31 Mar Form 10-K for ForeverGreen Worldwide Corporation
ForeverGreen Worldwide is a holding company which operates through its wholly-owned subsidiaries ForeverGreen International, LLC, Productos Naturales Forevergreen Internacional en Mexico S.A. de C.V., FVGR Colombia S.A.S., 3-101-607360 S.A. (a Costa Rican corporation), ForeverGreen Chile SpA, Forevergreen (Aust & NZ) Pty, Ltd, ForeverGreen Singapore Pte Ltd, ForeverGreen Taiwan, ForeverGreen Japan (KK), ForeverGreen Peru SAC, ForeverGreen (HK) Limited (Hong Kong), ForeverGreen Marketing Corporation (Philippines), FG International LLP (India), Forevergreen Puerto Rico LLC, Forevergreen Dominicana S.R.L. (Dominican Republic), Forevergreen Peru, SAC, ForeverGreen SP z.o.o , (Poland), FGXpress do Brasil Comercio de Alimentos LTDA (Brazil), and ForeverGreen Team B.V. (Netherlands)
We intend to continue our emphasis as a total lifestyle company focused on bringing our domestic and international Members and customers our exclusive Ketopia line, PowerStrip, SolarStrips, and BeautyStrips products. In addition through the Farmers Market we will continue to share our FrequenSea, organic chocolates, supplements, and weight management products to our Members and customers. In addition, our focus is to assist prospective Members in creating a home-based business with home business training, mentorship and accountability so that they can benefit from the residual income stream opportunities we offer. As our international markets mature, additional ForeverGreen products may also be introduced in each international market. We will seek relations with key vendors to continue developing innovative new products that are exclusive to our Members.
Our major challenges for the next twelve months will be to respond to current economic conditions and to properly manage our systems and logistics centers around the world to support the demand for our products and business opportunity. Included in this challenge is the need to continue to meet a high standard of quality and customer service and maintain the highest levels of Member satisfaction.
During 2015 the Company financed its operations with net cash flows from operations, the issuance of promissory notes, and the sale of common stock.
These factors combined, raise substantial doubt about the Company’s ability to continue as a going concern. Overcoming periodic economic downturns will require skilled personnel and responsive manufacturing and shipping facilities. Management intends to continue ongoing process improvement initiatives, especially in the areas of production and order fulfillment. These new operating efficiencies are targeted to address the current economic environment as well as prepare the Company for the upturn in demand as people continue to look for alternative income opportunities. We are actively positioning ForeverGreen to be the company they can align with for the future as traditional employment options.
To keep pace with our market and product growth, we anticipate the need to expand our international logistics centers. The rewards of this strategy include increased sales performance and diversified market incomes. International expansion is very expensive and profitability in a given foreign country depends on key Members who can rapidly ramp up their business growth and volume in the target region.
Results of Operations
The following chart summarizes the consolidated statements of operations of ForeverGreen Worldwide and Subsidiaries for the years ended December 31, 2015 and 2014.
Year ended December 31 SUMMARY OF OPERATING RESULTS 2015 % of Revenues 2014 % of Revenues Revenues, net $ 67,127,261 $ 58,341,422 Cost of sales 17,652,972 26.3% 12,470,044 21.0% Gross profit 49,474,289 73.7% 45,871,378 78.6% Selling and marketing expenses 30,240,630 45.0% 29,740,084 51.0% General and administrative expenses 21,349,012 31.8% 14,449,328 24.8% Total operating expenses 51,589,642 76.8% 44,189,412 75.7% Net operating income (loss) (2,115,353) -3.2% 1,681,966 2.9% Total other expense (446,753) -0.7% (565,795) -1.0% Income tax provision 58,315 0.1% 87,459 0.1% Net income (loss) (2,620,421) -3.9% 1,028,712 1.8% Net income per share (basic and diluted) $ (0.11) $ 0.05
The Company experienced a 15% increase in revenues in 2015 over 2014 resulting from a quarter over quarter increase in revenues. Our source of revenues is from the sale of various foods, other natural products, member sign up fees, kits, and freight and handling to deliver products to the members and customers. The FGXpress product offering was responsible for 89.6% and 81% of sales, in 2014 and 2015, respectively; while The Farmer’s Market product offering represented 10.4% and 19% of sales in 2014 and 2015, respectively. The increase in revenues for 2015 was primarily driven by the launch of the new Ketopia product line, a Farmers Market product, which comprises about $6.1 million of the 2015 product revenue. The growth of the FGXpress product offering is unique to our business as it can be delivered through the US Postal Service via First Class mail, giving the Company a more global sales opportunity than previous products. In 2015 active Members decreased slightly at 132,942 compared to 139,077 active members in 2014.
Cost of sales consists primarily of the cost of procuring and packaging products, and the cost of shipping product to our international subsidiaries and warehouses and to our Members, plus credit card sales processing fees. Cost of sales was approximately 26.3% of revenues for 2015 compared to 21% of revenues for 2014. The 2015 increase is primarily due to the increase product and shipping costs of our latest product, KetonX, which has a lower margin and is shipped in a box, instead of an envelope. When the Ketopia product line was launched in July 2015, the Company experienced a number of supply chain problems. The initial overwhelming demand for product very quickly surpassed the ability of the existing supply chain to keep up with the orders. In an effort to expedite and grow the supply chain, the Company incurred increased expediting costs as well as higher freight costs as efforts were focused on delivering products to customers in a timely manner. Additionally, as a token of good faith for our customers, since product deliveries were delayed, the Company offered free shipping to many customers. These factors, combined with the fact the Ketopia product is one of our higher costing products, contributed to the significant increase in cost of sales.
Management continues to negotiate better costs and terms with our key vendors to lower our cost of goods sold. Now that the Company is delivering Ketopia orders in a timely manner, we expect an immediate reduction in
cost moving forward as the need for expedited services is past. New products have been and will continue to be introduced to bolster Member recruiting and product sales. In addition, management intends to improve our marketing plan to enhance overall profitability. Our management will continue to scrutinize expenses related to our operating activities and order fulfillment to determine appropriate actions to take to reduce these costs.
Selling and marketing expenses include sales commissions paid to our Members, special incentives, costs for incentive trips and other rewards incentives. In 2015 this expense decreased to 45% of revenues compared to 51% in 2014. The decrease is a result of how the Ketopia product was marketed. Knowing the product cost was higher, the Company had to manage an offset, higher product costs needed to be offset by lower sales and marketing costs.
The Company management constantly makes a conscious effort to invite and attract direct marketing leaders to our Company. A direct marketing leader is simply an independent contractor, which we title “Members”, who normally earn a minimum of $200 in personal commissions and have enrolled at least two people. These leaders are experienced in training others how to build a successful and profitable direct selling business. During 2015 ForeverGreen spent $239,000 in short-term incentives recruiting new leaders, compared with $1.4 million spent in 2014. The costs associated with this initiative have been recorded as selling and marketing expense. The number of leaders during 2015 who fit the direct marketing leader description was 7,631. Of those, 6,503 were still active at the end of the year. The number of leaders during 2014 who fit the direct marketing leader description was 8,258. Of those, 6,033 were still active at the end of the year. These leaders were able to recruit, enroll, train, and influence their business contacts in a way which positively impacted ForeverGreen product sales. The Company expects to realize continued benefits from the efforts this year to partner with recognized and respected industry leaders.
General and administrative expenses increased as a percentage of revenues from 24.8% in 2014 to 31.8% in 2015. The majority of the dollar increase is due to hiring more employees, the increase in advertising and marketing expenses, professional fees, legal costs, and increased travel cost. The Company does not see these expenses continuing to increase in 2016.
Total other expense decreased for 2015 compared to 2014 by $119,042. The majority of the decrease for 2015 was due to reduced interest expense.
In 2015 the Company had an income tax provision of $58,315 compared to $87,459 in 2014. The 2014 taxes are comprised largely from foreign tax expense, which decreased in the current year. Even though the Company has a large net operating loss, the Company had to expense the calculated tax provision due under the alternative minimum tax law.
Liquidity and Capital Resources
Year ended December 31 SUMMARY OF BALANCE SHEET 2015 2014 Cash and cash equivalents $ 557,686 $ 580,522 Total current assets 3,994,888 4,743,432 Total assets 7,781,438 7,709,633 Total current liabilities 7,687,664 8,086,341 Long-term debt 1,501,024 -- Total liabilities 9,188,688 8,086,341
Year ended December 31 SUMMARY OF BALANCE SHEET - continued 2015 2014 Accumulated deficit (36,839,329) (34,218,908) Total stockholders' deficit $ (1,407,250) $ (376,708)
Our total liabilities at December 31, 2015 were $9,188,688 compared to $8,086,341 at December 31, 2014. The total liability increase reflects a net increase of accounts payable of $1,606,188 due to increased inventory purchases to support increasing revenues and supporting a much larger volume of business on a day-to-day basis. Net deferred revenue decreased by $84,489 due to increased efficiency of shipping orders to our Members. Accrued expenses decreased by $2,127,792 due to decreased commissions payable due to the timing of when commissions were paid, the rolling of interest into the new convertible notes payable for related parties, and paying down the accrued payroll taxes.
An increase in notes payable of $1,670,264 was due to a non-related party converting part of their convertible note payable, a new promissory note line of credit with a balance at December 31, 2015 of $890,000, and rolling two former notes along with accrued interest totaling $1,501,024 into a new note.
At December 31, 2015 the Company had cash and cash equivalents of $495,304, a working capital deficit of $3,692,776 and accumulated deficit of $36,839,329, negative cash flows from operations, and has experienced periodic cash flow difficulties. This decrease from the 2014 deficit of $3,342,909 was due to the large reduction of restricted cash of $527,067 and the reduction of member advances of $215,979, both defined earlier. During 2015 the Company financed its operations with net cash flows from operations, the issuance of promissory notes, and the sale of common stock. These factors combined, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to address and alleviate these concerns are as follows.
Management anticipates that future additional capital needed for cash shortfalls will be provided by either debt or equity financing. We may pay these loans with cash, if available, or convert these loans into common stock. Any private placement likely will rely upon exemptions from registration provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock then our shareholders may experience dilution in the value per share of their common stock.
Year ended December 31 SUMMARY OF CASH FLOWS 2015 2014 Net cash provided by operating activities $ (1,761,133) $ 1,432,110 Net cash used in investing activities (1,649,020) (2,395,328) Net cash provided by financing activities 3,350,913 1,896,384 Effect of foreign currency on cash (25,978) (637,385) Net increase (decrease) in cash $ (85,218) $ 295,781
The net cash used in operating activities decreased by $3,193,243 in 2015. This is directly attributable to the Company upgrading product branding/imaging across the major selling products, accompanied by changes to the company website, a large global launch event held in Las Vegas in May 2015, and a significant credit card fraud scheme which resulted in abnormally higher number of chargebacks, refunded orders, lost product, and unrecoverable commissions paid.
Net cash used in investing activities decreased by $746,308 in 2015 compared to 2014. This decrease is due to the Company investing in fewer software upgrades in 2015 compared to 2014.
Net cash provided by financing activities increased by $1,454,529 compared to 2014. This increase is due to the signing of a promissory note, issuance of stock of 1,020,586 shares, and the advances from related party notes payable of $578,546. The effect of foreign currency on cash of $25,978, changed by $611,407 from 2015 to 2014. This change is attributable to the Company expanding its operations into new international markets increasing its exposure to foreign exchange translation variances.
Commitments and Obligations
The Company has an agreement with one vendor, Marine Life Sciences, LLC, that supplies 100% of a the marine phytoplankton included in several top selling products. If that vendor were to discontinue the supply of this ingredient, our sales could decrease significantly. There are other providers of that ingredient in the world, however, the Company considers this provider to have the very best quality, which is nutritionally superior to other sources of this ingredient, and has no intention of obtaining it from any other provider.
As of December 31, 2015 the Company has $1.7 million in debt that will be due in the next twelve months. Management anticipates it will satisfy these notes payable through increased revenues or negotiation of new payment due dates.
Off-balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
Critical Accounting Estimates
The Company records impairment of long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company did an annual analysis for the period ended December 31, 2015 and determined no adjustment to long-lived assets was needed.
The Company adjusts its inventories to lower of cost or market. Additionally we adjust the carrying value of our inventory based on assumptions regarding future demand for our products and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional inventory write-downs could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously written down inventories are sold. We have obsolete and slow moving inventories which have been adjusted downward $40,000 as of December 31, 2015 and $40,000 as of December 31, 2014 to present them at their lower of cost or market in our consolidated balance sheets.
In determining the allowance for doubtful accounts, the Company evaluates the collectability of its accounts receivable and member advances based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings), the Company records a specific allowance for doubtful accounts against amounts due to reduce the net recognized receivable to the amount it reasonably believe will be collected. For all other customers, the Company recognizes allowances for
doubtful accounts based on the length of time the receivables are past due. If circumstances change (e.g., unexpected material adverse changes in a major customer’s ability to meet its financial obligation to us or higher than expected customer defaults), the Company’s estimates of the recoverability of amounts could differ from the actual amounts recovered.