In an interesting move, Youngevity (YGYI) has filed a prospectus to offer 400,000 shares of Series D Preferred Stock at a price of $25 per share. This series of stock will trade under the symbol YGYIP, and in many ways acts much like a bond. Holders of the stock will receive 9.75% interest. The interest payments equate to annual interest of about $2.44 per share held. Interest will be paid monthly. A big difference between typical bonds and these preferred shares is that, in concept, the preferred shares are more liquid.
This move, if fully subscribed, will raise $10,000,000 without diluting the share count of the YGYI symbol. Youngevity has been turning in consecutive EBITDA-positive quarters, and is on the cusp of profitability. The stock has seen pressure in recent months which is somewhat tied to the idea that many hemp, marijuana and CBD stocks have felt. Many companies in this sector were trading at multiples which simply seemed unrealistic. Despite the fact that Youngevity was not enjoying those multiples and still got hit could provide a great opportunity for the savvy trader. In simple terms, confusion about the hemp and CBD space vs. the marijuana and THC space has created market confusion which has seen many players in the space take a hit.
With Youngevity there seems to be a mentality by those playing the short side of the trade that the company will need to dilute to raise capital. Given the cash position of the company, and the fact that many of the deals are in their infancy, that thought process might have some logic. That being said, the company appears to be on the verge of reporting profit in Q3 as well as Q4, with 2020 shaping up to be quite healthy. These factors could set up a dynamic where the short side of the trade needs to consider exiting such a position. The preferred stock offering may actually accelerate that process.
In simple terms, the company has deployed a method to raise capital without dilution of the common stock. This move was not necessarily out of left field, but in my opinion many trading on a sector short thesis have not considered such a move. This move will allow the company to weather things out to a point where it can get a couple of profitable quarters under its belt.
The other dynamic that a sector short thesis is using is an indiscriminate assumption that everything within the space is created equal. What many are not realizing is that Youngevity is in the highly profitable extraction business, and is making material inroads into that space through its subsidiary Khrysos.
In mid-August, Youngevity’s Khrysos announced a 5-year extraction contract worth an estimated $34 million annually. This is in addition to a $19-million deal inked the month prior and a $60-million multi-year deal in June. Meanwhile, the coffee segment of Youngevity is marching along on fulfilling a multi-year $250 million supply contract for green coffee while also expanding its retail presence.
The extraction side of the CBD business may not appear as sexy as retail products, but it is likely the most important segment of the sector. A company like Neptune Wellness (NEPT) enjoys a market cap of $370 million on revenues of just $4 million per quarter while still reporting quarterly losses. In contrast, Youngevity has a market cap of just $135 million. If Youngevity can finish the second half of the year with profitable quarters, it will set itself apart from its competitors in the space. If Youngevity can continue to ink more processing deals whilst growing its retail and manufacturing, the story could unfold quickly.
I have characterized Youngevity as a speculative play with serious potential. I have also stated that it could be among the safer plays in the CBD space because it has a backstop of coffee and direct selling. That opinion remains intact. In simple terms, the business has improved greatly and the financials are cleaning up. The company has set the stage with various contracts and now it is a matter of execution and realization. I believe that this company could report a profitable second half of the year, and that dynamic alone should have Wall Street players paying attention. While I will stop shy of calling for a short squeeze on the preferred stock offering, I will say that this news should be seen as a shot across the bow for those betting against the company. If this preferred stock offering gets oversubscribed, it should be taken as a signal that certain players are lining up their positions. 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.
Additional disclosure: I have no position in NEPT