Youngevity International, Inc.
Q4 2017 Earnings Call Transcript

Published: 29 Mar 2018

[Steve Wallach:]

Thank you, Alex. Hello everyone, I want to welcome you all to the Youngevity International Shareholders call. Speakers on the call today are myself and our President and CFO of Youngevity, Dave Briskie, we will cover the following topics, we will highlight Q4 and yearend performance. We will provide an update on international operations, we will discuss growth drivers in our coffee, we will discuss profitability and improvements objectives and we will provide forward guidance. I’d like to invite Dave Briskie onto the call.

[Dave Briskie:]

Thank you, Steve. Hello everyone, I always love talking to our shareholders on our shareholder base. I keep in communication with many of you, so welcome to the call. I first like to start off with some highlights for the fourth quarter, consolidated revenues for Q4 were up 7% -- 6.9% to be exact overall direct selling sales were up 2%. Our international revenue in direct selling division on the international side of things largely led by Asia was up 28.9%, coffee division revenue was up 57.6% and that was led by green coffee distribution and Cafe LaRica our own brands growth in particularly in that South Florida market. We continued to experience growth since the relationship that we entered into with the Miami Maryland which is a baseball team, it’s really given us some brand awareness and given us a pretty nice foothold in that Florida market. So, let’s get to the fourth quarter 2017 financial results first. Revenues for the Q ended 12, 31, increased by 7% as discussed earlier to $41,041 million and this is compared to $38.4 million for the fourth quarter of 2016. We derived approximately 87% of that revenue from the direct selling division and approximately 13% of the revenue came from commercial coffee operations. Direct selling segment revenues increased 2% to $35.7 million in the current quarter as compared to $35 million for the quarter ended 2016. Commercial coffee segment revenues increased 57.6% to just over $5.3 million in the current quarter as compared to just under $3.4 million for the quarter ended in December 31, 2016. This increase was primarily attributable to the revenue increases in our green coffee distribution business as well as our sales of our Cafe LaRica branded line of the coffee division. Gross profit for the fourth quarter ended December 31, increased 3.7% to just over $23.8 million as compared to $22,975 million for fourth quarter ended December 31, 2016. This gross profit percentage increase was lower than our revenue percentage increased primarily due to the increase in the green coffee business revenue which has lower margins. Overall gross profit as a percentage of revenues decreased to 58.1% in the current quarter compared to 59.8% in the same period last year. The operating loss for the fourth quarter ended December 31, 2017, increased $241,000 to $989,000 as compared to $748,000 for the fourth quarter ended in December 31, 2016. This increase was primarily due to increases in some operating expenses due to international expansion and large expenses of legal fees. The income tax provision for the fourth quarter, which is a bit complicated and something that we need to pay attention to. So, fourth quarter ended December 31, 2017, our financials were impacted by $5,490,000 as an income tax, against, so that’s a $5,490,000 negative impact in the fourth quarter on an income tax provision versus an income tax benefit of $740,000 for the fourth quarter ended ‘16 of last year. The company increased the deferred tax valuation allowance by $3.5 million, just over 3.5 for the year ended December 31, 2017. The final income tax provision for the year, combined with the additional valuation allowance discussed as resulted in an income tax provision of $5,490,000 for the fourth quarter ended December 31, 2017. It’s important to note that this obviously is a non-cash event. Net loss for the fourth quarter ended December 31, 2017, predominantly because of this income tax provision ended up being $6,820,000 as compared to a net loss of $507,000 for the fourth quarter of ‘16. Once again, the increase in the net loss is primarily due to the non-cash impact in the income tax provision discussed a little bit earlier. Adjusted EBITDA for the Q4 ended ‘17 was $302,000 as compared to $352,000 for fourth quarter ended ‘16. As many you have been on calls before. We right to the base on the complication of our business and gap accounting. We think that adjusted EBITDA is the best quarter-to-quarter and year-to-year comparison and it obviously picks out some of those non-cash items and gives us a clear view of the business. Full year 2017 results, let’s get to that. The revenues for year ended December 31, ‘17 increased just under 2% to $165,696,000, this is compared to 162.6 million for the year ended ‘16. During the year ended ‘17, we derived approximately 86% of our revenue from our direct sales operation and 14% came in from the commercial coffee segment. Direct selling segment revenues decreased by just under $3 million or 2% to 142.4 million as compared to 145 million a year ago ‘16. For the year ended December 31, ‘17, commercial coffee segment revenues increased by almost $6 million or just under 35% to $23,246,000 compared to $17.2 million for the year ended December 31, 2016. The increase primarily came from and I think we discuss this earlier. The green coffee distribution business and our own branded Cafe LaRica brand in business. Gross profit for 2017 year-end decreased by 2.6% to 95,565,000, this is compared to 98,137,000 for the year ended ‘16. Gross profit in the direct selling segment decreased by 1.9% to $95,379,000 from $97,219,000 in the prior period, primarily as a result of a decrease in revenue just discussed. Gross profit as a percentage of revenue in the direct selling segment increased by approximately 0.1% to 66.9% for the year-ended '17 compared to 66.8% for the same period, so our GP numbers held pretty nicely through from '16 to '17. Gross profit in the Commercial Coffee segment decreased actually in spite of the increase in revenue to $186,000 compared to 918 for the prior year. The decrease in gross profit for the segment was primarily due to increase in raw material cost and the roasting operations business and additional cost incurred to increase direct labor costs repairs maintenance, depreciation expense as we added a number of pieces of equipment to the roasting operation and lower margin impact from the Green Coffee business. Overall, gross profit as a percentage of revenues decreased 57% in the current quarter compared to 60.3% in the same period. Operating expenses for the year-ended '17 increased 6.1% to $101 million as compared to $95 million for the year-ended '16. Sales and marketing increased 31% to $13.7 million from $10.4 million for the prior year. And this primarily was due to increases in convention and distributor event cost, increased wages and related benefits and increased marketing costs. The increase in convention costs was primarily due to a 20th anniversary celebration event that the company put on last year. General and administrative expenses also increased by 21.2%, $21.8 million versus $18.61 million for the year-ended '16. This was primarily due to increase in legal fees related to litigation, computer and internet related costs, international expansion costs, Investor Relations costs, increase in depreciation, amortization and stock-based compensation costs also increased to the number. Our operating loss for the year-ended December 31 was just over $5.8 million compared to operating income of $2.5 million for the year '16. Total other expenses for the year-ended December 17 increased by $965,000 and this was primarily due to warrant derivative liabilities and extinguishes losses on debt. Income tax provision for the year-end December 31 we kind of covered that in the Q4 numbers, where the entire impact was felt. But in '17 the income tax provision for the year was $2,727,000 as compared to an income tax benefit of $190,000 for the year-end December '16. This increase was primarily due to the increase of deferred tax valuation allowance by $3,550,000 and offset by an income tax benefit for the year-end December 31, 2017. For the year-ended, the company reported a net loss of $12.6 million as compared to a net loss of $398,000 for the year-ended '16. EBITDA, which is Earnings Before Interest, Income Taxes, Depreciation and Amortization to as adjusted to remove the effect the stock-based compensation expense and the change in fair market warrant derivatives and extinguishment losses on debt or adjusted EBITDA decreased to a negative $549,000 from the year-end '17 compared to $6.7 million in '16. Clearly in spite of the progress made in Q4 we have work to do and must focus on profitability moving into 2018. In the first three quarters of 2017, we spent a great deal of expenditures on our international expansion, on scaling our coffee operations and we invested significant dollars in sales and marketing to gain back our organic growth. Although we achieved modest growth numbers in ’17, it was driven from the international and lower margin coffee sales. We've been challenged in overcoming the departure of our sales and marketing team and three distributor groups have took place in 2016 and continues to have a negative drag on organic growth through most of 2017. We have experienced significant litigation expenses related to the situation and we were able to augment the negative organic growth impact in 2017 through our acquisition model. Unfortunately, this is a more expensive revenue to add to the business with integration, other acquisition costs and earn out expenses attributable to this revenue that replace almost $14 million of revenue that we lost due to this situation just discussed. So, with that $14 million negative impact being essentially replaced by acquisition revenue, this is the main driver for the negative impact in the numbers. On a positive note, Q4 showed signs that we have overcome this scenario and this negative organic growth pattern that we've been in since ’16 and we had very small negative growth or organic growth affecting our Q4 numbers and Q4 showing that positive trend as we lead into 2018. Obviously, [Audio Gap] improvement plan, it's in place, we're executing it now and we expect to have it completely in place over the next 90 days. We're going to be streamlining our expenses not only within the direct selling division, also within coffee operations and all of the international offices around the world. We feel like it is time to really focus and curtail a little bit our acquisition model and make them very targeted on only accretive transactions only. This is evident by the last two acquisitions that we did one, with a company Nature Direct, which is solely a company that operates in Australia and we were able to lay that accretive acquisition and that revenue over the top of already in place infrastructure and keep only very small expenses of that acquisition. The second acquisition we've accomplished this year ViaViente is 80% of its revenues is in Japan. We had a center in Japan that was burning cash and laying this acquisition of a Japanese company with revenue being produced in Japan over our infrastructure in Japan has turned that into a profit center for us as we move forward into 2018. You can expect to see more and more of this type of strategy in our acquisition model. We have a number of international offices now set-up in operating all international offices now are producing revenue, we will not be adding any additional international offices unless the region itself can pay for the expansion. For example, we will not expand into Latin America unless we have a profit Latin America base of business to pay for it, we will not be expand in Asian operations until Asian operations can pay for it and we will not be expanding other operations whether that be Canada, New Zealand, Australia or Eastern Europe unless they can be paid for by the region. And we think this is a very good strategy going forward, we don’t want to put burden on the domestic company of direct selling, which is very profitable. We want to make sure that we bring that profitability back to the bottom-line and focus on the profits as we move through 2018. Obviously, you can review our 10-K filling, which will be virtually on all financial sites by tomorrow, it maybe there already today. And with that, I would like to turn the call over to Steve Wallach, who will talk about specifically the international operations in the coffee division.

[Steve Wallach:]

Thank you, Dave. As we mentioned both the coffee division and/or international offices that received very significant investments over the last couple of years and it’s great to see the income now beginning to reproduce in the international markets for example. And you touch on that likely, but I’d like to the answer a little bit deeper. International revenue growth as we discussed overall international revenue is up just about 29% in Q4 2017 versus Q4 2016. This revenue growth is experiencing broad based success with really Russia being the only international market without revenue growth of the ones that we’re discussing. So, Australia, let me discuss through some of the numbers. Australia was up 38.3% in Q4 2017, the New Zealand revenue was up 22.7% in Q4 2017, Canada up 13.9%, UK up 94.1%, Asia as a region has grown significantly logging $1.4 million in sales for the quarter led by Hong Kong, which is up 137.5%, Singapore 426%, Taiwan 785%, Mexico was also up 62.5% that’s up approximately. Dave also mentioned the last two acquisitions one being ViaViente with a primary presence in Asia, primarily in Japan. And then Nature Direct with the primary presence in Australia. And Nature Direct is also a great example, a line extension or a product extension that makes total sense with very environmentally, friendly cleaners, organic cleaners that people have been asking for quite some time, so it was an acquisition that may total sense to all of us. And we really expect to a lot of positive things going forward from these two acquisitions. As Dave said, this really is our near-term strategy in terms of acquisitions that add accretive revenue into regions that we’re already in. And so, we’re excited about that. Also, as Dave discussed our coffee business is in a growth base. 2017, the coffee segment was up 34, almost 35%. We anticipate this growth continuing throughout 2018, all phases of our coffee business are growing, really led by the Green Coffee distribution and/or the [indiscernible] brand of business. Our food services business and our private label business are also experiencing strong growth as well. So, we're excited to see that trend and we expect it to continue in 2018 as well. So, what I'd like to do now is turn the call back over to Dave.

[Dave Briskie:]

So, what I'd like to talk about now is the actually some good news I'm sure everybody will be happy to hear this. I think most of those listening on the call are aware or will be ware obviously when we file our Q1 report. And I believe some of this maybe mentioned in the K. But we are in the middle of -- we filed an S1 earlier this year, we set our sights on doing an offering with the Tripoint Global Equities or bank preferred stock offering that was primarily targeted at investors and our distributor group. And we have had two closings on that offering. What is very interesting about that offering is Youngevity as an entity has some convertible debt notes in these convertible notes coupled about $6.8 million. And in this $6.8 million worth of debt, there is a clause in there that said the next time Youngevity was to raise $3 million, those notes would have to convert to equity. And I'm happy to announce on this call that the bank offering after its second closing there will be one more closing tomorrow. But after its second closing, we've achieved that $3 million target, so that creates $9.8 million plus positive flip on our balance sheet because of $6.8 million of debt now goes away and converts to equity. It will also be beneficial to our cash flow obviously as we move forward eliminating $6.8 million of interest at a higher rate of replacing it with this $3 million of new capital into the business and the new capital does pay a dividend of 5%, but it pays that dividend for 2 years and then itself has an auto conversion feature and converts to equity. So, it's very, very good news. Obviously, our balance sheet as we file next quarter will be much improved with the $10 million improvement just from this offering. And we'll put news on that likely on Monday with the actual final details as we close out the third funding of the -- tomorrow. As we move forward, it is time to and I know this will make everybody listening in. it's time to move and put this things in the hand of investment banker. We've had numerous talks with very, very strong and reputable investment bankers. And we expect to move forward with the banker as soon as we possibly can in 2018. We have our sights set on and looking for and really kind of tripling our efforts and finding analyst coverage for the company. We think it's important, we will be on the NASDAQ almost the year from June. And it's time to set that path. And one of the things that we're noticed as we're Steve and I have been conversations with the investment banking community is they all are encouraging us to provide guidance in a certain way and to develop KPIs and Key Performance Indicators for these calls. So hopefully by our Q1 call which is only about 45 days away but it's not by Q2 we will certainly have all of the systems in place, we're spending money now on creating those key performance in the cadre software pieces that will allow us to report really within seconds on any component of our business and that's well along, so we can when we have these calls, we can deliver KPI performance that you will be interested in hearing as shareholders and we’ll also start to provide guidance on a regular basis. We do expect to deliver in 2018 consolidated revenues in the range of $190 million to $200 million for 2018, and we have an expectation that we will return to profitability by Q4. We’ll get more detailed in guidance as we enter into the subsequent reports of each quarter coming up and we look forward to hearing you and speaking to you on the Q1 call, which is really just around the quarter. We wish everybody a safe and a happy weekend.