Notes
to Condensed Consolidated Financial Statements
(Unaudited)
June
30, 2017
Note 1. Basis of Presentation and Description of
Business
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for interim financial
information. Accordingly, certain information and footnote
disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and
regulations.
The
statements presented as of June 30, 2017 and for the three and six
months ended June 30, 2017 and 2016 are unaudited. In the opinion
of management, these financial statements reflect all normal
recurring and other adjustments necessary for a fair presentation,
and to make the financial statements not misleading. These
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
included in the Company’s Form 10-K for the year ended
December 31, 2016. The results for interim periods are not
necessarily indicative of the results for the entire
year.
Youngevity
International, Inc. (the
“
Company
”
)
consolidates all wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Certain
reclassifications have been made to conform to the current year
presentations including the Company’s adoption of Accounting
Standards Update (“ASU”) 2015-17 pertaining to the
presentation of
deferred tax assets and liabilities
as noncurrent
with retrospective application effective
January 1, 2017. This resulted in a reclassification
from deferred tax assets,
net current to deferred tax assets, net long-term
. These
reclassifications did not affect revenue, total costs and expenses,
income (loss) from operations, or net income (loss). The adoption
of ASU No. 2015-17 resulted in a reclassification of deferred tax
assets, net current of $565,000 to
deferred tax assets, net
long-term
on the Company’s consolidated financial
statements as of December 31, 2016.
As
previously reported on the Annual Report on Form 10-K/A for the
year ended December 31, 2016 filed with the Securities and Exchange
Commission on August 14, 2017, the Company restated the interim
Consolidated Statement of Cash Flows for the quarter ended
June 30, 2016 previously filed by the Company in its quarterly
report on Form 10-Q for the same period. This was due to an error
in the presentation of cash flow activity under the Company’s
factoring facility. The current report for the quarter ended June
30, 2017 reflects the restated numbers for the six months ended
June 30, 2016.
Nature of Business
The
Company, founded in 1996, develops and distributes health and
nutrition related products through its global independent direct
selling network, also known as multi-level marketing, and sells
coffee products to commercial customers. The Company
operates in two business segments, its direct selling segment where
products are offered through a global distribution network of
preferred customers and distributors and its commercial coffee
segment where products are sold directly to businesses. In the
following text, the terms “we,” “our,” and
“us” may refer, as the context requires, to the Company
or collectively to the Company and its subsidiaries.
The
Company operates through the following domestic wholly-owned
subsidiaries: AL Global Corporation, which operates 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. (“Siles”), located in
Nicaragua, Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd.,
Youngevity Russia, LLC, Youngevity Colombia S.A.S, Youngevity
International Singapore Pte. Ltd., Mialisia Canada, Inc., Legacy
for Life Limited (Hong Kong), BellaVita Group LLC; Taiwan, Hong
Kong, Singapore, Indonesia, Malaysia and Japan.
The
Company also operates subsidiary branches of Youngevity Global LLC
in the Philippines and Taiwan.
Reverse Stock Split
On
June 5, 2017, the Company filed a certificate to amend its Articles
of Incorporation to effect a reverse split on a one-for-twenty
basis (the “Reverse Split”), whereby, every twenty
shares of the Company’s common stock, par value $0.001 per
share (the “Common Stock or “common stock”), were
exchanged for one share of its common stock. The Reverse Split
became effective on June 7, 2017. All common stock share and per
share amounts have been adjusted to reflect retrospective
application of the Reverse Split, unless otherwise indicated. The
Common Stock began trading on a reverse split basis at the market
opening on June 8, 2017.
NASDAQ Listing
Effective
June 21, 2017, the Common Stock began trading on the NASDAQ Stock
Market LLC’s NASDAQ Capital Market, under the symbol
“YGYI”. Prior to the Company’s uplisting to
NASDAQ the Company’s common stock had been traded on the
OTCQX market.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“GAAP”) requires 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 condensed consolidated financial
statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected
prospectively in the period they occur.
Liquidity
We
believe that current cash balances, future cash provided by
operations, and available amounts under our accounts receivable
factoring agreement will be sufficient to cover our operating and
capital needs in the ordinary course of business for at least the
next twelve months as of August 14, 2017.
Though
our operations are currently meeting our working capital
requirements, if we experience an adverse operating environment or
unusual capital expenditure requirements, or if we continue our
expansion internationally or through acquisitions, additional
financing may be required. No assurance can be given, however, that
additional financing, if required, would be available on favorable
terms. We might also require or seek additional financing for the
purpose of expanding into new markets, growing our existing
markets, or for other reasons. Such financing may include the use
of additional debt or the sale of additional equity securities. Any
financing which involves the sale of equity securities or
instruments that are convertible into equity securities could
result in immediate and possibly significant dilution to our
existing shareholders.
Cash and Cash Equivalents
The
Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
Earnings Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss)
attributable to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income attributable to common
stockholders by the sum of the weighted-average number of common
shares outstanding during the period and the weighted-average
number of dilutive common share equivalents outstanding during the
period, using the treasury stock method. Dilutive common share
equivalents are comprised of in-the-money stock options, warrants
and convertible preferred stock and Common Stock associated with
the Company's convertible notes based on the average stock price
for each period using the treasury stock method.
Since
the Company incurred a loss for the three and six months ended June
30, 2017, 5,282,208 common share equivalents were not included in
the weighted-average calculations since their effect would have
been anti-dilutive.
The
Company incurred a loss for the three months ended June 30, 2016,
and therefore, 4,866,703 common share equivalents including
potential convertible shares of Common Stock associated with the
Company's convertible notes were not included in the
weighted-average calculation since their effect would have been
anti-dilutive. The incremental dilutive common share equivalents
were 1,380,915 for the six months ended June 30, 2016.
Income
and loss per share amounts and weighted average shares outstanding
for all periods have been retroactively adjusted to reflect the
Company’s 1-for-20 Reverse Split, which was effective June 7,
2017.
Stock Based Compensation
The
Company accounts for stock based compensation in accordance with
ASC Topic 718, “
Compensation – Stock
Compensation,”
which establishes accounting for equity
instruments exchanged for employee services. Under such provisions,
stock based compensation cost is measured at the grant date, based
on the calculated fair value of the award, and is recognized as an
expense, under the straight-line method, over the vesting period of
the equity grant.
The
Company accounts for equity instruments issued to non-employees in
accordance with authoritative guidance for equity based payments to
non-employees. Stock options issued to non-employees are accounted
for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Factoring Agreement
The
Company has a factoring agreement (“Factoring
Agreement”) with Crestmark Bank (“Crestmark”)
related to the Company’s accounts receivable resulting from
sales of certain products within its commercial coffee segment.
Effective May 1, 2016, the Company entered into a third amendment
to the factoring agreement (“Agreement”). Under the
terms of the Agreement, all new receivables assigned to Crestmark
shall be “Client Risk Receivables” and no further
credit approvals will be provided by Crestmark. Additionally, the
Agreement expands the factoring facility to include advanced
borrowings against eligible inventory up to 50% of landed cost of
finished goods inventory that meet certain criteria, not to exceed
the lesser of $1,000,000 or 85% of the value of the accounts
receivables already advanced with a maximum overall borrowing of
$3,000,000. Interest accrues on the outstanding balance and a
factoring commission is charged for each invoice factored which is
calculated as the greater of $5.00 or 0.75% to 0.875% of the gross
invoice amount and is recorded as interest expense. In addition,
the Company and the Company’s CEO, Mr. Wallach have entered
into a Guaranty and Security Agreement with Crestmark Bank
guaranteeing payments in the event that CLR were to default. This
Agreement is effective until February 1, 2019.
The
Company accounts for the sale of receivables under the Factoring
Agreement as secured borrowings with a pledge of the subject
inventories and receivables as well as all bank deposits as
collateral, in accordance with the authoritative guidance for
accounting for transfers and servicing of financial assets and
extinguishments of liabilities. The caption “Accounts
receivable, due from factoring company” on the accompanying
condensed consolidated balance sheets in the amount of
approximately $2,743,000 and $1,078,000 as of June 30, 2017
and December 31, 2016, respectively, reflects the related
collateralized accounts.
The
Company's outstanding liability related to the Factoring Agreement
was approximately $2,942,000 and $1,290,000 as of June 30, 2017 and
December 31, 2016, respectively, and is included in other current
liabilities on the condensed consolidated balance
sheets.
Plantation Costs
The
Company’s commercial coffee segment CLR includes the results
of the Siles Plantation Family Group (“Siles”), which
is a 500 acre coffee plantation and a dry-processing facility
located on 26 acres both located in Matagalpa, Nicaragua. Siles is
a wholly-owned subsidiary of CLR, and the results of
CLR include the depreciation and amortization of capitalized
costs, development and maintenance and harvesting costs of
Siles. In accordance with US generally accepted accounting
principles (“GAAP”), plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate throughout the year, and are expensed over the remainder
of the year as the coffee is sold. The difference between actual
harvest costs incurred and the amount of harvest costs recognized
as expense is recorded as either an increase or decrease in
deferred harvest costs, which is reported as an asset and included
with prepaid expenses and other current assets in the condensed
consolidated balance sheets. Once the harvest is complete, the
harvest cost is then recognized as the inventory
value.
As of
December 31, 2016, the inventory related to the 2016 harvest was
$112,000. As of June 30, 2017, all previously harvested coffee from
the 2016 harvest had been sold.
In
April 2017, the Company completed the 2017 harvest in Nicaragua and
approximately $552,000 of deferred harvest costs were reclassified
as inventory during the quarter ended June 30, 2017. The remaining
inventory as of June 30, 2017 is $391,000.
Costs
associated with the 2018 harvest as of June 30, 2017 total
approximately $100,000 and are included in prepaid expenses and
other current assets as deferred harvest costs on the
Company’s condensed consolidated balance sheets.
Related Party Transactions
Richard Renton
Richard
Renton is a member of the Board of Directors and owns and operates
with his wife Roxanna Renton, Northwest Nutraceuticals, Inc., a
supplier of certain inventory items sold by the Company. The
Company made purchases of approximately $59,000 and $16,000 from
Northwest Nutraceuticals Inc., for the three months ended June 30,
2017 and 2016, respectively, and $81,000 and $50,000 for the six
months ended June 30, 2017 and 2016, respectively. In addition, Mr.
Renton and his wife are distributors of the Company and can earn
commissions on product sales.
Other Relationships
Hernandez, Hernandez, Export Y Company
The
Company’s coffee segment, CLR, is associated with Hernandez,
Hernandez, Export Y Company (“H&H”), a Nicaragua
company, through sourcing arrangements to procure Nicaraguan green
coffee beans and in March 2014 as part of the Siles
acquisition, CLR engaged the owners of H&H as employees to
manage Siles. The Company made purchases of approximately $912,000
and $2,900,000 from this supplier for the three months ended June
30, 2017 and 2016, respectively and $1,327,000 and $4,700,000 for
the six months ended June 30, 2017 and 2016,
respectively.
In
addition, CLR sold approximately $1,056,000 and $1,500,000 for the
three months ended June 30, 2017 and 2016, respectively and
$1,547,000 and $2,200,000 for the six months ended June 30, 2017
and 2016, respectively, of green coffee beans to H&H Coffee
Group Export, a Florida based company which is affiliated with
H&H.
In
March 2017, the Company entered a settlement agreement and release
with H&H Coffee Group Export pursuant to which it was agreed
that $150,000 owed to H&H Coffee Group Export for services that
had been rendered would be settled by the issuance of Common Stock.
During the three months ended June 30, 2017, the Company issued to
H&H Coffee Group Export 27,500 shares of Common Stock in
accordance with this agreement.
In May
2017, the Company entered a settlement agreement with Alain Piedra
Hernandez, one of the owners of H&H and the operating manager
of Siles, who was issued a non-qualified stock option for the
purchase of 75,000 shares of the Company’s Common Stock at a
price of $2.00 with an expiration date of three years, in lieu of
an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H.
Revenue Recognition
The
Company recognizes revenue from product sales when the following
four criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable, and collectability is
reasonably assured. The Company ships the majority of its direct
selling segment products directly to the distributors primarily via
UPS, USPS or FedEx and receives substantially all payments for
these sales in the form of credit card transactions. The Company
regularly monitors its use of credit card or merchant services to
ensure that its financial risk related to credit quality and credit
concentrations is actively managed. Revenue is recognized upon
passage of title and risk of loss to customers when product is
shipped from the fulfillment facility. The Company ships the
majority of its coffee segment products via common carrier and
invoices its customer for the products. Revenue is recognized when
the title and risk of loss is passed to the customer under the
terms of the shipping arrangement, typically, FOB shipping
point.
Sales
revenue and a reserve for estimated returns are recorded net of
sales tax when product is shipped.
Deferred Revenues and Costs
Deferred
revenues relate primarily to the Heritage Makers product line and
represent the Company’s obligation for points purchased by
customers that have not yet been redeemed for product. Cash
received for points sold is recorded as deferred revenue. Revenue
is recognized when customers redeem the points and the product is
shipped. As of June 30, 2017 and December 31, 2016, the balance in
deferred revenues was approximately $1,848,000 and $1,870,000
respectively, of which the portion attributable to Heritage Makers
was approximately $1,623,000 and $1,662,000, respectively. The
remaining balance of approximately $225,000 and $208,000 as of
June 30, 2017 and December 31, 2016, related primarily to the
Company’s 2017 conventions, respectively, whereby attendees
pre-enroll in the events and the Company does not recognize this
revenue until the conventions occur.
Deferred
costs relate to Heritage Makers prepaid commissions that are
recognized in expense at the time the related revenue is
recognized. As of June 30, 2017 and December 31, 2016, the balance
in deferred costs was approximately $377,000 and $415,000
respectively, and was included in prepaid expenses and current
assets.
Commitments and Contingencies
We are, from time to time, the subject of claims and suits arising
out of matters occurring during the operation of our business. We
are not presently party to any legal proceedings that, if
determined adversely to us, would individually or taken together
have a material adverse effect on our business, operating results,
financial condition or cash flows. Regardless of the outcome,
current legal proceedings are having an adverse impact on us
because of litigation costs, diversion of management resources and
other factors.
Recently Issued Accounting Pronouncements
In
October 2016, the FASB issued Accounting Standard Update ("ASU")
2016-17, Consolidation (Topic 810): Interests Held through Related
Parties That Are under Common Control. This standard amends the
guidance issued with ASU 2015-02, Consolidation (Topic 810):
Amendments to the Consolidation Analysis in order to make it less
likely that a single decision maker would individually meet the
characteristics to be the primary beneficiary of a Variable
Interest Entity ("VIE"). When a decision maker or service provider
considers indirect interests held through related parties under
common control, they perform two steps. The second step was amended
with this ASU to say that the decision maker should consider
interests held by these related parties on a proportionate basis
when determining the primary beneficiary of the VIE rather than in
their entirety as was called for in the previous guidance. This ASU
was effective for fiscal years beginning after December 15, 2016,
and early adoption was not permitted. The Company adopted ASU
2016-17 effective the quarter ended March 31, 2017. The adoption of
ASU 2016-17 did not have a significant impact on its consolidated
financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The
standard requires lessees to recognize lease assets and lease
liabilities on the balance sheet and requires expanded disclosures
about leasing arrangements. The Company expects to adopt the
standard no later than January 1, 2019. The Company is currently
assessing the impact that the new standard will have on the
Company’s consolidated financial statements, which will
consist primarily of a balance sheet gross up of our operating
leases. The Company has not evaluated the impact this new standard
will have on its consolidated financial statements; however it is
expected to gross-up the consolidated balance sheet as a result of
recognizing a lease asset along with a similar lease
liability.
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes. This guidance
requires that entities with a classified statement of financial
position present all deferred tax assets and liabilities as
noncurrent. This update is effective for annual and interim periods
for fiscal years beginning after December 15, 2016, which required
the Company to adopt the new guidance in the first quarter of
fiscal 2017. Early adoption was permitted for financial statements
that have not been previously issued and may be applied on either a
prospective or retrospective basis. The Company adopted
ASU 2015-17 effective
the quarter ended March 31, 2017. The adoption of ASU 2015-17 did
not have a significant impact on its consolidated financial
statements o
ther than the netting of current and long-term
deferred tax assets and liabilities in the non-current section of
the balance sheet and footnote disclosures.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers, requiring an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised
goods or services to customers. The updated standard will replace
most existing revenue recognition guidance in U.S. GAAP when it
becomes effective and permits the use of either the retrospective
or cumulative effect transition method. In August 2015, the FASB
issued ASU No. 2015-14, Revenue from Contracts with Customers:
Deferral of the Effective Date, which deferred the effective date
of the new revenue standard for periods beginning after December
15, 2016 to December 15, 2017, with early adoption permitted but
not earlier than the original effective date. Accordingly, the
updated standard is effective for the Company in the first quarter
of fiscal 2018 and we do not plan to early adopt. The Company has
not yet selected a transition method and the Company is currently
evaluating the effect that the updated standard will have on its
consolidated financial statements and related
disclosures.
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
|
$
10,962
|
$
11,550
|
|
Raw
materials
|
10,776
|
11,006
|
|
|
21,738
|
22,556
|
|
Reserve for excess
and obsolete
|
(1,064
)
|
(1,064
)
|
|
Inventory,
net
|
$
20,674
|
$
21,492
|
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 six months ended June 30, 2017, the Company entered into two
acquisitions, which are detailed below. The acquisitions were
conducted in an effort to expand the Company’s distributor
network, enhance and expand its product portfolio, and diversify
its product mix. As such, the major purpose for all of the business
combinations was to increase revenue and profitability. The
acquisitions were structured as asset purchases which resulted in
the recognition of certain intangible assets.
BellaVita Group, LLC
Effective
March 1, 2017, the Company acquired certain assets of BellaVita
Group, LLC “BellaVita” a direct sales company and
producer of health and beauty products with locations and customers
primarily in the Asian market.
The
contingent consideration’s estimated fair value at the date
of acquisition was $1,750,000 as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred. In addition, the Company has assumed certain
liabilities in accordance with the agreement.
The
Company is obligated to make monthly payments based on a percentage
of the BellaVita distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of BellaVita products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to BellaVita aggregate cash payments of the
BellaVita distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
The
assets acquired were recorded at estimated fair values as of the
date of the acquisition. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation is as follows (in
thousands):
|
Distributor
organization
|
$
825
|
|
Customer-related
intangible
|
525
|
|
Trademarks and
trade name
|
400
|
|
Total purchase
price
|
$
1,750
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuations within one (1) year from
the acquisition date.
The
revenue impact from the BellaVita acquisition, included in the
condensed consolidated statements of operations for the three and
six months ended June 30, 2017 was approximately $620,000 and
$872,000, respectively.
The
pro-forma effect assuming the business combination with BellaVita
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
Ricolife, LLC
Effective
March 1, 2017, the Company acquired certain assets of Ricolife, LLC
“Ricolife” a direct sales company and producer of teas
with health benefits contained within its tea
formulas.
The
contingent consideration’s estimated fair value at the date
of acquisition was $920,000 as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred. In addition, the Company has assumed certain
liabilities in accordance with the agreement.
The
Company is obligated to make monthly payments based on a percentage
of the Ricolife distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of Ricolife products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to Ricolife aggregate cash payments of the
Ricolife distributor revenue and royalty revenue equal to a
predetermined maximum aggregate purchase price.
The
assets acquired were recorded at estimated fair values as of the
date of the acquisition. The fair values of the acquired assets
have not been finalized pending further information that may impact
the valuation of certain assets or liabilities. The preliminary
purchase price allocation is as follows (in
thousands):
|
Distributor
organization
|
$
440
|
|
Customer-related
intangible
|
280
|
|
Trademarks and
trade name
|
200
|
|
Total purchase
price
|
$
920
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuations within one (1) year from
the acquisition date.
The
revenue impact from the Ricolife acquisition, included in the
condensed consolidated statements of operations for the three and
six months ended June 30, 2017 was approximately $351,000 and
$415,000, respectively.
The
pro-forma effect assuming the business combination with Ricolife
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
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
|
$
14,195
|
$
7,779
|
$
6,416
|
$
12,930
|
$
7,162
|
$
5,768
|
|
Trademarks and
trade names
|
5,994
|
988
|
5,006
|
5,394
|
815
|
4,579
|
|
Customer
relationships
|
8,651
|
4,136
|
4,515
|
7,846
|
3,642
|
4,204
|
|
Internally
developed software
|
720
|
408
|
312
|
720
|
357
|
363
|
|
Intangible
assets
|
$
29,560
|
$
13,311
|
$
16,249
|
$
26,890
|
$
11,976
|
$
14,914
|
Amortization
expense related to intangible assets was approximately $690,000 and
$605,000 for the three months ended June 30, 2017 and 2016,
respectively. Amortization expense related to intangible assets was
approximately $1,335,000 and $1,209,000 for the six months ended
June 30, 2017 and 2016, respectively.
Trade
names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Approximately $2,267,000 in
trademarks from business combinations have been identified as
having indefinite lives.
Goodwill
Goodwill
is recorded as the excess, if any, of the aggregate fair value of
consideration exchanged for an acquired business over the fair
value (measured as of the acquisition date) of total net tangible
and identified intangible assets acquired. In accordance with
Financial Accounting Standards Board (“FASB”) ASC Topic
350,
“Intangibles —
Goodwill and Other”,
goodwill and other intangible
assets with indefinite lives are not amortized but are tested for
impairment on an annual basis or whenever events or changes in
circumstances indicate that the carrying amount of these assets may
not be recoverable. The Company conducts annual reviews for
goodwill and indefinite-lived intangible assets in the fourth
quarter or whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be fully
recoverable.
The
Company first assesses qualitative factors to determine whether it
is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. The testing is generally performed at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company has determined that its reporting units for goodwill
impairment testing are the Company’s reportable segments. As
such, the Company analyzed its goodwill balances separately for the
commercial coffee reporting unit and the direct selling reporting
unit. The goodwill balance as of June 30, 2017 and December 31,
2016 was $6,323,000. There were no triggering events indicating
impairment of goodwill or intangible assets during the three and
six months ended June 30, 2017 and 2016.
Goodwill
intangible assets consist of the following (in
thousands):
|
|
|
|
|
Goodwill,
commercial coffee
|
$
3,314
|
$
3,314
|
|
Goodwill, direct
selling
|
3,009
|
3,009
|
|
Total
goodwill
|
$
6,323
|
$
6,323
|
Note 6. Debt
Convertible Notes Payable
Our
total convertible notes payable as of June 30, 2017, 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)
|
$
2,771
|
$
2,296
|
|
8% Convertible
Notes due October and November 2018 (November 2015 Private
Placement) (2)
|
7,051
|
6,999
|
|
Net debt issuance
costs
|
(724
)
|
(968
)
|
|
Total convertible
notes payable, net of debt discount (3)
|
$
9,098
|
$
8,327
|
(1)
Principal amount
of $4,750,000 is net of unamortized debt discounts of $1,979,000 as
of June 30, 2017 and $2,454,000 as of December 31,
2016.
(2)
Principal amount
of approximately $7,188,000 is net of unamortized debt discounts of
$137,000 as of June 30, 2017 and $189,000 as of December 31,
2016.
(3)
Principal amounts
are net of unamortized debt discounts and issuance costs of
$2,840,000 as of June 30, 2017 and $3,611,000 as of December 31,
2016. (See Note 11 Subsequent Events, “July 2017 Private
Placement” below.)
July 2014 Private Placement
Between
July 31, 2014 and September 10, 2014 the Company entered into Note
Purchase Agreements (the “Note” or “Notes”)
related to its private placement offering (“2014 Private
Placement”) with seven accredited investors pursuant to which
the Company raised aggregate gross proceeds of $4,750,000 and sold
units consisting of five (5) year senior secured convertible Notes
in the aggregate principal amount of $4,750,000 that are
convertible into 678,568 shares of our Common Stock, at a
conversion price of $7.00 per share, and warrants to purchase
929,346 shares of Common Stock at an exercise price of $4.60 per
share. The Notes bear interest at a rate of eight percent (8%) per
annum and interest is paid quarterly in arrears with all principal
and unpaid interest due between July and September 2019. As of June
30, 2017 and December 31, 2016 the principal amount of $4,750,000
remains outstanding.
The
Company recorded debt discounts of $4,750,000 related to the
beneficial conversion feature of $1,053,000 and a debt discount of
$3,697,000 related to the detachable warrants discount. The
beneficial conversion feature discount and the detachable warrants
discount are amortized to interest expense over the life of the
Notes. As of June 30, 2017 and December 31, 2016 the remaining
balances of the debt discounts is approximately $1,979,000 and
$2,454,000, respectively. The quarterly amortization of the
issuance costs is approximately $238,000 and is recorded as
interest expense.
With
respect to the aggregate offering, the Company paid $490,000 in
expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes. As of
June 30, 2017 and December 31, 2016 the remaining balances of the
issuance cost is approximately $204,000 and $253,000, respectively.
The quarterly amortization of the issuance costs is approximately
$25,000 and is recorded as interest expense.
Unamortized
debt discounts and issuance costs are included with convertible
notes payable, net of debt discount on the condensed consolidated
balance sheets.
November 2015 Private Placement
Between
October 13, 2015 and November 25, 2015 the Company entered into
Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“November 2015 Private Placement”) with three (3)
accredited investors pursuant to which the Company raised cash
proceeds of $3,187,500 in the offering and converted $4,000,000 of
debt from the January 2015 Private Placement to this offering in
consideration of the sale of aggregate units consisting of
three-year senior secured convertible Notes in the aggregate
principal amount of $7,187,500, convertible into 1,026,784 shares
of Common Stock, at a conversion price of $7.00 per share, subject
to adjustment as provided therein; and five-year Warrants
exercisable to purchase 479,166 shares of the Company’s
common stock at a price per share of $9.00. The Notes bear interest
at a rate of eight percent (8%) per annum and interest is paid
quarterly in arrears with all principal and unpaid interest due at
maturity on October 12, 2018. As of June 30, 2017 and December 31,
2016 the principal amount of $7,187,500 remains outstanding. (See
Note 11 Subsequent Events, “July 2017 Private
Placement” below.)
The
Company recorded debt discounts of $309,000 related to the
beneficial conversion feature of $15,000 and a debt discount of
$294,000 related to the detachable warrants discount. The
beneficial conversion feature discount and the detachable warrants
discount are amortized to interest expense over the life of the
Notes. As of June 30, 2017 and December 31, 2016 the remaining
balances of the debt discounts is approximately $137,000 and
$189,000 respectively. The quarterly amortization of the issuance
costs is approximately $26,000 and is recorded as interest
expense.
With
respect to the aggregate offering, the Company paid $786,000 in
expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes. As of
June 30, 2017 and December 31, 2016 the remaining balances of the
issuance cost is approximately $349,000 and $480,000, respectively.
The quarterly amortization of the issuance costs is approximately
$65,000 and is recorded as interest expense.
In
addition the Company issued warrants to the placement agent in
connection with the Notes which were valued at approximately
$384,000. These warrants were not protected against down-round
financing and accordingly, were classified as equity instruments
and corresponding deferred issuance costs are amortized over the
term of the Notes. As of June 30, 2017 and December 31, 2016, the
remaining balance of the warrant issuance costs is approximately
$171,000 and $235,000, respectively. The quarterly amortization of
the warrant issuance costs is approximately $32,000 and is recorded
as interest expense.
Unamortized
debt discounts and issuance costs are included with convertible
notes payable, net of debt discount on the condensed consolidated
balance sheets.
Note 7. Derivative Liability
The
Company accounted for the warrants issued in conjunction with
our November 2015 and July 2014 Private Placements 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 issued to the investors that
relate to Notes are ineligible for equity classification due to
anti-dilution provisions set forth therein.
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. The Company will
continue to revalue the derivative liability on each subsequent
balance sheet date until the securities to which the derivative
liabilities relate are exercised or expire.
The
estimated fair value of the outstanding warrant liabilities was
$4,076,000 and $3,345,000 as of June 30, 2017 and December 31,
2016, 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 an increase to the liability of approximately
$1,341,000 for the three months ended June 30, 2017 compared to an
increase to the liability of approximately $484,000 for the three
months ended June 30, 2016. For the six months ended June 30, 2017
the liability increased by approximately $731,000 compared to a
decrease of approximately $166,000 for the six months ended
June 30, 2016.
Various
factors are considered in the pricing models the Company uses to
value the warrants, including its current stock price, the
remaining life of the warrants, the volatility of its stock price,
and the risk free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
warrant liability. As such, the Company expects 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.
The
estimated fair value of the warrants were computed as of June
30, 2017 and as of December 31, 2016 using Black-Scholes and Monte
Carlo option pricing models, using the following
assumptions:
|
|
|
|
|
Stock price
volatility
|
60% - 65
%
|
60% - 65
%
|
|
Risk-free interest
rates
|
1.38%-1.55
%
|
1.34%-1.70
%
|
|
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, the Company
issued warrants to purchase shares of its 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.
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 June
30, 2017
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
359
|
$
-
|
$
-
|
$
359
|
|
Contingent
acquisition debt, less current portion
|
9,058
|
-
|
-
|
9,058
|
|
Warrant derivative
liability
|
4,076
|
-
|
-
|
4,076
|
|
Total
liabilities
|
$
13,493
|
$
-
|
$
-
|
$
13,493
|
|
|
Fair Value at
December 31, 2016
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
628
|
$
-
|
$
-
|
$
628
|
|
Contingent
acquisition debt, less current portion
|
7,373
|
-
|
-
|
7,373
|
|
Warrant derivative
liability
|
3,345
|
-
|
-
|
3,345
|
|
Total
liabilities
|
$
11,346
|
$
-
|
$
-
|
$
11,346
|
The
fair value of the contingent acquisition liabilities are evaluated
each reporting period using projected revenues, discount rates, and
projected timing of revenues. Projected contingent payment amounts
are discounted back to the current period using a discount rate.
Projected revenues are based on the Company’s most recent
internal operational budgets and long-range strategic plans.
Increases in projected revenues will result in higher fair value
measurements. Increases in discount rates and the time to payment
will result in lower fair value measurements. Increases (decreases)
in any of those inputs in isolation may result in a significantly
lower (higher) fair value measurement. During the three and six
months ended June 30, 2017 the net adjustment to the fair value of
the contingent acquisition debt was a decrease of $680,000. During
the three and six months ended June 30, 2016 the net adjustment to
the fair value of the contingent acquisition debt was a decrease of
$480,000 and a decrease of $871,000, respectively.
Note 9. Stockholders’ Equity
The
Company’s Articles of Incorporation, as amended, authorize
the issuance of two classes of stock to be designated “Common
Stock” and “Preferred Stock”.
Common Stock
On May
31, 2017, the Board of Directors of the Company authorized a
reverse stock split in order to meet certain criteria in
preparation for the Company’s uplisting on the NASDAQ Capital
Market.
On
June 5, 2017, the Company filed a certificate of amendment to the
Company’s Articles of Incorporation with the Secretary of
State of the State of Delaware to effect a one-for-twenty reverse
stock split of the Company’s issued and outstanding common
stock. As a result of the Reverse Split, every twenty shares of the
Company issued and outstanding common stock were automatically
combined and reclassified into one share of the Company’s
common stock. The Reverse Split affected all issued and outstanding
shares of common stock, as well as common stock underlying stock
options, warrants outstanding, including common stock equivalents
issuable under convertible notes and preferred shares. No
fractional shares were issued in connection with the Reverse Split.
Stockholders who would otherwise hold a fractional share of common
stock will receive cash payment for the fractional
share.
The
Reverse Split became effective on June 7, 2017. All disclosures of
shares and per share data in these condensed consolidated financial
statements and related notes have been retroactively adjusted to
reflect the Reverse Split for all periods presented.
The
total number of authorized shares of common stock was reduced from
600,000,000 to 50,000,000. The total number of shares of stock
which the Corporation shall have authority to issue is 50,000,000
shares of common stock, par value $.001 per share and 5,000,000
shares of preferred stock, par value $.001 per share, of which
161,135 shares have been designated as Series A convertible
preferred stock, par value $.001 per share (“Series A
Convertible Preferred”).
As of
June 30, 2017, the total number of authorized shares of common
stock was is 50,000,000.
As of
June 30, 2017, and December 31, 2016 there were 19,668,166 and
19,634,345 shares of common stock outstanding, respectively. The
holders of the Common Stock are entitled to one vote for each share
held at all meetings of stockholders (and written actions in lieu
of meetings).
Convertible Preferred Stock
The
Company had 161,135 shares of Series A Convertible Preferred Stock
outstanding as of June 30, 2017 and December 31, 2016, and accrued
dividends of approximately $118,000 and $112,000, respectively. The
holders of the Series A Convertible Preferred Stock are entitled to
receive a cumulative dividend at a rate of 8.0% per year, payable
annually either in cash or shares of the Company's Common Stock at
the Company's election. Shares of Common Stock paid as
accrued dividends are valued at $10.00 per share. Each
share of Series A Convertible Preferred is convertible into two
shares of the Company's Common Stock. The holders of Series A
Convertible Preferred are entitled to receive payments upon
liquidation, dissolution or winding up of the Company before any
amount is paid to the holders of Common Stock. The holders of
Series A Convertible Preferred have no voting rights, except as
required by law.
Repurchase of Common Stock
On
December 11, 2012, the Company authorized a share repurchase
program to repurchase up to 750,000 of the Company's issued and
outstanding shares of Common Stock from time to time on the open
market or via private transactions through block
trades. A total of 196,594 shares have been repurchased
to-date as of June 30, 2017 at a weighted-average cost of $5.30.
There were no repurchases during the six months ended June 30,
2017. The remaining number of shares authorized for repurchase
under the plan as of June 30, 2017 is 553,406.
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 5,000 shares of restricted
common stock to be issued upon successfully meeting certain
criteria in accordance with the agreement. Subsequent to
September 1, 2015 this agreement has been extended under the same
terms with the monthly cash payment remaining at $6,000 per month
and 5,000 shares of restricted common stock for every six (6)
months of service performed.
As of
June 30, 2017, the Company has issued 5,000 shares of restricted
common stock in connection with this agreement and accrued for the
estimated per share value on each subsequent six (6) month periods
based on the price of Company’s common stock at each
respective date. As of June 30, 2017, the Company has accrued for
10,000 shares of restricted stock that have been earned. The fair
value of the shares to be issued are recorded as prepaid advisory
fees and are included in prepaid expenses and other current assets
on the Company’s condensed consolidated balance sheets and is
amortized on a pro-rata basis over the term of the respective
periods. During the three months ended June 30, 2017 and
2016, the Company recorded expense of approximately
$14,000 and $15,000, respectively and $28,000 and $31,000, during
the six months ended June 30, 2017 and 2016, respectively, in
connection with amortization of the stock issuance.
Warrants to Purchase Preferred Stock and Common Stock
As of
June 30, 2017, warrants to purchase 1,883,885 shares of the
Company's common stock at prices ranging from $4.60 to $10.00
were outstanding. All warrants are exercisable as of June 30, 2017
and expire at various dates through November 2020 and have a
weighted average remaining term of approximately 2.27 years and are
included in the table below as of June 30, 2017.
A
summary of the warrant activity for the six months ended June 30,
2017 is presented in the following table:
|
Balance at
December 31, 2016
|
1,899,385
|
|
Issued
|
-
|
|
Expired
/ cancelled
|
(15,500
)
|
|
Exercised
|
-
|
|
Balance at June
30, 2017
|
1,883,885
|
Stock Options
On May
16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
2,000,000 shares of Common Stock. On February 23, 2017, the
Company’s board of directors received the approval of our
stockholders, to amend the 2012 Stock Option Plan
(“Plan”) to increase the number of shares of common
stock available for grant and to expand the types of awards
available for grant under the Plan. The amendment of the Plan
increased the number of authorized shares of the Company’s
common stock that may be delivered pursuant to awards granted
during the life of the plan from 2,000,000 to 4,000,000
shares.
The
purpose of the Plan is to promote the long-term growth and
profitability of the Company by (i) providing key people and
consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
Plan allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At June 30, 2017, the Company had 2,294,018
shares of Common Stock available for issuance under the
Plan.
A
summary of the Plan Options for the six months ended June 30, 2017
is presented in the following table:
|
|
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding
December 31, 2016
|
1,660,964
|
$
4.74
|
$
1,346
|
|
Issued
|
76,547
|
2.07
|
|
|
Canceled /
expired
|
(54,332
)
|
4.28
|
|
|
Exercised
|
(6,321
)
|
4.19
|
-
|
|
Outstanding June
30, 2017
|
1,676,858
|
$
4.63
|
$
3,145
|
|
Exercisable June
30, 2017
|
959,533
|
$
4.35
|
$
2,079
|
The
weighted-average fair value per share of the granted options for
the six months ended June 30, 2017 and 2016 was approximately $3.08
and $2.93, respectively.
Stock
based compensation expense included in the condensed consolidated
statements of operations was $358,000 and $56,000 for the three
months ended June 30, 2017 and 2016, respectively, and $485,000 and
$126,000 for the six months ended June 30, 2017 and 2016,
respectively.
As of
June 30, 2017, there was approximately $1,828,000 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 3.93
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
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 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 roasted and
green coffee bean products are sold directly to
businesses.
The
Company’s segments reflect the manner in which the business
is managed and how the Company allocates resources and assesses
performance. The Company’s chief operating decision maker is
the Chief Executive Officer. The Company’s chief operating
decision maker evaluates segment performance primarily based on
revenue and segment operating income. The principal measures and
factors the Company considered in determining the number of
reportable segments were revenue, gross margin percentage, sales
channel, customer type and competitive risks. In addition, each
reporting segment has similar products and customers, similar
methods of marketing and distribution and a similar regulatory
environment.
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
|
$
35,538
|
$
37,019
|
$
68,780
|
$
71,817
|
|
Commercial
coffee
|
5,989
|
5,481
|
11,480
|
8,885
|
|
Total
revenues
|
$
41,527
|
$
42,500
|
$
80,260
|
$
80,702
|
|
Gross
profit
|
|
|
|
|
|
Direct
selling
|
$
24,195
|
$
24,967
|
$
46,050
|
$
48,457
|
|
Commercial
coffee
|
(93
)
|
464
|
(82
)
|
337
|
|
Total
gross profit
|
$
24,102
|
$
25,431
|
$
45,968
|
$
48,794
|
|
Operating income
(loss)
|
|
|
|
|
|
Direct
selling
|
$
595
|
$
1,708
|
$
(1,159
)
|
$
3,732
|
|
Commercial
coffee
|
(1,271
)
|
(184
)
|
(1,917
)
|
(1,045
)
|
|
Total
operating income
|
$
(676
)
|
$
1,524
|
$
(3,076
)
|
$
2,687
|
|
Net (loss)
income
|
|
|
|
|
|
Direct
selling
|
$
(135
)
|
$
416
|
$
(1,647
)
|
$
1,090
|
|
Commercial
coffee
|
(2,595
)
|
(525
)
|
(3,142
)
|
(1,048
)
|
|
Total
net (loss) income
|
$
(2,730
)
|
$
(109
)
|
$
(4,789
)
|
$
42
|
|
Capital
expenditures
|
|
|
|
|
|
Direct
selling
|
$
346
|
$
398
|
$
474
|
$
749
|
|
Commercial
coffee
|
101
|
299
|
281
|
718
|
|
Total
capital expenditures
|
$
447
|
$
697
|
$
755
|
$
1,467
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
Direct selling
|
$
42,821
|
$
40,127
|
|
Commercial coffee
|
26,462
|
25,881
|
|
Total assets
|
$
69,283
|
$
66,008
|
Total
tangible assets, net located outside the United States were
approximately $5.3 million and $5.4 million as of June 30, 2017 and
December 31, 2016, respectively.
The
Company conducts its operations primarily in the United States. For
the three months ended June 30, 2017 and 2016 approximately 10% and
9%, respectively, of the Company’s sales were derived from
sales outside the United States. For the six months ended June 30,
2017 and 2016 approximately 10% and 9%, respectively, of the
Company’s sales were derived from sales outside the United
States.
The
following table displays revenues attributable to the geographic
location of the customer (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
United
States
|
$
37,378
|
$
38,739
|
$
72,212
|
$
73,702
|
|
International
|
4,149
|
3,761
|
8,048
|
7,000
|
|
Total
revenues
|
$
41,527
|
$
42,500
|
$
80,260
|
$
80,702
|
Note 11. Subsequent Events
July 2017 Private Placement
On July
28, 2017, the Company, closed the first tranche of its July
2017 Private Placement offering (the “Offering”)
pursuant to which the Company offered for sale a minimum of
$100,000 of units up to a maximum of $10,000,000 of units, with
each unit (a “Unit”) consisting of: (i) a three (3)
year convertible note in the principal amount of $25,000 (the
“Note or Notes”) initially convertible into shares of
the Company’s Common Stock, at $4.60 per share (subject to
adjustment); and (ii) Series D Warrant (the “Class D
Warrant” or “Warrant(s)”), exercisable to
purchase 50% of the number of shares issuable upon conversion of
the Note at an exercise price equal to $5.56. On July 28, 2017, the
Company entered into a Note Purchase Agreement with eight (8)
accredited investors pursuant to which the Company raised gross
cash proceeds of $2,100,000 in the Offering and sold Notes in the
aggregate principal amount of $2,100,000, convertible into 456,522
shares of the Company’s Common Stock, at a conversion price
of $4.60 per share, subject to adjustment as provided therein; and
Warrants to purchase 228,261 shares of Common Stock at an exercise
price of $5.56. In addition, as part of the Offering, three (3)
investors in the Company’s November 2015 Private Placement
(the “Prior Investors”), converted their 8% Series C
Convertible Notes in the aggregate principal amount of $4,200,349
together with accrued interest thereon into new convertible notes
for an equal principal amount, convertible into 913,119 shares of
Common Stock and class D warrants to purchase an aggregate of
456,560 shares of Common Stock. The new note will carry the same
interest rate as the prior note. The Prior Investors also agreed to
exchange their Series A Warrants dated October 26, 2015 to purchase
an aggregate of 279,166 shares of Common Stock for a new warrant to
purchase an aggregate of 182,065 shares of Common Stock (see Note 6
above “November 2015 Private Placement”). The Offering
was extended an additional thirty (30) days from the initial
closing date of July 31, 2017. The Company intends to use the
proceeds for working capital purposes. For twelve (12) months
following the closing, the investors have the right to participate
in any future equity financings by the Company up to their pro rata
share of the maximum offering amount in the aggregate.
The
Notes bear interest at a rate of eight percent (8%) per annum. The
Company has the right to prepay the Notes at any time after the one
year anniversary date of the issuance of the Notes at a rate equal
to 110% of the then outstanding principal balance and accrued
interest. The Notes automatically convert to Common Stock if prior
to the maturity date the Company sells Common Stock, preferred
stock or other equity-linked securities with aggregate gross
proceeds of no less than $3,000,000 for the purpose of raising
capital. The Notes provide for full ratchet price protection for a
period of nine months after their issuance and thereafter weighted
average price adjustment.
In
connection with the Offering, the Company also entered into a
registration rights agreement with the investors in the Offering
(the “Registration Rights Agreement”). The Registration
Rights Agreement requires that the Company file a registration
statement (the “Initial Registration Statement”) with
the SEC within ninety (90) days of the final closing date of the
Offering (the “Filing Date”) for the resale by the
investors of all of the Common Shares underlying the Notes and the
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”). The Initial Registration Statement
must be declared effective by the SEC on the later of 180 days of
the final closing date of the Offering or, if the registration
statement receives a full review by the SEC, 210 days of the final
closing date (the “Effectiveness Date”) subject to
certain adjustments. Upon the occurrence of certain events (each an
“Event”), including, but not limited to, that the
Initial Registration Statement is not filed prior to the Filing
Date or declared effective by the Effectiveness Date, the Company
will be required to pay to the investors liquidated damages of 1.0%
of their respective aggregate purchase price upon the date of the
Event and then monthly thereafter until the Event is cured. In no
event may the aggregate amount of liquidated damages payable to
each of the Purchasers exceed in the aggregate 10% of the aggregate
purchase price paid by such Purchaser for the Registrable
Securities.
The
Company paid a placement fee of $262,008, excluding legal expenses,
and has agreed to issue to the Placement Agent three-year warrants
to purchase 159,817 shares of Common Stock at an exercise price of
$5.56 per share and the Company has agreed to issue the Placement
Agent 22,680 shares of the Company’s Common
Stock.
Acquisition Sorvana International, LLC
Effective
July 1, 2017, the Company acquired certain assets and assumed
certain liabilities of Sorvana International “Sorvana”.
Sorvana was the result of the unification of the two companies
FreeLife International, Inc. “FreeLife”, and
L’dara. Sorvana offers a variety of products with the
addition of the FreeLife and L’dara product lines. Sorvana
offers an extensive line of health and wellness product solutions
including healthy weight loss supplements, energy and performance
products and skin care product lines as well as organic product
options. As a result of this business combination, the
Company’s distributors and customers will have access to
Sorvana’s unique line of products and Sorvana’s
distributors and clients will gain access to products offered by
the Company. The maximum consideration payable by the Company
shall be $14,000,000, subject to adjustments. The Company will make
monthly payments based on a percentage of Sorvana’s
distributor revenue and royalty revenue until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid Sorvana’s aggregate cash payments of
Sorvana’s distributor revenue and royalty revenue equal to
the maximum aggregate purchase price. The final purchase price
allocation has not been determined as of the filing of this
report.
Grant of Restricted Stock Units and Stock Options
On
August 9, 2017, the Company granted an aggregate of 500,000
restricted stock units, each unit representing a contingent
right to receive one share of Common Stock vesting as follows: (i)
Year 3 - 50,000 shares; (ii) Year 4 – 75,000 shares; (iii)
Year 5 - 250,000 shares; and (iv) Year 6 – 125,000 shares;
provided that the grantee continues to serve as an executive
officer, employee or consultant, as applicable or otherwise is not
terminated for cause prior to such dates. Included in the grants
was a grant to Mr. Briskie of 250,000 restricted stock
units. The Company also granted ten year options to purchase an
aggregate of 20,000 shares of Common Stock to Messrs. Renton,
Sallwasser, Allodi and Thompson (a grant of an option to purchase
5,000 shares of Common Stock to each), having an exercise price of
$4.53 vesting immediately.