UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission file number:
YOUNGEVITY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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(Address of Principal Executive Offices) | (Zip Code) |
(
Registrant’s Telephone Number, Including Area Code
Not applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | |
Emerging growth company | |
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At June 17, 2022, the issuer had
YOUNGEVITY INTERNATIONAL, INC.
TABLE OF CONTENTS
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Item 1. |
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Condensed Consolidated Balance Sheets at March 31, 2020 (unaudited) & December 31, 2019 |
1 | |
2 | ||
3 | ||
4 | ||
6 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) |
7 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
40 |
Item 3. |
52 | |
Item 4. |
52 | |
Item 1. |
56 | |
Item 1A. |
56 | |
Item 2. |
57 | |
Item 3. |
57 | |
Item 4. |
58 | |
Item 5. |
58 | |
Item 6. |
58 | |
59 |
Item 1. Financial Statements
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
March 31, 2020 | December 31, 2019 | |||||||
ASSETS | (Unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Income tax receivable | ||||||||
Inventory | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Deferred tax assets | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | $ | ||||||
Accrued distributor compensation | ||||||||
Accrued expenses | ||||||||
Deferred revenues, current portion | ||||||||
Other current liabilities | ||||||||
Operating lease liabilities, current portion | ||||||||
Finance lease liabilities, current portion | ||||||||
Line of credit | ||||||||
Notes payable, net of debt discounts, current portion (Note 3) | ||||||||
Notes payable, net of debt discounts, current portion | ||||||||
Convertible notes payable, net of debt discounts, current portion | ||||||||
Contingent acquisition debt, current portion | ||||||||
Warrant derivative liability | ||||||||
Total current liabilities | ||||||||
Operating lease liabilities, net of current portion | ||||||||
Finance lease liabilities, net of current portion | ||||||||
Notes payable, net of current portion (Note 3) | ||||||||
Notes payable, net of debt discounts, net of current portion | ||||||||
Convertible notes payable, net of debt discounts, net of current portion | ||||||||
Contingent acquisition debt, net of current portion | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholders’ Equity | ||||||||
Preferred stock, $ par value: shares authorized | ||||||||
Series A – convertible preferred stock; shares issued and outstanding at March 31, 2020 and December 31, 2019 | ||||||||
Series B – convertible preferred stock; and shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | ||||||||
Series D – cumulative redeemable perpetual preferred stock; and shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively; $ liquidation preference at March 31, 2020 | ||||||||
Common stock, $ par value: shares authorized; and shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive income | ||||||||
Total stockholders’ equity | ||||||||
Total Liabilities and Stockholders’ Equity | $ | $ |
See accompanying notes to condensed consolidated financial statements.
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
Three Months Ended March 31, |
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2020 |
2019 |
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Revenues |
$ | $ | ||||||
Cost of revenues |
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Gross profit |
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Operating expenses |
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Distributor compensation |
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Sales and marketing |
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General and administrative |
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Total operating expenses |
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Operating loss |
( |
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( |
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Other income (expense), net |
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Interest expense, net |
( |
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( |
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Change in fair value of warrant derivative liability |
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Total other income (expense), net |
( |
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Net loss before income taxes |
( |
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( |
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Income tax provision (benefit) |
( |
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Net loss |
( |
) |
( |
) |
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Preferred stock dividends |
( |
) |
( |
) |
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Net loss attributable to common stockholders |
$ | ( |
) |
$ | ( |
) |
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Net loss per share, basic |
$ | ( |
) |
$ | ( |
) |
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Net loss per share, diluted (Note 1) |
$ | ( |
) |
$ | ( |
) |
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Weighted average shares outstanding, basic |
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Weighted average shares outstanding, diluted |
See accompanying notes to condensed consolidated financial statements.
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
Three Months Ended March 31, |
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2020 |
2019 |
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Net loss |
$ | ( |
) |
$ | ( |
) |
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Foreign currency translation |
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Total other comprehensive income |
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Comprehensive loss |
$ | ( |
) |
$ | ( |
) |
See accompanying notes to condensed consolidated financial statements.
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
Preferred Stock | Additional | Accumulated Other | ||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series D | Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for conversion of Series B preferred stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for vesting of RSU | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for debt financing, net of issuance costs | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series D preferred stock through underwritten registered public offering, net | ||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of common stock issued related to advance for working capital (recorded in prepaid expenses and other current assets) | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Equity-based compensation for services | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ |
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
Series A Preferred Stock |
Series B Preferred Stock |
Common Stock |
Additional Paid-in |
Accumulated Other Comprehensive |
Accumulated |
Total Stockholders' |
||||||||||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Income (Loss) |
Deficit |
Equity |
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Balance at December 31, 2018 |
$ | $ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||||||||||||||
Net loss |
- | - | - | ( |
) |
( |
) |
|||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
- | - | - | |||||||||||||||||||||||||||||||||||||
Issuance of common stock from at-the-market offering and exercise of stock options and warrants, net |
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Issuance of common stock for services |
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Issuance of common stock in private offering, net of issuance costs |
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Issuance of common stock for acquisition of Khrysos |
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Issuance of common stock for debt financing, net of issuance costs |
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Issuance of common stock for true-up shares |
- | - | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock for convertible note financing, net of issuance costs |
- | - | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock related to purchase of land - H&H |
- | - | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock related to purchase of trademark - H&H |
- | - | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock related to advance for working capital (note receivable) net of settlement of debt |
- | - | ||||||||||||||||||||||||||||||||||||||
Release of warrant liability upon exercise of warrants |
- | - | - | |||||||||||||||||||||||||||||||||||||
Release of warrant liability upon reclassification of liability to equity |
- | - | - | |||||||||||||||||||||||||||||||||||||
Warrant issued upon vesting for services |
- | - | - | |||||||||||||||||||||||||||||||||||||
Dividends on preferred stock |
- | - | - | ( |
) |
( |
) |
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Stock based compensation expense |
- | - | - | |||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 |
$ | $ | $ | $ | $ | $ | ( |
) |
$ |
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31, |
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2020 |
2019 |
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Cash Flows from Operating Activities: |
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Net loss |
$ | ( |
) |
$ | ( |
) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Equity-based compensation for services |
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Amortization of debt discounts and issuance costs |
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Change in fair value of warrant derivative liability |
( |
) |
( |
) |
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Change in fair value of contingent acquisition debt |
( |
) |
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Decrease in allowance for accounts receivables |
( |
) |
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Change in allowance for other receivable (Note 3) |
( |
) |
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Change in allowance for notes receivable (Note 3) |
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Changes in inventory reserve |
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Loss on disposal of property and equipment |
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Stock issuance for true-up shares |
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Noncash operating lease expense |
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Changes in operating assets and liabilities, net of effect from business combinations: |
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Accounts receivable |
( |
) |
( |
) |
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Income tax receivable |
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Inventory |
( |
) |
( |
) |
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Prepaid expenses and other current assets |
( |
) |
( |
) |
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Other assets |
( |
) |
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Accounts payable |
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Accrued distributor compensation |
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Deferred revenues |
( |
) |
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Accrued expenses and other current liabilities |
( |
) |
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Operating lease liabilities |
( |
) |
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Other long-term liabilities |
( |
) |
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Net Cash Used in 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 issuance of promissory notes, net of offering costs |
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Proceeds from private placement of common stock, net of offering costs |
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Proceeds from at-the-market-offering and exercise of stock options and warrants, net |
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Proceeds from the issuance of Series D preferred stock |
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Proceeds from line of credit, net |
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Payments of notes payable |
( |
) |
( |
) |
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Payments of contingent acquisition debt |
( |
) |
( |
) |
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Payments of finance leases |
( |
) |
( |
) |
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Payments of dividends |
( |
) |
( |
) |
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Net Cash Provided by Financing Activities |
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Foreign Currency Effect on Cash |
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Net decrease 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 |
$ | $ | ||||||
Supplemental Disclosures of Cash Flow Information |
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Cash paid during the period for: |
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Interest |
$ | $ | ||||||
Income taxes |
$ | $ | ||||||
Supplemental Disclosures of Noncash Investing and Financing Activities |
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Purchases of property and equipment funded by mortgage agreements |
$ | $ | ||||||
Purchases of property and equipment funded by financing leasing agreements |
$ | $ | ||||||
Decrease in fair value of common stock issued for in relation to advance for working capital (Note 3) |
$ | $ | ||||||
Issuance of common stock for promissory note financing (Note 10) |
$ | $ | ||||||
Fair value of stock issued for property and equipment (land) |
$ | $ | ||||||
Fair value of stock issued for purchase of intangibles (tradename) |
$ | $ | ||||||
Fair value of stock issued for note receivable, net of debt settlement |
$ | $ | ||||||
Fair value of stock issued for services |
$ | $ | ||||||
Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 2) |
$ | $ | ||||||
Dividends declared but not paid at the end of period (Note 10) |
$ | $ |
See accompanying notes to condensed consolidated financial statements.
Youngevity International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
Description of Business
Youngevity International, Inc. (the “Company”) operates in
Information on the operations of the Company’s three segments is as follows:
● | The direct selling segment is operated through the Company’s three domestic subsidiaries, AL Global Corporation, 2400 Boswell LLC, and Youngevity Global LLC, and twelve foreign subsidiaries: |
● | Youngevity Australia Pty. Ltd., |
● | Youngevity NZ, Ltd., |
● | Youngevity Mexico S.A. de CV, |
● | Youngevity Russia, LLC, |
● | Youngevity Israel, Ltd., |
● | Youngevity Europe SIA (Latvia), |
● | Youngevity Colombia S.A.S, |
● | Youngevity International Singapore Pte. Ltd., |
● | Mialisia Canada, Inc., |
● | Youngevity Global LLC, Taiwan Branch, |
● | Youngevity Global LLC, Philippine Branch, and |
● | Youngevity International (Hong Kong). |
● | The commercial coffee business is operated through the Company’s wholly-owned subsidiary, CLR Roasters LLC (“CLR”) and its wholly-owned subsidiary, Siles Plantation Family Group S.A. (“Siles”). |
● | The commercial hemp business is operated through the Company’s wholly-owned subsidiary, Khrysos Industries, Inc., a Delaware corporation (“KII”). KII acquired the assets of Khrysos Global Inc., a Florida corporation (“Khrysos Global”), in February 2019 and the wholly-owned subsidiaries of Khrysos Global, INXL Laboratories, Inc., a Florida corporation (“INXL”) and INX Holdings, Inc., a Florida corporation (“INXH”). |
In the following text, the term “the Company” refers collectively to the Company and its subsidiaries.
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 (the “SEC”) 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.
Youngevity International, Inc. (the “Company”) consolidates all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements presented at March 31, 2020 and for the three months ended March 31, 2020 and 2019 are unaudited. In the opinion of management, these unaudited condensed consolidated financial statements reflect all normal recurring and other adjustments necessary for a fair presentation, and to make the financial statements not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on June 25, 2021. The results for interim periods are not necessarily indicative of the results for the entire year.
Summary of Significant Accounting Policies
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements follows:
Segment Information
The Company has
During the three months ended March 31, 2020, the Company derived approximately
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes and related valuation allowances, fair value of derivative liabilities, uncertain tax positions, loss contingencies, fair value of options granted under the Company’s stock and equity-based compensation plan, fair value of assets and liabilities acquired in business combinations, finance leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, value of contingent acquisition debt, inventory obsolescence, and sales returns.
Actual results may differ from previously estimated amounts and such differences may be material to the condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared and presented on a basis assuming the Company will continue as a going concern. The Company has sustained significant net losses during the three months ended March 31, 2020 and 2019 of approximately $
Management has assessed the Company’s ability to continue as a going concern and concluded that additional capital will be required during the twelve-months subsequent to the filing date of this Quarterly Report on Form 10-Q. The timing of when the additional capital will be required is uncertain and highly dependent on factors discussed below. There can be no assurance that the Company will be able to execute license or purchase agreements or to obtain equity or debt financing, or on terms acceptable to it. Factors within and outside the Company’s control could have a significant bearing on its ability to obtain additional financing. As a result, management has determined that there are material uncertainties that raise substantial doubt upon the Company’s ability to continue as a going concern.
The Company has and continues to take actions to alleviate the cash used in operations. During the three months ending March 31, 2020, the Company reported total revenue of $
The outbreak of COVID-19 and resulting pandemic resulted in significant contraction of economies around the world and interrupted global supply chains as many governments issued stay-at-home orders to combat COVID-19. The outbreak of COVID-19 also impacted the Company’s ability to properly staff and maintain its domestic and international warehousing operations due to stay-at-home orders issued within various locations where the Company operates warehouse and shipping operations. The Company took actions to mitigate the impact but cannot assert that future stay-at-home orders or further restrictive orders will not have an impact on future operations. The Company experienced changes in product mix demand, with demand increasing toward health-oriented products and weakening for non-health related products. Such changes in demand may have a significant impact on revenues, margins and net operating profit in the future. The outbreak also impacted the Company’s ability to obtain some ingredients and packaging as well as ship products in some markets. The Company’s supply chain and logistics incurred some interruptions and cost impacts to date, and the Company could experience more significant interruptions and cost impacts. The Company’s suppliers of raw material and supplies have and could continue to be impacted by geopolitical events, such as the war in Ukraine, thus interrupting the Company’s supply chain. Additionally, the Company’s customers may experience interruptions from other suppliers that could cause a customer to delay or cancel orders. These factors and other events have negatively impacted the Company’s sales and operations and will likely continue to negatively affect the Company’s business and financial results. The Company is unable to predict the possible future effect on the demand for products sold by the Company, and the related revenues, margins and operating profit due to these events.
In addition, the outbreak of the COVID-19 coronavirus has disrupted the Company’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in the Company’s office or other workplace, or due to quarantines. COVID-19 illness could also impact members of the Company’s board of directors resulting in absenteeism from meetings of the directors or committees of directors and making it more difficult to convene the quorums of the full board of directors or its committees needed to conduct meetings for the management of the Company’s affairs.
The Company continues to seek and obtain equity or debt financing on terms that are acceptable to the Company. Depending on market conditions, there can be no assurance that additional capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company or to its stockholders.
These financial statements have been prepared on a going concern basis, which asserts the Company has the ability in the near term to continue to realize its assets and discharge its liabilities and commitments in a planned manner giving consideration to the above and expected possible outcomes. The financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty. Within the current operating environment due to the declared national emergency, related to COVID 19 combined with the management plans described above the Company cannot assert that the doubt of the Company’s ability to continue as a going concern has been substantially alleviated, Conversely, if the going concern assumption is not appropriate, adjustments to the carrying amounts of the Company’s assets, liabilities, revenues, expenses and balance sheet classifications may be necessary, and these adjustments could be material.
Revenue Recognition
The Company recognizes revenue from product sales when the following five steps are completed: i) Identify the contract with the customer; ii) Identify the performance obligations in the contract; iii) Determine the transaction price; iv) Allocate the transaction price to the performance obligations in the contract; and v) Recognize revenue when (or as) each performance obligation is satisfied.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
The transaction price for all sales is based on the price reflected in the individual customer's contract or purchase order. Variable consideration has not been identified as a significant component of the transaction price for any of the Company’s transactions.
Independent distributors receive compensation which is recognized as distributor compensation in the Company’s consolidated statements of operations. Due to the short-term nature of the contract with the customers, the Company accrues all distributor compensation expense in the month earned and pays the compensation the following month.
The Company also charges fees to become a distributor, and earn a position in the network genealogy, which are recognized as revenue in the period received. The Company’s distributors are required to pay a one-time enrollment fee and receive a welcome kit specific to that country or region that consists of forms, policy and procedures, selling aids, access to the Company’s distributor website and a genealogy position with no down line distributors.
The Company has determined that most contracts will be completed in less than one year. For those transactions where all performance obligations will be satisfied within one year or less, the Company is applying the practical expedient outlined in ASC 606-10-32-18. This practical expedient allows the Company not to adjust promised consideration for the effects of a significant financing component if the Company expects at contract inception the period between when the Company transfers the promised good or service to a customer and when the customer pays for that good or service will be one year or less. For those transactions that are expected to be completed after one year, the Company has assessed that there are no significant financing components because any difference between the promised consideration and the cash selling price of the good or service is for reasons other than the provision of financing.
Revenue recognition by segment is as follows:
Direct Selling. Direct distribution sales are made through the Company’s network (direct selling segment), which is a web-based global network of customers and distributors. The Company’s independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. The Company considers itself to be an e-commerce company whereby personal interaction is provided to customers by its independent sales network. Sales generated from direct distribution includes; health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products and other service-based products.
Revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Commercial Coffee - Roasted Coffee. The Company engages in the commercial sale of roasted coffee through CLR, which is sold under a variety of private labels through major national sales outlets and to customers including cruise lines and office coffee service operators, and under its own Café La Rica brand, Josie’s Java House Brand, Javalution brands and Café Cachita as well as through its distributor network within the direct selling segment.
Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Commercial Coffee - Green Coffee. The commercial coffee segment includes the sale of green coffee beans, which are sourced from the Nicaraguan rainforest.
Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Revenues where the Company sells green coffee beans that it has milled and where the Company has determined it is the agent with regard to the green coffee beans is recorded at net or recorded to reflect only the milling services provided. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Commercial Hemp. In the commercial hemp segment, the Company develops, manufactures, and sells equipment and related services to customers which enable them to extract CBD oils from hemp stock. The Company provides hemp growers, feedstock suppliers, and CBD crude oil producers the use of equipment, intellectual capital, production consultancy, tolling services, and wholesale CBD channel sales capabilities. The Company is also engaged in hemp-based CBD extraction technology including tolling processing which converts hemp crude oil to hemp extracts such as full spectrum distillate, and cannabinoid isolate (CBD, cannabigerol or CBG, cannabinol or CBN). The Company offers customers turnkey manufacturing solutions in extraction services and end-to-end processing systems. In addition, the Company provides a broad range of capabilities in regard to formulation, quality control, and testing standards with our CBD products, including potency analysis for its supply partners of hemp derived CBD products. The Company follows all guidelines for Current Good Manufacturing Practices ("CGMP") and our hemp extracts are processed, produced, and tested throughout the manufacturing process to confirm that the cannabinoid content meets strict company standards.
Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Contract Balances. Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records contract assets when performance obligations are satisfied prior to invoicing.
Contract liabilities are reflected as deferred revenues and customer deposits in accrued expenses, deferred revenue, other current liabilities and other long-term liabilities on the Company’s consolidated balance sheets. Contract liabilities relate to payments invoiced or received in advance of completion of performance obligations and are recognized as revenue upon the fulfillment of performance obligations. The Company recognizes deferred revenue in its direct selling, commercial coffee and commercial coffee segments.
In January 2020, the Company introduced a rewards program in the direct selling segment where its distributors earn points awards that can be redeemed for the future product purchases. These points awards are earned by the distributors through the purchase of products or through actions and participation in non-product purchase activities. The Company records the points earned through the purchase of product by reducing revenue and creates the liability at the point of purchase. Award points earned through non-product purchasing activities are recorded as marketing expenses and creates the liability at the time the distributor performs the non-revenue activity.
The deferred revenue related to Heritage Maker’s product line obligation for points purchased by customers represents cash payments received that have not yet been redeemed for product. Revenue is recognized when customers redeem the points, and the product is shipped. Deferred revenues related to pre-enrollment in conventions and distributor events primarily related to the Company’s 2020 events. The Company does not recognize revenue until the conventions or distributor events have occurred.
The Company also records deferred revenue within its direct selling, commercial coffee and commercial hemp segments related to payments made by customers for unshipped orders.
Deferred costs relate to Heritage Makers prepaid commissions are recorded in prepaid expenses and other current assets on the Company’s consolidated balance sheets and recognized in expense at the time the related revenue is recognized.
Plantation Costs
The Company’s commercial coffee segment includes the results of Siles, which is comprised of (i) a
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation,” which establishes accounting for equity instruments exchanged for services from employees and non-employees. Under such provisions, cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense net of forfeitures, under the straight-line method, over the vesting period of the equity grant. Forfeitures are recorded as they occur.
The Company uses the Black-Scholes to estimate the fair value of stock options. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the expected term of the option. The expected life is based on the contractual life of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, "Income Taxes," under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial statement and tax basis of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.
Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period.
The Company files income tax returns in the 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.
Commitments and Contingencies
The Company is from time to time, the subject of claims and suits arising out of matters related to the Company’s business. The Company is party to litigation at the present time and may become party to litigation in the future. In general, litigation claims can be expensive, and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results. It is not possible to predict the final resolution of the current litigation to which the Company is party to, and the impact of certain of these matters on the Company’s business, results of operations, and financial condition could be material. Regardless of the outcome, litigation has adversely impacted the Company’s business because of defense costs, diversion of management resources and other factors.
Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss 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, restricted stock, warrants, convertible preferred stock and common stock associated with the Company's convertible notes based on the average stock price for each period using the treasury stock method. Potentially dilutive shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive.
In periods where a net loss is presented, all potentially dilutive securities are anti-dilutive and are excluded from the computation of diluted net loss per share. Potentially dilutive securities for the three months ended March 31, 2020 and 2019 were
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Warrants | ||||||||
Preferred stock conversions | ||||||||
Principal conversions on convertible notes | ||||||||
Stock options | ||||||||
Restricted stock units | ||||||||
Total |
The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants, net of tax from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. During the three months ended March 31, 2019, the Company recorded a valuation gain on the fair value of the warrant derivative liability net of tax of approximately $
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Loss per Share – Basic | ||||||||
Numerator for basic loss per share | $ | ( | ) | $ | ( | ) | ||
Denominator for basic loss per share | ||||||||
Loss per common share – basic | $ | ( | ) | $ | ( | ) | ||
Loss per Share – Diluted | ||||||||
Numerator for basic loss per share | $ | ( | ) | $ | ( | ) | ||
Adjust: Fair value of dilutive warrants outstanding | ( | ) | ||||||
Numerator for dilutive loss per share | $ | ( | ) | $ | ( | ) | ||
Denominator for basic loss per share | ||||||||
Plus: Incremental shares underlying “in the money” warrants outstanding | ||||||||
Denominator for diluted loss per share | ||||||||
Loss per common share – diluted | $ | ( | ) | $ | ( | ) |
Recently Issued and Adopted Accounting Pronouncements
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the Company’s financial statements. During the three months ended March 31, 2020, the Company did not adopt any accounting pronouncements.
Note 2. Acquisitions and Business Combinations
During 2019, the Company entered into two acquisitions which are detailed below. The acquisitions were conducted to allow the Company to enter into the hemp market and expand the Company’s distributor network within the direct selling segment, enhance and expand its product portfolio, and diversify its product mix. As a result of the Company’s business combinations, the Company’s distributors and customers will have access to the acquired company’s products and acquired company’s distributors and customers will gain access to products offered by the Company.
As such, the major purpose for 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.
During the three months ended March 31, 2020, the Company did not have any acquisitions.
2019 Acquisitions
BeneYOU
On October 31, 2019, the Company entered into an asset purchase agreement with an effective date of November 1, 2019, with BeneYOU, LLC, a Utah limited liability company (“BeneYOU”), and Ryan Anderson (the “BeneYOU Representing Party”), for the Company to acquire certain assets of BeneYOU to including all of the outstanding equity of BeneYOU Holding, LLC, a Utah limited liability company (“BeneYOU Holding”), collectively “BeneYOU”. In accordance with the asset purchase agreement, the Company also acquired BeneYOU’s customer and distributor organization lists, all intellectual property, product formulations, products, product packaging, product registrations, licenses, marketing materials, sales tools and swag, and all saleable inventory. BeneYOU’s flagship brand Jamberry has an extensive line of nail products with a core competency in social selling, and two other brands including Avisae which focuses on the gut health and the M.Global brand of products that includes hydration products.
The Company is obligated to make monthly payments based on a percentage of the BeneYOU distributor revenue derived from sales of the Company’s products and a percentage of royalty revenue derived from sales of BeneYOU products until the earlier of the date that is ten years from the closing date or such time as the Company has paid to BeneYOU aggregate cash payments of the BeneYOU distributor revenue and royalty revenue equal to the maximum aggregate purchase price of $
The contingent consideration’s estimated fair value at the date of acquisition was approximately $
The purchase agreement contains customary representations, warranties and covenants of the Company, BeneYOU and the BeneYOU Representing Party. Subject to certain customary limitations the BeneYOU Representing Party have agreed to indemnify the Company and BeneYOU against certain losses related to, among other things, breaches of the BeneYOU Representing Party’s representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the purchase agreement.
The Company recorded the fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows (in thousands):
Contingent consideration | $ | |||
Aggregate purchase price | $ |
The following table summarizes the fair values of the assets acquired and liabilities assumed in November 2019 (in thousands):
Current assets (excluding inventory) | $ | |||
Inventory (net of $ reserve) | ||||
Trademarks and trade name | ||||
Distributor organization | ||||
Customer relationships | ||||
Non-compete agreement | ||||
Goodwill | ||||
Current liabilities | ( | ) | ||
Net assets acquired | $ |
The reported fair value of intangible assets acquired of $
Goodwill of $
The pro-forma effect assuming the business combination with BeneYOU discussed above had occurred at the beginning of 2019 is not presented as the information was not available.
Khrysos Global, Inc.
On February 12, 2019, the Company and KII entered into an asset and equity purchase agreement (the “AEPA”) with Khrysos Global, and Leigh Dundore and Dwayne Dundore (collectively, the “Khrysos Representing Party”), for KII to acquire substantially all the assets of Khrysos Global and all the outstanding equity of INXL and INXH. The collective business manufactures proprietary systems to provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts.
The aggregate consideration payable for the assets of Khrysos Global and the equity of INXL and INXH of $
At closing on February 15, 2019, Khrysos Global and the Khrysos Representing Party received an aggregate of
The AEPA contains customary representations, warranties and covenants of the Company, Khrysos Global and the Khrysos Representing Party. Subject to certain customary limitations Khrysos Global and the Khrysos Representing Party have agreed to indemnify the Company and KII against certain losses related to, among other things, breaches of the Khrysos Representing Party’s representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the AEPA.
In conjunction with the acquisition and organization of KII, the Company retained Dwayne Dundore as President of KII. Previously agreed-upon equity compensation in the form of warrants that was to be provided as part of the closing to Dwayne Dundore by the Company were mutually terminated. Effective September 17, 2020, Dwayne Dundore was no longer employed with KII or the Company.
The Company has estimated fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows (in thousands):
Present value of cash consideration | $ | |||
Estimated fair value of common stock issued | ||||
Aggregate purchase price | $ |
The following table summarizes the estimated and as adjusted fair values of the assets acquired and liabilities assumed in February 2019 (in thousands):
Current assets | $ | |||
Inventory | ||||
Property, plant and equipment |