Youngevity Makes Move To Clean Up Balance Sheet
Oct. 31, 2018 5:12 AM ET|5 comments | About: Youngevity International, Inc. (YGYI)
Spencer Osborne
Spencer Osborne
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Summary
Company eliminates secured convertible debt.
The move cleans up its balance sheet substantially.
GAAP accounting may be confusing, but this move is a positive.
Youngevity (NASDAQ:YGYI) delivered some positive news that many average retail investors may not immediately grasp. In an 8-K filed on October 29th, the company indicated that it has exchanged stock to close out virtually all of its secured convertible debt. The news was met with a muted reaction on the equity, but that can be expected, as the benefits of the move are not vividly apparent to many investors.
GAAP accounting is a set of rules that account for how a company deals with various aspects of accounting. In general, a lot of these rules can be straightforward. Confusion often results from some of the more nuanced aspects of accounting rules as it relates to more complex financing instruments that involve warrants of convertible bonds. What I will try to do is outline why this move was good in layman's terms, while also discussing some potentially bad optics that relate to GAAP accounting.
First things first, when the company reports its numbers in both Q3 and Q4, some of them will look very ugly. The reason for that is actually quite simple. Warrants and converts do not really tie to dollars, but instead, tie to stock. To better explain this for the less experienced readers, I will ask the more seasoned ones to be patient.
The price of stock is more volatile than the value of a dollar. If there is a convert that allows its holder to obtain a share of stock for $5 but the current price is $20, what does that mean? It means that the company will have lost $15, because it must give an asset worth $20 to satisfy a contract worth $5. That loss, however, is not a cash loss - it is a paper loss. Why? Because the stock certificate is simply a piece of paper. From an accounting standpoint however, the value of the loss must be captured and reported.
Now, some readers may ask the question of why a deal struck in Q4 will impact Q3. The answer is that this deal in and of itself will not make Q3 look bad on paper - it was the sudden rise in stock price that will make it look bad. This Q4 deal will correct that issue because it will essentially remove the convertibles from the equation and, by extension, clean up the balance sheet greatly. Q4 will show the impact of that clean-up on paper, but subsequent quarters will no longer need to worry about this matter.
So, What Happened?
A long-term substantial shareholder, Carl Grover, exchanged all amounts owed under an 8% Secured Convertible Promissory Note in the principal amount of $4,000,000 which matures on July 30, 2019, for 747,664 shares of the Company’s common stock (at a conversion price of $5.35 per share) and a four-year warrant to purchase 631,579 shares of Common Stock at an exercise price of $4.75 per share.
In layman's terms, the secured debt and converts are erased, and Mr. Grover has a right to purchase 631,579 shares at $4.75
Ascendant Alternative Strategies, LLC, acted as the Company’s advisor in connection with the Exchange transaction. Upon a closing of the Exchange, subject to stockholder approval and pursuant to an Advisory Agreement with Ascendant, the Company has agreed to issue to Ascendant 30,000 shares of Common Stock, a four-year warrant to purchase 80,000 shares of Common Stock at an exercise price of $5.35 per share (the “$5.35 Warrants”) and a four-year warrant to purchase 70,000 shares of Common Stock at an exercise price of $4.75 per share (the “$4.75 Warrants”).
In addition, Mr. Grover had previously exercised his right to convert all amounts owed under an 8% Series C Promissory Note held by him in the principal amount of $3,000,000 maturing in October 2018 into 428,571 shares of Common Stock (at a conversion rate of $7.00 per share), in accordance with its stated terms.
What Does It Mean?
The balance sheet is now much more clear, which is a distinct positive. In addition, the company is no longer collateralize assets to secure the notes. This debt was secured debt. With the debt being paid, there are no longer any liens against assets. With assets free of leans, they could be used in the future for better terms on non-dilute financing at superior rates. This also means that beginning in 2019, the balance sheet will be clearer, and thus, will be a bit less susceptible to GAAP rules applying a paper loss quarter after quarter.
Simply stated, a cleaner balance sheet creates better optics, better maneuverability, and a better chance for equity appreciation. It can also make deals better and help in any negotiations, as potential partners will look at the financials.
Speaking of 2019
Speaking of 2019, it would appear that things are shaping up well. With substantial coffee deal on the books, CBD products now being sold, and the company's stated goal of buying a hemp farm to produce highly desirable CBD oil and CBD islets still waiting in the wings, this equity is poised to make some meaningful moves that could make the recent run from $3 to $16 look tame. Even better, future moves would be based on a more solid foundation than the speculative move that rocketed this stock in early October.
As some readers may be aware, there has been a bit of a selloff in CBD stocks of late. This week, India Globalization Capital (NYSEMKT:IGC) got rocked when it was announced that trading was being suspended and the company was going to be delisted from the exchange. The exchange stated, “substantially discontinued the business that it conducted at the time it was listed or admitted to trading, and has become engaged in ventures or promotions which have not developed to a commercial stage or the success of which is problematical”. In simple terms, it seems to have now been labeled as a scam.
Last month I penned an article titled "Youngevity Could Be The Most Undervalued And Safest CBD Play On The Market". That article outlined several reasons why it is more of a safe way to play the CBD space. Youngevity is an already established business that already possess the tools and know-how to not only enter the CBD space, but to do so in a big manner. It is an experienced retail seller, an experienced coffee producer, and an experienced distributor. While the market shakes out the bad apples of the CBD space and rids itself of the "Johnny come lately" entrants, Youngevity is poised to take advantage.
The stock market is not always efficient, but it is supposed to be forward-looking. Readers who played Youngevity after my last article and found the top in the recent run are likely quite happy. That run was not the move the company is capable of once it gets a solid CBD business up and running. Youngevity is projected to do over $240 million in revenue in 2019 without even considering CBD. That makes it undervalued once again at just under $7 per share. If you missed the last move that was based on excitement, consider what might happen when the real news hits and the bad apples have been weeded out of the sector!
No, the debt conversion was not a sexy announcement, but it was an important one. I expect the close to 2018 with Youngevity to be exciting, and I anticipate Youngevity wanting to start off 2019 running. Stay tuned!
Disclosure: I am/we are long YGYI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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