of the aggregate fair
value of consideration exchanged for an acquired business over the
fair value (measured as of the acquisition date) of total net
tangible and identified intangible assets acquired. A liability for
contingent consideration, if applicable, is recorded at fair value
as of the acquisition date. In determining the fair value of such
contingent consideration, management estimates the amount to be
paid based on probable outcomes and expectations on financial
performance of the related acquired business. The fair value of
contingent consideration is reassessed quarterly, with any change
in the estimated value charged to operations in the period of the
change. Increases or decreases in the fair value of the contingent
consideration obligations can result from changes in actual or
estimated revenue streams, discount periods, discount rates, and
probabilities that contingencies will be met.
Long-Lived Assets
Long-lived
assets, including property and equipment and definite lived
intangible assets are carried at cost less accumulated
amortization. Costs incurred to renew or extend the life of a long
lived asset are reviewed for capitalization. All finite-lived
intangible assets are amortized on a straight-line basis, which
approximates the pattern in which the estimated economic benefits
of the assets are realized, over their estimated useful lives. We
evaluate long-lived assets for impairment whenever events or
changes in circumstances indicate their net book value may not be
recoverable. Impairment, if any, is based on the excess of the
carrying amount over the fair value, based on market value when
available, or discounted expected cash flows, of those assets and
is recorded in the period in which the determination is
made.
Goodwill
Goodwill
is recorded as the excess, if any, of the aggregate fair value of
consideration exchanged for an acquired business over the fair
value (measured as of the acquisition date) of total net tangible
and identified intangible assets acquired. Goodwill and other
intangible assets with indefinite lives are not amortized but are
tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable.
Stock Based Compensation
We account for stock based compensation in
accordance with Financial Accounting Standards Board
("FASB") Accounting Standards Board ("ASC") Topic
718, Compensation – Stock
Compensation, which establishes
accounting for equity instruments exchanged for employee services.
Under such provisions, stock based compensation cost is measured at
the grant date, based on the calculated fair value of the award,
and is recognized as an expense, under the straight-line method,
over the vesting period of the equity grant. We account for equity
instruments issued to non-employees in accordance with
authoritative guidance for equity based payments to non-employees.
Stock options issued to non-employees are accounted for at their
estimated fair value determined using the Black-Scholes
option-pricing model. The fair value of options granted to
non-employees is re-measured as they vest, and the resulting
increase in value, if any, is recognized as expense during the
period the related services are rendered.
Income Taxes
We
account for income taxes under the asset and liability method which
includes the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the consolidated financial statements. Under this
approach, deferred taxes are recorded for the future tax
consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income
taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred taxes
result from differences between the financial statement and tax
bases of our assets and liabilities, and are adjusted for changes
in tax rates and tax laws when changes are enacted. The effects of
future changes in income tax laws or rates are not
anticipated.
Results of Operations
The
comparative financials discussed below show the consolidated
financial statements of Youngevity International, Inc. as of and
for the years ended December 31, 2016 and 2015.
Year ended December 31, 2016 compared to year ended December 31,
2015
Revenues
For
the year ended December 31, 2016, our revenue increased 3.9% to
$162,667,000 as compared to $156,597,000 for the year ended
December 31, 2015. During the year ended December 31, 2016,
we derived approximately 89% of our revenue from our direct sales
and approximately 11% of our revenue from our commercial coffee
sales. Direct selling segment revenues increased by $6,491,000
or 4.7% to $145,418,000 as compared to the year ended December 31,
2015. This increase was primarily attributed to additional revenues
of $9,602,000 derived from the Company’s new acquisitions,
offset by a decrease of $3,111,000 in revenues from existing
business. For the year ended December 31, 2016, commercial coffee
segment revenues decreased by $421,000 or 2.4% to $17,249,000 as
compared to the year ended December 31, 2015. This decrease was
primarily attributed to a decrease in our roaster business due to a
strategic shift in the segment’s business model to focus more
effort on Company owned brands and forego its lower margin bulk
coffee processing business, partially offset by an increase in
green coffee sales as a result of increases in green coffee
prices.
The
following table summarizes our revenue in thousands by
segment:
|
|
For the years ended
December 31,
|
Percentage
|
|
|
Segment
Revenues
|
2016
|
2015
|
change
|
|
Direct
selling
|
$145,418
|
$138,927
|
4.7%
|
|
Commercial
coffee
|
17,249
|
17,670
|
(2.4)%
|
|
Total
|
$162,667
|
$156,597
|
3.9%
|
Cost of Revenues
For the year ended December 31, 2016, overall cost of revenues
increased approximately 1.4% to $64,530,000 as compared to
$63,628,000 for the year ended December 31, 2015. The direct
selling segment cost of revenues increased 6.4% as a result of cost
related to the increase in sales, an increase in product royalties
and labor costs, partially offset by a decrease in shipping costs.
For the year ended December 31, 2016, the cost of revenues of the
commercial coffee segment decreased 10.8% when compared to the same
period last year. This was attributable to decreases in sales
related to the roaster business and lower green coffee costs as a
result of the Company’s ability to procure green coffee at
lower costs from its plantation and other suppliers in
Nicaragua.
Cost
of revenues includes the cost of inventory including green coffee,
shipping and handling costs incurred in connection with shipments
to customers, direct labor and benefits costs, royalties associated
with certain products, transaction merchant fees and depreciation
on certain assets.
Gross Profit
For the year ended December 31, 2016, gross profit increased
approximately 5.6% to $98,137,000 as compared to $92,969,000 for
the year ended December 31, 2015. Gross profit in the direct
selling segment increased by 3.9% to $97,219,000 from $93,613,000
in the prior year as a result of the changes in revenues and costs
discussed above. Gross profit as a percentage of revenues in the
direct selling segment decreased by approximately 0.5% to 66.9% for
the year ended December 31, 2016, compared with the same period
last year. Gross profit in the commercial coffee segment
increased to $918,000, compared to a loss of $644,000 in the prior
year. The improvement in gross profit percentage in the commercial
coffee segment was primarily due to improved margins in green
coffee business as a result of more favorable pricing structure,
the ability to procure coffee at lower costs from the
Company’s plantation and other suppliers in Nicaragua,
increased K-Cup® revenues in the current year, which carry
higher margins and a strategic initiative to focus more on
marketing CLR Roasters company-owned brands which yield higher
gross margins and the decrease in the certain fixed costs
associated with the setup of the K-Cup business when compared to
2015. Gross profit as a percentage of revenues in the commercial
coffee segment increased by approximately 9.0% to 5.3% for the year
ended December 31, 2016, compared with the same period last year.
Overall gross profit as a percentage of revenues increased to
60.3%, compared to 59.4% in the prior year. Below is a table of
gross profit percentages by segment:
|
|
For the years
ended December 31,
|
Percentage
|
|
|
Segment Gross Profit (Loss)
|
2016
|
2015
|
change
|
|
Direct
selling
|
$97,219
|
$93,613
|
3.9%
|
|
Gross Profit % of Revenues
|
66.9%
|
67.4%
|
(0.5)%
|
|
Commercial
coffee
|
918
|
(644)
|
243.5%
|
|
Gross Profit % of Revenues
|
5.3%
|
(3.6)%
|
9.0%
|
|
Total
|
$98,137
|
$92,969
|
5.6%
|
|
Gross Profit % of Revenues
|
60.3%
|
59.4%
|
0.9%
|
Operating Expenses
For
the year ended December 31, 2016, our operating expenses increased
approximately 9.2% to $95,622,000 as compared to $87,563,000 for
the year ended December 31, 2015. Included in operating expense is
distributor compensation paid to our independent distributors in
the direct selling segment. For the year ended December 31, 2016,
distributor compensation increased 6.1% to $67,148,000 from
$63,276,000 for the year ended December 31, 2015. This increase was
primarily attributable to the increase in revenues. Distributor
compensation as a percentage of direct selling revenues increased
to 46.2% for the year ended December 31, 2016 as compared to 45.5%
for the year ended December 31, 2015. This increase was primarily
attributable to added incentive payouts and higher level
achievements by distributors.
For
the year ended December 31, 2016, the sales and marketing expense
increased 26.8% to $10,413,000 from $8,212,000 for the year ended
December 31, 2015 primarily due to increases in marketing and
customer service staff direct labor and benefits costs, product
marketing costs, convention costs and distributor events
costs.
For
the year ended December 31, 2016, the general and administrative
expense increased 12.4% to $18,061,000 from $16,075,000 for the
year ended December 31, 2015 primarily due to increases in costs
related to the international expansion, employee labor and benefits
costs, consulting fees, amortization costs, computer and internet
related costs, travel costs, offset primarily by a decrease in
non-cash expense of $253,000 as compared to last year related to
warrant modification expense recognized during the year ended
December 31, 2015. In addition, the contingent liability
revaluation resulted in a benefit of $1,462,000 for the year ended
December 31, 2016 compared to a benefit of $446,000 for the year
ended December 31, 2015.
Operating Income
For
the year ended December 31, 2016, operating income decreased
approximately 53.5% to $2,515,000 as compared to $5,406,000 for the
year ended December 31, 2015. This was primarily due to the
increase in sales and marketing costs discussed
above. Operating income as a percentage of revenues decreased
to 1.5%, for the year ended December 31, 2016 compared to 3.5% for
the year ended December 31, 2015.
Total Other Expense
For
the year ended December 31, 2016, total other expense decreased by
$2,625,000 to $3,103,000 as compared to $5,728,000 for the year
ended December 31, 2015. Total other expense is primarily net
interest expense of $4,474,000 and the change in the fair value of
warrant derivative of $1,371,000.
Net
interest expense decreased by $17,000 for the year ended December
31, 2016 to $4,474,000 as compared to $4,491,000 in 2015. Interest
expense includes interest payments related to acquisitions and
other operating debt, interest payments to investors associated
with the 2014 and 2015 Private Placement transactions and related
non-cash amortization costs of $1,438,000 and other non-cash costs
of $129,000.
The
Company recorded a non-cash extinguishment loss on debt of
$1,198,000 for the year ended December 31, 2015 as a result of the
repayment of $5,000,000 in Notes Payable to one of the investors
from the January 2015 Private Placement through issuance of a new
November 2015 Note Payable. This loss represents the difference
between the reacquisition value of the new debt to the holder of
the note and the carrying amount of the holder’s extinguished
debt (see Note 5, to the consolidated financial statements.)
Change in Fair Value of
Warrant Derivative Liability.
Various factors are considered in the pricing models we use to
value the warrants, including our current stock price, the
remaining life of the warrants, the volatility of our stock price,
and the risk free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
warrant liability. As such, we expect future changes in the fair
value of the warrants to continue and may vary significantly from
year to year (see Note 7, to the consolidated financial
statements.)
The extinguishment loss on debt and warrant liability revaluations
has not had a cash impact on our working capital, liquidity or
business operations.
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using statutory tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the effective date
of the change. The Company has determined through consideration of
all positive and negative evidence that the US deferred tax assets
are more likely than not to be realized. The Company does not have
a valuation allowance in the US Federal tax jurisdiction. A
valuation allowance remains on the state and foreign tax attributes
that are likely to expire before realization. The valuation
allowance increased approximately $183,000 for the year ended
December 31, 2016 and increased approximately $161,000 for the year
ended December 31, 2015.We have recognized an income tax benefit of
$190,000, which is our estimated federal, state and foreign income
tax liability for the year ended December 31, 2016. The current
effective tax rate is 32.3% compared to the Federal statutory tax
rate of 35.0%.
Net Loss
For
the year ended December 31, 2016, the Company reported a net loss
of $398,000 as compared to a net loss of $1,706,000 for the year
ended December 31, 2015. The primary reason for the decrease in net
loss when compared to prior year was due to the decrease in income
tax provision from $1,384,000 in tax provision in 2015 to a tax
benefit of $190,000 in 2016, offset by an increase in net loss
before income taxes from $322,000 in 2015 to $588,000 in net loss
before income taxes in 2016.
Adjusted EBITDA
EBITDA
(earnings before interest, income taxes, depreciation and
amortization) as adjusted to remove the effect of stock based
compensation expense and the non-cash loss on extinguishment of
debt and the change in the fair value of the warrant derivative or
"Adjusted EBITDA," decreased 26.5% to $6,772,000 for the year ended
December 31, 2016 compared to $9,215,000 in the same period for the
prior year.
Management
believes that Adjusted EBITDA, when viewed with our results under
GAAP and the accompanying reconciliations, provides useful
information about our period-over-period changes. Adjusted EBITDA
is presented because management believes it provides additional
information with respect to the performance of our fundamental
business activities and is also frequently used by securities
analysts, investors and other interested parties in the evaluation
of comparable companies. We also rely on Adjusted EBITDA as a
primary measure to review and assess the operating performance of
our company and our management team.
Adjusted
EBITDA is a non-GAAP financial measure. We calculate
adjusted EBITDA by taking net income (loss), and adding back the
expenses related to interest, income taxes, depreciation,
amortization, stock based compensation expense, change in the fair
value of the warrant derivative, non-cash impairment loss and debt
extinguishment gain or loss, as each of those elements are
calculated in accordance with GAAP. Adjusted EBITDA
should not be construed as a substitute for net income (loss) (as
determined in accordance with GAAP) for the purpose of analyzing
our operating performance or financial position, as Adjusted EBITDA
is not defined by GAAP.
A
reconciliation of our adjusted EBITDA to net loss for the
years ended December 31, 2016 and 2015 is included in the table
below (in thousands):
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Net
loss
|
$(398)
|
$(1,706)
|
|
Add
|
|
|
|
Interest,
net
|
4,474
|
4,491
|
|
Income
taxes
|
(190)
|
1,384
|
|
Depreciation
|
1,518
|
1,242
|
|
Amortization
|
2,344
|
2,112
|
|
EBITDA
|
7,748
|
7,523
|
|
Add
|
|
|
|
Stock
based compensation
|
395
|
455
|
|
Change
in the fair value of warrant derivative
|
(1,371)
|
39
|
|
Extinguishment
loss on debt
|
-
|
1,198
|
|
Adjusted
EBITDA
|
$6,772
|
$9,215
|
Liquidity and Capital Resources
Sources of Liquidity
At
December 31, 2016 we had cash and cash equivalents of approximately
$869,000 as compared to cash and cash equivalents of $3,875,000 as
of December 31, 2015. The decrease in cash was primarily due to
inventory purchases, cash for payments of financing
activities and cash used for capital
expenditures.
Cash Flows
Cash used
in operating activities.
Net cash used in operating activities for the year ended December
31, 2016 was $161,000 as compared to net cash provided by
operating activities of $1,367,000 for the year ended December 31,
2015. Net cash used in operating activities consisted of net loss
of $398,000, net non-cash operating activity of $2,030,000
offset by $1,793,000 in changes in operating assets and
liabilities.
Net non-cash operating expenses included $3,862,000 in depreciation
and amortization, $395,000 in stock based compensation expense,
$360,000 related to the amortization of deferred financing costs
associated with our Private Placements, $1,053,000 related to the
amortization of debt discounts, $128,000 related to the
amortization of warrant issuance costs and $88,000 in other
non-cash items, offset by $1,371,000 related to the
change in the fair value of warrant derivative liability, $325,000
related to deferred income taxes, $698,000 in expenses allocated in
profit sharing agreement and $1,462,000 related to the change in
the fair value of contingent acquisition debt.
Changes
in operating assets and liabilities were attributable to decreases
in working capital, primarily related to changes in inventory of
$3,515,000, changes in accounts receivable of $525,000 of which
$522,000 related to an increase in our factoring receivable and an
increase of $3,000 from trade related receivables, prepaid expenses
and other current assets of $733,000, accrued distributor
compensation of $60,000, deferred revenues of $710,000 and income
tax receivable of $138,000. Increases in working capital primarily
related to changes in accrued expenses and other liabilities of
$2,729,000, and accounts payable of $1,159,000.
Cash used in
investing activities. Net cash used in investing activities for
the year ended December 31, 2016 was $1,445,000, as compared to net
cash used in investing activities of $3,230,000 for the year ended
December 31, 2015. Net cash used in investing activities consisted
of purchases of property and equipment, leasehold improvements and
cash expenditures related to business acquisitions.
Cash used
in financing activities.
Net cash used in financing activities was $1,508,000 for the year
ended December 31, 2016 as compared to net cash provided by
financing activities of $2,792,000 for the year ended December 31,
2015. The decrease in cash provided by financing activities was
primarily due to the net proceeds related to the January 2015
Private Placement of approximately $5,080,000 received during the
prior year period.
Net
cash used in financing activities consisted of $833,000 in payments
related to the CLR Roasters factoring agreement, $453,000 in
payments to reduce notes payable, $773,000 in payments related to
contingent acquisition debt, and $36,000 in payments related to our
share repurchase program offset by proceeds from the exercise of
stock options and warrants, net, of $30,000 and $557,000 in
proceeds from capital lease financing net of payments to reduce
capital lease obligations.
Payments Due by Period
The
following table summarizes our expected contractual obligations and
commitments subsequent to December 31, 2016 (in
thousands):
|
|
|
Current
|
Long-Term
|
||||
|
Contractual Obligations*
|
Total
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
|
Operating
Leases
|
$4,578
|
$1,138
|
$930
|
$634
|
$557
|
$571
|
$748
|
|
Capital
Leases
|
2,678
|
984
|
972
|
604
|
90
|
28
|
-
|
|
Purchase
Obligations
|
1,164
|
1,164
|
-
|
-
|
-
|
-
|
-
|
|
Convertible
Notes Payable, “July 2014 Private
Placement”(*)
|
4,750
|
-
|
-
|
4,750
|
-
|
-
|
-
|
|
Convertible
Notes Payable, “November 2015 Private Placement”
(*)
|
7,188
|
-
|
7,188
|
-
|
-
|
-
|
-
|
|
Notes
Payable, Operating
|
4,650
|
220
|
162
|
141
|
143
|
108
|
3,876
|
|
Contingent
Acquisition Debt
|
8,001
|
628
|
719
|
694
|
814
|
382
|
4,764
|
|
Total
|
$33,009
|
$4,134
|
$9,971
|
$6,823
|
$1,604
|
$1,089
|
$9,388
|
(*) The
notes issued in the November 2015 and July 2014 Private Placements
mature in three and five years, respectively, after their date of
issuance unless they are converted into shares of Common Stock
prior to maturity.
“Operating
leases” generally provide that property taxes, insurance, and
maintenance expenses are our responsibility. Such expenses are not
included in the operating lease amounts that are outlined in the
table above.
During
the third quarter of fiscal year ended December 31, 2014, we
completed a private placement and entered into Note Purchase
Agreements with seven (7) accredited investors pursuant to which we
sold units consisting of five (5) year senior secured convertible
Notes in the aggregate principal amount of $4,750,000, that are
convertible into shares of our common stock. The Notes are due in
September 2019 if the option to convert has not been exercised (see
Note 5, to the consolidated financial
statements.)
In
November 2015, we completed a private placement and entered into
Note Purchase Agreements with three (3) accredited investors
pursuant to which we sold senior secured convertible notes in
the aggregate principal amount of $7,187,500, that are convertible
into shares of Common Stock. The Notes are due in October 2018 if
the option to convert has not been exercised (see Note 5, to the
consolidated financial statements.)
The
“Notes Payable, Operating” relates primarily to our
note and mortgage on our corporate office property 2400 Boswell
building. On March 15, 2013, we acquired 2400 Boswell for
approximately $4.6 million dollars. 2400 Boswell LLC is
the owner and lessor of the building occupied by us for our
corporate office and warehouse in Chula Vista, CA. The purchase was
from an immediate family member of our Chief Executive Officer and
consisted of approximately $248,000 in cash, $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.00%. Additionally, we assumed a
long-term mortgage of $3,625,000, payable over 25 years and have an
initial interest rate of 5.75%. The interest rate is the prime rate
plus 2.50%. The lender will adjust the interest rate on the first
calendar day of each change period. As of December 31, 2016 the
balance on the long-term mortgage was $3,363,000 and the balance on
the promissory note was $108,000, both of which are included in
notes payable.
The
“Contingent acquisition debt” relates to contingent
liabilities related to business acquisitions. Generally, these
liabilities are payments to be made in the future based on a level
of revenue derived from the sale of products. These
numbers are estimates and actual numbers could be higher or lower
because many of our contingent liabilities relate to payments on
sales that have no maximum payment amount. In many of those
transactions, we have recorded a liability for contingent
consideration as part of the purchase price. All
contingent consideration amounts are based on management’s
best estimates utilizing all known information at the time of the
calculation.
In connection with our 2011 acquisition of FDI, we assumed mortgage
guarantee obligations made by FDI on the building previously
housing our New Hampshire operations. The balance of the
mortgages is approximately $1,806,000 as of December 31,
2016.
Factoring Agreement
We have a factoring agreement (“Factoring Agreement”)
with Crestmark Bank (“Crestmark”) related to the
Company’s accounts receivable resulting from sales of certain
products within its commercial coffee segment. Effective May 1,
2016, the Company entered into a third amendment to the factoring
agreement (“Agreement”). Under the terms of the
Agreement, all new receivables assigned to Crestmark shall be
“Client Risk Receivables” and no further credit
approvals will be provided by Crestmark and there will be no new
credit-approved receivables. The changes to the Agreement include
expanding the factoring facility to include borrowings to be
advanced against acceptable eligible inventory up to 50% of landed
cost of finished goods inventory and meeting certain criteria, not
to exceed the lesser of $1,000,000 or 85% of the value of the
receivables already advanced with a maximum overall borrowing of
$3,000,000. Interest accrues on the outstanding balance and a
factoring commission is charged for each invoice factored which is
calculated as the greater of $5.00 or 0.75% to 0.875% of the gross
invoice amount and is recorded as interest expense. In addition the
Company and the Company’s CEO Mr. Wallach have entered into a
Guaranty and Security Agreement with Crestmark Bank if in the event
that CLR were to default. This Agreement continues in full force
and is effective until February 1, 2019.
The
Company accounts for the sale of receivables under the Factoring
Agreement as secured borrowings with a pledge of the subject
inventories and receivables as well as all bank deposits as
collateral, in accordance with the authoritative guidance for
accounting for transfers and servicing of financial assets and
extinguishments of liabilities. The caption “Accounts
receivable, due from factoring company” on the accompanying
consolidated balance sheets in the amount of approximately
$1,078,000 and $556,000 as of December 31, 2016 and December
31, 2015, respectively, reflects the related collateralized
accounts.
The
Company's outstanding liability related to the Factoring Agreement
was approximately $1,290,000 and $457,000 as of December 31, 2016
and December 31, 2015, respectively, and is included in other
current liabilities, net on the consolidated balance
sheets.
Future Liquidity Needs
We
believe that current cash balances, future cash provided by
operations, and available amounts under our accounts receivable
factoring agreement will be sufficient to cover our operating and
capital needs in the ordinary course of business for at least the
next 12 months.
-40-
Table of Contents
Though
our operations are currently meeting our working capital
requirements, if we experience
an adverse operating environment or unusual capital expenditure
requirements, or if we continue our expansion internationally or
through acquisitions, additional financing may be required. No
assurance can be given, however, that additional financing, if
required, would be available on favorable terms. We might also
require or seek additional financing for the purpose of expanding
into new markets, growing our existing markets, or for other
reasons. Such financing may include the use of additional debt or
the sale of additional equity securities. Any financing which
involves the sale of equity securities or instruments that are
convertible into equity securities could result in immediate and
possibly significant dilution to our existing
shareholders.
Off-Balance Sheet Arrangements
There
were no off-balance sheet arrangements as of December 31,
2016.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
As
a Smaller Reporting Company as defined by Rule 12b-2 of the
Exchange Act and in Item 10(f)(1) of Regulation S-K, we are
electing scaled disclosure reporting obligations and therefore are
not required to provide the information requested by this
Item.
Item 8. Consolidated
Financial Statements
Index to Consolidated Financial Statements
|
42
|
|
|
Financial
Statements:
|
43
|
|
43
|
|
|
44
|
|
|
45
|
|
|
46
|
|
|
47
|
|
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Youngevity International, Inc.
Chula
Vista, California
We have audited the accompanying consolidated
balance sheets of Youngevity International, Inc.
and Subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the
related consolidated statements of operations, comprehensive income
(loss), stockholders’ equity, and cash flows for each of the
years then ended. The Company’s management is responsible for
these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of
Youngevity
International, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the
consolidated results of its operations and cash flows for each of
the years then ended in conformity with accounting principles
generally accepted in the United States of
America.
/s/
Mayer Hoffman McCann P.C.
San
Diego, California
March
30, 2017
|
Youngevity International, Inc.
and Subsidiaries
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
(In thousands, except share amounts)
|
||||||||
|
|
|
As of
|
|
|||||
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
||
|
ASSETS
|
|
|
|
|
|
|
||
|
Current Assets
|
|
|
|
|
|
|
||
|
Cash
and cash equivalents
|
|
$
|
869
|
|
|
$
|
3,875
|
|
|
Accounts
receivable, due from factoring company
|
|
|
1,078
|
|
|
|
556
|
|
|
Trade
accounts receivable, net
|
|
|
1,071
|
|
|
|
1,068
|
|
|
Income
tax receivable
|
|
|
311
|
|
|
|
173
|
|
|
Deferred
tax assets, net current
|
|
|
565
|
|
|
|
711
|
|
|
Inventory
|
|
|
21,492
|
|
|
|
17,977
|
|
|
Prepaid
expenses and other current assets
|
|
|
3,087
|
|
|
|
2,412
|
|
|
Total
current assets
|
|
|
28,473
|
|
|
|
26,772
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
14,006
|
|
|
|
12,699
|
|
|
Deferred tax assets, long-term
|
|
|
2,292
|
|
|
|
1,821
|
|
|
Intangible assets, net
|
|
|
14,914
|
|
|
|
13,714
|
|
|
Goodwill
|
|
|
6,323
|
|
|
|
6,323
|
|
|
Total
assets
|
|
$
|
66,008
|
|
|
$
|
61,329
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,174
|
|
|
$
|
7,015
|
|
|
Accrued
distributor compensation
|
|
|
4,163
|
|
|
|
4,223
|
|
|
Accrued
expenses
|
|
|
3,701
|
|
|
|
3,605
|
|
|
Deferred
revenues
|
|
|
1,870
|
|
|
|
2,580
|
|
|
Other
current liabilities
|
|
|
2,389
|
|
|
|
577
|
|
|
Capital
lease payable, current portion
|
|
|
821
|
|
|
|
111
|
|
|
Notes
payable, current portion
|
|
|
219
|
|
|
|
456
|
|
|
Warrant
derivative liability
|
|
|
3,345
|
|
|
|
4,716
|
|
|
Contingent
acquisition debt, current portion
|
|
|
628
|
|
|
|
264
|
|
|
Total
current liabilities
|
|
|
25,310
|
|
|
|
23,547
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease payable, net of current portion
|
|
|
1,569
|
|
|
|
294
|
|
|
Notes payable, net of current portion
|
|
|
4,431
|
|
|
|
4,647
|
|
|
Convertible notes payable, net of debt discount
|
|
|
8,327
|
|
|
|
6,786
|
|
|
Contingent acquisition debt, net of current portion
|
|
|
7,373
|
|
|
|
7,174
|
|
|
Total
liabilities
|
|
|
47,010
|
|
|
|
42,448
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies, Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock, $0.001 par value: 100,000,000 shares authorized;
161,135 shares issued and outstanding at December 31, 2016 and
December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
Common
Stock, $0.001 par value: 600,000,000 shares authorized; 392,698,557
and 392,583,015 shares issued and outstanding at December 31, 2016
and December 31, 2015, respectively
|
|
|
393
|
|
|
|
393
|
|
|
Additional
paid-in capital
|
|
|
169,839
|
|
|
|
169,432
|
|
|
Accumulated
deficit
|
|
|
(151,016
|
)
|
|
|
(150,618
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(218
|
)
|
|
|
(326
|
)
|
|
Total
stockholders’ equity
|
|
|
18,998
|
|
|
|
18,881
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
66,008
|
|
|
$
|
61,329
|
|
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
|
|
|
Years Ended
December 31,
|
|
|||||
|
|
|
2016
|
|
|
2015
|
|
||
|
|
|
|
|
|
|
|
||
|
Revenues
|
|
$
|
162,667
|
|
|
$
|
156,597
|
|
|
Cost of revenues
|
|
|
64,530
|
|
|
|
63,628
|
|
|
Gross
profit
|
|
|
98,137
|
|
|
|
92,969
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Distributor
compensation
|
|
|
67,148
|
|
|
|
63,276
|
|
|
Sales
and marketing
|
|
|
10,413
|
|
|
|
8,212
|
|
|
General
and administrative
|
|
|
18,061
|
|
|
|
16,075
|
|
|
Total
operating expenses
|
|
|
95,622
|
|
|
|
87,563
|
|
|
Operating income
|
|
|
2,515
|
|
|
|
5,406
|
|
|
Interest
expense, net
|
|
|
(4,474
|
)
|
|
|
(4,491
|
)
|
|
Extinguishment
loss on debt
|
|
|
-
|
|
|
|
(1,198
|
)
|
|
Change
in fair value of warrant derivative liability
|
|
|
1,371
|
|
|
|
(39
|
)
|
|
Total
other expense
|
|
|
(3,103
|
)
|
|
|
(5,728
|
)
|
|
Loss before income taxes
|
|
|
(588
|
)
|
|
|
(322
|
)
|
|
Income tax (benefit) provision
|
|
|
(190
|
)
|
|
|
1,384
|
|
|
Net loss
|
|
|
(398
|
)
|
|
|
(1,706
|
)
|
|
Preferred stock dividends
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
Net loss available to common stockholders
|
|
$
|
(410
|
)
|
|
$
|
(1,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
Net loss per share, diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
392,641,735
|
|
|
|
392,075,608
|
|
|
Weighted average shares outstanding, diluted
|
|
|
392,641,735
|
|
|
|
392,075,608
|
|
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Consolidated Statements of Comprehensive Loss
(In thousands)
|
|
|
Years Ended
December 31,
|
|
|||||
|
|
|
2016
|
|
|
2015
|
|
||
|
|
|
|
|
|
|
|
||
|
Net loss
|
|
$
|
(398
|
)
|
|
$
|
(1,706
|
)
|
|
Foreign
currency translation
|
|
|
108
|
|
|
|
(51
|
)
|
|
Total other comprehensive income (loss)
|
|
|
108
|
|
|
|
(51
|
)
|
|
Comprehensive loss
|
|
$
|
(290
|
)
|
|
$
|
(1,757
|
)
|
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
|
|
Preferred Stock
|
Common Stock
|
Additional Paid-in
|
Accumulated Other
Comprehensive
|
Accumulated
|
Total
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
(loss)
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance at December 31, 2014
|
161,135
|
$-
|
390,301,312
|
$390
|
$167,386
|
$(275)
|
$(148,912)
|
$18,589
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,706)
|
(1,706)
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
(51)
|
-
|
(51)
|
| Beneficial conversion feature of convertible notes payable, net of tax |
-
|
-
|
-
|
-
|
402
|
-
|
-
|
402
|
|
Issuance of common stock pursuant to Notes Payable
|
-
|
-
|
2,450,000
|
2
|
585
|
-
|
-
|
587
|
|
Issuance of warrants pursuant to Convertible Notes Payable debt
financing
|
-
|
-
|
-
|
-
|
384
|
-
|
-
|
384
|
|
Issuance of common stock pursuant to the exercise of
warrants
|
-
|
-
|
806,250
|
1
|
201
|
-
|
-
|
202
|
|
Issuance of common stock pursuant to the exercise of stock
options
|
-
|
-
|
369,675
|
-
|
70
|
| ||