N
otes to Condensed Consolidated
Financial Statements
(Unaudited)
September 30, 2016
Note 1. Basis of Presentation and Description of
Business
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission for interim
financial information. Accordingly, certain information and
footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules
and regulations.
The statements presented as of September 30, 2016 and for the three
and nine months ended September 30, 2016 and 2015 are unaudited. In
the opinion of management, these financial statements reflect all
normal recurring and other adjustments necessary for a fair
presentation, and to make the financial statements not misleading.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
included in the Company’s Form 10-K for the year ended
December 31, 2015. The results for interim periods are not
necessarily indicative of the results for the entire
year.
Certain reclassifications have been made to conform to the current
year presentations including the Company’s adoption of
Accounting Standards Update ("ASU") 2015-03 and ASU 2015-15,
pertaining to the presentation of debt issuance costs with
retrospective application effective January 1, 2016. This resulted
in a reclassification
from prepaid expenses
and other assets to convertible notes payable, net of debt
discount
. Refer below to
“Recently Issued Accounting Pronouncements” of the
notes to the condensed consolidated financial statements for
further details. These reclassifications did not affect revenue,
total costs and expenses, income (loss) from operations, or net
income (loss).
The Company consolidates all majority owned subsidiaries,
investments in entities in which we have controlling influence and
variable interest entities where we have been determined to be the
primary beneficiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Business
Youngevity International, Inc. (the “Company”), founded
in 1996, develops and distributes nutritional supplements, sports
and energy drinks, health and wellness, weight loss, gourmet
coffee, skincare and cosmetics, lifestyle services, digital
products including scrap books and memory books, packaged foods,
pharmacy discount cards, clothing and jewelry line products through
its global independent direct selling network, also known as
multi-level marketing, and sells coffee products to commercial
customers. The Company operates in two business
segments, its direct selling segment where products are offered
through a global distribution network of preferred customers and
distributors and its commercial coffee segment where products are
sold directly to businesses. In the following text, the terms
“we,” “our,” and “us” may
refer, as the context requires, to the Company or collectively to
the Company and its subsidiaries.
The Company operates through the following domestic wholly-owned
subsidiaries: AL Global Corporation, which operates our direct
selling networks, CLR Roasters, LLC (“CLR”), our
commercial coffee business, Financial Destination, Inc., FDI
Management, Inc., and MoneyTrax LLC (collectively referred to as
“FDI”), 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).
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and
expense for each reporting period. Estimates are used in
accounting for, among other things, allowances for doubtful
accounts, deferred taxes, and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under our stock based
compensation plan, fair value of assets and liabilities acquired in
business combinations, capital leases, asset impairments, estimates
of future cash flows used to evaluate impairments, useful lives of
property, equipment and intangible assets, value of contingent
acquisition debt, inventory obsolescence, and sales
returns.
Actual results may differ from previously estimated amounts and
such differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected
prospectively in the period they occur.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) attributable to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income attributable
to common stockholders by the sum of the weighted-average number of
common shares outstanding during the period and the
weighted-average number of dilutive common share equivalents
outstanding during the period, using the treasury stock method.
Dilutive common share equivalents are comprised of in-the-money
stock options, warrants and convertible preferred stock, based on
the average stock price for each period using the treasury stock
method.
The incremental dilutive common share equivalents for the three and
nine months ended September 30, 2016 were 7,845,400 and 7,491,263,
respectively.
The incremental dilutive common share equivalents for the three
months ended September 30, 2015 were 12,098,454. The Company
incurred a loss for the nine months ended September 30, 2015, and
therefore, 8,890,982 common share equivalents were not included in
the weighted-average calculation since their effect would have been
anti-dilutive.
Stock Based Compensation
The Company accounts for stock based compensation in accordance
with Accounting Standards Codification ("ASC") Topic 718,
“
Compensation – Stock
Compensation,”
which
establishes accounting for equity instruments exchanged for
employee services. Under such provisions, stock based compensation
cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense, under the
straight-line method, over the vesting period of the equity
grant.
The Company accounts for equity instruments issued to non-employees
in accordance with authoritative guidance for equity based payments
to non-employees. Stock options issued to non-employees are
accounted for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Factoring Agreement
The Company has a factoring agreement (“Factoring
Agreement”) with Crestmark Bank (“Crestmark”)
related to the Company’s accounts receivable resulting from
sales of certain products within its commercial coffee segment.
Effective May 1, 2016, the Company entered into a third amendment
to the factoring agreement (“Agreement”). Under the
terms of the Agreement, all new receivables assigned to Crestmark
shall be “Client Risk Receivables” and no further
credit approvals will be provided by Crestmark 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
1.00% of the gross invoice amount and is recorded as interest
expense. In addition Youngevity Inc. has 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
condensed consolidated balance sheets in the amount of
approximately $1,442,000 and $556,000 as of September 30, 2016
and December 31, 2015, respectively, reflects the related
collateralized accounts.
The Company's outstanding liability related to the Factoring
Agreement was approximately $1,588,000 and $457,000 as of September
30, 2016 and December 31, 2015, respectively, and is included in
other current liabilities, net on the condensed consolidated
balance sheets.
Plantation Costs
The Company’s commercial coffee segment, CLR, includes the
results of the Siles Plantation Family Group (“Siles”),
which is a 450 acre coffee plantation and a dry-processing facility
located on 26 acres both located in Matagalpa, Nicaragua. Siles is
a wholly-owned subsidiary of CLR, and the results of
CLR include the depreciation and amortization of capitalized
costs, development and maintenance and harvesting costs of
Siles. In accordance with GAAP, plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate throughout the year, and are expensed over the remainder
of the year as the coffee is sold. The difference between actual
harvest costs incurred and the amount of harvest costs recognized
as expense is recorded as either an increase or decrease in
deferred harvest costs, which is reported as an asset and included
with prepaid expenses and other current assets in the condensed
consolidated balance sheets. Once the harvest is complete, the
harvest cost is then recognized as the inventory
value.
In April 2015, the Company completed the 2015 coffee harvest in
Nicaragua and approximately $723,000 of deferred harvest costs were
reclassified as inventory during the quarter ended June 30, 2015.
The remaining inventory as of September 30, 2016 and December 31,
2015 is $144,000 and $192,000, respectively.
In May 2016, the Company completed the 2016 coffee harvest in
Nicaragua and approximately $650,000 of deferred harvest costs were
reclassified as inventory during the quarter ended June 30, 2016.
The remaining inventory as of September 30, 2016 is
$41,000.
Costs associated with the 2017 harvest as of September 30, 2016
total approximately $188,000 and are included in prepaid expenses
and other current assets as deferred harvest costs on the
Company’s condensed consolidated balance sheet.
Related Party Transactions
Our coffee segment CLR is associated with Hernandez, Hernandez,
Export Y Company (“H&H”), a Nicaragua company,
through sourcing arrangements to procure Nicaraguan green coffee
and in March 2014 as part of the Siles acquisition, CLR
engaged H&H as employees to manage Siles. The Company made
purchases of approximately $2,700,000 and $7,400,000 from this
supplier for the three months and nine months ended September 30,
2016, respectively. In addition, for the three months and nine
months ended September 30, 2016, CLR sold $0 and $2,200,000
respectively, in green coffee to H&H Coffee Group Export, a
Florida Company which is affiliated with H&H.
Revenue Recognition
The Company recognizes revenue from product sales when the
following four criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the selling price is fixed or determinable, and
collectability is reasonably assured. The Company ships the
majority of its direct selling segment products directly to the
distributors via UPS or USPS and receives substantially all
payments for these sales in the form of credit card transactions.
The Company regularly monitors its use of credit card or merchant
services to ensure that its financial risk related to credit
quality and credit concentrations is actively managed. Revenue is
recognized upon passage of title and risk of loss to customers when
product is shipped from the fulfillment facility. The Company ships
the majority of its coffee segment products via common carrier and
invoices its customer for the products. Revenue is recognized when
the title and risk of loss is passed to the customer under the
terms of the shipping arrangement, typically, FOB shipping
point.
Sales revenue and a reserve for estimated returns are recorded net
of sales tax when product is shipped.
Deferred Revenues and Costs
Deferred revenues relate primarily to the Heritage Makers product
line and represent the Company’s obligation for points
purchased by customers that have not yet been redeemed for product.
Cash received for points sold is recorded as deferred revenue.
Revenue is recognized when customers redeem the points and the
product is shipped. As of September 30, 2016 and December 31, 2015,
the balance in deferred revenues was approximately $1,928,000 and
$2,580,000 respectively, of which the portion attributable to
Heritage Makers was approximately $1,928,000 and $2,485,000,
respectively. The remaining balance of approximately
$95,000 as of December 31, 2015, related primarily to the
Company’s 2016 conventions whereby attendees pre-enroll in
the events and the Company does not recognize this revenue until
the conventions occur.
Deferred costs relate to Heritage Makers prepaid commissions that
are recognized in expense at the time the related revenue is
recognized. As of September 30, 2016 and December 31, 2015, the
balance in deferred costs was approximately $561,000 and $967,000,
respectively, and was included in prepaid expenses and current
assets.
Recently Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board (the “FASB”),
which are adopted by the Company as of the specified date. Unless
otherwise discussed, management believes the impact of recently
issued standards, some of which are not yet effective, will not
have a material impact on its unaudited condensed consolidated
financial statements upon adoption.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
,
which clarifies how companies present and classify certain cash
receipts and cash payments in the statement of cash flows. This
guidance is effective for fiscal years beginning after
December 15, 2017, including interim periods within those
fiscal years. Early adoption is permitted. The Company is currently
assessing the impact of this guidance.
In March 2016, the FASB issued ASU No. 2016-07,
Simplifying the Transition to
the Equity Method of Accounting
(“ASU 2016-07”). ASU 2016-07
eliminates the requirement that when an investment qualifies for
use of the equity method as a result of an increase in the level of
ownership interest or degree of influence, an investor must adjust
the investment, results of operations, and retained earnings
retroactively on a step-by-step basis as if the equity method had
been in effect during all previous periods that the investment had
been held. ASU 2016-07 requires that the equity method investor add
the cost of acquiring the additional interest in the investee to
the current basis of the investor's previously held interest and
adopt the equity method of accounting as of the date the investment
becomes qualified for equity method accounting. Therefore, upon
qualifying for the equity method of accounting, no retroactive
adjustment of the investment is required. ASU 2016-17 requires that
an entity that has an available-for-sale equity security that
becomes qualified for the equity method of accounting recognize
through earnings the unrealized holding gain or loss in accumulated
other comprehensive income at the date the investment becomes
qualified for use of the equity method. ASU 2016-07 is effective
for the Company’s financial statements for annual and interim
periods beginning on or after December 15, 2016, and must be
applied prospectively. The Company is currently assessing the
impact of this guidance.
In March 2016, the FASB issued ASU No. 2016-09,
“
Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting”
(“ASU 2016-09”). ASU 2016-09
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is
effective for us beginning January 1, 2017. Early adoption is
permitted.
The Company is currently assessing the impact of
this guidance.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842).
The amendments in this ASU changes the
existing accounting standards for lease accounting, including
requiring lessees to recognize most leases on their balance sheets
and making targeted changes to lessor accounting. The guidance is
effective for annual reporting periods beginning after
December 15, 2018. The new leases standard requires a modified
retrospective transition approach for all leases existing at, or
entered into after, the date of initial application, with an option
to use certain transition relief.
The Company is currently
assessing the impact of this guidance.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers (“ASU 2014-09”), which
requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing
revenue recognition guidance in U.S. GAAP when it becomes
effective. In July 2015, the FASB approved a one-year deferral of
the effective date of the new revenue recognition standard. The new
standard will become effective for the Company on January 1, 2018
and the Company has the option to adopt it effective January 1,
2017. The standard permits the use of either the retrospective or
cumulative effect transition method. In March 2016, the FASB issued
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606),
Principal versus Agent Considerations (Reporting Revenue versus
Net) (“ASU 2016-08”), which clarifies the
implementation guidance on principal versus agent considerations in
the new revenue recognition standard. ASU 2016-08 clarifies how an
entity should identify the unit of accounting (i.e., the specified
good or service) for the principal versus agent evaluation and how
it should apply the control principle to certain types of
arrangements. In April 2016, the FASB issued Accounting Standards
Update No. 2016-10, Revenue from Contracts with Customers (Topic
606), Identifying Performance Obligations and Licensing (“ASU
2016-10”), which amends certain aspects of the guidance on
identifying performance obligations and the implementation guidance
on licensing. The Company is evaluating the effect the ASUs will
have on its consolidated financial statements and related
disclosures.
The Company is
currently assessing the impact of this
guidance.
In April 2015, the FASB issued ASU No. 2015-03,
Interest-Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs
to simplify the
presentation of debt issuance costs. The amendments in the update
require that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct reduction
of the carrying amount of
the debt. Recognition and measurement of debt
issuance costs were not affected
by this amendment. In August 2015, FASB issued ASU
2015-15, “Presentation and
Subsequent Measurement of Debt Issuance Costs
Associated With Line-of-Credit Arrangements-Amendments to SEC
Paragraphs Pursuant to Staff Announcement at
June 18, 2015 EITF Meeting” which clarified
that the SEC would not object to an
entity deferring and presenting debt issuance
costs as an asset and subsequently
amortizing the deferred debt issuance costs
ratably over the term of the
line-of-credit arrangement.
ASU 2015-03 represents
a change in accounting principle and was effective on January 1,
2016 and was applied on a retrospective basis. The adoption of ASU
2015-03 resulted in a retrospective reclassification of our debt
issuance costs as described above from prepaid expenses and other
assets to convertible notes payable, net of debt discount on our
December 31, 2015 balance sheet in the amount of
$1,456,000.
Note
2.
Income
Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, “
Income Taxes,”
under the asset and liability method
which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the condensed consolidated financial
statements. Under this approach, deferred taxes are recorded for
the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable
for the current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
statement and tax basis of assets and liabilities, and are adjusted
for changes in tax rates and tax laws when changes are enacted. The
effects of future changes in income tax laws or rates are not
anticipated.
Income taxes for the interim periods are computed using the
effective tax rates estimated to be applicable for the full fiscal
year, as adjusted for any discrete taxable events that occur during
the period.
The Company files income tax returns in the United States
(“U.S.”) on a federal basis and in many U.S. state and
foreign jurisdictions. Certain tax years remain open to examination
by the major taxing jurisdictions to which the Company is
subject.
Note
3.
Inventory and
Costs of Revenues
Inventory is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. The Company
records an inventory reserve for estimated excess and obsolete
inventory based upon historical turnover, market conditions and
assumptions about future demand for its products. When applicable,
expiration dates of certain inventory items with a definite life
are taken into consideration.
Inventories consist of the following (in thousands):
|
|
|
|
|
Finished
goods
|
$
11,489
|
$
9,893
|
Raw
materials
|
9,645
|
8,970
|
Total
inventory
|
21,134
|
18,863
|
Reserve
for excess and obsolete inventory
|
(1,232
)
|
(886
)
|
Total
inventory, net
|
$
19,902
|
$
17,977
|
Cost of revenues includes the cost of inventory, shipping and
handling costs, royalties associated with certain products,
transaction banking costs, warehouse labor costs and depreciation
on certain assets.
Note 4. Acquisitions and Business Combinations
The Company accounts for business combinations under the
acquisition method and allocates the total purchase price for
acquired businesses to the tangible and identified intangible
assets acquired and liabilities assumed, based on their estimated
fair values. When a business combination includes the exchange of
the Company’s common stock, the value of the common stock is
determined using the closing market price as of the date such
shares were tendered to the selling parties. The fair values
assigned to tangible and identified intangible assets acquired and
liabilities assumed are based on management or third-party
estimates and assumptions that utilize established valuation
techniques appropriate for the Company’s industry and each
acquired business. Goodwill is recorded as the excess, if any, of
the aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date. In determining the fair
value of such contingent consideration, management estimates the
amount to be paid based on probable outcomes and expectations on
financial performance of the related acquired business. The fair
value of contingent consideration is reassessed quarterly, with any
change in the estimated value charged to operations in the period
of the change. Increases or decreases in the fair value of the
contingent consideration obligations can result from changes in
actual or estimated revenue streams, discount periods, discount
rates and probabilities that contingencies will be
met.
During
the nine months ended September 30, 2016, the Company entered into
four acquisitions, which are described below. The acquisitions were
conducted in an effort to expand the Company’s distributor
network, enhance and expand its product portfolio,
and diversify its product mix. As such, the major
purpose for the Company’s business combination was to
increase revenue and profitability. The acquisitions were
structured as asset purchases which resulted in the recognition of
certain intangible assets.
Legacy for Life, LLC
On
August 18, 2016, with an effective date of September 1, 2016 the
Company entered into an agreement to acquire certain assets of
Legacy for Life, LLC, an Oklahoma based direct-sales company and
entered into an agreement to acquire the equity of two wholly owned
subsidiaries of Legacy for Life, LLC; Legacy for Life Taiwan and
Legacy for Life Limited (Hong Kong) collectively referred to as
(“Legacy for Life”).
Legacy for Life is a
science-based direct seller of i26, a
product made from the patented IgY Max formula or hyperimmune whole
dried egg, which is the key ingredient in Legacy for Life products.
Additionally, the Company has entered into an Ingredient Supply
Agreement to market i26 worldwide. IgY Max promotes healthy gut
flora and healthy digestion and was created by exposing a specially
selected flock of chickens to natural elements from the human
world, whereby the chickens develop immunity to these elements. In
a highly patented process, these special eggs are harvested as a
whole food and are processed as a whole food into i26 egg powder,
an all-natural product. Nothing is added to the egg nor does any
chemical extraction take place.
As
a result of this acquisition, the Company’s distributors and
customers have access to the unique line of the Legacy for Life
products and the Legacy for Life distributors and customers have
gained access to products offered by the Company. The Company has
agreed to purchase certain inventories and assume certain
liabilities. The Company is obligated to make monthly payments
based on a percentage of the Legacy for Life distributor revenue
derived from sales of the Company’s products and a percentage
of royalty revenue derived from sales of the Legacy for Life
products until the earlier of the date that is fifteen (15) years
from the closing date or such time as the Company has paid to
Legacy for Life aggregate cash payments of Legacy for Life
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
The acquisition of Legacy for Life was accounted
for under the acquisition method of accounting.
The assets acquired and liabilities
assumed by the Company were recognized at their estimated fair
values as of the acquisition date.
The fair values of the acquired assets have not
been finalized pending further information that may impact the
valuation of certain assets or liabilities.
The acquisition related costs, such as legal costs
and other professional fees were minimal and expensed as
incurred.
The contingent consideration’s estimated fair value at the
date of acquisition was $825,000 as determined by management using
a discounted cash flow methodology. In addition the Company paid
$221,000 for the net assets of the Taiwan and Hong Kong entities
and certain inventories from Legacy for Life.
The preliminary purchase price allocation for the acquisition of
Legacy for Life (in thousands) is as follows:
Cash
paid for the equity in Legacy for Life Taiwan and Legacy for Life
Limited (Hong Kong)
|
$
26
|
Cash
paid for inventory
|
195
|
Total
cash consideration
|
221
|
Trademarks
and trade name
|
185
|
Customer-related
intangible
|
250
|
|
390
|
Total
intangible assets acquired, non-cash
|
825
|
Total
purchase price
|
$
1,046
|
The preliminary fair value of intangible assets acquired was
determined through the use of a discounted cash flow methodology.
The trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The Company expects to finalize the valuation within one (1) year
from the acquisition date.
Revenues
included in the condensed consolidated statements of operations as
a result of this acquisition for the three and nine months ended
September 30, 2016 were $137,000.
The pro-forma effect assuming the business combination with Legacy
for Life discussed above had occurred at the beginning of the
current period is not presented as the information provided to the
Company was not independently reviewed in accordance with
attestation standards established by the American Institute of
Certificated Public Accountants.
Nature’s Pearl Corporation
On August 1, 2016, the Company entered into an agreement to acquire
certain assets of Nature’s Pearl Corporation,
(“Nature’s Pearl”) with an effective date of
September 1, 2016. Nature’s Pearl is a direct-sales company
that produces nutritional supplements and skin and personal care
products using the muscadine grape grown in the southeastern region
of the United States that are deemed to be rich in antioxidants. As
a result of this acquisition, the Company’s distributors and
customers have access to the unique line of Nature’s Pearl
products and Nature’s Pearl distributors and customers have
gained access to products offered by the Company. The Company is
obligated to make monthly payments based on a percentage of
Nature’s Pearl distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of Nature’s Pearl products until the
earlier of the date that is ten (10) years from the closing date or
such time as the Company has paid to Nature’s Pearl aggregate
cash payments of Nature’s Pearl distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price. The Company paid approximately $200,000 for certain
inventories, which payment was applied against the maximum
aggregate purchase price.
The contingent consideration’s estimated fair value at the
date of acquisition was $2,765,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation for Nature’s Pearl is as follows
(in thousands):
Distributor
organization
|
$
1,300
|
Customer-related
intangible
|
865
|
Trademarks
and trade name
|
600
|
Total
purchase price
|
$
2,765
|
The preliminary fair value of intangible assets acquired was
determined through the use of a discounted cash flow methodology.
The trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The Company expects to finalize the valuation within one (1) year
from the acquisition date.
Revenues
included in the condensed consolidated statements of operations as
a result of this acquisition for the three and nine months ended
September 30, 2016 were $452,000.
The
pro-forma effect assuming the business combination with
Nature’s Pearl discussed above had occurred at the beginning
of the current period is not presented as the information provided
to the Company was not independently reviewed in accordance with
attestation standards established by the American Institute of
Certificated Public Accountants.
Renew Interest, LLC (SOZO Global, Inc.)
On July 29, 2016, the Company acquired certain assets of Renew
Interest, LLC (“Renew”) formerly owned by SOZO Global,
Inc. (“SOZO”), a direct-sales company that produces
nutritional supplements, skin and personal care products, weight
loss products and coffee products. The SOZO
brand
of products contains
CoffeeBerry a fruit extract known for
its high level of antioxidant properties. As a result of this
business combination, the Company’s distributors and
customers have access to the unique line of the Renew products and
Renew distributors and customers have gained access to products
offered by the Company. The Company is obligated to make
monthly payments based on a percentage of Renew distributor revenue
derived from sales of the Company’s products and a percentage
of royalty revenue until the earlier of the date that is twelve
(12) years from the closing date or such time as the Company has
paid to Renew, aggregate cash payments of Renew distributor revenue
and royalty revenue equal to a predetermined maximum aggregate
purchase price. The Company paid approximately $300,000 for certain
inventories and assumed liabilities, which payment was applied to
the maximum aggregate purchase price.
The contingent consideration’s estimated fair value at the
date of acquisition was $865,000 as determined by management using
a discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation for SOZO is as follows (in
thousands):
Distributor
organization
|
$
400
|
Customer-related
intangible
|
280
|
Trademarks
and trade name
|
185
|
Total
purchase price
|
$
865
|
The preliminary fair value of intangible assets acquired was
determined through the use of a discounted cash flow methodology.
The trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The Company expects to finalize the valuation within one (1) year
from the acquisition date.
Revenues included in the condensed consolidated statements of
operations as a result of this acquisition for the three and nine
months ended September 30, 2016 were $198,000.
The
pro-forma effect assuming the business combination with SOZO
discussed above had occurred at the beginning of the current period
is not presented as the information provided to the Company was not
independently reviewed in accordance with attestation standards
established by the American Institute of Certificated Public
Accountants.
South Hill Designs Inc.
In January 2016, the Company acquired certain assets of South Hill
Designs Inc., (“South Hill”) a direct-sales and
proprietary jewelry company that sells customized lockets and
charms. As a result of this business combination the
Company’s distributors have access to South Hill’s
customized products and the South Hill distributors and customers
have gained access to products offered by the
Company.
The Company has agreed to pay South Hill a monthly royalty payment
on all gross sales revenue generated by the South Hill distributor
organization in accordance with this agreement, regardless of
products being sold and a monthly royalty payment on South
Hill product revenue for seven (7) years from the closing
date.
The contingent consideration’s estimated fair value at the
date of acquisition was $2,650,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
During
the third quarter ended September 30, 2016 the purchase accounting
was finalized and the Company determined that the initial purchase
price should be reduced by $1,490,000 from $2,650,000 to
$1,160,000. The final purchase price allocation of the intangible
assets acquired for South Hill (in thousands) is as
follows:
Distributor
organization
|
$
547
|
Customer-related
intangible
|
394
|
Trademarks
and trade name
|
219
|
Total
purchase price
|
$
1,160
|
The fair value of intangible assets acquired was determined through
the use of a discounted cash flow methodology. The trademarks and
trade name, customer-related intangible and distributor
organization intangible are being amortized over their estimated
useful life of ten (10) years using the straight-line method which
is believed to approximate the time-line within which the economic
benefit of the underlying intangible asset will be
realized.
Revenues
included in the condensed consolidated statements of operations as
a result of this acquisition for the three and nine months ended
September 30, 2016 were $816,000 and $3,355,000,
respectively.
The pro-forma effect assuming the business combination with South
Hill discussed above had occurred at the beginning of the current
period is not presented as the information was not
available.
2015 Acquisition
Mialisia & Co., LLC
On June 1, 2015, the Company acquired certain assets of Mialisia
& Co., LLC, (“Mialisia”) a direct-sales jewelry
company that specializes in interchangeable jewelry. As a result of
this business combination, the Company’s distributors and
customers have access to Mialisia’s patent-pending
“VersaStyle” jewelry and Mialisia’s distributors
and customers have gained access to products offered by the
Company. The purchase price consisted of a maximum aggregate
purchase price of $1,900,000. The Company paid $118,988 for certain
inventories, which payment was applied against the maximum
aggregate purchase price.
The Company has agreed to pay Mialisia a monthly payment equal to
seven (7%) of all gross sales revenue generated by the Mialisia
distributor organization in accordance with the asset purchase
agreement, regardless of products being sold and pay five (5%)
royalty on Mialisia product revenue until the earlier of the date
that is fifteen (15) years from the closing date or such time as
the Company has paid aggregate cash payment equal to $1,781,012
provided, however, that in no event will the maximum aggregate
purchase price be reduced below $1,650,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $700,000 as determined by management using
a discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
During the second quarter ended June 30, 2016 the purchase
accounting was finalized and the Company determined that the
initial purchase price should be reduced by $108,000 from $700,000
to $592,000. The final purchase price allocation of the intangible
assets acquired for Mialisia (in thousands) is as
follows:
Distributor
organization
|
$
296
|
Customer-related
intangible
|
169
|
Trademarks
and trade name
|
127
|
Total
purchase price
|
$
592
|
The fair value of intangible assets acquired was determined through
the use of a discounted cash flow methodology. The trademarks and
trade name, customer-related intangible and distributor
organization intangible are being amortized over their estimated
useful life of ten (10) years using the straight-line method which
is believed to approximate the time-line within which the economic
benefit of the underlying intangible asset will be
realized.
Note 5. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of distributor organizations,
trademarks and tradenames, customer relationships and internally
developed software. The Company's acquired intangible
assets, which are subject to amortization over their estimated
useful lives, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
intangible asset may not be recoverable. An impairment loss is
recognized when the carrying amount of an intangible asset exceeds
its fair value.
Intangible assets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$
13,756
|
$
6,886
|
$
6,870
|
$
11,173
|
$
6,086
|
$
5,087
|
Trademarks
and trade names
|
5,832
|
743
|
5,089
|
4,666
|
537
|
4,129
|
Customer
relationships
|
8,545
|
3,416
|
5,129
|
6,787
|
2,751
|
4,036
|
Internally
developed software
|
720
|
333
|
387
|
720
|
258
|
462
|
Intangible
assets
|
$
28,853
|
$
11,378
|
$
17,475
|
$
23,346
|
$
9,632
|
$
13,714
|
Amortization expense related to intangible assets was approximately
$537,000 and $560,000 for the three months ended September 30, 2016
and 2015, respectively. Amortization expense related to intangible
assets was approximately $1,746,000 and $1,578,000 for the nine
months ended September 30, 2016 and 2015,
respectively.
Trade names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Approximately $2,267,000 in
trademarks from business combinations have been identified as
having indefinite lives.
Goodwill
Goodwill is recorded as the excess, if any, of the
aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. In
accordance with Financial Accounting Standards Board
(“FASB”) ASC Topic 350,
“Intangibles - Goodwill
and Other”,
goodwill and
other intangible assets with indefinite lives are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. The Company conducts annual reviews
for goodwill and indefinite-lived intangible assets in the fourth
quarter or whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be fully
recoverable.
The Company first assesses qualitative factors to determine whether
it is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. The testing is generally performed at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company has determined that its reporting units for goodwill
impairment testing are the Company’s reportable segments. As
such, the Company analyzed its goodwill balances separately for the
commercial coffee reporting unit and the direct selling reporting
unit. The goodwill balance as of September 30, 2016 and December
31, 2015 was $6,323,000. There were no triggering events indicating
impairment of goodwill or intangible assets during the three and
nine months ended September 30, 2016 and 2015.
Goodwill intangible assets consist of the following (in
thousands):
|
|
|
Goodwill,
commercial coffee
|
$
3,934
|
$
3,934
|
Goodwill,
direct selling
|
2,389
|
2,389
|
Total
goodwill
|
$
6,323
|
$
6,323
|
Note 6. Debt
Our total convertible notes payable, net of debt discount
outstanding consisted of the amount set forth in the following
table (in thousands):
|
|
|
8%
Convertible Notes due July and August 2019 (July 2014 Private
Placement)
(1)
|
$
2,059
|
$
1,346
|
8%
Convertible Notes due October and November 2018 (November 2015
Private Placement)
(2)
|
6,973
|
6,896
|
Net
debt issuance costs
(3)
|
(1,090
)
|
(1,456
)
|
Total
convertible notes payable, net of debt discount
(4)
|
$
7,942
|
$
6,786
|
(1)
Principal amount of $4,750,000 are net of unamortized debt
discounts of $2,691,000 as of September 30, 2016 and
$3,404,000 as of December 31, 2015.
(2)
Principal amount of approximately $7,188,000 are net of unamortized
debt discounts of $215,000 as of September 30, 2016 and
$292,000 as of December 31, 2015.
(3)
As
of January 1, 2016, we adopted ASU 2015-03 with retrospective
application. This resulted in a $1,456,000 reclassification from
prepaid expenses and other current assets to convertible notes
payable, net of debt discount, for unamortized debt issuance
costs.
(4)
Principal
amounts are net of unamortized discounts and issuance costs of
$3,996,000 as of September 30, 2016 and $5,152,000 as of December
31, 2015.
Convertible Notes Payable
November 2015 Private Placement
Between October 13, 2015 and November 25, 2015 the Company entered
into Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“November 2015 Private Placement”) with three (3)
accredited investors pursuant to which the Company raised cash
proceeds of $3,187,500 in the offering and converted $4,000,000 of
debt from the January 2015 Private Placement to this offering in
consideration of the sale of aggregate units consisting of three
(3) year senior secured convertible Notes in the aggregate
principal amount of $7,187,500, convertible into 20,535,714 shares
of common stock, par value $0.001 per share, at a conversion price
of $0.35 per share, subject to adjustment as provided therein; and
five (5) year Warrants exercisable to purchase 9,583,333 shares of
the Company’s common stock at a price per share of $0.45. The
Notes bear interest at a rate of eight percent (8%) per
annum and interest is paid quarterly in arrears with all
principal and unpaid interest due at maturity on October 12, 2018.
As of September 30, 2016 and December 31, 2015 the principal amount
of $7,187,500 remains outstanding.
July 2014 Private Placement
Between July 31, 2014 and September 10, 2014 the
Company entered into Note Purchase Agreements (the
“Note” or “Notes”) related to
its private placement offering (“2014 Private
Placement”) with seven accredited investors pursuant to which
the Company raised aggregate gross proceeds of $4,750,000 and sold
units consisting of five (5) year senior secured convertible Notes
in the aggregate principal amount of $4,750,000, that are
convertible into 13,571,429 shares of our common stock, at a
conversion price of $0.35 per share, and warrants to purchase
18,586,956 shares of common stock at an exercise price of $0.23 per
share. The Notes bear interest at a rate of eight percent (8%) per
annum and interest is paid quarterly in arrears with all principal
and unpaid interest due between July and September 2019. As of
September 30, 2016 and December 31, 2015 the principal amount of
$4,750,000 remains outstanding.
Notes Payable
January 2015 Private Placement
In January 2015, the Company entered into Note Purchase Agreements
(the “Note” or “Notes”) related to its
private placement offering (“January 2015 Private
Placement”) with three (3) accredited investors pursuant to
which the Company sold units consisting of one (1) year senior
secured notes in the aggregate principal amount of $5,250,000. One
holder of a January 2015 Note in the principal amount of $5,000,000
was prepaid on October 26, 2015 through a cash payment from us to
the investor of $1,000,000 and the remaining $4,000,000 owed was
applied to the investor’s purchase of a $4,000,000 November
2015 Note in the November 2015 Private Placement and a November
2015 Warrant exercisable to purchase 5,333,333 shares of Common
Stock. The Notes bore interest at a rate of eight percent (8%) per
annum and interest was paid quarterly in 2015. The remaining
balance of the January 2015 Notes as of December 31, 2015 was
$250,000 and was paid in January 2016.
Note 7. Derivative Liability
The Company accounted for the warrants issued in conjunction
with our November 2015 and July 2014 Private Placement’s in
accordance with the accounting guidance for derivatives ASC Topic
815. The accounting guidance sets forth a two-step model to be
applied in determining whether a financial instrument is indexed to
an entity’s own stock, which would qualify such financial
instruments for a scope exception. This scope exception specifies
that a contract that would otherwise meet the definition of a
derivative financial instrument would not be considered as such if
the contract is both (i) indexed to the entity’s own
stock and (ii) classified in the stockholders’ equity
section of the entity’s balance sheet. The
Company determined the warrants related to Notes are
ineligible for equity classification due to anti-dilution
provisions set forth therein.
The Company revalued the warrants as of the end of each reporting
period, and the estimated fair value of the outstanding warrant
liabilities was approximately $4,181,000 and $4,716,000 as of
September 30, 2016 and December 31, 2015,
respectively.
Increases or decreases in fair value of the derivative liability
are included as a component of total other expense in the
accompanying condensed consolidated statements of operations
for the respective period. The changes to the derivative
liability for warrants resulted in a decreases of $369,000 and
$1,069,000 for the three months ended September 30, 2016 and 2015,
respectively, and a decrease of $535,000 as compared to an increase
of $1,232,000 for the nine months ended September 30, 2016 and
2015, respectively.
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
period to period. The warrant liability and revaluations have
not had a cash impact on our working capital, liquidity or business
operations.
Warrants classified as derivative liabilities are recorded at their
estimated fair value (see Note 8, below) at the issuance date and
are revalued at each subsequent reporting date. We will continue to
revalue the derivative liability on each subsequent balance sheet
date until the securities to which the derivative liabilities
relate are exercised or expire.
The estimated fair value of the warrants were computed as
of September 30, 2016 and as of December 31, 2015 using
Black-Scholes and Monte Carlo option pricing models, using the
following assumptions:
|
|
|
Stock
price volatility
|
70
%
|
70
%
|
Risk-free
interest rates
|
0.71%-1.0
%
|
1.76
%
|
Annual
dividend yield
|
0
%
|
0
%
|
Expected
life
|
|
|
In addition, Management assessed the probabilities of future
financing assumptions in the valuation models.
Note 8. Fair Value of Financial
Instruments
Fair value measurements are performed in accordance with the
guidance provided by ASC Topic 820,
“Fair Value Measurements
and Disclosures.”
ASC
Topic 820 defines fair value as the price that would be received
from selling an asset, or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date. Where available, fair value is based on observable market
prices or parameters or derived from such prices or parameters.
Where observable prices or parameters are not available, valuation
models are applied.
ASC Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 – Quoted prices in active markets for identical
assets or liabilities that an entity has the ability to
access.
Level 2 – Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data.
Level 3 – Unobservable inputs that are supportable by little
or no market activity and that are significant to the fair value of
the asset or liability.
The carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, capital lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s long
term notes payable approximates its fair value based on interest
rates available to the Company for similar debt instruments and
similar remaining maturities.
The estimated fair value of the contingent consideration related to
the Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
In connection with the 2015 and 2014 Private Placements, we issued
warrants to purchase shares of our common stock which are accounted
for as derivative liabilities (see Note 7 above.) The estimated
fair value of the warrants is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
We used Level 3 inputs for the valuation methodology of the
derivative liabilities. Our derivative liabilities are adjusted to
reflect estimated fair value at each period end, with any decrease
or increase in the estimated fair value being recorded in other
income or expense accordingly, as adjustments to the fair value of
the derivative liabilities.
The following table details the fair value measurement within the
three levels of the value hierarchy of the Company’s
financial instruments, which includes the Level 3 liabilities (in
thousands):
|
Fair Value at September 30, 2016
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
657
|
$
-
|
$
-
|
$
657
|
Contingent
acquisition debt, less current portion
|
9,790
|
-
|
-
|
9,790
|
Warrant
derivative liability
|
4,181
|
-
|
-
|
4,181
|
Total
liabilities
|
$
14,628
|
$
-
|
$
-
|
$
14,628
|
|
Fair Value at December 31, 2015
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
264
|
$
-
|
$
-
|
$
264
|
Contingent
acquisition debt, less current portion
|
7,174
|
-
|
-
|
7,174
|
Warrant
derivative liability
|
4,716
|
-
|
-
|
4,716
|
Total
liabilities
|
$
12,154
|
$
-
|
$
-
|
$
12,154
|
The
fair value of the contingent acquisition liabilities are evaluated
each reporting period using projected revenues, discount rates, and
projected timing of revenues. Projected contingent payment amounts
are discounted back to the current period using a discount rate.
Projected revenues are based on the Company’s most recent
internal operational budgets and long-range strategic plans. In
some cases, there is no maximum amount of contingent consideration
that can be earned by the sellers. Increases in projected revenues
will result in higher fair value measurements. Increases in
discount rates and the time to payment will result in lower fair
value measurements. Increases or decreases in any of those inputs
in isolation may result in a significantly lower or higher fair
value measurement. During the three and nine months ended September
30, 2016 the net adjustment to the fair value of the contingent
acquisition debt was a decrease of approximately $315,000 and
approximately $1,185,000, respectively. During the three and nine
months ended September 30, 2015 the net adjustment to the fair
value of the contingent acquisition debt was an increase of
approximately $120,000.
Note 9. Stockholders’ Equity
The Company’s Articles of Incorporation, as amended,
authorize the issuance of two classes of stock to be designated
“Common Stock” and “Preferred
Stock”.
Convertible Preferred Stock
The Company had 161,135 shares of Series A Convertible Preferred
Stock ("Series A Preferred") outstanding as of September 30, 2016
and December 31, 2015, and accrued dividends of approximately
$108,000 and $98,000, respectively. The holders of the Series A
Preferred Stock are entitled to receive a cumulative dividend at a
rate of 8.0% per year, payable annually either in cash or shares of
the Company's Common Stock at the Company's
election. Shares of Common Stock paid as accrued
dividends are valued at $0.50 per share. Each share of
Series A Preferred is convertible into two shares of the Company's
Common Stock. The holders of Series A Preferred are entitled to
receive payments upon liquidation, dissolution or winding up of the
Company before any amount is paid to the holders of Common Stock.
The holders of Series A Preferred have no voting rights, except as
required by law.
Common Stock
The Company had 392,694,807 common shares outstanding as of
September 30, 2016. The holders of Common Stock are entitled to one
vote per share on matters brought before the
shareholders.
Repurchase of Common Stock
On December 11, 2012, the Company authorized a share repurchase
program to repurchase up to 15 million of the Company's issued and
outstanding common shares from time to time on the open market or
via private transactions through block trades. Under
this program, for the nine months ended September 30, 2016, the
Company repurchased a total of 125,708 shares at a weighted-average
cost of $0.28. A total of 3,931,880 shares have been
repurchased to-date at a weighted-average cost of $0.27. The
remaining number of shares authorized for repurchase under the plan
as of September 30, 2016 is 11,068,120.
Warrants to Purchase Preferred Stock and Common Stock
As of September 30, 2016, warrants to purchase 40,773,546 shares
of the Company's common stock at prices ranging from
$0.10 to $0.50 were outstanding. All warrants are exercisable as of
September 30, 2016 and expire at various dates through November
2020 and have a weighted average remaining term of approximately
2.80 years as of September 30, 2016.
A summary of the warrant activity for the nine months ended
September 30, 2016 is presented in the following
table:
Balance
at December 31, 2015
|
41,674,796
|
Issued
|
-
|
Expired
/ cancelled
|
(860,000
)
|
Exercised
|
(41,250
)
|
Balance
at September 30, 2016
|
40,773,546
|
Advisory Agreements
PCG
Advisory Group.
On September 1,
2015, the Company entered into an agreement with PCG Advisory Group
(“PCG”), pursuant to which PCG agreed to provide
investor relations services for six (6) months in exchange for fees
paid in cash of $6,000 per month and 100,000 shares of restricted
common stock to be issued in accordance with the agreement upon
successfully meeting certain criteria in accordance with the
agreement. In connection with this agreement, the
Company accrued for the estimated per share value on the agreement
date at $0.32 per share, the price of Company’s common stock
at September 1, 2015 for a total of $32,000 due to PCG. The fair
values of the shares was recorded as prepaid advisory fees and were
included in prepaid expenses and other current assets on the
Company’s balance sheets and were amortized on a pro-rata
basis over the term of the contract. On June 28, 2016 the
Company issued PCG 100,000 restricted shares of our common stock in
accordance with the performance of the agreement as previously
accrued. These shares were valued at $0.30 per share, based on the
price per share of the Company’s common stock on June 28,
2016. During the nine months ended September 30, 2016, the
Company recorded expense of approximately $9,000, in
connection with amortization of the stock issuance. There were no
amortization expense for the three months ended September 30,
2016.
On March 1, 2016, the Company signed a renewal contract with PCG,
pursuant to which PCG agreed to provide investor relations services
for six (6) months in exchange for fees paid in cash of $6,000 per
month and 100,000 shares of restricted common stock to be issued in
accordance with the agreement upon successfully meeting certain
criteria in accordance with the agreement. In connection with this
agreement, the Company has accrued for the estimated per share
value on the agreement date at $0.30 per share, the price of
Company’s common stock at March 1, 2016 for a total of
$30,000 due to PCG. The fair values of the shares was recorded as
prepaid advisory fees and are included in prepaid expenses and
other current assets on the Company’s balance sheets and will
be amortized on a pro-rata basis over the term of the
contract. During the three and nine months ended September 30,
2016, the Company recorded expense of approximately
$10,000 and $30,000, respectively, in connection with amortization
of the stock issuance.
On
September 1, 2016, the Company signed a renewal contract with PCG,
pursuant to which PCG agreed to provide investor relations services
for six (6) months in exchange for fees paid in cash of $6,000 per
month and 100,000 shares of restricted common stock to be issued in
accordance with the agreement upon successfully meeting certain
criteria in accordance with the agreement. In connection with this
agreement, the Company has accrued for the estimated per share
value on the agreement date at $0.29 per share, the price of
Company’s common stock at September 1, 2016 for a total of
$29,000 due to PCG. The fair values of the shares was recorded as
prepaid advisory fees and are included in prepaid expenses and
other current assets on the Company’s balance sheets and will
be amortized on a pro-rata basis over the term of the
contract. During the three and nine months ended September 30,
2016, the Company recorded expense of approximately
$7,000 in connection with amortization of the stock issuance. As of
September 30, 2016, the total remaining balance of the prepaid
investor relation services is approximately
$22,000.
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
40,000,000 shares of Common Stock. The purpose of the Plan is to
promote the long-term growth and profitability of the Company by
(i) providing key people and consultants with incentives to improve
stockholder value and to contribute to the growth and financial
success of the Company and (ii) enabling the Company to attract,
retain and reward the best available persons for positions of
substantial responsibility. The Plan permits the granting of stock
options, including non-qualified stock options and incentive stock
options qualifying under Section 422 of the Code, in any
combination (collectively, “Options”). At September 30,
2016, the Company had 17,046,975 shares of Common Stock available
for issuance under the Plan.
A summary of the Plan Options for the nine months ended September
30, 2016 is presented in the following table:
|
|
Weighted
Average
Exercise Price
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding
December 31, 2015
|
23,521,600
|
0.22
|
$
2,044
|
Issued
|
1,778,250
|
0.29
|
|
Canceled
/ expired
|
(2,713,500
)
|
0.22
|
|
Exercised
|
(98,750
)
|
0.21
|
-
|
Outstanding
September 30, 2016
|
22,487,600
|
$
0.22
|
$
1,864
|
Exercisable
September 30, 2016
|
17,803,000
|
$
0.23
|
$
1,326
|
The weighted-average fair value per share of the granted options
for the nine months ended September 30, 2016 and 2015 was
approximately $0.09 and $0.15, respectively.
Stock based compensation expense included in the condensed
consolidated statements of operations was $166,000 and $161,000 for
the three months ended September 30, 2016 and 2015, respectively,
and $292,000 and $436,000 for the nine months ended September 30,
2016 and 2015, respectively.
As of September 30, 2016, there was approximately $487,000 of total
unrecognized compensation expense related to unvested share-based
compensation arrangements granted under the Plan. The expense is
expected to be recognized over a weighted-average period of 2.79
years.
The Company uses the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate the fair value of
stock option grants. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
Note 10. Segment and Geographical
Information
The
Company offers a wide variety of products to support a healthy
lifestyle including; nutritional supplements, sports and energy
drinks, health and wellness, weight loss, gourmet coffee, skincare
and cosmetics, lifestyle services, digital products including scrap
books and memory books, packaged foods, pharmacy discount cards,
and clothing and jewelry lines. The Company’s business is
classified by management into two reportable segments: direct
selling and commercial coffee.
The Company’s segments reflect the manner in which the
business is managed and how the Company allocates resources and
assesses performance. The Company’s chief operating decision
maker is the Chief Executive Officer. The Company’s chief
operating decision maker evaluates segment performance primarily
based on revenue and segment operating income. The principal
measures and factors the Company considered in determining the
number of reportable segments were revenue, gross margin
percentage, sales channel, customer type and competitive risks. In
addition, each reporting segment has similar products and
customers, similar methods of marketing and distribution and a
similar regulatory environment.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Direct
selling
|
$
38,576
|
$
37,056
|
$
110,393
|
$
103,206
|
Commercial
coffee
|
4,986
|
4,270
|
13,871
|
13,670
|
Total
revenues
|
$
43,562
|
$
41,326
|
$
124,264
|
$
116,876
|
Gross
profit
|
|
|
|
|
Direct
selling
|
$
26,233
|
$
25,395
|
$
74,690
|
$
69,872
|
Commercial
coffee
|
135
|
(362
)
|
472
|
(748
)
|
Total
gross profit
|
$
26,368
|
$
25,033
|
$
75,162
|
$
69,124
|
Operating
income (loss)
|
|
|
|
|
Direct
selling
|
$
1,171
|
$
2,079
|
$
4,903
|
$
6,288
|
Commercial
coffee
|
(595
)
|
(1,022
)
|
(1,640
)
|
(2,568
)
|
Total
operating income
|
$
576
|
$
1,057
|
$
3,263
|
$
3,720
|
Net
income (loss)
|
|
|
|
|
Direct
selling
|
$
822
|
$
986
|
$
1,912
|
$
3,329
|
Commercial
coffee
|
(755
)
|
(570
)
|
(1,803
)
|
(3,690
)
|
Total
net income (loss)
|
$
67
|
$
416
|
$
109
|
$
(361
)
|
Capital
expenditures
|
|
|
|
|
Direct
selling
|
$
590
|
$
477
|
$
1,339
|
$
1,326
|
Commercial
coffee
|
145
|
302
|
863
|
1,556
|
Total
capital expenditures
|
$
735
|
$
779
|
$
2,202
|
$
2,882
|
|
|
|
|
|
Total
assets
|
|
|
Direct selling
|
$
43,161
|
$
36,907
|
Commercial coffee
|
24,793
|
24,422
|
Total assets
|
$
67,954
|
$
61,329
|
Total assets located outside the United States are approximately
$5.3 million as of September 30, 2016. For the year ended December
31, 2015, total assets located outside the United States were
approximately $5.2 million.
The Company conducts its operations primarily in the United States.
The Company also sells its products in 70 different countries. The
following table displays revenues attributable to the geographic
location of the customer (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
United
States
|
$
39,630
|
$
38,351
|
$
113,332
|
$
108,306
|
International
|
3,932
|
2,975
|
10,932
|
8,570
|
Total
revenues
|
$
43,562
|
$
41,326
|
$
124,264
|
$
116,876
|