Steve Wallach - CEO Dave Briskie - President & CFO

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 to turn this call over to our CEO, Mr. Steve Wallach.

Thank you, Alex. Hello everyone, I want to welcome everybody to the Youngevity International Shareholders Call this morning or this good afternoon where you're at. Speakers on the call today are myself, and our President and CFO of Youngevity, Dave Briskie. We will cover the following topics. We will cover the highlights of Q1 performance, we'll provide an update on new product strategy that ties into our expanding Science Advisory Board. We'll discuss growth drivers in coffee apps and international apps. And what I'd like to do now is bringing Dave Briskie on the call. Hey Dave, are you on this morning.

Yes, I am on, Steve, and I know it's 3

15 here. So welcome everybody. I guess this means we truly are a global company. I'm happy to be here in Taipei, Taiwan, I have a 7 o'clock flight this morning out to Manila, Philippines, I had a really nice event here and excited to speak to all of our shareholders on the call. So let's get right to the highlights. First of all, I'm sure many of you have seen the press release out this morning. We made some progress and that is good to see and let's go over some of that right now. So revenues in Q1 versus Q1 last year, just a few highlights, increased to 11% over the prior year to over $43 million. Obviously we're happy to see revenue increases impacting the numbers. Gross profit increased significantly, 14.4% to $25 million compared to the prior year. Adjusted EBITDA, very important number for our company in this growth phase increased to $1.5 million. This is compared to a negative $1.2 million in the prior year. So pretty significant flip there. And the Coffee segment posted 40% revenue growth over prior year. The 11% increase to $42.9 million or sorry just under $43 million, $42.994 million in this period, as compared to $38.733 million for the same period last year. We derived approximately 82% of our revenue from the direct selling division and 18% from commercial coffee sales. The direct selling revenues increased by just over $2 million or 6.2% to $35 million as compared to $33 million for the same period last year. Commercial coffee revenues increased by almost $2.2 million or just under 40% to $7.683 million for the Q and this compares to just under $5.5 million for the same period last year. Our gross profit increased 14.4% to $25 million in this period and that's just a comparison of - to $21.8 million for the prior period. So overall gross profit as a percentage of revenues increased 58.2% compared to 56.5% for the prior year. Obviously important number to us. The total operating expenses increased just 3% to $24.988 million in this period and that compares to $24.266 million for the same period last year. Understanding the number of international offices that we've taken on, we feel like we're now starting to scale the international operations here. A breakdown of the expenses, distributor compensation and the direct selling segment increased just 1% to $15.578 million compared to $15.419 million for the same period last year. And sales and marketing expenses decreased 4.8% to $3.499 million from $3.675 million for the same period last year. Primarily this decrease was due to a restructure of distributor events and it certainly had an impact as we make those events more efficient and more widely attended around the globe. General and administrative expenses increased 14.3% to - that's $5.911 million from $5.172 for the same period last year, primarily due to increases in amortization cost. As you all know that have been shareholders for a while the acquisition model that we employ does increase the cost of amortizing those acquisitions, such as non-cash expense and also non-cash compensation costs increased as the general and administrative costs for the commercial coffee segment as well as increased international costs primarily related to operations in Russia, Mexico, Taiwan and New Zealand. Total other expenses increased by $1.495 million to $2.082 million as compared to $587,000 for the same period last year. The total other expenses includes net interest expense, the change in the fair value of derivative liabilities and extinguishment loss on debt. Net interest expense increased by $515,000 in the current quarter to $1.712 million, and the change in fair value of derivative liabilities increased by $102,000 in the current quarter to $712,000 which resulted in a reduction to other expenses. We also recorded a non-cash extinguishment loss on debt of $1.082 in the current period as a result of triggering of the automatic conversion of our 2017 notes associated with our July 2017 private placement to common stock. The company's recognized an income tax expense for the quarter of $250,000, which is our estimated federal, state and foreign income tax expense for the current quarter. This compares to an income tax benefit in the prior quarter a year ago for that same period, when we experienced those losses that obviously been working on turning around. The company reported a net loss of $2.3 million in the current period as compared to a net loss of $2.059 in the same period. The increase in net loss was a result of increases in other expenses discussed above, in income taxes and some of odd operating expenses and offset by the increase in the gross profit. As many of you know that was affected by a number of those non-cash expenses discussed earlier. Adjusted EBITDA, earnings before interest, taxes, depreciation and amortization as adjusted to remove the effect of stock-based compensation expense and the non-cash loss on extinguishment of debt and the change in the fair value of the derivatives which we go - call adjusted EBITDA, increased to $1.520 million for the period compared to a negative $1.237 in the same period last year. It's important to know that Q-to-Q from a year ago, we've achieved the $2.7 million turnaround in our adjusted EBITDA from Q1'17 to this year. As many of you know, 2017, there was a number of different things that we were working on overcoming. We discussed in our numerous calls, adjusted EBITDA was negative last year and many years prior we've enjoyed strong positive EBITDA. We start off 2018 with just over $1.5 million in adjusted EBITDA and so we feel like we're starting to get the ship going in the right direction in terms of our profitability, our sales, our revenue, our gross profit. The big effect on income was the non-cash extinguishment loss on our debt conversion. That debt conversion was triggered by the - just that $3.6 million we raised on the BANQ platform by achieving over $3 million. We had a trigger event on $7.2 million of our debt, and that debt converted to equity. Important to know that conversion was at $4.60 per share. And that had a very positive impact on our balance sheet. Our shareholder's equity improved, you will notice on our balance sheet, by $8 million and we also had an income tax provision hit this year of $250,000. And I guess I'd never - I never really thought I'd be happy to talk about paying income taxes but as many of you know the IRS looks at income differently than the SEC, who is obviously more conservative and protects shareholders. And so therefore we had to take a $250,000 expense to income tax based on the performance of our gross profit and gross operating income for 2017 Q1. With that, I encourage you all to go read the 10-Q that will be up on all financial sites today or at the latest tomorrow, but likely posted today. And with that I want to also encourage you to go to ygyi.com, our corporate site, where you can find our postings also on the corporate site. I'd like to turn this call now back over to CEO, Steve Wallach.

Thank you, Dave. Let's see with that let me get into some of the direct selling highlights and numbers, Dave touched on this already. But we're pleased to see our direct selling division stabilizing its organic growth, which has been a challenge over the last couple of years. The international markets are now contributing to revenue and revenue growth. This has been a sizable investment as all of you certainly know, over the last couple of years or last several years. And to see these markets revenue growth and performance is obviously encouraging. Our acquisition strategy of overlaying accretive revenue on top of infrastructure has proven to be effective. For example, the Nature Direct acquisition is contributing nicely to our Australia and New Zealand growth and profitability. And we expect to integrate their line of healthier green cleaning products here in the US, at our convention in San Diego in August. Similarly, the acquisition of ViaViente is driving nice revenue increases in Japan and a major driver of our growth in Asia. Japan is very quickly becoming a - has very quickly become a profitable market for our company. And let me go through some of these international numbers. For Q1 2017 versus Q1 2018 the growth represent in Australia and New Zealand as a region over Q1 2017 for Q1 2018, there is an increase of 37.6%. Asia as a region is up 557 - almost 558%, which is where Dave and I both are currently heading towards our international Asian convention later this week. Canada is up 13%, Q1 2018 over Q1 2017; Great Brittain 32%, just over 32%; Latin America almost 17%, Jamaica up about 44.4% and Russia saw a decline of about 22 - almost 23% although we've made some recent changes there as well and we're seeing some nice indications of growth there as well. Speaking of the San Diego convention as well, that's coming up in August later this year, and we're excited about all sort of announcements such as the Nature Direct product, introduction to the US market and to other markets as well. Certainly, a product category that we've been looking into and then excited to be able to add to our existing product lines. We certainly don't have those types of products currently the overall general product range. And so we're excited to introduce this to our overall database for example, later this year. Also we intend to introduce some additional exciting products at our San Diego convention. Certainly some that we've been researching and working on for more than two years. So we definitely are very excited to make those announcements later this year at the convention than certainly out of the convention. So that's exciting. And with that, I guess what I want to do now is bring Dave back on the call to provide some additional details on other KPIs and growth of our coffee segment, Dave you still there?

Yeah, I'm here and yeah, I want to talk about some of this, that many of you know, when you're all waiting for us to talk about our move to the investment banking community. We talked about the BANQ platform being the final kind of piece before we would sign with an investment banker. And one of the things we were learning and was required from the number of banks that we had interviewed was this notion of being able to track KPIs. And so from a technology standpoint, we put our technologies team to work and have been creating various dashboards that will allow us to deliver these KPIs. I think we touched upon it briefly on the last call. And I'm proud to say now that we can, we have that a push-to-mobile capability. We have it on our computer dashboards as executives for the company. We are starting to get that data and be able to compare data, so we can make expedient decisions for the business. Some of the KPIs that we are evaluating and continue to evaluate and we'll work as a team to see tangible results on. The first one is, we look at auto ship as a percent of sales, obviously continuity business is very important, it also tells us the strength of our company. It's something that the investment banking community found very impressive actually, that Youngevity's auto-ship revenue is over 50% of its gross sales. And so that is a KPI that we watch very, very carefully. We are happy to see a trend of growth in the number of our customers and our distributors that are putting our products on a monthly continuity program. It tells the strength of our product line, frankly, certainly coffee and the direct selling area is growing nicely and people have a tendency to put that on an auto-ship type item and to compete with the behemoth Amazon out there when you auto-ship with Youngevity. The shipping is free and so it allows us a nice competitive edge. And as we moved through the quarter, we saw auto-ship rising and impact in April, which I know is the next quarter. We saw that number actually increase to the highest level we've seen in some time. We also are tracking numbers of orders, our orders are definitely moving up, the most encouraging is our orders of new customers, each mid-month in February to March, and now March to April, the number of new customers enjoying Youngevity products is significantly on the rise and that's good to see. Also our distributor growth now is on the ride, March and April, where some of the largest acquisitions of new distributors, in fact in the month of March alone, we added over almost 6,000, but 5,800 new distributors were - got involved in Youngevity. And the - we also - and I'm giving you a taste of these KPIs ordering distributors versus ordering customers, those numbers are also on the rise. And one of the most encouraging KPIs that we're evaluating is average distributor order and average per distributed order. Those numbers have gone up each month since November and have actually reached the highest point in April on a significant rise in our average order. The average order now for the company of Youngevity, for our distributor base has reached $108 - $109 for each average preferred customer. And the average per preferred customer order now is over $142. And the average per distributor order now is $170, $160 per month. The industry average runs in the $80 range. So this strategy of Youngevity to expand multiple vertical operations to provide opportunities for our distributors and customers to kind of swap where they shop and buy other and influence other products that will allow them to earn commissions as they influence on other products is showing some nice results and driving our top line revenues. So that is encouraging to see. As we refine these KPIs, we will be building a KPI report that we will be sharing on each shareholder call and measuring them Q-to-Q, so that you as our shareholder base can understand where the company is doing well and where the company is challenged and then we'll roll out our plan to how to deal with challenges and how to pour gasoline on the fire on those areas that are doing well. As it relates to coffee, obviously we're pretty excited with the growth in coffee at 40%. The coffee business is really starting to hit on all cylinders, a very significant investment that the company has made in the coffee space, a big move in owning our own plantation, building our large processing facility and building our - and expanding our roasting operation in Miami, Florida. The coffee business is really doing some interesting things, and it's very, very relevant today. I encourage you as shareholders to pick up the Time Special Edition magazine that will be out on shelves until the middle of June. The entire segment is on coffee and the growth of the industry and the big guys getting bigger, and we feel like we've positioned the company in a very good spot with our coffee business. As you know for a smaller coffee business, we have built the company in the coffee sector that allows us to scale in a number of areas. We're seeing scale on our green coffee distribution business, we're seeing scale on our own brand like Cafe La Rica brand and Josie's Java House, I want to touch on that for just a second. We don't forget a year ago, we became the official Cafecito of the Miami Marlins Major League Baseball team. This allowed us to position our brand - our company owned brand with major brands like Budweiser in the stadium and it allows the consumer to look at our Cafe La Rica brand as a player in the marketplace in this crowded space that you may call coffee. So what was the effect of that? Here we are. We started our second year, major league baseball season just got underway a month ago. It's very interesting statistics, 2017 we sold a 125,000 units of our Cafe La Rica brick packs in the first quarter. So that was the quarter prior to Major League Baseball season starting. So what type of effect has this engagement with the Marlins and this building of our brand had in terms of our distribution. So we sold a 125,000 units in 2017, pre-anyone knowing where the official Cafecito with the Marlins. And in 2018 Q1, we sold 407,000 bricks through at retail. That's a 224% increase in our own brand. Food service sales, which of course our food service business as you all know, is branded Cafe La Rica as well, as we're offering coffee to drink in food service accounts where people understand that the coffee they're enjoying after a meal is our Cafe La Rica coffee. So we launched that in parallel with this opportunity with the Marlins to grow our brand. Our food service sales in 2017 were just $46,000 and in Q1 2018, keep in mind Q1 2017 we were just thinking about this knowing the direction we were heading and just launching in the food service business. In 2018 Q1, $145,000 in food service for the quarter alone, over a $98,000 increase and 211%, and that is the highest margin business there is in coffee is at the food service level. So we're very, very bullish on what we're seeing our own brands doing. We just completed a reset on all 21 Fresco Y Más positions which was the Winn Dixie owned Latino segment of the market. We are now Cafe La Rica in the first position as a brand in all 21 of those stores and who we took that first position from was Pilon and Bustelo. And so we're very, very proud of that obviously, Pilon and Bustelo is a major brand, many of you are aware that just around four years ago it sold for over $300 million to Smucker's. And so one of our strategies was to build our brand in parallel to their strategy and to be able to obtain a first position in a retailer in South Florida, along with a few other retailers. It starts to tell us that we're gaining a foothold in that market and this strategy that we embarked on is definitely paying dividends. The new distributors that we've been working on, we know that our strategy is to really take advantage of the South Florida market, which is the market for coffee particularly Espresso. And just like Pilon and Bustelo, strategy when they sold to Smucker's, they only were in two markets, they were in Florida and New York. So obviously, we've been working on distribution in New York and we're very, very happy to say that we have signed United Brands in the Northeast. They're currently a distributor of not only our Bricks but our Josie's Java House K Cups in the Northeast. And we're seeing uptick in various retailers in Northeast and the New York area in particular. We have now started - we discussed on our previous call, the private label opportunity with a company call Safe Mart [ph], a Florida chain. They have over 280, 270 supermarkets. That new contract is just now shipping. So we will see new results for that and a sizable K Cup order from Safe Mart will now start to ship in the month of May or June and that contract is $2.8 million in yearly sales on that new private label business. That was the first private label cross account brought by Damon Brothers, our national account representation team and there are a number of other opportunities going on with Damon, that I cannot yet disclose, but we're very bullish on maintaining our growth in private label with coffee and continuing to really grow all of the sectors for our coffee business. With that, and I'm glad to turn the call back over to Steve Wallach to finish up the call. But before I do that, I've got a number of text from our distributors out there and shareholders that have be - distributors who had become shareholders. And we keep asking in - then everyone's waiting and kind of clambering for whether or not we will sign an investment banker. And I will tell you that the decision has been made. The endorsement of a contract is imminent we've talked about it a number of times. And we're very - we've been very patient about doing this. And so expect that to take place very, very shortly, and we will move forward with an investment banking community. Those of you that are paying attention to our filings, you will see a filing coming up soon. And I think you'll be pleased with the direction of the company in that area. With that, I turn the call over to Steve Wallach.

Thanks Dave. Definitely exciting updates on the coffee side, I can tell you being here in Asia I'm missing my Be the Change Coffee. I'm drinking more the local coffee which leaves a lot to be desired by comparison. Of course everything does by comparison to the Youngevity coffee and my favorite Be The Change coffee. So looking forward to getting back and getting more of that. With that, I'm going to wrap up the call but I just want to reiterate before I do, that we remain optimistic that we will deliver between a $190 million and $200 million in revenue for 2018 and continue improving adjusted EBITDA as we've been discussing on this call. And calls leading into this call as we progress throughout 2018. So with that I look forward to seeing and hearing from everybody and everybody being on the next shareholder call coming up as well. So with that I'm going to wrap up this call. Everybody have a great rest of your day. And thank you for attending this shareholders call. Thank you.