FOREVERGREEN WORLDWIDE CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of and for the period ended June 30, 2016 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2015 audited financial statements as reported in its Form 10-K. The results of operations for the three-month and six-month period ended June 30, 2016 are not necessarily indicative of the operating results for the full year ended December 31, 2016.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated balance sheets and statement of operations at June 30, 2016 include the books of ForeverGreen Worldwide Corporation (Nevada) and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidation.
Foreign Currency Translation
The Company's functional currency is recorded in various currencies, corresponding to the various foreign subsidiaries and its reporting currency is the United States dollar. Management has adopted ASC 830-20, "Foreign Currency Matters – Foreign Currency Transactions." All assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. For revenues and expenses, the weighted average exchange rate for the period is used. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in other comprehensive loss.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term nature of these financial instruments. The carrying amounts reported for notes payable approximate fair value because the underlying instruments are at interest rates which approximate current market rates.
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FOREVERGREEN WORLDWIDE CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Reclassification
Certain balances in previously issued financial statements have been reclassified to be consistent with the current period presentation.
Basic and Diluted Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. For the six-months ended June 30, 2016, there was 9,651,888 common stock equivalents from convertible notes that were excluded from the diluted EPS calculation as their effect is anti-dilutive. For the three-months ended June 30, 2016 there were 9,651,888 common stock equivalents from convertible notes that were included in the diluted EPS calculation.
Revenue Recognition
Revenues and costs of revenues are recognized during the period in which the products are provided. The Company applies the provisions of FASB Accounting Standards Codification ("ASC") 605-10, Revenue Recognition in Financial Statements ASC 605-10, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. ASC 605-10 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue for sale of products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.
The Company's source of revenue is from the sale of various food and other natural products. The Company recognizes the sale upon shipment of such goods. The Company offers a 100% satisfaction guarantee against defects for 30 days after the sale of their product except for a few circumstances. The Company extends this return policy to its members for a 30 day period and the consumer has the same return policy in effect against the member. All conditions of ASC 605-10 are met and the revenue is recorded upon sale, with an estimated allowance for returns where material.
Inventory
Inventory is recorded at the lower of cost or market and valued on a first-in, first-out basis. Inventory consists primarily of consumable food products and ingredients. Food products are discarded as they reach the expiration dates because the food products are made with natural foods containing a minimum of preservatives. Non-food products are reviewed periodically to determine any obsolescence and a reserve is booked when appropriate. The products have expiration dates that range from 3 months on some of the food products to 2 years for non-food products. On June 30, 2016 and December 31, 2015, the reserve for obsolete inventory had balances in the amount of $40,000 and $40,000, respectively.
Accounts Receivable and Member Advances
Normally the majority of accounts receivable are sales deposits processed by third parties from the prior one to four days that have not posted to the Company's bank account.
Members are required to pay for products prior to shipment. Members typically pay for products in cash, by wire transfer or by credit card. Accordingly, the Company seldom carries accounts receivable from members that are not distribution centers and any balances carried would be minimal. In order to increase business, the Company occasionally makes advances to new Members to assist them with building their businesses.
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FOREVERGREEN WORLDWIDE CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Valuation of Long-lived Assets
In accordance with ASC 360-10, the carrying values of the Company's long-lived assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that they may not be recoverable. The Company records impairment of long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company's assessment of events and circumstances indicated that an analysis for impairment of long-lived assets as of June 30, 2016 was not needed.
Intangible Assets
Intangible assets consist of patent costs, trademark costs and the customer base. Patent costs are costs incurred to develop and file patent applications. Trademark costs are costs incurred to develop and file trademark applications. If the patents or trademarks are approved, the costs are amortized using the straight-line method over the estimated lives of 7 years for patents and 10 years for trademarks. Unsuccessful patent and trademark application costs are expensed at the time the application is denied. Management assesses the carrying values of long-lived assets for impairment when circumstances warrant such a review. In performing this assessment, management considers current market analysis of the technology and future cash flows.
The Company recognizes impairment losses when undiscounted cash flows estimated to be generated from long-lived assets are less than the net carrying amount of intangible assets. No impairment was recognized, accordingly, during the periods ended June 30, 2016 and 2015.
New Accounting Pronouncements
After evaluating the recent accounting pronouncements through the date of this filing, the Company has concluded that application of these pronouncements will have no material impact on the Company's financial results.
NOTE 3 – DEBT
Convertible notes payable and notes payable as of June 30, 2016
| | | | | | |
TYPE | CONVERSION RATE PER SHARE |
ORIGINATION DATE | INTEREST RATE |
DUE DATE | BALANCE |
Convertible, Related party |
0.68 |
12/01/2015 |
10% |
12/31/2018 |
$ 1,501,024 |
Convertible, Related party | 0.15 | 10/7/2010 | 10% | 12/31/2017 | $ 45,000 |
Convertible, Related party | 0.20 | 1/19/2011 | 10% | 12/31/2017 | $ 200,000 |
Convertible, Non-related | 0.20 | 3/9/2010 | 10% | 12/31/2017 | $ 231,756 |
Convertible, Non-related | 0.20 | 3/14/2011 | 14% | 12/31/2015 | $ 100,000 |
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FOREVERGREEN WORLDWIDE CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 3 – DEBT – continued
Convertible notes payable and notes payable as of June 30, 2016 - continued
| | | | | | |
TYPE | CONVERSION RATE PER SHARE |
ORIGINATION DATE | INTEREST RATE |
DUE DATE | BALANCE |
Convertible, Non-related |
0.70 |
02/25/2015 |
14% |
12/31/2015 |
$ 891,718 |
Convertible, Non-related | 1.00 | 07/06/2015 | 12% | 08/31/2015 | $ 200,000 |
Convertible, Non-related | 0.35 | 05/27/2016 | 10% | 12/31/2018 | $ 500,000 |
Convertible, Non-related | 0.35 | 06/23/2016 | 10% | 12/31/2018 | $ 150,000 |
Non-related | NA | 03/01/2016 | 4.66% | 03/01/2018 | $ 440,214 |
Total | | | | | $ 4,259,712 |
During the period ended, March 31, 2016, the Company issued two promissory notes for $100,000 each. Both notes have an annual interest rate of 10% and are secured by the Company's inventory. The principal amount of the notes, and all accrued interest is due and payable on or before February 28, 2021. The notes have a conversion feature for common shares at $0.40 per share. Due to the fact that the trading price of our stock was greater than the stated conversion rate of this note, a total discount of $55,000 for the beneficial conversion was recorded against these notes and will be amortized against interest expense through the life of the notes. As of March 31, 2016 interest expense of $55,000 was recorded as part of the amortization of the beneficial conversion feature of these notes. Both of these notes were paid off on May 18, 2016.
During the period ended, March 31, 2016, the Company issued a promissory note for $506,158 in exchange for leasehold improvements to a Company warehouse and offices. This note has an annual interest rate of 4.66%. The principal amount of the note and all accrued interest is due and payable on or before March 1, 2018. As of June 30, 2016 the Company has paid $65,944 toward the note balance, leaving a balance of $440,214 due on this note.
During the period ended, June 30, 2016, the Company issued two promissory notes totaling $650,000. These notes have an annual interest rate of 10% and are secured by the Company's inventory. The principal amount of the notes and all accrued interest is due and payable on or before December 31, 2018. The notes have a conversion feature for common shares at $0.35 per share.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company has evaluated commitments and contingencies from the balance sheet date through the date the financial statements were issued and has determined that there are no such commitments and contingencies that would be a material impact on the financial statements.
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FOREVERGREEN WORLDWIDE CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 5 – INVENTORY
Inventories for June 30, 2016 and December 31, 2015 were classified as follows:
| | | | |
| | June 30, 2016 | | December 31, 2015 |
Raw Materials | $ | 1,681,527 | $ | 1,055,243 |
Finished Goods | | 1,137,611 | | 1,012,399 |
Total Inventory | | 2,819,138 | | 2,067,642 |
Less Reserve for Obsolete Inventory | | (40,000) | | (40,000) |
Total Inventory (net of reserve) | $ | 2,779,138 | $ | 2,027,642 |
NOTE 6 – LITIGATION SETTLEMENT
On August 24, 2015, Pruvit Ventures, Inc. filed a complaint in the United States District Court, Eastern District of Texas, Sherman Division, against Axcess Global LLC (Axcess) and ForeverGreen International LLC (FGI) alleging, among other things, breach of contract and unfair competition. Both Axcess and FGI answered the complaint and asserted counterclaims against Pruvit for, among other things, patent infringement, false advertising, and misappropriation of trade secrets. Both FGI and Axcess claimed injunctive relief as well as damages in an amount to be determined. As of February 25, 2016, Axcess Global Sciences, LLC, ForeverGreen International, LLC and Pruvit Ventures, Inc. reached an agreement to settle the existing lawsuit between them. The settlement resolves all claims between all parties to the litigation. Under the settlement agreement, the parties have agreed to dismiss the pending litigation and to refrain from any statements that disparage or criticize the other. Other terms of the settlement agreement are confidential.
NOTE 7 – GOING CONCERN
As reported in the accompanying consolidated financial statements the Company has a working capital deficit of $2,993,076 and accumulated deficit of $37,172,129 at June 30, 2016, negative cash flows from operations, and has experienced periodic cash flow difficulties. These factors combined, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans to address and alleviate these concerns are as follows:
The Company has reviewed its cost structure and is taking steps to implement cost saving measures deemed to be effective. This includes a reduction in labor force, restructuring of lease agreements, revised pricing of certain products to enhance sales incentives, and a marketing plan which involves more interaction with a broad scope of customers and Members.
Additionally, we expect we will take advantage of limited international expansion opportunities. These expansion opportunities will continue to be evaluated and those which provide the best opportunity for success will be pursued on a priority basis. New products have been and will continue to be introduced to bolster Member recruiting and sales. Management is reviewing improvements to the marketing plan which will enhance the opportunities for continued growth. The Company intends to seek debt and equity financing as necessary.
Management anticipates that any future additional capital needed for cash shortfalls will be provided by debt financing. We may pay these loans with cash, if available, or convert these loans into common stock. We may also issue private placements of stock to raise additional funding. Any private placement likely will rely upon
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FOREVERGREEN WORLDWIDE CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 7 – GOING CONCERN – continued
exemptions from registration provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock then our shareholders may experience dilution in the value per share of their common stock.
NOTE 8 – SUBSEQUENT EVENTS
On July 8, 2016, the Company received a $50,000 draw from its line of credit. This draw is from the same promissory note issued on May 27, 2016 with a conversion feature for common shares of $0.35 per share and has a due date of December 31, 2018.
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In this report references to "ForeverGreen," "the Company," "we," "us," and "our" refer to ForeverGreen Worldwide Corp. and its subsidiaries.
NOTE REGARDING FORWARD LOOKING STATEMENTS
The U.S. Securities and Exchange Commission ("SEC") encourages reporting companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as "may," "expect," "believe," "anticipate," "estimate," "project," or "continue" or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
ForeverGreen Worldwide is a holding company which operates through its wholly owned subsidiaries: ForeverGreen International, LLC, Productos Naturales Forevergreen Internacional en Mexico S.A. de C.V., FVGR Colombia S.A.S., 3-101-607360 S.A. (a Costa Rican corporation), ForeverGreen Chile SpA, Forevergreen (Aust & NZ) Pty, Ltd, ForeverGreen Singapore Pte Ltd, ForeverGreen Taiwan, ForeverGreen Japan (KK), ForeverGreen Peru SAC, ForeverGreen (HK) Limited (Hong Kong), ForeverGreen Marketing Corporation (Philippines), FG International LLP (India), Forevergreen Puerto Rico LLC, Forevergreen Dominicana S.R.L. (Dominican Republic), Forevergreen Peru, SAC, ForeverGreen SP z.o.o , (Poland), FGXpress do Brasil Comercio de Alimentos LTDA (Brazil), and ForeverGreen Team B.V. (Netherlands).
We intend to continue our emphasis as a total lifestyle company focused on bringing our domestic and international customers and Members our exclusive Ketopia line, PowerStrips, SolarStrips, and BeautyStrips products. In addition, through the Farmers Market we will continue to share our array of nutrition, supplement, and weight management products to our customers and Members. Our focus is to assist prospective Members in creating a home-based business with home business training, mentorship and accountability so that they can benefit from the residual income stream opportunities we offer. As our international markets mature, additional ForeverGreen products may also be introduced in each international market. We will seek relations with key vendors to continue developing innovative new products that are exclusive to our Members.
During the first six months of 2016 the Company experienced exciting updates and international restructuring that included new international payment methods, new product introductions, and growth in new areas.
In April, ForeverGreen expanded its exclusive Ketopia line with two new companion products. The Ketopia line was joined by the KetoCream shake. The KetoCream shake is the first of its kind and features the recommended ratios of fat, protein and carbohydrates one needs while in ketosis, making it the perfect complement to the Ketopia system. The vanilla/white chocolate taste can be used as a shake, delicious creamer for coffee or tea, or as a frozen dessert. The second companion product announced was KetoBoosters. KetoBoosters provide the user with both BHB and MCT oils. BHB is found naturally in many foods including eggs and milk. The "BHB salt" is simply a compound that consists of sodium (Na+), potassium (K+), and the ketone body B-hydroxybutyrate. MCT is medium chain triglycerides and is primarily comprised of caprylic and capric fatty acids which occurs naturally in coconut oil and other foods. The spray technology is a technological innovation providing a superior delivery system. Trends in the market are pointing to this type of delivery system around the world and we believe
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ForeverGreen is leading the way. To keep pace with our market and product growth, we anticipate the need to expand our Ketopia line internationally and offer a more synergistic global offering. The rewards of this strategy include increased sales performance and diversified market incomes.
In late April, management announced the Company has continued to make profitability a priority in 2016 with several advances in its business operations, some of which include cost cutting, trimming markets, staff reorganization among other changes to make operations more efficient. Those cost cutting measures reduced overhead by over $500,000 per month.
An important international growth highlight came from the Oceania region. The official launch of Ketopia in Australia was announced which attracted major networkers. With the strength of the launch, Joe Jensen, Chief Sales Officer, projected Oceania to become the next market to produce $1 million a month in sales.
In May, ForeverGreen officially kicked off a key campaign to drive product sales and attract new customers. The multi-stop tour crisscrossed the United States and Canada and encountered packed rooms. The focus of the meetings was business and business building activities in over forty cities, which produced a 9.1% increase in month-to-date sales.
In June, our Members in Europe received a ketogenic product called KetoBrü. KetoBrü is a cacao bean drink made with pure cacao. It can be enjoyed alone mixed in hot water, or added to coffee to create a great mocha flavor, but with the nutritional benefits of cacao. Our Members have expressed excitement about this product and the positive business building conversations it provides throughout Europe.
June also saw the milestone announcement regarding PowerStrips sales in excess of 30 million PowerStrips sold. PowerStrips continues to be our number-one selling product worldwide. This envelope model product is such a unique product which we believe has the ability to reach customers across the globe.
The Company will continue to look for opportunities to improve upon or expand the restructuring and cost cutting initiatives implemented in the first and second quarter. Management has instigated cost cutting measures to reduce overhead and anticipates the launch of new products to stabilize revenues. As the Company has prepared to introduce some of the new products mentioned above, inventory levels have been managed as new products are prepared for their introduction into the various markets. We continually manage our systems and logistics centers around the world to support the demand for our products and business opportunity. We continually challenge ourselves to continue to meet a high standard of quality and customer service and maintain the highest levels of Member satisfaction.
Overcoming periodic economic downturns and managing profitability will continue to require skilled personnel and responsive manufacturing and shipping facilities. Management intends to continue ongoing process improvement initiatives, especially in the areas of production and order fulfillment. These new operating efficiencies are targeted to address the current economic environment as well as prepare the Company for the upturn in demand as people continue to look for alternative income opportunities. We are actively positioning ForeverGreen to be the Company they can align with for the future as traditional employment options.
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Results of Operations
The following chart summarizes the consolidated statements of operations of ForeverGreen Worldwide and subsidiaries for the three and six month periods ending June 30, 2016 and 2015.
The Company recognized product revenues of $21,101,894 and shipping and other revenues of $1,640,138 for the six month period of 2016 compared to product revenues of $31,306,029, and shipping and other revenues of $1,971,928 for the comparable period in 2015. The Company recognized product revenues of $10,009,061 and shipping and other revenues of $789,015 for the second quarter of 2016 compared to product revenues of $15,190,411, and shipping and other revenues of $888,606 for the comparable period in 2015.
The Company experienced a 31.7% decrease in revenues totaling $10,535,925 for the 2016 six month period compared to the 2015 six month period. The Company experienced a 32.8% decrease in revenues totaling $5,280,941 for the 2016 second quarter compared to the 2015 second quarter. Our source of revenue is from the sale of various foods, other natural products, kits, and freight and handling to deliver products to the Members and customers. We recognize revenue upon shipment of a sales order. The decrease in revenues relates to the supply chain challenges the Company experienced in launching the Ketopia product line which resulted in sales less than expected and a decrease in the demand for the PowerStrip product. Additionally, as a result of the marketing focus on launching the Ketopia product line, there was less focus in 2016 on the PowerStrip product line than in 2015. Management has initiatives to increase global marketing focus on PowerStrips more during the remainder of 2016, emphasizing the global envelope model.
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Cost of sales consists primarily of the cost of procuring and packaging products, the cost of shipping product to our international subsidiaries, warehouses and to our Members, plus credit card processing fees. Cost of sales was approximately 30.3% of revenues totaling $6,908,221 for the six month period of 2016 compared to 24.7% of revenues totaling $8,232,744 for six month period of 2015. Cost of sales was approximately 27.9% of revenues totaling $3,015,135 for the second quarter of 2016 compared to 25.1% of revenues totaling $4,039,543 for second quarter of 2015. This percentage increase is primarily attributable to our newest product, Ketopia, as it has higher product costs, higher shipping costs, and royalty fees.
Management continues to negotiate better costs and terms with our key vendors to lower our cost of goods sold. New products have been and will continue to be introduced to bolster Member recruiting and product sales. In addition, management intends to improve our marketing plan to enhance Member leadership incentives and overall profitability. Our management will continue to scrutinize expenses related to our operating activities and order fulfillment to determine appropriate actions to take to reduce these costs.
Sales and marketing expenses were 39% of revenues totaling $8,874,451 for the 2016 six month period compared to 48.3% of revenues totaling $16,078,464 for 2015 six month period. Sales and marketing expenses were 37.5% of revenues totaling $4,056,821 for the 2016 second quarter compared to 49% of revenues totaling $7,890,203 for 2015 second quarter. This percentage decrease is due to lower commissions paid on sales related to the Ketopia product line.
General and administrative expenses were $7,719,320, or 33.9 % of revenue, for the 2016 six month period compared to $9,728,050, or 29.2% of revenue, for the 2015 six month period, representing a decrease of $2,008,730 from the prior year. General and administrative expenses were $3,387,969, or 33.4% of revenue, for the 2016 second quarter compared to $5,322,385 or 33.1% of revenue, for the 2015 second quarter, representing a decrease of $1,934,416 from the prior year. These decreases are primarily due to the implementation of cost cutting initiatives during 2016. The Company labor force has been reduced both domestically as well as internationally. These restructuring efforts involved employee severance agreements, some of which were mandated by local employment tax laws. Extra costs in legal fees were also incurred in the 2016 six month period as the Company restructured a number of lease arrangements and the litigation settlement with Pruvit Ventures, Inc.
Total other income was $427,161 for the 2016 six month period compared to other expense of $350,118 for the 2015 six month period. This decrease of $832,279 is primarily attributable to the gain on litigation settlement. Total other expense was $148,432 for the 2016 second quarter compared to other expense of $273,683 for the 2015 second quarter. This decrease of $180,251 is primarily attributable to international market expenses incurred in 2015 that did not occur in 2016.
The Company experienced a net loss of $277,800 for the 2016 six month period compared to a net loss of $1,111,419 for the 2015 six month period. This decrease of $833,619 is attributable to managements cost cutting initiatives and decreased revenues. The Company experienced net income of $244,720 for the second quarter compared to a net loss of $1,446,797 for the 2015 second quarter. This represents a decrease of $1,691,517 which again is attributable to the Company's cost cutting initiatives.
During the last couple of years, the Company has focused on top line revenue growth. The Company's focus has now shifted to driving Company profitability, which in turn will drive shareholder value. The six month period in 2016 has seen the Company implement changes, as discussed above regarding general and administrative expenses, which will reduce costs and put the Company in a much better position to deliver future positive shareholder results. It has been a number of years since the Company had a price increase on many of our products. The combined impact of a revenue reduction along with the additional costs associated with implementing a cost restructure are attributed to the reported loss for the first six months of 2016.
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Liquidity and Capital Resources
| | | | |
SUMMARY OF BALANCE SHEET | | Six months ended June 30, 2016 | |
Year ended December 31, 2015 |
| | (Unaudited) | | |
Cash and cash equivalents | $ | 181,759 | $ | 495,304 |
Total current assets | | 5,159,127 | | 3,994,888 |
Total assets | | 9,478,416 | | 7,781,438 |
Total current liabilities | | 8,152,203 | | 7,687,664 |
Total liabilities | | 11,220,197 | | 9,188,688 |
Accumulated deficit | | (37,172,129) | | (36,839,329) |
Total stockholders' deficit | $ | (1,741,781) | $ | (1,407,250) |
The Company's total assets increased to $9,478,416 as of June 30, 2016 compared to $7,781,438 as of December 31, 2015. The 21.0% increase of $1,696,978 is due to an increase in inventory of $751,494, other receivables of $794,113 related to a settlement of litigation, and the remaining increase is due to leasehold improvements and software capitalization. The litigation settlement occurred in the first quarter of 2016 and the Company recorded a receivable. Under the settlement agreement, the parties have agreed to dismiss the pending litigation and to refrain from any statements that disparage or criticize the other. Other terms of the settlement agreement are confidential.
The Company's total liabilities at June 30, 2016 were $11,220,197 compared to $9,188,688 at year end 2015, an increase of $2,031,509. This increase is attributable to a $893,282 increase in convertible notes payable, $680,267 increase in accounts payable which is in line with the increase in inventory, a new notes payable of $440,963 to pay for leasehold improvements, and the balance is due to increases in accrued expenses and deferred revenue.
As reported in the accompanying consolidated financial statements the Company has a working capital deficit of $2,993,076 and accumulated deficit of $37,172,129 at June 30, 2016, negative cash flows from operations, and has experienced periodic cash flow difficulties. These factors combined raise substantial doubt about the Company's ability to continue as a going concern. Management's plans to address and alleviate these concerns are as follows.
The Company has reviewed its cost structure and is taking steps to implement cost saving measures deemed to be effective. This includes a reduction in labor force, restructuring of lease agreements, revised pricing of certain products to enhance sales incentives, and a marketing plan which involves more interaction with a broad scope of customers and Members.
Additionally, we expect we will take advantage of limited international expansion opportunities. These expansion opportunities will continue to be evaluated and those which provide the best opportunity for success will be pursued on a priority basis. New products have been and will continue to be introduced to bolster Member recruiting and sales. Management is reviewing improvements to the marketing plan which will enhance the opportunities for continued growth. The Company intends to seek debt and equity financing as necessary.
Management anticipates that any future additional capital needed for cash shortfalls will be provided by debt financing. We may pay these loans with cash, if available, or convert these loans into common stock. We may also issue private placements of stock to raise additional funding. Any private placement likely will rely upon
16
exemptions from registration provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock then our shareholders may experience dilution in the value per share of their common stock.
Commitments and Obligations
The Company has an agreement with a related party, Marine Life Sciences, LLC, that supplies 100% of a the marine phytoplankton included in several top selling products. If that vendor were to discontinue the supply of this ingredient, our sales could decrease significantly. There are other providers of that ingredient in the world, however, the Company considers this provider to have the very best quality, which is nutritionally superior to other sources of this ingredient, and has no intention of obtaining it from any other provider.
As of June 30, 2016 the Company has $1,746,024 in convertible notes payable to related parties and $2,073,474 in convertible notes payable, with $1,191,718 of this amount past due or due within the next 12 months. The Company also has notes payable of $440,214. Management anticipates it will satisfy these notes payable through increased revenues and/or negotiation of new payment due dates.
Off-balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
Critical Accounting Estimates
The Company records impairment of long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company did an annual analysis for the period ended June 30, 2016 and determined no adjustment to long-lived assets was needed.
The Company adjusts its inventories to lower of cost or market. Additionally we adjust the carrying value of our inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management's assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold.
In determining the allowance for doubtful accounts, the Company evaluates the collectability of its accounts
receivable and member advances based on a combination of factors. In circumstances where the Company is aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filings), the Company records a specific allowance for doubtful accounts against amounts due to reduce the net recognized receivable to the amount it reasonably believe will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due. If circumstances change (e.g., unexpected material adverse changes in a major customer's ability to meet its financial obligation to us or higher than expected customer defaults), the Company's estimates of the recoverability of amounts could differ from the actual amounts recovered.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and concluded that our disclosure controls and procedures were effective.
Changes to Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has determined that there were no changes made in the implementation of our internal controls over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 6. EXHIBITS
Part I Exhibits
