UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2013 |
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-54900
YOUNGEVITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 90-0890517 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2400 Boswell Road, Chula Vista, CA 91914 |
(Address of principal executive offices) (Zip Code) |
Registrant’s telephone number, including area code (619) 934-3980
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 8, 2013, the issuer had 388,838,547 shares of its Common Stock issued and outstanding.
YOUNGEVITY INTERNATIONAL, INC.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| Youngevity International, Inc. and Subsidiaries | ||||||||
| Condensed Consolidated Balance Sheets | ||||||||
| (In thousands, except share amounts) | ||||||||
| As of | ||||||||
| September 30, 2013 | December 31, 2012 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 4,394 | $ | 3,025 | ||||
| Accounts receivable, due from factoring company | 769 | 836 | ||||||
| Accounts receivable, trade | 109 | - | ||||||
| Note receivable, related party | - | 330 | ||||||
| Inventory | 6,028 | 4,675 | ||||||
| Prepaid expenses and other current assets | 731 | 430 | ||||||
| Total current assets | 12,031 | 9,296 | ||||||
| Property and equipment, net | 4,687 | 1,343 | ||||||
| Intangible assets, net | 9,660 | 9,114 | ||||||
| Goodwill | 5,596 | 5,154 | ||||||
| $ | 31,974 | $ | 24,907 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 2,769 | $ | 2,144 | ||||
| Accrued distributor compensation | 2,864 | 2,992 | ||||||
| Accrued expenses | 1,432 | 1,426 | ||||||
| Deferred revenues | 2,027 | - | ||||||
| Other current liabilities | 153 | 238 | ||||||
| Capital lease payable, current portion | 101 | 71 | ||||||
| Notes payable, current portion | 318 | 366 | ||||||
| Contingent acquisition debt, current portion | 825 | 619 | ||||||
| Total current liabilities | 10,489 | 7,856 | ||||||
| Other liabilities | - | 75 | ||||||
| Capital lease payable, less current portion | 52 | 101 | ||||||
| Deferred tax liability | 742 | 742 | ||||||
| Notes payable, less current portion | 5,011 | 1,189 | ||||||
| Contingent acquisition debt, less current portion | 4,896 | 5,065 | ||||||
| Total liabilities | 21,190 | 15,028 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| Youngevity International, Inc. stockholders' equity: | ||||||||
| Convertible Preferred Stock, $0.001 par value: 100,000,000 shares authorized; 211,135 shares issued and outstanding at September 30, 2013 and December 31, 2012 | - | - | ||||||
| Common Stock, $0.001 par value: 600,000,000 share authorized; 389,037,018 and 389,599,848 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively | 389 | 389 | ||||||
| Note receivable for stock purchase | - | (62 | ) | |||||
| Additional paid-in capital | 165,515 | 165,017 | ||||||
| Accumulated deficit | (154,799 | ) | (155,266 | ) | ||||
| Accumulated other comprehensive loss | (158 | ) | (123 | ) | ||||
| Total Youngevity International, Inc. stockholders' equity | 10,947 | 9,955 | ||||||
| Noncontrolling interest | (163 | ) | (76 | ) | ||||
| Total equity | 10,784 | 9,879 | ||||||
| $ | 31,974 | $ | 24,907 | |||||
| See accompanying notes to condensed consolidated financial statements. | ||||||||
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||||||
| Revenues | $ | 21,212 | $ | 20,604 | $ | 62,932 | $ | 55,784 | |||||||||
| Cost of revenues | 8,325 | 8,127 | 24,930 | 23,269 | |||||||||||||
| Gross profit | 12,887 | 12,477 | 38,002 | 32,515 | |||||||||||||
| Operating expenses | |||||||||||||||||
| Distributor compensation | 8,540 | 8,735 | 24,584 | 23,465 | |||||||||||||
| Sales and marketing | 1,071 | 953 | 3,267 | 2,949 | |||||||||||||
| General and adminstrative | 2,341 | 2,259 | 6,688 | 6,148 | |||||||||||||
| Total operating expenses | 11,952 | 11,947 | 34,539 | 32,562 | |||||||||||||
| Operating income (loss) | 935 | 530 | 3,463 | (47 | ) | ||||||||||||
| Other income (loss) | - | - | (1 | ) | 227 | ||||||||||||
| Interest expense, net | (300 | ) | (261 | ) | (855 | ) | (782 | ) | |||||||||
| Total other expense | (300 | ) | (261 | ) | (856 | ) | (555 | ) | |||||||||
| Income (loss) before income taxes | 635 | 269 | 2,607 | (602 | ) | ||||||||||||
| Income tax provision | 119 | 33 | 436 | 49 | |||||||||||||
| Net income (loss) | 516 | 236 | 2,171 | (651 | ) | ||||||||||||
| Net loss attributable to noncontrolling interest | - | (67 | ) | (81 | ) | (71 | ) | ||||||||||
| Net income (loss) attributable to Youngevity | 516 | 303 | 2,252 | (580 | ) | ||||||||||||
| Preferred stock dividends | 4 | 4 | 12 | 13 | |||||||||||||
| Net income (loss) available to common stockholders | $ | 512 | $ | 299 | $ | 2,240 | $ | (593 | ) | ||||||||
| Net income (loss) per share, basic | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | (0.00 | ) | ||||||||
| Net income (loss) per share, diluted | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | (0.00 | ) | ||||||||
| Weighted average shares outstanding, basic | 389,082,677 | 388,888,973 | 389,227,156 | 386,627,902 | |||||||||||||
| Weighted average shares outstanding, diluted | 393,541,049 | 392,409,443 | 393,172,875 | 386,627,902 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Net income (loss): | $ | 516 | $ | 236 | $ | 2,171 | $ | (651 | ) | |||||||
| Foreign currency translation | (14 | ) | 3 | (35 | ) | (21 | ) | |||||||||
| Total other comprehensive income (loss) | (14 | ) | 3 | (35 | ) | (21 | ) | |||||||||
| Comprehensive income (loss) | $ | 502 | $ | 239 | $ | 2,136 | $ | (672 | ) | |||||||
See accompanying notes to condensed consolidated financial statements.
| Youngevity International, Inc. and Subsidiaries | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
| (In thousands) | ||||||||
| (Unaudited) | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income (loss) | $ | 2,171 | $ | (651 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 1,467 | 1,389 | ||||||
| Stock based compensation expense | 651 | 413 | ||||||
| Increase in fair value of contingent acquisition debt | 45 | - | ||||||
| Amortization of debt discount | 37 | 59 | ||||||
| Loss on disposal of assets | - | 54 | ||||||
| Interest income accrued on note receivable, related party | (3 | ) | (3 | ) | ||||
| Changes in operating assets and liabilities net of effect from business combinations: | ||||||||
| Accounts receivable | (89 | ) | 23 | |||||
| Inventory | (1,261 | ) | 1,094 | |||||
| Prepaid expenses and other current assets | (172 | ) | 67 | |||||
| Accounts payable | 569 | (323 | ) | |||||
| Accrued distributor compensation | (201 | ) | 1,854 | |||||
| Deferred revenues | 427 | - | ||||||
| Accrued expenses and other liabilities | (244 | ) | (275 | ) | ||||
| Net Cash Provided by Operating Activities | 3,397 | 3,701 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Acquisition of Heritage Makers, net of cash acquired | (22 | ) | - | |||||
| Purchases of property and equipment | (1,074 | ) | (414 | ) | ||||
| Net Cash Used in Investing Activities | (1,096 | ) | (414 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from the sale of common stock and the exercise of stock options, net | 2 | 700 | ||||||
| Proceeds from factoring company, net | 67 | (222 | ) | |||||
| Payments of notes payable, net | (282 | ) | (421 | ) | ||||
| Proceeds (payments) for note receivable, related party, net | 62 | (308 | ) | |||||
| Payments of contingent acquisition debt | (508 | ) | (341 | ) | ||||
| Payments of capital leases | (94 | ) | (44 | ) | ||||
| Repurchase of common stock | (144 | ) | - | |||||
| Net Cash Used in Financing Activities | (897 | ) | (636 | ) | ||||
| Foreign Currency Effect on Cash | (35 | ) | (21 | ) | ||||
| Net increase in cash and cash equivalents | 1,369 | 2,630 | ||||||
| Cash and Cash Equivalents, Beginning of Period | 3,025 | 1,390 | ||||||
| Cash and Cash Equivalents, End of Period | $ | 4,394 | $ | 4,020 | ||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 855 | $ | 728 | ||||
| Income taxes, net of refunds | $ | 473 | $ | 12 | ||||
| See accompanying notes to condensed consolidated financial statements. | ||||||||
Youngevity International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
| 1. | Basis of Presentation |
The Company consolidates all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Effective July 23, 2013, the Company changed its name from AL International, Inc. to Youngevity International, Inc.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.
The statements presented as of September 30, 2013 and for the three months and nine months ended September 30, 2013 and 2012 are unaudited. In the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair presentation, and to make the financial statements not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012, included in the Company’s Form 10-G/A filed with the Securities and Exchange Commission on May 31, 2013. The results for interim periods are not necessarily indicative of the results for the entire year. Certain reclassifications were made to the prior year’s numbers between sales and marketing and general and administrative expenses to conform to the current year presentation. These reclassifications had no effect on reported results of operations or stockholders’ equity.
Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of options granted under our stock based compensation plans, fair value of assets and liabilities acquired in business combinations, capital leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, value of contingent acquisition debt, inventory obsolescence, and the allowance for sales returns. Actual results may differ from previously estimated amounts and such differences may be material to the condensed consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected prospectively in the period they occur.
| 2. | Income Taxes |
Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period.
The Company files income tax returns in the United States (“U.S.”) on a federal basis and in many U.S. state and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject.
| 3. | Inventory and Cost of Sales |
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. The Company records an inventory reserve for estimated excess and obsolete inventory based upon historical turnover, market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items with a definite life are taken into consideration.
Inventories consist of the following (in thousands):
| As of | ||||||||
September 30, 2013 | December 31, 2012 | |||||||
| Finished goods | $ | 4,697 | $ | 3,213 | ||||
| Raw materials | 1,789 | 1,828 | ||||||
| 6,486 | 5,041 | |||||||
| Reserve for excess and obsolete | (458 | ) | (366 | ) | ||||
| Inventory, net | $ | 6,028 | $ | 4,675 | ||||
Cost of revenues includes the cost of inventory, shipping and handling costs incurred by the Company in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets.
| 4. | Business Combinations |
The Company accounts for business combinations under the acquisition method and allocates the total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on their estimated fair values. When a business combination includes the exchange of the Company’s Common Stock, the value of the Common Stock is determined using the closing market price as of the date such shares were tendered to the selling parties. The fair values assigned to tangible and identified intangible assets acquired and liabilities assumed are based on management or third party estimates and assumptions that utilize established valuation techniques appropriate for the Company’s industry and each acquired business. Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. A liability for contingent consideration, if applicable, is recorded at fair value as of the acquisition date. In determining the fair value of such contingent consideration, management estimates the amount to be paid based on probable outcomes and expectations of the financial performance of the related acquired business. The fair value of contingent consideration is reassessed quarterly, with any change in the estimated value charged to operations in the period of the change. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in actual or estimated revenue streams, discount periods, discount rates and probabilities that contingencies will be met.
| 5. | Intangible Assets and Goodwill |
Intangible assets are comprised of distributor organizations, customer relationships and trademarks. The Company's acquired intangible assets, which are subject to amortization over their estimated useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset exceeds its fair value.
Intangible assets consist of the following (in thousands):
| September 30, 2013 | December 31, 2012 | |||||||||||||||
| Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | |||||||||||||
| Distributor organizations | $ | 7,525 | $ | (3,901 | ) | $ | 6,825 | $ | (3,157 | ) | ||||||
| Trademarks | 3,041 | (101 | ) | 2,741 | (66 | ) | ||||||||||
| Customer relationships | 3,700 | (1,104 | ) | 3,500 | (729 | ) | ||||||||||
| Other | 520 | (20 | ) | 20 | (20 | ) | ||||||||||
| Intangible assets, net | $ | 14,786 | $ | (5,126 | ) | $ | 13,086 | $ | (3,972 | ) | ||||||
Amortization expense related to intangible assets was approximately $396,000 and $395,000 for the three months ended September 30, 2013 and 2012, respectively. Amortization expense was approximately $1,154,000 and $1,151,000 for the nine months ended September 30, 2013 and 2012, respectively.
Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. In accordance with Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other”, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company conducts annual reviews for goodwill and indefinite-lived intangible assets in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. The goodwill balance as of September 30, 2013 was $5,596,000. There were no triggering events indicating impairment of goodwill or intangible assets during the nine months ended September 30, 2013 and 2012.
| 6. | Stock Based Compensation |
The Company accounts for stock based compensation in accordance with Financial Accounting Standards Board (“FASB”) Topic 718, Compensation – Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the vesting period of the equity grant.
The Company accounts for equity instruments issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value, determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
| 7. | Distributor Compensation |
In the direct selling segment, the Company utilizes a network of independent distributors, each of whom has signed an agreement with the Company, enabling them to purchase products at wholesale prices, enroll new distributors for their down-line and earn compensation on product purchases made by those down-line distributors.
Due to the multi-layer independent sales approach, distributor incentives are a significant component of the Company’s cost structure. The Company accrues all distributor compensation expense in the month earned and pays the compensation the following month.
| 8. | Acquisitions |
Acquisition of Heritage Makers, Inc.
On August 14, 2013, the Company acquired certain assets and assumed certain liabilities of Heritage Makers, Inc., a direct sales personal publishing company based in Provo, Utah. The transaction was accounted for as a business combination. The purchase price consisted of $500,000 paid at closing, plus an amount equal to 4% of gross sales revenue generated by Heritage Makers’ distributor organization until such time a maximum of $700,000 of 4% payments are made by the Company. As a result of this acquisition, Youngevity distributors and customers will have access to Heritage Makers’ web-based publishing software, which allows consumers to personally design photo books, cards, calendars, posters and other printed products and Heritage Makers customers will gain access to all products offered by Youngevity.
The fair values of the acquired assets have not been finalized pending further information that may impact the valuation of certain assets or liabilities. The Company has preliminarily estimated fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows:
| Cash paid | $ | 500,000 | ||
| Estimated fair value of earn-out | 500,000 | |||
| Aggregate purchase price | $ | 1,000,000 | ||
| Purchase price allocation: | ||||
| Cash | $ | 478,000 | ||
| Accounts Receivable | 20,000 | |||
| Inventory | 92,000 | |||
| Prepaid expenses and other current assets | 147,000 | |||
| Property, plant and equipment | 26,000 | |||
| Trademarks and trade name | 300,000 | |||
| Customer-related intangible | 200,000 | |||
| Distribution network | 700,000 | |||
| Internally developed software | 500,000 | |||
| Goodwill | 442,000 | |||
| Accounts payable | (56,000 | ) | ||
| Accrued expenses | (249,000 | ) | ||
| Deferred revenues | (1,600,000 | ) | ||
The preliminary fair value of intangible assets acquired in the amount of $1,700,000 was determined through the use of a third party valuation firm using various income and cost approach methodologies. Specifically, the intangibles identified in the acquisition were trademarks and trade name, customer-related intangible, distributor network and internally developed software. The trademarks and trade name will have an indefinite life, customer-related intangible and distribution network are being amortized over their estimated useful life of ten years and internally developed software is being amortized over its estimated useful life of seven years. The straight-line method is being used and is believed to approximate the time-line with which the economic benefit of the underlying intangible asset will be realized.
Goodwill of $442,000 was recognized in the direct selling segment as the excess purchase price over the acquisition-date fair value of net assets acquired. Goodwill is estimated to represent the synergistic values expected to be realized from the combination of the two businesses. The goodwill is expected to be deductible for tax purposes.
The costs related to the acquisition of Heritage Makers totaled approximately $38,000 which included legal and valuation fees. These costs were expensed as incurred in the periods in which services were received and recognized in the consolidated statements of operations in general and administrative expenses. Revenues from Heritage Makers included in the consolidated statements of operations from the acquisition date of August 14, 2013 to September 30, 2013 were $523,000. The estimated fair value of the earn-out of $500,000 was recorded as contingent acquisition debt in the consolidated balance sheets. The corresponding balance as of September 30, 2013 was $488,000.
This acquisition did not have a material impact on the Company’s condensed consolidated financial statements, and therefore pro forma disclosures have not been presented.
Acquisition of 2400 Boswell, LLC
2400 Boswell, LLC (“2400 Boswell”) is the owner and lessor of the building occupied by the Company for its corporate office and warehouse in Chula Vista, CA. The Company is the lessee and currently the sole tenant. An immediate family member of a greater than 5% shareholder of the Company was the single member of 2400 Boswell as of December 31, 2012.
On March 15, 2013, the Company acquired 2400 Boswell for approximately $4.6 million. The purchase was from an immediate family member of a greater than 5% shareholder of the Company and consisted of approximately $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, which is payable in equal monthly payments over 5 years and bears interest at 5.00%. Additionally, the Company assumed a long-term mortgage of $3,625,000, payable over 25 years and has an initial interest rate of 5.75%. The interest rate is the prime rate plus 2.50%. The lender will adjust the interest rate on the first calendar day of each change period.
Pursuant to ASC 805-50-30-5, because 2400 Boswell, LLC and the Company were both owned by related parties under common control, the Company must record the assets acquired at the carrying basis that pre-existed on the books of 2400 Boswell, LLC, prior to the acquisition. The total carrying cost of the land and building was $2,814,000, which is $1,786,000 less than the consideration amount paid by the Company. The Company therefore recorded a $1,786,000 charge to equity as a deemed dividend in the first quarter of the current year. An appraisal of the land and building ordered by and provided to the lender on February 27, 2013, estimated the “as-is fee simple market value” at $5,150,000 as of February 21, 2013.
| 9. | Deferred Revenues |
Deferred revenues relate to the Heritage Makers product line and represent the Company’s obligation for points purchased by customers that have not yet been redeemed for product. Cash received for points sold is recorded as deferred revenue. Revenue is recognized when customers redeem the points and the product is shipped. As of the acquisition date of Heritage Makers, deferred revenues acquired were fair valued at $1,600,000 (See Note 8). As of September 30, 2013, the balance in deferred revenues was $2,027,000.
| 10. | Fair Value of Financial Instruments |
Fair value measurements are performed in accordance with the guidance provided by ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 defines fair value as the price that would be received from selling an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
| Level 1 – Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. |
| Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 – Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability. |
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair values based on their short-term nature. The carrying amount of the Company’s long term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities. The estimated fair value of the contingent consideration related to the Company’s business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
The following table details the fair value measurement within the three levels of the value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities related to contingent consideration on acquisitions (in thousands):
| Fair Value at September 30, 2013 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent acquisition debt | $ | 5,721 | $ | - | $ | - | $ | 5,721 | ||||||||
| Total liabilities | $ | 5,721 | $ | - | $ | - | $ | 5,721 | ||||||||
| Fair Value at December 31, 2012 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent acquisition debt | $ | 5,684 | $ | - | $ | - | $ | 5,684 | ||||||||
| Total liabilities | $ | 5,684 | $ | - | $ | - | $ | 5,684 | ||||||||
The contingent acquisition liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, and projected timing of revenues. Projected contingent payment amounts are discounted back to the current period using a discount rate. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. In some cases, there is no maximum amount of contingent consideration that can be earned by the sellers. Increases in projected revenues will result in higher fair value measurements. Increases in discount rates and the time to payment will result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. A $45,000 adjustment was made to increase the estimated contingent acquisition debt recognized during the three and nine months ended September 30, 2013. The expense is included in general and administrative expense. There were no adjustments to the estimated acquisition debt recognized during the three and nine months ended September 30, 2012.
| 11. | Earnings Per Share |
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock method. Dilutive common share equivalents are comprised of in-the-money stock options, warrants and convertible preferred stock, based on the average stock price for each period using the treasury stock method. Since the Company incurred a loss for the nine months ended September 30, 2012, 34,476,000 common share equivalents were excluded in the computation of diluted loss per share for that period.
| 12. | Equity |
The Company’s Articles of Incorporation, as amended, authorize the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock.”
The Company had 211,135 shares of Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of September 30, 2013 and December 31, 2012. The holders of the Series A Preferred Stock are entitled to receive a cumulative dividend at a rate of 8.0% per year, payable annually either in cash or shares of the Company's Common Stock at the Company's election. Shares of Common Stock paid as accrued dividends are valued at $.50 per share. Each share of Series A Preferred is convertible into two shares of the Company's Common Stock. The holders of Series A Preferred are entitled to receive payments upon liquidation, dissolution or winding up of the Company before any amount is paid to the holders of Common Stock. The holders of Series A Preferred shall have no voting rights, except as required by law. As of September 30, 2013, warrants to purchase 40,000 shares of Preferred Stock at a price of $0.25 per share were outstanding. All warrants were exercisable as of September 30, 2013 and expire on November 25, 2013. The warrants were issued to replace similar instruments outstanding from the Javalution business.
The Company had 389,037,018 common shares outstanding as of September 30, 2013. The holders of Common Stock are entitled to one vote per share on matters brought before the shareholders. As of September 30, 2013, warrants to purchase 17,253,139 shares of Common Stock at prices ranging from $0.10 to $0.50 were outstanding. All warrants are exercisable as of September 30, 2013 and expire at various dates through May 2017. During the three and nine months ended September 30, 2013, 1,250 and 2,905,684 warrants expired respectively.
On December 11, 2012, the Company authorized a share repurchase program to repurchase up to 15 million of the Company's issued and outstanding common shares from time to time on the open market or via private transactions through block trades. Under this program, the Company repurchased a total of 88,080 shares and 573,830 shares at a weighted-average cost of $0.29 and $0.25 for the three and nine months ended September 30, 2013, respectively. A total of 648,830 shares have been repurchased to date. The remaining number of shares authorized for repurchase under the plan as of September 30, 2013 is 14,351,170.
| 13. | Stock Option Plan |
On May 16, 2012, the Company established the 2012 Stock Option Plan (“Plan”) authorizing the granting of options for up to 40,000,000 shares of Common Stock. The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people and consultants with incentives to improve stockholder value and to contribute to the growth and financial success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The Plan permits the granting of stock options, including non-qualified stock options and incentive stock options qualifying under Section 422 of the Code, in any combination (collectively, "Options").
The Company uses the Black-Scholes option-pricing model (“Black-Scholes model”) to estimate the fair value of stock option grants. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the contractual term of the option. The expected life is based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant.
A summary of the Plan Options for the nine months ended September 30, 2013 is presented in the following table:
Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | ||||||||||
| Outstanding December 31, 2012 | 13,728,000 | $ | 0.22 | $ | 5 | |||||||
| Granted | 777,250 | 0.29 | ||||||||||
| Exercised | (11,000 | ) | 0.26 | - | ||||||||
| Outstanding September 30, 2013 | 14,494,250 | 0.22 | 428 | |||||||||
| Exercisable September 30, 2013 | 8,894,250 | $ | 0.22 | $ | 260 | |||||||
The weighted-average fair value per share of the granted options for the nine months ended September 30, 2013 was $0.14.
The following table sets forth the exercise price range, number of shares, weighted-average exercise price and remaining contractual lives at September 30, 2013:
| Weighted | Weighted | Weighted | ||||||||||||
| Average | Average | Average | ||||||||||||
| Exercise Price | Options | Exercise Price | Remaining Life | |||||||||||
| Outstanding: | ||||||||||||||
| $ | 0.16 - $0.21 | 449,250 | $ | 0.17 | 2.09 | |||||||||
| $ | 0.21 - $0.23 | 12,942,000 | $ | 0.22 | 3.76 | |||||||||
| $ | 0.23 - $0.32 | 1,103,000 | $ | 0.28 | 2.42 | |||||||||
| 14,494,250 | $ | 0.22 | 3.61 | |||||||||||
| Exercisable: | ||||||||||||||
| $ | 0.16 - $0.21 | 449,250 | $ | 0.17 | 2.09 | |||||||||
| $ | 0.21 - $0.23 | 7,342,000 | $ | 0.22 | 3.83 | |||||||||
| $ | 0.23 - $0.32 | 1,103,000 | $ | 0.28 | 2.42 | |||||||||
| 8,894,250 | $ | 0.22 | 3.57 | |||||||||||
At September 30, 2013, the Company had 25,493,750 shares of Common Stock available for issuance under the Plan.
Stock based compensation expense was $224,000 and $651,000 for the three and nine months ended September 30, 2013, respectively, and $231,000 and $413,000 for the three and nine months ended September 30, 2012, respectively. As of September 30, 2013, there was approximately $335,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plan. The expense is expected to be recognized over a weighted-average period of 0.80 years.
| 14. | Factoring Agreement |
The Company has a factoring agreement (“Factoring Agreement”) with Crestmark Bank (“Crestmark”) related to the Company’s accounts receivable resulting from sales of certain products within its commercial coffee reportable segment. Under the terms of the Factoring Agreement, the Company effectively sold all of its accounts receivable to Crestmark with non-credit related recourse. The Company continues to be responsible for the servicing and administration of the receivables. The terms of the Factoring Agreement require that it stay in effect until February 1, 2014 at which time it will automatically renew for successive one year periods unless proper notice of termination is given. During January 2013, the Company extended its Factoring Agreement through February 1, 2016, and modified certain of the terms.
The Factoring Agreement provides for the Company to receive advances against the purchase price of its receivables at a rate up to 100% of the aggregate purchase price of the receivable outstanding at any time less: receivables that are in dispute, receivables that are not credit approved within the terms of the Factoring Agreement and any fees or estimated fees related to the Factoring Agreement. Interest is accrued on all outstanding advances at the greater of 5.25% per annum or the Prime Rate (as identified by the Wall Street Journal) plus an applicable margin. The margin is based on the magnitude of the total outstanding advances and ranges from 2.50% to 5.00%. In addition to the interest accrued on the outstanding balance, the factor charges a factoring commission for each invoice factored which is calculated as the greater of $5.00 or 0.875% to 1.00% of the gross invoice amount and is recorded as interest expense. The minimum factoring commission payable to the bank is $90,000 during each consecutive 12-month period.
The Company accounts for the sale of receivables under the Factoring Agreement as secured borrowing with a pledge of the subject receivables as well as all bank deposits as collateral, in accordance with the authoritative guidance for accounting for transfers and servicing of financial assets and extinguishments of liabilities. The caption “Accounts receivable, due from factoring company” on the accompanying consolidated balance sheet in the amount of approximately $769,000 and $836,000 as of September 30, 2013 and December 31, 2012 respectively, reflects the related collateralized accounts.
| 15. | Segment and Geographical Information |
The Company offers a wide variety of products including; nutritional and health, sports and energy drinks, gourmet coffee, skincare and cosmetics, lifestyle, pharmaceutical discount card and pet related. In addition, the Company offers health and wellness services. The Company’s business is classified by management into two reportable segments: direct selling and commercial coffee.
The Company’s segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker evaluates segment performance primarily based on revenue and segment operating income. The principal measures and factors the Company considered in determining the number of reportable segments were revenue, gross margin percentage, sales channel, customer type and competitive risks. In addition, each reporting segment has similar products and customers, similar methods of marketing and distribution and a similar regulatory environment.
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies. Segment revenue excludes intercompany revenue eliminated in the consolidation. The following tables present certain financial information for each segment (in thousands):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Revenues | ||||||||||||||||
| Direct selling | $ | 19,223 | $ | 18,595 | $ | 56,549 | $ | 50,061 | ||||||||
| Commercial coffee | 1,989 | 2,009 | 6,383 | 5,723 | ||||||||||||
| Total revenues | $ | 21,212 | $ | 20,604 | $ | 62,932 | $ | 55,784 | ||||||||
| Gross margin | ||||||||||||||||
| Direct selling | $ | 12,850 | $ | 12,231 | $ | 37,492 | $ | 31,828 | ||||||||
| Commercial coffee | 37 | 246 | 510 | 687 | ||||||||||||
| Total gross margin | $ | 12,887 | $ | 12,477 | $ | 38,002 | $ | 32,515 | ||||||||
| Net income (loss) | ||||||||||||||||
| Direct selling | $ | 918 | $ | 418 | $ | 2,979 | $ | (38 | ) | |||||||
| Commercial coffee | (402 | ) | (182 | ) | (808 | ) | (613 | ) | ||||||||
| Total net income (loss) | $ | 516 | $ | 236 | $ | 2,171 | $ | (651 | ) | |||||||
| Capital expenditures | ||||||||||||||||
| Direct selling | $ | 16 | $ | 18 | $ | 2,866 | $ | 286 | ||||||||
| Commercial coffee | 102 | 46 | 775 | 360 | ||||||||||||
| Total capital expenditures | $ | 118 | $ | 64 | $ | 3,641 | $ | 646 | ||||||||
| As of | ||||||||
| September 30, 2013 | December 31, 2012 | |||||||
| Total assets | ||||||||
| Direct selling | $ | 22,059 | $ | 17,403 | ||||
| Commercial coffee | 9,915 | (1) | 7,504 | |||||
| Total assets | $ | 31,974 | $ | 24,907 | ||||
(1) Commercial coffee excludes intercompany liability balances as of September 30, 2013 | ||||||||
The Company conducts its operations in the U.S. and New Zealand and ships to over 40 countries. The following table displays revenues attributable to the geographic location of the customers (in thousands):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Revenues | ||||||||||||||||
| United States | $ | 19,752 | $ | 18,882 | $ | 58,292 | $ | 51,097 | ||||||||
| International | 1,460 | 1,722 | 4,640 | 4,687 | ||||||||||||
| Total revenues | $ | 21,212 | $ | 20,604 | $ | 62,932 | $ | 55,784 | ||||||||
| 16. | Subsequent Event |
Acquisition of Go Foods Global, LLC.
On October 1, 2013, the Company acquired certain assets and assumed certain liabilities of Go Foods Global, LLC, an innovative global food company based in American Fork, Utah. As a result of this business combination, the Company’s distributors and customers will have access to Go Foods Global’s unique line of healthy and nutritious extended shelf-life food products and Go Foods Global’s distributors and clients will gain access to products offered by the Company. The consideration payable by the Company shall be five percent of the gross sales revenue received by the Company up to a maximum of two million dollars (the “Maximum”); however, if the aggregate revenue received by the Company from Go Foods Global distributors for the twelve months commencing September 4, 2013 is not at least $2,400,000 then the Maximum will be reduced but in no event shall the Maximum be less than $1,450,000. The final purchase price allocation has not been determined as of the filing of this quarterly report.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” and in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Registration Statement on Form 10-G/A filed with the Securities and Exchange Commission on May 31, 2013. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
| A. | Overview |
We operate in two segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors and the commercial coffee segment where products are sold directly to businesses. In the direct selling segment we sell health and wellness products on a global basis and offer a wide range of products through an international direct selling network. Our direct sales are made through our network of independent distributors, which is a web-based global network of customers and distributors. Our multiple independent selling forces sell a variety of products through friend-to-friend marketing and social networking. Our direct selling products comprise a number of brand names that are in most part owned by Youngevity® Essential Life Sciences. There are a smaller number of brands that are marketed under license agreements. We also engage in the commercial sale of one of our products, our coffee. We own a traditional coffee roasting business that produces coffee under its own Café La Rica brand, as well as under a variety of private labels through major national sales outlets and major customers including cruise lines and office coffee service operators.
| B. | Results of Operations |
The comparative financials discussed below show the condensed consolidated financial statements of Youngevity International, Inc. as of and for the nine months ended September 30, 2013 and 2012.
Nine months ended September 30, 2013 compared to nine months ended September 30, 2012
For the nine months ended September 30, 2013, our revenue increased 12.8% to $62,932,000 as compared to $55,784,000 for the nine months ended September 30, 2012. The increase in revenue is attributed primarily to the increase in our product offerings and the number of distributors and customers resulting from our acquisitions during 2012, revenues from Heritage Makers, Inc, acquired on August 14, 2013 and the organic growth of the CLR Roasters private label business as well as the continued growth of CLR Roasters company owned Café La Rica brand. The following table summarizes our revenue in thousands by segment:
For the nine months ended September 30, | Percentage change | |||||||||||
| Segment | 2013 | 2012 | ||||||||||
| Direct selling | $ | 56,549 | $ | 50,061 | 13.0 | % | ||||||
| Commercial coffee | 6,383 | 5,723 | 11.5 | % | ||||||||
| Total | $ | 62,932 | $ | 55,784 | 12.8 | % | ||||||
For the nine months ended September 30, 2013, cost of sales increased approximately 7.1% to $24,930,000 as compared to $23,269,000 for the nine months ended September 30, 2012. The increase in cost of sales is primarily attributable to the increase in revenues discussed above.
For the nine months ended September 30, 2013, gross profit increased approximately 16.9% to $38,002,000 as compared to $32,515,000 for the nine months ended September 30, 2012. Below is a table of the gross margin percentages by segment:
Gross Profit % For the nine months ended September 30, | ||||||||
| Segment | 2013 | 2012 | ||||||
| Direct selling | 66.3 | % | 63.6 | % | ||||
| Commercial coffee | 8.0 | % | 12.0 | % | ||||
| Combined | 60.4 | % | 58.3 | % | ||||
The increase in gross profit as a percentage of revenues in the direct selling segment was primarily due to improved efficiencies in fulfillment costs and the economies of scale as a result of the increase in revenues. The decrease in gross margin in the commercial coffee segment was primarily due to a faulty quenching system that was discovered midway through the third quarter that created larger than ordinary shrink during the roasting process, expenses incurred in connection with a facility expansion, repairs and maintenance costs related to preparing the roasting operations for Safe Quality Foods ("SQF") certification and labor costs related to same.
For the nine months ended September 30, 2013, our operating expenses increased approximately 6.1% to $34,539,000 as compared to $32,562,000 for the nine months ended September 30, 2012. Included in operating expense is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the nine months ended September 30, 2013, distributor compensation increased 4.8% to $24,584,000 from $23,465,000 for the nine months ended September 30, 2012. This increase was primarily attributable to the increase in revenues. Distributor compensation as a percentage of direct selling revenues decreased to 43.5% as compared to 46.9% for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, the sales and marketing expense increased 10.8% to $3,267,000 from $2,949,000 for the nine months ended September 30, 2012 primarily due to increased promotional and selling costs and additional selling costs from Heritage Makers. For the nine months ended September 30, 2013, the general and administrative expense increased 8.8% to $6,688,000 from $6,148,000 for the nine months ended September 30, 2012 primarily due to stock based compensation expense which was established during the second quarter of 2012, additional general and administrative costs from Heritage Makers and accounting and legal fees related to the filing of the Registration Statement on Form 10 with the Securities and Exchange Commission in the current year.
For the nine months ended September 30, 2013, other loss was $1,000 compared to other income of $227,000 for the nine months ended September 30, 2012. This difference is primarily due to income recognized as a result of a legal settlement at our Australian subsidiary during the nine months ended September 30, 2012.
For the nine months ended September 30, 2013, interest expense increased 9.3% to $855,000 as compared to $782,000 for the nine months ended September 30, 2012. The increase was primarily due to interest expense related to contingent acquisition debt and the long-term mortgage related to the acquisition of 2400 Boswell, LLC.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. As of September 30, 2013 we have recognized income tax expense of $436,000 which is our estimated federal and state income tax liability for the nine months ended September 30, 2013. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. We continue to evaluate the realizability of the deferred tax asset, based upon achieved and estimated future results. If it is determined that it is more likely than not that the deferred tax asset will be realized, we will reverse all or a portion of the allowance as deemed appropriate. The difference between the effective rate of 16.7% and the Federal statutory rate of 35.0% is due to the change in our valuation allowance account, state income taxes (net of federal benefit), and certain permanent differences between our taxable and book income.
For the nine months ended September 30, 2013, net income was $2,171,000 as compared to a loss of $651,000 for the nine months ended September 30, 2012. The increase of $2,822,000 was attributable to the increase in income before income taxes of $3,209,000 offset by an increase in income tax provision of $387,000.
Adjusted EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) as adjusted to remove the effect of stock based compensation expense or "Adjusted EBITDA", was $5,580,000 for the nine months ended September 30, 2013 compared to $1,982,000 in the same period for the prior year.
Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.
Adjusted EBITDA is a non-GAAP financial measure. We calculate Adjusted EBITDA by taking net income, and adding back the expenses related to interest, taxes, depreciation, amortization, stock based compensation expense and non-cash impairment loss, as each of those elements are calculated in accordance with GAAP. Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.
A reconciliation of our Adjusted EBITDA to net income (loss) for the nine months ended September 30, 2013 and 2012 is included in the table below:
Nine months ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| Net income (loss) | $ | 2,171,000 | $ | (651,000 | ) | |||
| Add | ||||||||
| Interest | 855,000 | 782,000 | ||||||
| Taxes | 436,000 | 49,000 | ||||||
| Depreciation | 313,000 | 238,000 | ||||||
| Amortization | 1,154,000 | 1,151,000 | ||||||
| EBITDA | 4,929,000 | 1,569,000 | ||||||
| Add | ||||||||
| Stock based compensation | 651,000 | 413,000 | ||||||
| Adjusted EBITDA | $ | 5,580,000 | $ | 1,982,000 | ||||
The comparative financials discussed below show our condensed consolidated financial statements as of and for the three months ended September 30, 2013 and 2012.
Three months ended September 30, 2013 compared to three months ended September 30, 2012
For the three months ended September 30, 2013, our revenue increased 3.0% to $21,212,000 as compared to $20,604,000 for the three months ended September 30, 2012. The increase in revenue is attributed primarily to revenues of $523,000 from Heritage Makers, Inc, acquired on August 14, 2013 and the increase in our product offerings. The following table summarizes our revenue in thousands by segment:
For the three months ended September 30, | Percentage change | |||||||||||
| Segment | 2013 | 2012 | ||||||||||
| Direct selling | $ | 19,223 | $ | 18,595 | 3.4 | % | ||||||
| Commercial coffee | 1,989 | 2,009 | -1.0 | % | ||||||||
| Total | $ | 21,212 | $ | 20,604 | 3.0 | % | ||||||
For the three months ended September 30, 2013, cost of sales increased approximately 2.4% to $8,325,000 as compared to $8,127,000 for the three months ended September 30, 2012. The increase in cost of sales is primarily attributable to increased costs related to facility expansion, preparation of the plant for SQF certification and repairs and maintenance and related overtime payroll expenses at CLR Roasters.
For the three months ended September 30, 2013, gross profit increased approximately 3.3% to $12,887,000 as compared to $12,477,000 for the three months ended September 30, 2012. Below is a table of the gross margin percentages by segment:
Gross Profit % For the three months ended September 30, | ||||||||
| Segment | 2013 | 2012 | ||||||
| Direct selling | 66.8 | % | 65.8 | % | ||||
| Commercial coffee | 1.9 | % | 12.2 | % | ||||
| Combined | 60.8 | % | 60.6 | % | ||||
The increase in gross profit as a percentage of revenues in the direct selling segment was primarily due to improved efficiencies in fulfillment costs and the economies of scale as a result of the increase in revenues. The decrease in gross margin in the commercial coffee segment was primarily due to a faulty quenching system that was discovered midway through the third quarter that created larger than ordinary shrink during the roasting process, expenses incurred in connection with a facility expansion, repairs and maintenance costs related to preparing the roasting operations for SQF certification and labor costs related to same.
For the three months ended September 30, 2013, our operating expenses remained approximately the same at $11,952,000 as compared to $11,947,000 for the three months ended September 30, 2012. Included in operating expense is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the three months ended September 30, 2013, distributor compensation decreased 2.2% to $8,540,000 from $8,735,000 for the three months ended September 30, 2012. Distributor compensation as a percentage of direct selling revenues decreased to 44.4% as compared to 47.0% for the three months ended September 30, 2012. For the three months ended September 30, 2013, the sales and marketing expense increased 12.4% to $1,071,000 from $953,000 for the three months ended September 30, 2012 primarily due to sales and marketing costs from the newly acquired Heritage Makers. For the three months ended September 30, 2013, the general and administrative expense increased 3.6% to $2,341,000 from $2,259,000 for the three months ended September 30, 2012 primarily due to general and administrative costs at the newly acquired Heritage Makers.
For the three months ended September 30, 2013, interest expense increased 14.9% to $300,000 as compared to $261,000 for the three months ended September 30, 2012. The increase was primarily due to higher interest expense related to contingent acquisition debt and the long-term mortgage related to the acquisition of 2400 Boswell, LLC.
For the three months ended September 30, 2013, net income was $516,000 as compared to $236,000 for the three months ended September 30, 2012. The increase of $280,000 was attributable to the increase in income before income taxes of $366,000, offset by an increase in income tax provision of $86,000.
Liquidity
At September 30, 2013 we had cash and cash equivalents of approximately $4,394,000 and working capital of approximately $1,542,000 as compared to cash and cash equivalents of $3,025,000 and a working capital of approximately $1,440,000 as of December 31, 2012.
Net cash provided by operating activities for the nine months ended September 30, 2013 was $3,397,000, as compared to $3,701,000 for the nine months ended September 30, 2012. Net cash provided by operating activities consisted of net income of $2,171,000, adjusted for depreciation and amortization of $1,467,000, stock based compensation of $651,000, other adjustments of $79,000 and a decrease of $971,000 in changes in working capital, net of acquired assets and liabilities.
Net cash used in investing activities for the nine months ended September 30, 2013 was approximately $1,096,000, as compared to $414,000 for the nine months ended September 30, 2012. Net cash used in investing activities consisted primarily of $826,000 in purchases of equipment, primarily to increase production capacity in the commercial coffee segment, $248,000 in cash paid for the acquisition of the corporate headquarters building at 2400 Boswell and $22,000 in net cash paid for the acquisition of Heritage Makers.
Net cash used in financing activities was $897,000 for the nine months ended September 30, 2013 as compared to $636,000 in the same period in 2012 and was primarily attributed to payments to reduce notes payable and contingent acquisition debt and to a lesser extent, repurchases of common stock.
Payments Due by Period
The following table summarizes our expected contractual obligations and commitments subsequent to September 30, 2013 (in thousands):
| Current | Long-Term | |||||||||||||||||||||||||||
| Contractual Obligations | Total | 2013-14 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||||||
| Operating Leases | $ | 3,777 | $ | 571 | $ | 94 | $ | 341 | $ | 322 | $ | 342 | $ | 2,107 | ||||||||||||||
| Capital Leases | 153 | 101 | 25 | 24 | 3 | - | - | |||||||||||||||||||||
| Capital Commitments | - | - | - | - | - | - | - | |||||||||||||||||||||
| Purchase Obligations | 8,643 | 8,643 | - | - | - | - | - | |||||||||||||||||||||
| Notes Payable | 5,329 | 318 | 65 | 285 | 302 | 312 | 4,047 | |||||||||||||||||||||
| Contingent Acquisition Debt | 5,721 | 825 | 228 | 910 | 534 | 451 | 2,773 | |||||||||||||||||||||
| Total | $ | 23,623 | $ | 10,458 | $ | 412 | $ | 1,560 | $ | 1,161 | $ | 1,105 | $ | 8,927 | ||||||||||||||
“Operating leases" generally provide that property taxes, insurance, and maintenance expenses are our responsibility. Such expenses are not included in the operating lease amounts that are outlined in the table above.
“Purchase obligations” relates to minimum future purchase commitments for green or unroasted coffee.
The “Notes payable” relates to notes payable on 2400 Boswell building acquisition and debt related to business acquisitions.
The “Contingent acquisition debt” relates to contingent liabilities related to business acquisitions. Generally, these liabilities are payments to be made in the future based on a level of revenue derived from the sale of products. These numbers are estimates and actual numbers could be higher or lower because many of our contingent liabilities relate to payments on sales that have no maximum payment amount.
In connection with our acquisition of FDI, we assumed mortgage guarantee obligations made by FDI on the building housing our New Hampshire office. The balance of the mortgages is approximately $2,086,000 as of September 30, 2013.
We believe that current cash balances, future cash provided by operations, and our accounts receivable factoring agreement will be sufficient to cover our operating and capital needs in the ordinary course of business for at least the next 12 months. If we experience an adverse operating environment or unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
| C. | Off-Balance Sheet Arrangements |
There are no off-balance sheet arrangements as of September 30, 2013.
| D. | Customer Concentrations |
We have no single customer or independent distributor that accounts for any substantial portion of our current revenues.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this item.
ITEM 4. Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures |
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2013, the end of the quarterly fiscal period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2013, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| (b) | Changes in Internal Control Over Financial Reporting |
There were no changes in our internal controls over financial reporting that occurred during our third quarter and nine months of fiscal year 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in its condensed consolidated balance sheets would not be material to the financial statements as a whole.
Not required as a smaller reporting company.
Share repurchase activity during the three months ended September 30, 2013 was as follows:
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
| Period ending September 30, 2013 | Total Number of Shares Purchased (*) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| July 1 to July 31 | 27,080 | 0.32 | 27,080 | 14,412,170 | ||||||||||||
| August 1 to August 31 | 16,500 | 0.29 | 16,500 | 14,395,670 | ||||||||||||
| September 1 to September 30 | 44,500 | 0.27 | 44,500 | 14,351,170 | ||||||||||||
| Total | 88,080 | 0.29 | 88,080 | 14,351,170 | ||||||||||||
(*) On December 11, 2012, the Company authorized a share repurchase program to repurchase up to 15 million of the Company's issued and outstanding common shares from time to time on the open market or via private transactions through block trades. This program, according to its terms, will expire on December 31, 2013 unless revoked earlier by the Board. | ||||||||||||||||
None.
Not applicable.
None.
See Index to Exhibits below.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
YOUNGEVITY INTERNATIONAL, INC. | |
| (Registrant) | |
| /s/ Stephan Wallach | |
| Stephan Wallach | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 13, 2013 | |
| /s/ David Briskie | |
| David Briskie | |
| Chief Financial Officer | |
| (Principal Financial Officer) | |
| Date: November 13, 2013 |
EXHIBIT INDEX
| Exhibit No. | Exhibit | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |