Youngevity International, Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Welcome to this Youngevity Shareholders Call. During this call, we will be making forward-looking statements regarding Youngevity's current expectations and projections about future events. Generally, the forward-looking statements can be identified by terminology such as may, should, expects, anticipates, intends, plans, believes, estimates and similar expressions. These statements are based upon current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, including those set forth in Youngevity's filings with the SEC, many of which are difficult to predict. No forward-looking statements can be guaranteed and actual results may differ materially from such statements. The information on this call is provided only as of the date of this call, and Youngevity undertakes no obligation to update any forward-looking statements contained on this conference call on account of new information, future events, or otherwise, except as required by law. It is my privilege now to turn this call over to Mr. Steve Wallach our CEO and Co-Founder

[Steve Wallach:]

Hello. I want to welcome everyone 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 Q3 performance, we'll provide an update on our new Hemp FX brand launch. We'll discuss growth drivers in the coffee ops and international operations. And I'd like to now bring Dave Briskie on to the call now.

[Dave Briskie:]

Thanks, Steve. Welcome to all our shareholders, our analysts, that are on the call here today this afternoon. This is certainly the most well attended call that we've had. So, thank you for caring to look into YGYI. So let's get right to the numbers. We've obviously issued a press release today that outlines the numbers and the filing will be made by the deadline. So you are certainly welcome to take a look at our Q3 filing that will be up on all financials sites soon. For the three months ended September 30, 2018. Our revenues declined 12%, to $39.082 million as compared to $44.395 million for the three months ended September 30, 2017. We derived around 88% of our revenue from our direct selling business and approximately 12% of our revenue from our commercial coffee business for this quarter. Direct selling revenues decreased by $3.6 million or 9.7% to $34.280 million as compared to $37.954 million for the same period last year. This decrease was primarily attributed to general weakness in North America direct selling business and supply chain challenges that predominantly negatively impacted our international market growth. Steve Wallach will talk to those supply chain challenges later in this presentation. In addition, the Company changed its promotion strategy where it has significantly reduced promotions that impacted top line revenues through discounting while maintaining commission levels. The promotion in the current quarter targeted products with higher gross margins and utilized incentives that had less costly impact on our profitability. For the three months ended September 30, 2018, our commercial coffee segment revenues decreased by $1.6 million or 25% to $4.8 million as compared to $6.4 million for the three months ended September 30, 2017. This decrease was primarily attributable to $2.4 million in green coffee sales, offset by an increase in the roasted coffee sales side of our business. The decrease in green coffee sales was primarily due to our domestic finance company no longer interested in financing an oversees green coffee business, this should be noted will only cause a temporary disruption in sales for just this quarter only, as other arrangements for financing, our green coffee business are already in place. For the three months ended September 30, 2018, gross profit decreased approximately 8% to $23.7 million as compared to just under $25.8 million for the three months ended September 30, 2017. Overall gross profit as a percentage of revenues increased to 60.7%, compared to 58% in the same period last year. This is due to the promotional discussion in terms of our product promotion that I mentioned earlier. Gross profit as a percentage of revenues in the direct selling segment increased to 68.9% for the three months ended September 30, 2018, compared to 67.1% in 2017, primarily due to price increases on certain products as well as our promotion strategy. For the three months ended September 30, 2018, our operating expenses decreased 8.9% to $25.118 million as compared to $27.581 million for the three months ended September 30, 2017. Distributor compensation expense decreased 13.3% to $15.076 million from $17.391 million for the same period a year ago. This decrease was primarily due to the lower revenues discussed above and the promotion strategy discussed earlier in this call. Distributor compensation as a percentage of direct selling revenues decreased to 44% for the three months ended September 30, 2018 as compared to 45.8% in the same period. This is primarily attributable to the price increases reflected in revenues, as well as our promotion strategy, which impacted commission based revenues. Our sales and marketing expense decreased 2.7% to just over $3.9 million from $4.074 million for the same period a year ago. In the direct selling segment, sales and marketing costs decreased by 3.6% to just over $3.7 million in the current quarter from just under $3.9 for the same period a year ago. This was primarily due to lower compensation costs and lower convention costs in the current quarter compared to the same quarter last year. General and administrative expenses decreased 36.6% to $3.880 million from $6.116 million for the same period last year primarily due to the contingent liability revaluation which resulted in a benefit of $2.6 million for the three months ended September 30, 2018 compared to a benefit of just $340,000 for the same period last year. This benefit included a $2.2 million adjustment to our contingent liability related to one of our acquisitions. General and admin expenses also decreased both due to lower legal expense and compensation expense, offset by increases in depreciation and amortization expense and investor relations expenses. We recorded a $2.2 million loss on impairment of intangible assets for the three months ended September 30, 2018, related to the same acquisition for which the Company had significant revaluation of the contingent liability discussed earlier. Our operating loss and this is a couple of areas that I really like to pay close attention to, due to all of the non-cash transactions that are flowing through our financial statements. And so there's a couple of areas that it – those that are institutional investors, I'm sure will be looking at those that are more of our retail investment community that may not have the same level of sophistication as an institution, would probably want to take a look at our operating loss area, which is not affected by non-cash expenses as well as adjusted EBITDA. Operating loss decreased to a loss of $1.4 million compared to a loss of $1.8 million for the same period last year. Total other expenses increased by $6.4 million to $6.945 million as compared to $541,000 for the same period last year. Our net interest expense decreased by $345,000 to $1.4 million compared to just over $1.7 million for the same period last year. The change in fair value of derivative liabilities, a non-cash expense increased by $7.057 million for the three months ended September 30, 2018 to a $5.538 million expense compared to a benefit of $1.519 million for the same period last year. Various factors are considered in the pricing models and we use the value the warrants including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk-free interest rate. The increase in the change in fair value of the warrant derivative was primarily due to the rise of our Company’s stock price. So we have an inverse relationship to this non-cash expense. This quarter our stock had risen and therefore we had a large non-cash warrant derivative liability expense. And when we compared it to last year for the period our stock had fallen, which actually created an inverse relationship. Hence, why our derivative liability compared to last year increased on non-cash basis $7.057 million. We did report a net loss of $8.410 million, which was substantially non-cash as described, predominantly coming from the change in fair value of derivative liabilities as well as non-cash impact from amortization, the non-cash impact from depreciation and the non-cash interest expense impact as compared to a net loss of a $1.068 million for the same period last year. The increase in net loss was the result of the increases in these expenses just discussed. We also in addition recorded an income tax expense of $59,000 in the current quarter compared to an income tax benefit of almost $1.3 million for the same period a year ago. Now onto adjusted EBITDA, which those of you that have been on our calls know that it's one of the areas that we certainly encourage investors to take a close look at, in terms of really evaluating our Company's performance. And it is a non-GAAP measure adjusted EBITDA. So EBITDA, which is earnings before interest, income taxes, depreciation and amortization as adjusted to remove the effect of stock based compensation expense, the loss on impairment of intangible assets, the non-cash loss on extinguishment of debt. And the change in fair value of warrants, derivatives or adjusted EBITDA increased to $2.670 million for the three months ended September 30. This compares to a negative $359,000 for the three months ended September 30, 2017. So there's a few areas I'd like to point out to our shareholders, investors that I believe are significant interest to some in terms of comparing not just the quarter but how we're trending for the nine months of the year. So the year-to-date performance compared to last year for the nine-month period. All this information is clearly outlined in the 10-Q which will be posted on all financial sites, but can easily be found for all of you at YGYI.com, which is our investor relations site. All the information is always there for your viewing. So revenue for the nine months ended September 30, 2018 increased 1.3% to $126.331 million, 84% of the nine month revenue has come from the direct selling space and 16% from our coffee operation. Direct selling up 0.3% and coffee increased by 11% for the nine month period. Gross profit increased approximately 3.3% to $74.1 million as compared to $71.7 million versus the same period a year ago. In overall gross profits as a percentage of revenue increased to 58.7% from 57.5%. Our operating expenses decreased 2.3% to $74.8 million, as compared to $76.6 million for the nine months ended September 30, 2017. Sales and marketing expense decreased slightly and G&A expenses decreased 9.2%. We cut our operating loss for the nine month period by $4,164,000 to an operating loss of $729,000 for the nine month period ended September 30, 2018 as compared to an operating loss of $4,000,009 for the same period a year ago. For the nine month period, our adjusted EBITDA improved from a negative $851,000 through 2017’s nine month period, to a positive EBITDA of over $6.3 million, actually $6,393,000 for this nine month period. This represents a positive swing in adjusted EBITDA of over $7.2 million versus last year. I would now like to turn this call over to our CEO, Steve Wallach to give you an update on some areas of the business that I’m sure, you’ll want to hear about.

[Steve Wallach:]

As many of you know, in August, we announced the launch of three new products that contain hemp-derived cannabidiol. And we later added two more products to our HempFX branded products. I’m pleased to report that our HempFX products are exceeding expectations in the areas of revenue generation, new customer and distributor acquisition and current distributor interest in marketing the Youngevity's latest brand. You may recall that on October 18, our website hempFX.com became fully transactional since launching this line of products sales revenue has already eclipsed $400,000. We underestimated the initial demand for this line of products and it’s currently oversold in the HempFX line under the following products, Trio Bundle, HempFX Soothe and HempFX Relax. We have been able to increase our production on the HempFX product line. And we have a commitment from our suppliers to increase production on our next several orders. We anticipate being back in stock on the full line by November 21, just a few weeks or a couple of weeks from now. When all back orders that we shipped and delivered to customers, we are pleased with our initial product launch and we will continue to ramp up production is demand for these products develops. Based on the obvious brand acceptance, we will accelerate the launch of additional products as well. Given our competency and the vertical integration of our coffee operations, we are confident that we will be well positioned to introduce a coffee product into our HempFX brand offering soon. So now I want to move on to international as well. The third quarter’s revenue was negatively impacted by supply chain challenges as Dave had mentioned earlier, experienced predominantly in our international markets and a policy change implemented by our finance company within the coffee segment in regards to international business. Despite these challenges, our year-to-date number is continue to improve over last year in key financial metrics including revenue, operating income and adjusted EBITDA, which as Dave outlined has improved dramatically over the last year. In terms of supply chain challenges, this had the most significant effect on our growth in Asia, our liquid supplier for SanoVita product abruptly went out of business and forced us to seek alternate supply. Given we had to change suppliers, which always has an affect on the taste of liquids in particular, we chose to change the formula somewhat for SanoVita and to implement a product that had new preservatives, in other words to eliminate the preservatives which had been a request from our distributors in the field, selling our products and as well as our customers in the Asian markets. And we felt this was a good time to implement this change. As you may recall, we had our strongest month in Asia, last quarter with the last month of the quarter that being June, being particularly strong. We entered Q3 in an out-of-stock situation on our best-selling product and did not get back into stock until the quarter was essentially over. This created a disruption in sales in the following markets

[Dave Briskie:]

Yes. Thank you, Steve. And that was a great update. Appreciate that information. I'm sure our shareholders do as well. As we look into our coffee business, we discussed the green coffee business, which I'll call kind of a one-time event for Q3. As we have been moving to 2019, which will be the beginning of our $250 million coffee contract at $50 million per year. We have already made arrangements to acquire that green coffee in inventory and to deliver that piece of business. So separate financing arrangements and separate acquisition for green coffee has already been made. And so it was unfortunate that we had this incident in Q3, which caused us a revenue decline in our green coffee business. But we don't expect that to have any impact in future revenues or impact at all in 2019. On a real positive note on the roasted side of our coffee business, we’ve really had the best quarter we've ever had in the history of the coffee business. Our overall sales on roasted coffee was up over 39% compared to prior year. We landed new business with a couple of exciting retailers, one being Save Mart so that is all plus business. And we also now are doing Whole Foods, private-label business and so that is all plus business that contributed to our 39% increase. We had year-on-year or as compared to last quarter volume increases on our Café La Rica Brick 10-ounce business, which is of course the official Cafecito of the Miami Marlins that we started a year and a half or two ago and that business and that brand continues to gain steam. In fact, Café La Rica at associated grocers and the super value chain is up 31% over last year for the quarter. Our business with Wal-Mart is up 65% in Q3 this year versus last year. Our business with Winn-Dixie now is all new business on the Café La Rica brand. And of course United Foods out of the northeast is also new business on the Café La Rica brand. So for Café La Rica espresso brand, our business versus prior is up 98% over last year. I also want to note in the private-label side of our business, we've renewed our contract with a Norwegian Cruise Line, NCL. In our business with NCL is now up 11% over last year. And our food service program, which is predominantly with our Café La Rica brand in restaurants and Bodegoes and different cafes is up 54% percent versus prior. So certainly a strong year for Café La Rica and given that this was in the summer months, we can only anticipate that as the weather cools, we should continue to see growth with our Café La Rica brand in our private-label opportunity. I want to touch base a little bit because it's such a sizable contract as we go into next year in 2019. I've been asked by our analysts and from different institutional investors on how we're going to be able to move all this coffee in 2019. We actually have entered into a lease agreement with a new mill. So we will be operating two mills into 2019. Those mills are now up and running and taking in coffee as we speak. So that is our plan for 2019, we have bolder plans for 2020 and beyond, which we will probably begin to disclose and announced as some things firm up in terms of how we'll manage this $250 million contract in 2020 and beyond. We're going to be providing guidance as we move into 2019, something we've been reluctant to do. In terms of our revenue guidance for 2019, we've created a range for revenue. On the low end of the scale, we are $215 million, high end of the scale of $235 million. That is less any future acquisitions or incremental accretive businesses that might be part of the equation. This is based on our current business. And we expect to reach profitability by the third quarter of 2019. We also expect adjusted EBITDA numbers between $15 million and $18 million for 2019. With that, I am fine to open up the call.

[Dave Briskie:]

[Operator Instructions] Okay. We're bringing axiom onto the call for question. [Operator Instructions] Mr. Sutherland, Will Sutherland with Benchmark. Have a question?

[Bill Sutherland:]

Yes, yes. Hey Steve. Hi, wanted to understand a little bit better on the impacts to the direct selling business. You called out three things and you sized one of them, which was the supply chain disruption being $5 million. So where would you – how would you raise the promotion strategy change? And then just kind of curious about what you're seeing is – what your thoughts were when you said general weakness in the domestic direct selling market?

[Steve Wallach:]

Sure. First of all, in the general weakness, those that followed the direct selling channel, there's an inverse relationship between the job markets and the U.S. economy to the direct selling business. With it being a lot of the sellers being part time sellers when there is really, really strong U.S. job market economy, we can see some general weakness in the direct selling space in general. However, we feel the biggest impact was in the U.S. due to our promotion strategy. We felt like driving top line sales at the expense of delivering bottom line performance was not a good long-term strategy for our business. And as we started to scale, we did not feel like this type of revenue is in the best interest of our shareholders for the long-term. So we feel the most significant impact was the change in this promotion strategy that really put a lot more dollars in the distributors’ pockets, which is always good. But it was a discounting strategy that we were using to really kind of jumpstart our business based on some circumstances we were facing last year that we did not feel we needed to do any longer with our international growth starting to come forward and our plans for 2019. So we felt fixing the model now, made the most sense. And so we made those changes in our promotion strategy, which certainly affected our top line but also had a nice positive impact on our bottom line.

[Bill Sutherland:]

That's good. I want to just hear a little bit more about HempFX as far as, you said the increment – the revenue posted since you went live transactionally on the site was, it was the last week of October and you already booked $400,000. Is that accurate?

[Steve Wallach:]

Right. So the website went live October 18 and we've exceeded 400,000 in sales of HempFX products so far.

[Bill Sutherland:]

And you were out of stock on three products?

[Steve Wallach:]

We're currently out of stock on three products and it'll be – we anticipate November 21, to be back in stock and then fulfilling those back orders.

[Bill Sutherland:]

You also mentioned, Steve, that it had been expanded your distributor ranks or did I get that wrong, the other impacts of the…

[Steve Wallach:]

What we're also seeing is that the HempFX product introductions are attracting new distributors and new customers. So it's not that it's expanded the numbers per se compared to what we were seeing before but we're reaching new distributors and we are bringing in obviously new distributors and new customers that we feel we would not have brought in otherwise.

[Bill Sutherland:]

I see. The infused coffee intro – is that before year-end do you think?

[Steve Wallach:]

Probably the first quarter of 2019, we're well down the road on the R&D and really creating some amazing products in that category. But we're looking at introducing finished goods Q1 of 2019.

[Bill Sutherland:]

Okay. And then last, Dave, I thought maybe if you could just give us a few highlights. So weren't any in the press release. I know the filing, we'll have everything but on the balance sheet at September 30 and maybe related to some of the financing activities that you've completed?

[Dave Briskie:]

Yes, the financing activity has gone very well. Bill, a couple of things that happened, first of all, we had some convertible debt pieces and due to the recent rise in our stock performance are convertible debt, now is all actually been converted to equity. So essentially other than our line with a Crestmark Bank on the coffee end of the business, the company has eliminated it's debt that will likely be seen in Q4’s numbers. Although in the 8-Ks that we filed in the 14C, one can determine that those two pieces of debt will no longer be part of the business as we move into Q4. So it is in a subsequent event filing on the financials, of course, our cash position has increased fairly significantly and actually our cash position and the reduction of our payables. So certainly one of the focus was to fortify our balance sheet as we moved through Q3 and that will continue into Q4 to set us up for 2019.

[Bill Sutherland:]

And so the Crestmark line – would it be over the line replacing them in the fourth quarter?

[Steve Wallach:]

We're evaluating different lending relationships and a senior secured lender for the business as it makes sense. But currently we're talking about only $4.5 million of debt on the Company in terms of either convertible type of debt or debt that buy assets. And of course, we do have the building mortgage of about $3 million. So that represents the debt on the business.

[Bill Sutherland:]

Okay. So your, you'll put your, replacing Crestmark for the fourth quarter to do whatever shipments you are going to do.

[Steve Wallach:]

Actually, we have that’s on the green coffee side of the business. So Crestmark is still in place on the domestic side of the coffee business and on the green coffee business. We through our consortium have, have a financial arrangement on our green coffee to acquire all the coffee for the green coffee contract that starts ship in 2019.

[Bill Sutherland:]

Okay. So, so that's, that just won’t be part of the Q4 as far as the shipments, [indiscernible]. It sounds like.

[Steve Wallach:]

On the Crestmark side, yes. In other words, our roasted coffee business is Crestmark is financing.

[Bill Sutherland:]

Okay. Very good. Thanks.

[Steve Wallach:]

Appreciate it. Bill.

[Dave Briskie:]

We have a caller out of Arizona. the floor is yours.

[Unidentified Analyst:]

Well, going forward, how are we going to help those who do not have online access, you know, what kind of online access prefer paper catalogs and whatnot.

[Steve Wallach:]

Are you talking about in the direct selling into the business?

[Unidentified Analyst:]

Yes sir.

[Steve Wallach:]

Okay. So Youngevity has developed an app that we've launched called the Youngevity GOTO App and all of our catalogs now are done virtually and in digital format that allows it to be shared to all types of prospects. This really is the way of the future. And so all of our digital assets are now app based and shareable. And we are, already this was an app that was launched in August and those of you on the call may be interested to know that we've already had shares of various digital marketing pieces of 20,000 different shares through this digital platform. Thank you for your question.

[Dave Briskie:]

Mr. Mike Rousselle out of San Jose, California. Okay. It looks like those are all the questions that we have a hang on one last question.

[Unidentified Analyst:]

Dave. Thank you for taking the question. Is there any further plan to, further penetrating retail doors with the coffee?

[Steve Wallach:]

Well, obviously there's a, we are penetrating retail doors with our Cafe La Rica brand and our Josie's Java House brand, continuously. We are seeing great results with our relationship with Damon Worldwide, which we announced a little over a year ago, which is really the largest rep group with national accounts and they have been then really helping the growth of our business and landing some of these more prestigious accounts. And our opportunity to bid on business has been driven by their capabilities. So, given the strength of the brand and obviously the sales success, particularly of Cafe La Rica, it makes our job a little bit easier in terms of performance and growth, as a Cafe La Rica has become the number two selling Expresso in South Florida, which is the largest Expresso market in the United States.

[Unidentified Analyst:]

Great. Thank you.

[Steve Wallach:]

You're welcome.

[Dave Briskie:]

Okay, so we're going to close out the call now. We appreciate everyone. It will be recorded and the call will be up on our ygyi.com site. Thank you everybody for listening in.