ygyi10qajune302014.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
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[X]
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2014
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[ ]
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 000-54900
YOUNGEVITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
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90-0890517
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2400 Boswell Road, Chula Vista, CA
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91914
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (619) 934-3980
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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[X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 8, 2014, the issuer had 391,535,768 shares of its Common Stock issued and outstanding.
This Amendment No. 1 on Form 10-Q (the “Amendment”) amends the Quarterly Report on Form 10-Q of Youngevity International, Inc. (the “Company”) for the quarter ended June 30, 2014, originally filed with the Securities and Exchange Commission (“SEC”) on August 13, 2014 (the “Original Filing”). The sole purpose of this Amendment is to correct the description of the document filed as reflected on the SEC’s EDGAR system. This Amendment does not amend or otherwise update any other information in the Original Filing. Except as stated herein, this Amendment does not reflect events occurring after the Original Filing and no attempt has been made in this Amendment to modify or update other disclosures as presented in the Original Filing.
In addition, as required by Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment under Item 15 of Part IV hereof.
INDEX
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Page
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PART I. FINANCIAL INFORMATION
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PART II. OTHER INFORMATION
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Youngevity International, Inc. and Subsidiaries
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Condensed Consolidated Balance Sheets
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(In thousands, except share amounts)
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As of
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June 30,
2014
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December 31, 2013
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ASSETS
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(Unaudited)
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Current Assets:
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Cash and cash equivalents
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Accounts receivable, due from factoring company
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Accounts receivable, trade
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Prepaid expenses and other current assets
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Property and equipment, net
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Accrued distributor compensation
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Other current liabilities
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Capital lease payable, current portion
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Notes payable, current portion
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Contingent acquisition debt, current portion
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Total current liabilities
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Capital lease payable, less current portion
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Notes payable, less current portion
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Contingent acquisition debt, less current portion
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Commitments and contingencies
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Youngevity International, Inc. stockholders' equity:
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Convertible Preferred Stock, $0.001 par value: 100,000,000 shares authorized; 211,135 shares issued and outstanding at June 30, 2014 and December 31, 2013
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Common Stock, $0.001 par value: 600,000,000 shares authorized; 390,518,703 and 388,686,445 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
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Additional paid-in capital
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Accumulated other comprehensive loss
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Total Youngevity International, Inc. stockholders' equity
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See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Income
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2014
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2013
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2014
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2013
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General and administrative
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Income before income taxes
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Net loss attributable to noncontrolling interest
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Net income attributable to Youngevity
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Preferred stock dividends
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Net income available to common stockholders
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Net income per share, basic
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Net income per share, diluted
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Weighted average shares outstanding, basic
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Weighted average shares outstanding, diluted
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See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2014
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2013
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2014
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2013
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Foreign currency translation
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Total other comprehensive loss
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See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Cash Flows
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(In thousands, except share amounts)
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(Unaudited)
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Six Months Ended
June 30,
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2014
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2013
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Cash Flows from Operating Activities:
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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Stock based compensation expense
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Increase in fair value of contingent acquisition debt
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Amortization of debt discount
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Gain on disposal of assets
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Interest income accrued on note receivable, related party
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Changes in operating assets and liabilities, net of effect from business combinations:
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Prepaid expenses and other current assets
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Accrued distributor compensation
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Accrued expenses and other liabilities
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Net Cash Provided by Operating Activities
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Cash Flows from Investing Activities:
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Acquisitions, net of cash acquired
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Purchases of property and equipment
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Net Cash Used in Investing Activities
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Cash Flows from Financing Activities:
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Proceeds from the exercise of stock options and warrants, net
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Proceeds from factoring company, net
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Payments of notes payable, net
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Payments for note receivable, related party, net
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Payments of contingent acquisition debt
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Payments of capital leases
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Repurchase of common stock
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Net Cash Used in Financing Activities
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Foreign Currency Effect on Cash
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Net (decrease) increase in cash and cash equivalents
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Cash and Cash Equivalents, Beginning of Period
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Cash and Cash Equivalents, End of Period
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Supplemental Disclosures of Cash Flow Information
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Cash paid during the period for:
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Supplemental Disclosures of Noncash Investing and Financing Activities
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Acquisition of net assets in exchange for contingent acquisition debt (see Note 4)
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See accompanying notes to condensed consolidated financial statements.
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Note 1. Basis of Presentation and Nature of Business
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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, 2014 and for the three and six months ended June 30, 2014 and 2013 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 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, 2013. 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. These reclassifications had no effect on reported results of operations or stockholders’ equity.
Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of options granted under our stock based compensation plans, 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 the allowance for 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.
Nature of Business
Youngevity International, Inc., founded in 1996, operates through the following domestic wholly-owned subsidiaries: AL Global Corporation, which operates our direct selling networks, CLR Roasters, LLC (“CLR Roasters”), our commercial coffee business which includes our recently acquired Siles Plantation Family Group in Nicaragua, Financial Destinations, Inc., FDI Management, Inc., and MoneyTrax, LLC; (collectively referred to as “FDI”), MK Collaborative LLC, and the wholly owned foreign subsidiaries Youngevity Australia Pty. Ltd. and Youngevity NZ, Ltd. Effective July 23, 2013, the Company changed its name from AL International, Inc. to Youngevity International, Inc.
We operate in two segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors and the commercial coffee segment where products are sold directly to businesses. During the six months ended June 30, 2014, we derived approximately 89% of our revenue from our direct sales and approximately 11% of our revenue from our commercial coffee sales.
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.
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 Cost of Sales
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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):
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As of
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June 30,
2014
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December 31,
2013
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Reserve for excess and obsolete
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Cost of revenues includes the cost of inventory, shipping and handling costs incurred by the Company in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets.
Note 4. Acquisitions and Business Combinations
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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 of the 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, 2014, the Company entered into three acquisitions, which are detailed below. All of the acquisitions were conducted in an effort to expand the Company’s distributor network, enhance and expand its product portfolio, diversify its product mix or expand the coffee business. 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.
We have accounted for all of our business combinations using the acquisition method of accounting, whereby the total purchase price was allocated to the acquired identifiable net assets based on assessments of their respective fair values, and the excess of the purchase price over the fair values of these identifiable net assets was allocated to goodwill, if any.
Good Herbs, Inc.
On April 28, 2014, the Company acquired certain assets and assumed certain liabilities of Good Herbs, Inc., (“Good Herbs”) a traditional natural herbal supplements company, whose primary sales channel has been targeted toward certified natural health professionals. As a result of this business combination, the Company’s distributors and customers will have access to Good Herbs’ unique line of products and Good Herbs’ distributors and clients will gain access to products offered by the Company. The purchase price consisted of a maximum purchase price of $1,900,000, of which approximately $120,000 was related to assumed liabilities. The Company has agreed to pay Good Herbs’ a monthly payment equal to five (5%) of all gross sales revenue generated by the Good Herbs’ distributor organization, regardless of products being sold within the Good Herbs’ distributor organization provided, however, for the first six (6) months effective May 12, 2014 Good Herbs’ will receive a minimum guaranteed payment of $20,000 per month which will be applied to the maximum purchase price. In addition, the Company agrees to pay Good Herbs’ five (5%) of Good Herbs’ product sales generated outside the Good Herbs’ distributor organization. Payments will be made monthly until the earlier of the date that is ten (10) years from the closing or until such time the Company has paid aggregate cash payments equal to $1,900,000, however if the aggregate gross sales revenue generated by the Good Herbs’ distributor organization, regardless of the products being sold, received by the Company for the fifteen (15) months period following the Closing Date does not equal or exceed $1,900,000, then the maximum aggregate purchase price shall be reduced by the difference between $1,900,000 and the fifteen month revenue; provided, however, that in no event shall the maximum aggregate purchase price be reduced below $1,000,000. The contingent consideration’s estimated fair value at the date of acquisition was $800,000, 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 and liabilities assumed 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 Good Herbs’ (in thousands) is as follows:
Trademarks and trade name
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Customer-related intangible
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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 (10) ten 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 will be finalizing the valuation within the next twelve (12) months.
The Company did not recognize any product revenue for Good Herbs’ during the three and six months ended June 30, 2014. The Company anticipates selling Good Herbs’ products during the Company’s third quarter of fiscal 2014.
The Company’s business combination related to Good Herbs did not have a material impact on the Company’s unaudited condensed consolidated financial statements as of June 30, 2014, and therefore pro forma disclosures have not been presented.
Beyond Organic, LLC
On May 1, 2014, the Company acquired certain assets and assumed certain liabilities of Beyond Organic, LLC, (“Beyond Organic”) a vertically integrated organic food and beverage company. The purchase price consisted of a maximum purchase price of $6,200,000, of which approximately $200,000 was related to assumed liabilities. The Company has agreed to pay Beyond Organic a monthly payment equal to ten (10%) of all gross sales revenue generated by the Beyond Organic distributor organization, regardless of products being sold within the Beyond Organic distributor organization provided, however, for the first ten (10) months effective May 12, 2014 Beyond Organic will receive a minimum guaranteed payment of $92,500 per month which will be applied to the maximum purchase price. In addition, the Company agreed to pay Beyond Organic five (5%) of Beyond Organic product sales generated outside the Beyond Organic distributor organization. Payments will be made monthly until the earlier of the date that is seven (7) years from the closing or until such time the Company has paid aggregate cash payments equal to $6,000,000. The contingent consideration’s estimated fair value at the date of acquisition was $3,100,000, 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 and liabilities assumed were recorded at their 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 Beyond Organic (in thousands) is as follows:
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Trademarks and trade name
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|
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Customer-related intangible
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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 (10) ten 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.
Goodwill of $300,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. Goodwill is estimated to represent the synergistic values expected to be realized from the combination of the two businesses. The goodwill is expected to be deductible for tax purposes.
The Company will be finalizing the valuation within the next twelve (12) months.
Revenue included in the consolidated statement of operations for the three and six months ended June 30, 2014 was approximately $332,000.
The Company’s business combination related to Beyond Organic did not have a material impact on the Company’s unaudited condensed consolidated financial statements as of June 30, 2014, and therefore pro forma disclosures have not been presented.
Siles Plantation Family Group SA (Sociedad Anonima), Nicaragua coffee plantations and dry-processing plant.
On May 13, 2014, the Company, through its wholly-owned subsidiary CLR Roasters, LLC (“CLR”), completed the acquisition of the Siles Plantation Family Group SA (“Siles Plantation”), a Nicaraguan entity. The results of Siles Plantation are included in the consolidated financial statements of the Company from the date of acquisition. The transaction is being accounted for as a business combination.
The Siles Plantation will be operated and managed by a Nicaraguan plantation group Hernandez, Hernandez Export Co., LTD (“H&H”). As an inducement to harvest the plantations and operate the dry-processing plant profitably, CLR and H&H entered into an Operating and Profit Sharing Agreement “(Agreement”). In accordance with the Agreement, H&H will share equally (50%) in all profits and losses generated by the Siles Plantation, and profits from any subsequent sale of the plantation, after profits are first distributed to CLR equal to the amount of CLR’s cash contributions for the acquisitions, then after profits are distributed to H&H in an amount equal to their cash contributions, and after certain other conditions are met.
Concurrent with the acquisition of the Siles Plantation, the Siles Plantation acquired the assets of a dry-processing plant “La Pita”, a coffee plantation “El Paraiso” and has an option to purchase a second coffee plantation “El Paraisito” as follows:
1)
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“La Pita”, a dry-processing plant sitting on approximately 18 acres of land is located in Matagalpa, Nicaragua. The property includes buildings, structures, machinery & equipment and furnishings & fixtures. The total purchase price was $1,904,840, of which CLR paid $1,050,000 and H&H paid $854,840. The preliminary purchase price allocation for La Pita (in thousands) is as follows:
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Customer relationships, intangible
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2)
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“EL Paraiso”, a coffee plantation located in Matagalpa, Nicaragua, consisting of approximately 450 acres of land and hundreds of thousands of coffee plants of various ages. The total purchase price was $1,400,000, of which CLR paid $1,050,000 and H&H paid $350,000. The purchase price allocation for El Paraiso (in thousands) is as follows:
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3)
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Additionally, the Siles Plantation has the option to purchase “El Paraisito”, an approximate 450 acre plantation located adjacent to El Paraiso. The Company is currently in the process of completing final settlement of the purchase agreement. CLR has a deposit towards this purchase of $200,000, which is recorded in prepaid expenses and other current assets on the Company’s consolidated balance sheet.
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In connection with the acquisitions of the Siles Plantation, La Pita, and El Paraiso, the Company recognized a contingent liability of approximately $1,600,000, which is payable after certain working capital conditions are met and after CLR’s cash contributions for the acquisitions are fully paid. This liability is included in the contingent acquisition debt balance as of June 30, 2014.
As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. Changes to the preliminary purchase price allocation are expected to occur, and may be significant, upon completion of the acquisition valuation. The Company will be finalizing the valuation within the next twelve (12) months.
Siles Family Plantation is a newly formed entity and does not have current or historical financial statements, therefore pro forma disclosures have not been presented.
Note 5. Intangible Assets and Goodwill
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Intangible assets are comprised of distributor organizations, trademarks, 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):
|
|
June 30, 2014
|
|
|
December 31, 2013
|
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|
|
|
|
Accumulated
|
|
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|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor organizations
|
|
$
|
10,345
|
|
|
$
|
4,684
|
|
|
$
|
5,661
|
|
|
$
|
8,425
|
|
|
$
|
4,169
|
|
|
$
|
4,256
|
|
Trademarks and trade names
|
|
|
4,341
|
|
|
|
200
|
|
|
|
4,141
|
|
|
|
3,841
|
|
|
|
113
|
|
|
|
3,728
|
|
Customer relationships
|
|
|
6,000
|
|
|
|
1,555
|
|
|
|
4,445
|
|
|
|
4,133
|
|
|
|
1,248
|
|
|
|
2,885
|
|
Internally developed software
|
|
|
720
|
|
|
|
107
|
|
|
|
613
|
|
|
|
720
|
|
|
|
57
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
21,406
|
|
|
$
|
6,546
|
|
|
$
|
14,860
|
|
|
$
|
17,119
|
|
|
$
|
5,587
|
|
|
$
|
11,532
|
|
Amortization expense related to intangible assets was approximately $482,000 and $379,000 for the three months ended June 30, 2014 and 2013, respectively. Amortization expense related to intangible assets was approximately $959,000 and $758,000 for the six months ended June 30, 2014 and 2013, respectively.
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 Accounting Standards Codification (“ASC”) Topic 350, “Intangibles — Goodwill and Other”, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company conducts annual reviews for goodwill and indefinite-lived intangible assets in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. During the three months ending June 30, 2014 the Company recorded an increase in goodwill in the amount of $300,000 related to the acquisition of Beyond Organic. The goodwill balance as of June 30, 2014 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, 2014 and 2013.
Note 6. Stock Based Compensation
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The Company accounts for stock based compensation in accordance with the guidance provided by 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.
Note 7. Distributor Compensation
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In the direct selling segment, the Company utilizes a network of independent distributors, each of whom has signed an agreement with the Company, enabling them to purchase products at wholesale prices, enroll new distributors for their down-line and earn compensation on product purchases made by those down-line distributors.
Due to the multi-layer independent sales approach, distributor incentives are a significant component of the Company’s cost structure. The Company accrues all distributor compensation expense in the month earned and pays the compensation the following month.
Note 8. Deferred Revenues and Costs
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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, 2014, the balance in deferred revenues attributable to Heritage Makers was approximately $4,642,000.
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, 2014, the balance in deferred costs was approximately $1,396,000 and was included in prepaid expenses and current assets.
Note 9. Fair Value of Financial Instruments
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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:
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Level 1 – Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
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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.
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|
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.
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The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses 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.
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 related to contingent consideration on acquisitions (in thousands):
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Fair Value at June 30, 2014
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|
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Total
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|
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Level 1
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|
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Level 2
|
|
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Level 3
|
|
Liabilities:
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Contingent acquisition debt, current portion
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Contingent acquisition debt, less current portion
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Fair Value at December 31, 2013
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Contingent acquisition debt, current portion
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|
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Contingent acquisition debt, less current portion
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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 (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. During the six months ended June 30, 2014 and 2013, the net adjustment to the fair value of the contingent acquisition liabilities was immaterial.
Note 10. Earnings Per Share
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Basic earnings per share is computed by dividing net income 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 stock options, warrants and convertible preferred stock.
The Company’s Articles of Incorporation, as amended, authorize the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”.
The Company had 211,135 shares of Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of June 30, 2014 and December 31, 2013. 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 $.50 per share. Each share of Series A Preferred is convertible into two shares of the Company's Common Stock. The holders of Series A Preferred are entitled to receive payments upon liquidation, dissolution or winding up of the Company before any amount is paid to the holders of Common Stock. The holders of Series A Preferred shall have no voting rights, except as required by law.
The Company had 390,518,703 common shares outstanding as of June 30, 2014. The holders of Common Stock are entitled to one vote per share on matters brought before the shareholders. As of June 30, 2014, warrants to purchase 11,559,140 shares of Common Stock at prices ranging from $0.10 to $0.50 were outstanding. All warrants are exercisable as of June 30, 2014 and expire at various dates through December 2018.
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 six months ended June 30, 2014, the Company repurchased a total of 672,742 shares at a weighted-average cost of $0.23. A total of 1,689,145 shares have been repurchased to date at a weighted-average cost of $0.23. The remaining number of shares authorized for repurchase under the plan as of June 30, 2014 is 13,310,855.
Note 12. Stock Option Plan
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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 June 30, 2014, the Company had 21,162,500 shares of Common Stock available for issuance under the Plan.
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 contractual term of the option. The expected life is based on the contractual term 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.
A summary of the Plan Options for the six months ended June 30, 2014 is presented in the following table:
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Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
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Outstanding December 31, 2013
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Outstanding June 30, 2014
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Exercisable June 30, 2014
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The weighted-average fair value per share of the granted options for the six months ended June 30, 2014 and 2013 was $0.09 and $0.14, respectively.
Stock-based compensation expense was approximately $100,000 and $247,000 for the three and six months ended June 30, 2014, respectively, compared to approximately $128,000 and $427,000 for the three and six months ended June 30, 2013.
As of June 30, 2014, there was approximately $445,000 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 3.07 years.
Note 13. Factoring Agreement
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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 reportable segment. Under the terms of the Factoring Agreement, the Company effectively sells all of its accounts receivable to Crestmark with non-credit related recourse. The Company continues to be responsible for the servicing and administration of the receivables. In January 2013, the Company extended its Factoring Agreement through February 1, 2016, and modified certain of the terms.
The Factoring Agreement provides for the Company to receive advances against the purchase price of its receivables at a rate up to 85% of the aggregate purchase price of the receivable outstanding at any time less: receivables that are in dispute, receivables that are not credit approved within the terms of the Factoring Agreement and any fees or estimated fees related to the Factoring Agreement. Interest is accrued on all outstanding advances at the greater of 5.25% per annum or the Prime Rate (as identified by the Wall Street Journal) plus an applicable margin. The margin is based on the magnitude of the total outstanding advances and ranges from 2.50% to 5.00%. In addition to the interest accrued on the outstanding balance, the factor charges a factoring commission for each invoice factored which is calculated as the greater of $5.00 or 0.875% to 1.00% of the gross invoice amount and is recorded as interest expense. The minimum factoring commission payable to the bank is $90,000 during each consecutive 12-month period.
The Company accounts for the sale of receivables under the Factoring Agreement as secured borrowing with a pledge of the subject receivables as well as all bank deposits as collateral, in accordance with the authoritative guidance for accounting for transfers and servicing of financial assets and extinguishments of liabilities. The caption “Accounts receivable, due from factoring company” on the accompanying consolidated balance sheets in the amount of approximately $1,174,000 and $1,051,000 as of June 30, 2014 and December 31, 2013, respectively, reflects the related collateralized accounts. Amounts advanced under the Factoring Agreement were $553,000 and $0 as of June 30, 2014 and December 31, 2013, respectively. These balances are included in other current liabilities.
Note 14. Segment and Geographic Information
|
The Company offers a wide variety of products including; nutritional and health, sports and energy drinks, gourmet coffee, skincare and cosmetics, lifestyle, pharmaceutical discount card and pet related. In addition, the Company offers health and wellness services. 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):
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Three months ended
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Six months ended
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June 30,
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June 30,
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2014
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2013
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2014
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2013
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Total capital expenditures
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As of
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June 30,
2014
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December 31,
2013
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Revenues are primarily derived from customers within the United States. International revenues represent 60 different countries. Revenues based on geographic location are summarized in the following table:
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Three months ended
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Six months ended
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June 30,
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June 30,
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2014
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2013
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2014
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2013
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Note 15. Subsequent Events
On July 31, 2014, the Company entered into a Note Purchase Agreement with three accredited investors pursuant to which the Company raised gross proceeds of $4,350,000 and sold units consisting of five (5) year senior secured convertible notes in the aggregate principal amount of $4,350,000 convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at $0.35 per share, subject to adjustment as provided therein (the “Note(s)”); and Series A Warrants exercisable to purchase 17,021,739 shares of Common Stock (the “Warrant(s)”). The sale was part of a private placement offering in which the Company offered for sale as units a maximum of $5,000,000 principal amount of Notes initially convertible into 14,285,715 shares of Common Stock and 19,565,217 Warrants.
The Notes bear interest at a rate of eight percent (8%) per annum and mature on July 30, 2019. 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 Company paid a placement fee of approximately $437,000, including expenses and issued one five-year warrant exercisable in an aggregate amount of 1,242,857 shares of Common Stock at an exercise price of $0.35 per share and one five-year warrant exercisable in the aggregate amount of 1,702,174 shares of Common Stock at an exercise price of $0.23 per share.
The Company intends to invest the net proceeds in its wholly owned subsidiary, CLR Roasters, LLC (“CLR”), to fund the purchase of K-Cup manufacturing capabilities, to execute its option to acquire a second coffee plantation in Matagalpa, Nicaragua, and fund capital improvements on its plantations and processing plant and for the purchase of green coffee to accelerate the growth of its newly formed green coffee division.
Subsequent to June 30, 2014, the Company entered into an amendment agreement related to one of its business acquisitions that was consummated in a prior year, which reduces the maximum amount that will be paid to the seller. This resulted in a reduction in the estimated fair value of the related contingent acquisition debt, which is reflected in the estimated fair value of the contingent acquisition debt as of June 30, 2014.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2014 and herein as reported under Part II Other Information, Item 1A. Risk Factors. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
We operate in two segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors and the commercial coffee segment where products are sold directly to businesses. In the direct selling segment we sell health and wellness products on a global basis and offer a wide range of products through an international direct selling network. Our direct sales are made through our network of independent distributors, which is a web-based global network of customers and distributors. Our multiple independent selling forces sell a variety of products through friend-to-friend marketing and social networking. Our direct selling products comprise a number of brand names that are in most part owned by Youngevity® Essential Life Sciences. There are a smaller number of brands that are marketed under license agreements. We also engage in the commercial sale of one of our products, our coffee. We own a traditional coffee roasting business CLR Roaster (“CLR”) that produces coffee under its own Cafe La Rica brand, as well as under a variety of private labels through major national sales outlets and major customers including cruise lines and office coffee service operators.
In May 2014, our coffee roasting business CLR acquired a coffee plantation and processing facility located in Matagalpa, Nicaragua – an ideal coffee growing region that is historically known for high quality coffee production. In addition, the Company plans to execute its option to acquire a second plantation under contract that would double the size of its land holdings in Nicaragua.
Each plantation is roughly 450-acres and produces 100 percent Arabica coffee beans that are shade grown, Rainforest Alliance Certified™ and Fair Trade Certified™. The two plantations are located on adjacent plots of land and when coupled with the Company’s recently acquired dry-processing facility and existing U.S. based coffee roaster facilities allows CLR to control the coffee production process from field to cup (see Note 4, to the financial statements).
The comparative financials discussed below show the condensed consolidated financial statements of Youngevity International, Inc. for the three and six months ended June 30, 2014 and 2013.
Three months ended June 30, 2014 compared to three months ended June 30, 2013
Revenues
For the three months ended June 30, 2014, our revenue increased 56.6% to $32,718,000 as compared to $20,893,000 for the three months ended June 30, 2013. The increase in revenue is attributed primarily to the increase in our product offerings and the increase in the number of distributors selling our product and the increase in the number of customers consuming our products as well as $3,786,000 in additional revenues derived from the acquisitions of Beyond Organic, Inc., acquired on May 1, 2014, Heritage Makers, Inc., acquired on August 14, 2013, Good Herbs, Inc., acquired on April 28, 2014, GoFoods Global, LLC, acquired on October 1, 2013 and Biometics International Inc., acquired on November 19, 2013. The increase in revenues in commercial coffee is primarily due to the addition of green coffee business. The following table summarizes our revenue in thousands by segment:
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For the three months ended
June 30,
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Percentage change
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Segment Revenues
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2014
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2013
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Gross Profit
For the three months ended June 30, 2014, cost of sales increased approximately 68.1% to $13,776,000 as compared to $8,195,000 for the three months ended June 30, 2013. The increase in cost of revenues is primarily attributable to the increase in revenues discussed above. Cost of revenues includes the cost of inventory, shipping and handling costs incurred by the Company in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets. Cost of sales in the commercial coffee segment increased approximately 123.6%, primarily due to the addition of green coffee business, which is sold at wholesale, and set up costs associated with the Nicaragua operations.
For the three months ended June 30, 2014, gross profit increased approximately 49.2% to $18,942,000 as compared to $12,698,000 for the three months ended June 30, 2013. Below is a table of the gross margin percentages by segment:
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Gross Profit %
For the three months
ended June 30,
|
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Segment Gross Profit
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2014
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2013
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Gross profit as a percentage of revenues in the direct selling segment remained approximately the same for the second quarter of 2014, compared with the same period last year. The decrease in gross margin in the commercial coffee segment was primarily due to expenses incurred in connection with a facility expansion, repairs and maintenance, and to a lesser extent, a small increase in raw materials fulfillment costs. The decrease in gross margin in the commercial coffee segment was also due to Nicaragua operations set up costs discussed above and the lower margin business from green coffee sales.
Operating Expenses
For the three months ended June 30, 2014, our operating expenses increased approximately 52.4% to $17,700,000 as compared to $11,617,000 for the three months ended June 30, 2013. Included in operating expense is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the three months ended June 30, 2014, distributor compensation increased 53.4% to $12,753,000 from $8,313,000 for the three months ended June 30, 2013. This increase was primarily attributable to the increase in revenues and distributors reaching higher rank levels. Distributor compensation as a percentage of direct selling revenues increased to 44.5% as compared to 44.0% for the three months ended June 30, 2013, primarily due to added incentive programs and higher level achievements by distributors. For the three months ended June 30, 2014, the sales and marketing expense increased 34.5% to $1,905,000 from $1,416,000 for the three months ended June 30, 2013 primarily due to the increase in revenues and additional selling costs related to the Heritage Makers acquisition, the Company’s annual national convention, start-up costs related to MK collaborative line of business that the Company launched in the first quarter of the current year and costs related to the international expansion efforts that the Company expects to start generating revenues towards the end of the current year. For the three months ended June 30, 2014, the general and administrative expense increased 61.1% to $3,042,000 from $1,888,000 for the three months ended June 30, 2013 primarily due to costs related to Heritage Makers, MK collaborative, Nicaragua set up costs, international expansion and increased legal, business insurance, investor relations and wages related to our rapid expansion plans.
Other Income (Expense)
For the three months ended June 30, 2014, other income (expense), net increased 67.7% to $503,000 as compared to $300,000 for the three months ended June 30, 2013. The increase was primarily due to interest expense related to contingent acquisition debt, increase in factoring costs and the long-term mortgage related to the acquisition of 2400 Boswell, LLC that occurred at the end of the first fiscal quarter of 2013.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. As of June 30, 2014 we have recognized income tax expense of $195,000, which is our estimated federal and state income tax liability for the three months ended June 30, 2014. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. We continue to evaluate the realizability of the deferred tax asset, based upon achieved and estimated future results. If it is determined that it is more likely than not that the deferred tax asset will be realized, we will reverse all or a portion of the allowance as deemed appropriate. The difference between the effective rate of 26.4% and the Federal statutory rate of 35.0% is due to the change in our valuation allowance account, state income taxes (net of federal benefit), and certain permanent differences between our taxable and book income.
Net Income
For the three months ended June 30, 2014, net income decreased to $544,000 as compared to a net income of $662,000. The decrease of $118,000 was attributable to the decrease in income before income taxes of $42,000 and an increase in income tax provision of $76,000.
Six months ended June 30, 2014 compared to six months ended June 30, 2013
Revenues
For the six months ended June 30, 2014, our revenue increased 41.7% to $59,121,000 as compared to $41,720,000 for the six months ended June 30, 2013. The increase in revenue is attributed primarily to the increase in our product offerings and the increase in the number of distributors selling our product and the increase in the number of customers consuming our products as well as $6,133,000 in additional revenues derived from the acquisitions of Good Herbs, Inc., acquired April 28, 2014, Beyond Organic, Inc., acquired on May 1, 2014, Heritage Makers, Inc., acquired on August 14, 2013, GoFoods Global, LLC, acquired on October 1, 2013 and Biometics International Inc., acquired on November 19, 2013. The increase in revenues in commercial coffee is primarily due to the addition of green coffee business. The following table summarizes our revenue in thousands by segment:
|
|
For the six months ended
June 30,
|
|
|
Percentage change
|
|
Segment Revenues
|
|
2014
|
|
|
2013
|
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Gross Profit
For the six months ended June 30, 2014, cost of sales increased approximately 46.6% to $24,343,000 as compared to $16,605,000 for the six months ended June 30, 2013. The increase in cost of revenues is primarily attributable to the increase in revenues discussed above. Cost of revenues includes the cost of inventory, shipping and handling costs incurred by the Company in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets. Cost of sales in the commercial coffee segment increased approximately 61%, primarily due to the addition of the green coffee business which is sold at wholesale and set up costs associated with the Nicaragua operations.
For the six months ended June 30, 2014, gross profit increased approximately 38.5% to $34,778,000 as compared to $25,115,000 for the six months ended June 30, 2013. Below is a table of the gross margin percentages by segment:
|
|
Gross Profit %
For the six months
ended June 30,
|
|
Segment Gross Profit
|
|
2014
|
|
|
2013
|
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Gross profit as a percentage of revenues in the direct selling segment remained approximately the same for the first six months of 2014, compared with the same period in the prior year. The decrease in gross margin in the commercial coffee segment was primarily due to Nicaragua operations set up costs discussed above and the lower margin business from green coffee sales.
Operating Expenses
For the six months ended June 30, 2014, our operating expenses increased approximately 44.2% to $32,578,000 as compared to $22,587,000 for the six months ended June 30, 2013. Included in operating expense is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the six months ended June 30, 2014, distributor compensation increased 47.7% to $23,702,000 from $16,044,000 for the six months ended June 30, 2013. This increase was primarily attributable to the increase in revenues and distributors reaching higher rank levels. Distributor compensation as a percentage of direct selling revenues increased to 44.9% as compared to 43.0% for the six months ended June 30, 2013, primarily due to added incentive programs and higher level achievements by distributors. For the six months ended June 30, 2014, the sales and marketing expense increased 48.8% to $3,267,000 from $2,196,000 for the six months ended June 30, 2013 primarily due to the increase in revenues and additional selling costs related to the Heritage Makers acquisition, Beyond Organic acquisition, the Company’s annual national convention, and start-up costs related to MK collaborative line of business that the Company launched in the first quarter of the current year and costs related to the international expansion efforts that the Company expects to start generating revenues towards the end of the current year. For the six months ended June 30, 2014, general and administrative expense increased 29.0% to $5,609,000 from $4,347,000 for the six months ended June 30, 2013 primarily due to costs related to Heritage Makers, MK collaborative, Nicaragua set up costs, international expansion and increased legal, business insurance, investor relations and wages related to the rapid expansion.
Other Income (Expense)
For the six months ended June 30, 2014, other income (expense), net increased 58.8% to $883,000 as compared to $556,000 for the six months ended June 30, 2013. The increase was primarily due to interest expense related to contingent acquisition debt, increase in factoring costs and the long-term mortgage related to the acquisition of 2400 Boswell, LLC that occurred at the end of the first fiscal quarter of 2013.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. As of June 30, 2014 we have recognized income tax expense of $346,000, which is our estimated federal and state income tax liability for the six months ended June 30, 2014. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. We continue to evaluate the realizability of the deferred tax asset, based upon achieved and estimated future results. If it is determined that it is more likely than not that the deferred tax asset will be realized, we will reverse all or a portion of the allowance as deemed appropriate. The difference between the effective rate of 26.3% and the Federal statutory rate of 35.0% is due to the change in our valuation allowance account, state income taxes (net of federal benefit), and certain permanent differences between our taxable and book income.
Net Income
For the six months ended June 30, 2014, net income decreased to $971,000 as compared to a net income of $1,655,000. The decrease of $684,000 was attributable to the decrease in income before income taxes of $655,000 and an increase in income tax provision of $29,000.
Adjusted EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) as adjusted to remove the effect of stock based compensation expense or "Adjusted EBITDA", was $3,714,000 for the six months ended June 30, 2014 compared to $3,909,000 in the same period for the prior year.
Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.
Adjusted EBITDA is a non-GAAP financial measure. The Company calculates adjusted EBITDA by taking net income, and adding back the expenses related to interest, taxes, depreciation, amortization, stock based compensation expense and non-cash impairment loss, as each of those elements are calculated in accordance with GAAP. Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing the Company’s operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.
A reconciliation of the Company's adjusted EBITDA to net income for the six months ended June 30, 2014 and 2013 is included in the table below.
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Six months ended
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June 30,
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2014
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2013
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Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2014 we had cash and cash equivalents of approximately $4,144,000 and negative working capital of approximately $2,344,000 as compared to cash and cash equivalents of $4,320,000 and a working capital of approximately $1,048,000 as of December 31, 2013. The decrease in cash was primarily related to the Siles Plantation Family Group acquisition, offset by an increase in cash from operations.
Cash Flows
Net cash provided by operating activities for the six months ended June 30, 2014 was $3,500,000, as compared to net cash provided by operating activities of $2,195,000 for the six months ended June 30, 2013. Net cash provided by operating activities consisted of net income of $971,000, adjusted for depreciation and amortization of $1,265,000, stock based compensation expense of $247,000, other adjustments of $26,000 and changes in working capital of $991,000.
Net cash used in investing activities for the six months ended June 30, 2014 was $3,348,000, as compared to net cash used in investing activities of $956,000 for the six months ended June 30, 2013. Net cash used in investing activities of $1,248,000 consisted primarily of purchases of equipment to increase production capacity in the commercial coffee segment and expenditures related to leasehold improvements at the corporate facility, $2,100,000 in cash paid for the acquisition of the Siles Family Plantation Group. (See Note 4, to the Financial Statements).
Net cash used in financing activities was $273,000 for the six months ended June 30, 2014 as compared to net cashed used in financing activities of $601,000 in the same period in 2013 and was primarily attributed to payments to reduce notes payable and contingent acquisition debt including the addition of contingent debt related to Beyond Organic and Good Herbs’ acquisitions during the Company’s second quarter. (See Note 4, to the Financial Statements). This was offset by proceeds of $351,000 received from the exercise of warrants and proceeds of $553,000 from the factoring company.
Future Liquidity Needs
We believe that current cash balances, future cash provided by operations, and our accounts receivable factoring agreement will be sufficient to cover our operating and capital needs in the ordinary course of business for at least the next 12 months. Though our operations are currently meeting our working capital requirements, on July 31, 2014 the Company entered into a Note Purchase Agreement with accredited investors (see Note 15 to the financial statements). The net proceeds of approximately $3.9 million are to be used to fund the purchase of K-Cup manufacturing capabilities, to execute its option to acquire a second coffee plantation and to fund capital improvements on its Nicaragua coffee plantations and processing plant.
If we experience an adverse operating environment or unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
Off-balance Sheet Arrangements
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None.
Critical Accounting Policies
The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2013.
New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the threshold for a disposal to qualify as a discontinued operation. To be considered a discontinued operation a disposal now must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. This ASU also requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
ITEM 4. Controls and Procedures
(a)
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Evaluation of Disclosure Controls and Procedures
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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2014, the end of the quarterly fiscal period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
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Changes in Internal Control Over Financial Reporting
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There were no changes in our internal controls over financial reporting that occurred during our second quarter of fiscal year 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in its condensed consolidated balance sheets would not be material to the financial statements as a whole.
ITEM 1A. RISK FACTORS
Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described in our Annual Report on Form 10-K as filed with the SEC on March 27, 2014, and all of the information contained in our public filings before deciding whether to purchase our common stock. Except as set forth below, there have been no material revisions to the “Risk Factors” as set forth in our Annual Report on Form 10-K as filed with the SEC on March 27, 2014.
The failure to comply with the terms of our recently issued $4,350,000 of secured convertible notes could result in a default under the terms of the note and, if uncured, it could potentially result in action against the pledged assets of CLR Roasters.
We have issued $4,350,000 of convertible notes to investors in our recent private placement offering that are secured by the assets of CLR Roasters used in its coffee operations in Nicaragua, other than its inventory and accounts receivable. Stephan Wallach, our Chief Executive Officer, has also personally guaranteed the repayment of the notes, and has agreed not to sell, transfer or pledge 30 million shares of our common stock that he owns so long as his personal guaranty is in effect. The notes mature on July 30, 2019 and require us, among other things, to maintain the security interest given by CLR Roasters for the notes, make quarterly installments of interest, reserve a sufficient number of our shares of common stock for conversion requests and honor any conversion requests made by the investors to convert their notes into shares of our common stock. If we fail to comply with the terms of the notes, the note holders could declare a default under the notes and if the default were to remain uncured, as secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against CLR Roasters assets would likely have a serious disruptive effect on our coffee operations.
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our green coffee business in based in Nicaragua. We own one plantation and intend to purchase another in Nicaragua. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to the risks associated with international operations, including:
• The possibility that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
• the lack of well-established or reliable legal systems in certain areas;
• the presence of high inflation in the economies of international markets;
• the possibility that a foreign government authority might impose legal, tax or other financial burdens on us or our coffee operations, or sales force, due, for example, to the structure of our operations in various markets;
• the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
• the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
Currency exchange rate fluctuations could reduce our overall profits.
In 2013, we recognized approximately 7% of net sales in markets outside of the United States. In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.
Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.
As a multinational corporation, in several countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.
A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
Non-compliance with anti-corruption laws could harm our business.
Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA"). Any allegations that we are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any determination that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties. Although we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are aware that one of our direct marketing competitors is under investigation in the United States for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse publicity or increased scrutiny of our industry, our business could be harmed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share repurchases activity during the three months ended June 30, 2014 was as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
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Three months ended June 30, 2014
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Total Number of Shares Purchased (*)
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Average Price Paid per Share
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Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs
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Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
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April 1, 2014 to April 30, 2014
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May 1, 2014 to May 31, 2014
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June 1, 2014 to June 30, 2014
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$ |
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$ |
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(*) 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. The initial expiration date for the stock repurchase program was December 31, 2013. On October 7, 2013, the Board voted to extend the stock repurchase program until a date is set to revoke the program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Report
Exhibit No.
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Exhibit
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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XBRL Taxonomy Extension Schema Document
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XBRL Taxonomy Extension Calculation Linkbase Document
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XBRL Taxonomy Extension Definition Linkbase Document
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XBRL Taxonomy Extension Label Linkbase Document
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XBRL Taxonomy Extension Presentation Linkbase Document
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* Previously filed in the Original Filing
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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YOUNGEVITY INTERNATIONAL INC.
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(Registrant)
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/s/ Stephan Wallach
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Stephan Wallach
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Chief Executive Officer
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(Principal Executive Officer)
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Date: August 14, 2014
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/s/ David Briskie
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David Briskie
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Chief Financial Officer
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(Principal Financial Officer)
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Date: August 14, 2014
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