Youngevity International, Inc. - Quarter Report: 2015 September (Form 10-Q)

ygyi10q_sep302015.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-54900

YOUNGEVITY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		90-0890517
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2400 Boswell Road, Chula Vista, CA		91914
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (619) 934-3980

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 10, 2015, the issuer had 392,616,365 shares of its Common Stock issued and outstanding.

YOUNGEVITY INTERNATIONAL INC.

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	1
	Condensed Consolidated Statements of Operations For the three and nine months ended September 30, 2015 & 2014 (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) For the three and nine months ended September 30, 2015 & 2014 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2015 & 2014 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
	As of
	September 30, 2015			December 31, 2014
ASSETS	(Unaudited)
Current Assets
Cash and cash equivalents	$	1,980		$	2,997
Accounts receivable, due from factoring company		399			827
Accounts receivable, trade		1,262			965
Income tax receivable		586			308
Deferred tax assets, net current		801			801
Inventory		17,521			11,783
Prepaid expenses and other current assets		4,534			3,753
Total current assets		27,083			21,434

Property and equipment, net		12,306			10,319
Deferred tax assets, long-term		3,140			3,140
Intangible assets, net		14,323			14,516
Goodwill		6,323			6,323
Total assets	$	63,175		$	55,732

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	6,725		$	5,407
Accrued distributor compensation		4,369			4,177
Accrued expenses		3,507			2,332
Deferred revenues		3,528			5,075
Other current liabilities		382			477
Capital lease payable, current portion		43			24
Notes payable, current portion		5,477			228
Warrant derivative liability		4,944			3,712
Contingent acquisition debt, current portion		2,681			2,765
Total current liabilities		31,656			24,197

Capital lease payable, net of current portion		106			4
Notes payable, net of current portion		4,677			4,839
Convertible notes payable, net of debt discount		1,108			396
Contingent acquisition debt, net of current portion		6,370			7,707
Total liabilities		43,917			37,143

Commitments and contingencies

Stockholders’ Equity
Convertible Preferred Stock, $0.001 par value: 100,000,000 shares authorized; 161,135 shares issued and outstanding at September 30, 2015 and December 31, 2014		-			-
Common Stock, $0.001 par value: 600,000,000 shares authorized; 392,631,528 and 390,301,312 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		393			390
Additional paid-in capital		168,527			167,386
Accumulated deficit		(149,273	)		(148,912	)
Accumulated other comprehensive loss		(389	)		(275	)
Total stockholders’ equity		19,258			18,589
Total Liabilities and Stockholders’ Equity	$	63,175		$	55,732

See accompanying notes to condensed consolidated financial statements.

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Youngevity International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Revenues	$	41,326		$	37,619		$	116,876		$	96,740
Cost of revenues		16,293			16,641			47,752			40,984
Gross profit		25,033			20,978			69,124			55,756
Operating expenses
Distributor compensation		17,387			14,470			47,261			38,172
Sales and marketing		2,374			2,167			6,087			5,434
General and administrative		4,215			3,103			12,056			8,712
Total operating expenses		23,976			19,740			65,404			52,318
Operating income		1,057			1,238			3,720			3,438
Interest expense, net		(1,101	)		(710	)		(3,280	)		(1,593	)
Change in fair value of warrant derivative liability		1,069			(273	)		(1,232	)		(273	)
Total other expense		(32	)		(983	)		(4,512	)		(1,866	)
Net income (loss) before income taxes		1,025			255			(792	)		1,572
Income tax provision (benefit)		609			70			(431	)		416
Net income (loss)		416			185			(361	)		1,156
Preferred stock dividends		(3	)		(4	)		(9	)		(12	)
Net income (loss) available to common stockholders	$	413		$	181		$	(370	)	$	1,144

Net income (loss) per share, basic	$	0.00		$	0.00		$	0.00		$	0.00
Net income (loss)per share, diluted	$	0.00		$	0.00		$	0.00		$	0.00

Weighted average shares outstanding, basic		392,430,816			390,219,932			391,903,256			389,235,633
Weighted average shares outstanding, diluted		404,529,270			392,139,155			391,903,256			389,839,584

See accompanying notes to condensed consolidated financial statements.

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Youngevity International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net income (loss)	$	416		$	185		$	(361	)	$	1,156
Foreign currency translation		(33	)		(3	)		(114	)		(52	)
Total other comprehensive loss		(33	)		(3	)		(114	)		(52	)
Comprehensive income (loss)	$	383		$	182		$	(475	)	$	1,104

See accompanying notes to condensed consolidated financial statements.

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Youngevity International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands, except share amounts)

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash Flows from Operating Activities:
Net (loss) income	$	(361	)	$	1,156
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		2,473			1,948
Stock based compensation expense		436			387
Warrant modification expense		253			-
Amortization of deferred financing costs		639			16
Amortization of prepaid advisory fees		5			-
Change in fair value of warrant derivative liability		1,232			273
Amortization of debt discount		712			190
Expenses allocated in profit sharing agreement		(349	)		-
Change in fair value of contingent acquisition debt		120			(429	)
Gain on disposal of assets		-			(1	)
Changes in operating assets and liabilities, net of effect from business combinations:
Accounts receivable		131			(53	)
Inventory		(5,738	)		(5,329	)
Prepaid expenses and other current assets		(668	)		(1,772	)
Accounts payable		907			3,513
Accrued distributor compensation		192			1,146
Deferred revenues		(1,547	)		1,872
Accrued expenses and other liabilities		1,285			49
Income taxes receivable		(278	)		-
Net Cash (Used in) Provided by Operating Activities		(556	)		2,966

Cash Flows from Investing Activities:
Acquisitions, net of cash acquired		(32	)		(2,100	)
Purchases of property and equipment		(2,307	)		(2,120	)
Net Cash Used in Investing Activities		(2,339	)		(4,220	)

Cash Flows from Financing Activities:
Proceeds from issuance of secured promissory notes and common stock, net of offering costs		5,080			-
Proceeds from issuance of convertible notes payable, net		-			4,260
Proceeds from the exercise of stock options and warrants, net		259			352
Payments to factoring company, net		(214	)		2
Payments of notes payable, net		(163	)		(172	)
Payments of contingent acquisition debt		(2,545	)		(1,637	)
Payments of capital leases		(43	)		(70	)
Repurchase of common stock		(382	)		(314	)
Net Cash Provided by Financing Activities		1,992			2,421
Foreign Currency Effect on Cash		(114	)		(112	)
Net (decrease) increase in cash and cash equivalents		(1,017	)		1,055
Cash and Cash Equivalents, Beginning of Period		2,997			4,320
Cash and Cash Equivalents, End of Period	$	1,980		$	5,375

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	1,748		$	1,640
Income taxes	$	-		$	594

Supplemental Disclosures of Noncash Investing and Financing Activities
Acquisitions of net assets in exchange for contingent acquisition debt (see Note 4 for non-cash activity)	$	1,211		$	5,532
Common stock issued in connection with financing	$	587		$	-
Capital lease and accounts payable agreements for manufacturing equipment	$	564		$	-

See accompanying notes to condensed consolidated financial statements.

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Youngevity International, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation and Description of Business

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.

The statements presented as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 are unaudited. In the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair presentation, and to make the financial statements not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results for interim periods are not necessarily indicative of the results for the entire year. Certain reclassifications have been made to conform to the current year presentations. These reclassifications had no effect on reported results of operations or stockholders’ equity.

Effective June 30, 2015 we reclassified the interest expense and the change in the derivative liability associated with our 2014 Private Placement from our direct selling segment to our commercial coffee segment within our condensed consolidated statements of operations to conform to our current period presentation. The proceeds related to the 2014 Private Placement have been primarily used to expand to commercial coffee segment. These reclassifications did not affect revenue, total costs and expenses, income (loss) from operations, or net income (loss).

The Company consolidates all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Nature of Business

Youngevity International, Inc. (the “Company”), founded in 1996, develops and distributes health and nutrition related products through its global independent direct selling network, also known as multi-level marketing, and sells coffee products to commercial customers. The Company operates in two business segments, its direct selling segment where products are offered through a global distribution network of preferred customers and distributors and its commercial coffee segment where products are sold directly to businesses. In the following text, the terms “we,” “our,” and “us” may refer, as the context requires, to the Company or collectively to the Company and its subsidiaries.

The Company operates through the following domestic wholly-owned subsidiaries: AL Global Corporation, which operates our direct selling networks, CLR Roasters, LLC (“CLR”), our commercial coffee business, Financial Destinations, Inc., FDI Management, Inc., and MoneyTrax LLC (collectively referred to as “FDI”), 2400 Boswell LLC, MK Collaborative LLC, Youngevity Global LLC and the wholly-owned foreign subsidiaries Youngevity Australia Pty. Ltd. and Youngevity NZ, Ltd., Siles Plantation Family Group S.A. located in Nicaragua, Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd., Youngevity Russia, LLC, Youngevity Colombia S.A.S and Youngevity International Singapore Pte. Ltd.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes, and related valuation allowances, fair value of derivative liabilities, uncertain tax positions, loss contingencies, fair value of options granted under our stock based compensation plan, fair value of assets and liabilities acquired in business combinations, capital leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, value of contingent acquisition debt, inventory obsolescence, and sales returns.

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Actual results may differ from previously estimated amounts and such differences may be material to the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected prospectively in the period they occur.

Cash and Cash Equivalents

The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents.

Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock method. Dilutive common share equivalents are comprised of in-the-money stock options, warrants and convertible preferred stock, based on the average stock price for each period using the treasury stock method.

Since the Company incurred a net loss for the nine months ended September 30, 2015, 8,890,982 common share equivalents were not included in the weighted-average calculation since their effect would have been anti-dilutive.

Stock Based Compensation

The Company accounts for stock based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation,” which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the vesting period of the equity grant.

The Company accounts for equity instruments issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value, determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

Factoring Agreement

The Company has a factoring agreement (“Factoring Agreement”) with Crestmark Bank (“Crestmark”) related to the Company’s accounts receivable resulting from sales of certain products within its commercial coffee segment. Under the terms of the Factoring Agreement, the Company effectively sold those identified accounts receivable to Crestmark with non-credit related recourse. The Company continues to be responsible for the servicing and administration of the receivables.

The Company accounts for the sale of receivables under the Factoring Agreement as secured borrowings with a pledge of the subject receivables as well as all bank deposits as collateral, in accordance with the authoritative guidance for accounting for transfers and servicing of financial assets and extinguishments of liabilities. The caption “Accounts receivable, due from factoring company” on the accompanying condensed consolidated balance sheets in the amount of approximately $399,000 and $827,000 as of September 30, 2015 and December 31, 2014, respectively, reflects the related collateralized accounts.

The Company's outstanding liability related to the Factoring Agreement was approximately $325,000 and $538,000 as of September 30, 2015 and December 31, 2014, respectively, and is included in other current liabilities on the condensed consolidated balance sheets.

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Plantation Costs

The Company’s commercial coffee segment CLR includes the results of the Siles Plantation Family Group (“Siles”), which is a 450 acre coffee plantation and a dry-processing facility located on 26 acres both located in Matagalpa, Nicaragua. Siles is a wholly-owned subsidiary of CLR, and the results of CLR include the depreciation and amortization of capitalized costs, development and maintenance and harvesting costs of Siles. In accordance with US generally accepted accounting principles (“GAAP”), plantation maintenance and harvesting costs for commercially producing coffee farms are charged against earnings when sold. Deferred harvest costs accumulate throughout the year, and are expensed over the remainder of the year as the coffee is sold. The difference between actual harvest costs incurred and the amount of harvest costs recognized as expense is recorded as either an increase or decrease in deferred harvest costs, which is reported as an asset and included with prepaid expenses and other current assets in the condensed consolidated balance sheets. Once the harvest is complete, the harvest cost is then recognized as the inventory value.

In April 2015, the Company completed the 2015 coffee harvest in Nicaragua and approximately $723,000 of deferred harvest costs were reclassified as inventory during the quarter ended June 30, 2015. The remaining inventory as of September 30, 2015 is $464,000.

Costs associated with the 2016 harvest as of September 30, 2015 total approximately $194,000 and are included in prepaid expenses and other current assets as deferred harvest costs on the Company’s condensed consolidated balance sheet.

Revenue Recognition

The Company recognizes revenue from product sales when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. The Company ships the majority of its direct selling segment products directly to the distributors via UPS or USPS and receives substantially all payments for these sales in the form of credit card transactions. The Company regularly monitors its use of credit card or merchant services to ensure that its financial risk related to credit quality and credit concentrations is actively managed. Revenue is recognized upon passage of title and risk of loss to customers when product is shipped from the fulfillment facility. The Company ships the majority of its coffee segment products via common carrier and invoices its customer for the products. Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point.

Sales revenue and a reserve for estimated returns are recorded net of sales tax when product is shipped.

Deferred Revenues and Costs

Deferred revenues relate primarily to the Heritage Makers product line and represent the Company’s obligation for points purchased by customers that have not yet been redeemed for product. Cash received for points sold is recorded as deferred revenue. Revenue is recognized when customers redeem the points and the product is shipped. The balance deferred revenues as of September 30, 2015 and December 31, 2014, is approximately $3,528,000 and $5,075,000, respectively.

Deferred costs relate to prepaid commissions that are recognized in expense at the time the related revenue is recognized. The balance in deferred costs as of September 30, 2015 and December 31, 2014, is approximately $1,388,000 and $1,695,000, respectively, and is included in prepaid expenses and current assets.

Recently Issued Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2015, as compared to the recent accounting pronouncements described in the Annual Report on Form 10-K for the year ended December 31, 2014 that are of material significance, or have potential material significance, to the Company.

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In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs to simplify the presentation of debt issuance costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of the debt. Recognition and measurement of debt issuance costs were not affected by this amendment. In August 2015, FASB issued ASU 2015-15,"Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting" which clarified that the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015. This standard does not have an impact on our financial statements. As of September 30, 2015, we early adopted this standard and recorded debt issuance costs as a debt discount.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company's consolidated financial statements. Early adoption is permitted.

In August 2014, the FASB issued ASU 2014-15 Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-05”). ASU 2014-05 requires management to assess each annual and interim period if there is substantial doubt about the entity’s ability to continue as a going concern; provides principles for considering the mitigating effect of management’s plans; requires certain disclosures when substantial doubt is alleviated as a result of management’s plans, and requires an express statement and other disclosures when substantial doubt is not alleviated. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early application permitted. The Company is evaluating the new guidance to determine the impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015 the FASB approved a one year delay in the effective date with an early adoption up to the original effective date for public companies. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

Note 2. Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, "Income Taxes," under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial statement and tax basis of assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.

Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period.

The Company files income tax returns in the United States (“U.S.”) on a federal basis and in many U.S. state and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject.

Note 3. Inventory and Cost of Sales

Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. The Company records an inventory reserve for estimated excess and obsolete inventory based upon historical turnover, market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items with a definite life are taken into consideration.

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The Company analyzes its firm purchase commitments, which currently consist primarily of commitments to purchase green coffee, at each period end. When necessary, provisions are made in each reporting period if the amounts to be realized from the disposition of the inventory items are not adequately protected by firm sales contracts of such inventory items. In that situation, a loss would be recorded for the inventory cost in excess of the saleable market value. There were no such losses for the nine months ended September 30, 2015 and 2014.

Inventories consist of the following (in thousands):

	As of
	September 30, 2015			December 31, 2014
Finished goods	$	9,714		$	7,817
Raw materials		8,406			4,444
		18,120			12,261
Reserve for excess and obsolete		(599	)		(478	)
Inventory, net	$	17,521		$	11,783

Cost of revenues includes the cost of inventory, shipping and handling costs incurred by the Company in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets.

Note 4. Acquisitions and Business Combinations

The Company accounts for business combinations under the acquisition method and allocates the total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on their estimated fair values. When a business combination includes the exchange of the Company’s common stock, the value of the common stock is determined using the closing market price as of the date such shares were tendered to the selling parties. The fair values assigned to tangible and identified intangible assets acquired and liabilities assumed are based on management or third-party estimates and assumptions that utilize established valuation techniques appropriate for the Company’s industry and each acquired business. Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. A liability for contingent consideration, if applicable, is recorded at fair value as of the acquisition date. In determining the fair value of such contingent consideration, management estimates the amount to be paid based on probable outcomes and expectations on financial performance of the related acquired business. The fair value of contingent consideration is reassessed quarterly, with any change in the estimated value charged to operations in the period of the change. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in actual or estimated revenue streams, discount periods, discount rates and probabilities that contingencies will be met.

During the nine months ended September 30, 2015, the Company entered into four acquisitions, which are detailed below. The acquisitions were conducted in an effort to expand the Company’s distributor network, enhance and expand its product portfolio, and diversify its product mix. As such, the major purpose for all of the business combinations was to increase revenue and profitability. The acquisitions were structured as asset purchases which resulted in the recognition of certain intangible assets.

Paws Group, LLC

Effective July 1, 2015, the Company acquired certain assets of Paws Group, LLC, (“PAWS”) a direct-sales company for pet lovers that offers an exclusive pet boutique carrying treats for dogs and cats as well as grooming and bath products. The purchase price consisted of a maximum aggregate purchase price of $150,000. The Company agreed to pay initial cash payment of approximately $61,000, for which the Company received certain inventories, the initial cash payment was applied against and reduce the maximum aggregate purchase price.

The contingent consideration’s estimated fair value at the date of acquisition was $125,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.

The Company recorded a preliminary fair value of a customer relations intangible asset of $125,000 and is being amortized over its estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.

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Mialisia & Co., LLC

On June 1, 2015, the Company acquired certain assets of Mialisia & Co., LLC, (“Mialisia”) a direct-sales jewelry company that specializes in interchangeable jewelry. As a result of this business combination, the Company’s distributors and customers have access to the unique line of Mialisia’s patent-pending “VersaStyle™” jewelry and Mialisia’s distributors and customers will gain access to products offered by the Company. The purchase price consisted of a maximum aggregate purchase price of $1,900,000. The Company agreed to pay initial cash payment of $118,988, for which the Company received certain inventories, the initial cash payment was applied against and reduce the maximum aggregate purchase price.

The Company has agreed to pay Mialisia a monthly payment equal to seven (7%) of all gross sales revenue generated by the Mialisia distributor organization in accordance with the asset purchase agreement, regardless of products being sold and pay five (5%) royalty on Mialisia product revenue until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid aggregate cash payment equal to $1,781,012. All payments of Mialisia distributor revenue will be applied against and reduce the maximum aggregate purchase price; however if the aggregate gross sales revenue generated by the Mialisia distributor organization, for a twelve (12) months period following the closing date does not equal or exceed $1,900,000 then the maximum aggregate purchase price will be reduced by the difference of the $1,900,000 and the average distributor revenue for a twelve (12) month period: provided, however, that in no event will the maximum aggregate purchase price be reduced below $1,650,000.

The contingent consideration’s estimated fair value at the date of acquisition was $700,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.

The assets acquired were recorded at estimated fair values as of the date of the acquisition. The fair values of the acquired assets have not been finalized pending further information that may impact the valuation of certain assets or liabilities. The preliminary purchase price allocation for Mialisia is as follows (in thousands):

Distributor organization	$	350
Customer-related intangible		200
Trademarks and trade name		150
Total purchase price	$	700

The preliminary fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The trademarks and trade name, customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.

The Company expects to finalize the valuation within one (1) year from the acquisition date.

Revenues related to the acquisition for the nine months ended September 30, 2015 were $458,000.

The pro-forma effect assuming the business combination with Mialisia discussed above had occurred at the beginning of the current period is not presented as the information would not be significant to a user of the condensed consolidated financial statements.

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Sta-Natural, LLC

On February 23, 2015, the Company acquired certain assets and assumed certain liabilities of Sta-Natural, LLC, (“Sta-Natural”) a dietary supplement company and provider of vitamins, minerals and supplements for families and their pets. As a result of this business combination, the Company’s distributors and customers have access to Sta-Natural’s unique line of products and Sta-Natural’s distributors and clients gain access to products offered by the Company. The purchase price consisted of a maximum aggregate purchase price of $500,000. The Company made an initial cash payment of $50,000 of which the Company also received certain inventories valued at $25,000, the initial cash payment was applied against and reduce the maximum aggregate purchase price.

The Company has agreed to pay Sta-Natural a monthly payment equal to eight (8%) of all gross sales revenue generated by the Sta-Natural distributor organization in accordance with the asset purchase agreement, regardless of products being sold and pay five (5%) royalty on Sta-Natural product revenue until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid aggregate cash payment equal to $450,000. All payments of Sta-Natural distributor revenue will be applied against and reduce the maximum aggregate purchase price; however if the aggregate gross sales revenue generated by the Sta-Natural distributor organization, for a twelve (12) months period following the closing date does not equal or exceed $500,000 then the maximum aggregate purchase price will be reduced by the difference of the $500,000 and the average distributor revenue for a twelve (12) month period: provided, however, that in no event will the maximum aggregate purchase price be reduced below $300,000.

The contingent consideration’s estimated fair value at the date of acquisition was $285,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.

The assets acquired and liabilities assumed were recorded at estimated fair values as of the date of the acquisition. The fair values of the acquired assets have not been finalized pending further information that may impact the valuation of certain assets or liabilities. The preliminary purchase price allocation for Sta-Natural is as follows (in thousands):

Distributor organization	$	140
Customer-related intangible		110
Trademarks and trade name		60
Initial cash payment		(25	)
Total purchase price	$	285

The Company expects to finalize the valuation within one (1) year from the acquisition date.

Revenues related to the acquisition for the nine months ended September 30, 2015 were $454,000.

The pro-forma effect assuming the business combination with Sta-Natural discussed above had occurred at the beginning of the current period is not presented as the information was not available.

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JD Premium LLC

On March 4, 2015, the Company acquired certain assets of JD Premium, LLC (“JD Premium”) a dietary supplement company. As a result of this business combination, the Company’s distributors and customers have access to JD Premium’s unique line of products and JD Premium’s distributors and clients gain access to products offered by the Company. The purchase price consisted of a maximum aggregate purchase price of $500,000. The Company made an initial cash payment of $50,000 for the purchase of certain inventories, which has been applied against and reduce the maximum aggregate purchase price.

The Company has agreed to pay JD Premium a monthly payment equal to seven (7%) of all gross sales revenue generated by the JD Premium distributor organization in accordance with the asset purchase agreement, regardless of products being sold and pay five (5%) royalty on JD Premium product revenue until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid aggregate cash payment equal to $450,000. All payments of JD Premium distributor revenue will be applied against and reduce the maximum aggregate purchase price; however if the aggregate gross sales revenue generated by the JD Premium distributor organization, effective April 4, 2015 for a twenty-four (24) months period does not equal or exceed $500,000 then the maximum aggregate purchase price will be reduced by the difference of the $500,000 and the average annual distributor revenue; provided, however, that in no event will the maximum aggregate purchase price be reduced below $300,000.

The contingent consideration’s estimated fair value at the date of acquisition was $195,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.

Distributor organization	$	110
Customer-related intangible		85
Total purchase price	$	195

The preliminary fair value of intangible assets acquired was determined through the use of a discounted cash flow methodology. The customer-related intangible and distributor organization intangible are being amortized over their estimated useful life of ten (10) years using the straight-line method which is believed to approximate the time-line within which the economic benefit of the underlying intangible asset will be realized.

The Company expects to finalize the valuation within one (1) year from the acquisition date.

Revenues related to the acquisition for the nine months ended September 30, 2015 were minimal.

The pro-forma effect assuming the business combination with JD Premium discussed above had occurred at the beginning of the current period is not presented as the information was not available.

Note 5. Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of distributor organizations, trademarks, customer relationships and internally developed software. The Company's acquired intangible assets, which are subject to amortization over their estimated useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset exceeds its fair value.

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Intangible assets consist of the following (in thousands):

	September 30, 2015						December 31, 2014
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Distributor organizations	$	11,215	$	5,843	$	5,372	$	10,475	$	5,126	$	5,349
Trademarks and trade names		4,666		477		4,189		4,441		304		4,137
Customer relationships		6,820		2,546		4,274		6,400		1,932		4,468
Internally developed software		720		232		488		720		158		562
Intangible assets	$	23,421	$	9,098	$	14,323	$	22,036	$	7,520	$	14,516

Amortization expense related to intangible assets was approximately $560,000 and $480,000 for the three months ended September 30, 2015 and 2014, respectively. Amortization expense related to intangible assets was approximately $1,578,000 and $1,439,000 for the nine months ended September 30, 2015 and 2014, respectively.

Trade names, which do not have legal, regulatory, contractual, competitive, economic, or other factors that limit the useful lives are considered indefinite lived assets and are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Approximately $2,267,000 in trademarks from business combinations have been identified as having indefinite lives.

Goodwill

Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles — Goodwill and Other”, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company conducts annual reviews for goodwill and indefinite-lived intangible assets in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable.

The Company first assesses qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that goodwill is impaired. After considering the totality of events and circumstances, the Company determines whether it is more likely than not that goodwill is not impaired. If impairment is indicated, then the Company conducts the two-step impairment testing process. The first step compares the Company’s fair value to its net book value. If the fair value is less than the net book value, the second step of the test compares the implied fair value of the Company’s goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss equal to that excess amount. The testing is generally performed at the “reporting unit” level. A reporting unit is the operating segment, or a business one level below that operating segment (referred to as a component) if discrete financial information is prepared and regularly reviewed by management at the component level. The Company has determined that its reporting units for goodwill impairment testing are the Company’s reportable segments. As such, the Company analyzed its goodwill balances separately for the commercial coffee reporting unit and the direct selling reporting unit. The goodwill balance as of September 30, 2015 and December 31, 2014 was $6,323,000. There were no triggering events indicating impairment of goodwill or intangible assets during the three and nine months ended September 30, 2015 and 2014.

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Note 6. Debt

January 2015 Private Placement

On January 29, 2015, the Company completed its January 2015 Private Placement and entered into Note Purchase Agreements (the “Note” or “Notes”) with three accredited investors. The Company raised aggregate gross proceeds of $5,250,000 in the offering and sold aggregate units consisting of the Notes in the aggregate principal amount of $5,250,000 and 1,575,000 shares of our common stock, par value $0.001 per share. The Notes bear interest at a rate of eight percent (8%) per annum to be paid quarterly in arrears starting March 31, 2015, with all principal and unpaid interest due at maturity on January 5, 2016 and January 28, 2016 in accordance with the respective Notes. The Company has the right to prepay the Notes at any time at a rate equal to 100% of the then outstanding principal balance and accrued interest. The Notes rank pari passu to all other notes of the Company other than certain outstanding senior debt. The Company’s wholly-owned subsidiary, CLR, has provided collateral to secure the repayment of the Notes and has pledged the Nicaragua green coffee beans acquired with the proceeds, that are to be sold under the terms of our contracts with our customers, Sourcing and Supply Agreements, the contract rights under the letter of intent and all proceeds of the foregoing (which lien is junior to CLR’s line of credit and equipment lease but senior to all of its other obligations), all subject to the terms and conditions of a security agreement among the Company, CLR and the investors. Additionally, Stephan Wallach, the Company’s Chief Executive Officer, has also personally guaranteed the repayment of the Notes, subject to the terms of a Guaranty Agreement executed by him with the investors. With respect to the aggregate offering, the Company used one placement agent and paid a placement fee of $157,500, in addition to the payment of certain legal expenses of the placement agent, and the Company issued to the placement agent an aggregate of 875,000 shares of common stock, par value $0.001 per share.

Issuance costs related to the Notes and the common stock were approximately $170,000 and $587,000 in cash and non-cash costs, respectively, which were recorded as deferred financing costs and are included under prepaid expenses and other current assets on the condensed consolidated balance sheets and are being amortized over the term of the Notes. As of September 30, 2015 the remaining balance in deferred financing costs is approximately $189,000. The quarterly amortization of the deferred financing costs is $189,000 and is recorded as interest expense.

The net proceeds were used primarily for the purchase of green coffee to accelerate the growth of the coffee segment green coffee business. As of September 30, 2015 the principal amount of $5,250,000 remains outstanding on the Notes.

Convertible Notes Payable

Note Purchase Agreement – July 2014 Private Placement

As of September 30, 2015 and December 31, 2014, the Company had outstanding convertible notes payable of $1,108,000 and $396,000, net of unamortized discounts of $3,642,000 and $4,354,000, respectively that it issued in its July 2014 Private Placement Offering (the “July 2014 Private Placement”). The outstanding convertible notes payable (“Convertible Notes”) of the Company are secured by certain pledged Company assets, bear interest at a rate of eight percent (8%) per annum and paid quarterly in arrears with all principal and unpaid interest due at maturity between July 30, 2019 and September 9, 2019. As of September 30, 2015 the principal amount of $4,750,000 remains outstanding.

In connection with the issuance of these Convertible Notes, the Company issued warrants that require derivative liability classification in accordance with authoritative guidance ASC Topic 815, “Derivatives and Hedging.” The estimated fair value of the warrants issued in connection with the Convertible Notes totaled $4,944,000, as of September 30, 2015 and has been recorded as a derivative liability with a corresponding debt discount that will be amortized over the term of the Convertible Notes to interest expense. We revalue the derivative liability on each balance sheet date until the securities to which the derivatives liabilities relate are exercised or expire, in accordance with the Convertible Notes (see Note 7, below.)

Additionally, upon issuance of the Convertible Notes, the Company recorded the discount for the beneficial conversion feature of $1,053,000. The debt discount associated with the beneficial conversion feature is amortized to interest expense over the life of the Convertible Notes. The Company recorded approximately $712,000 of interest expense for the amortization of the debt discounts during the nine months ended September 30, 2015.

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The following table summarizes information relative to the convertible note(s) outstanding (in thousands):

	September 30, 2015			December 31, 2014
Convertible notes	$	4,750		$	4,750
Less: detachable warrants discount		(3,697	)		(3,697	)
Less: conversion feature discount		(1,053	)		(1,053	)
Amortization of debt discounts		1,108			396
Convertible notes, net of discounts	$	1,108		$	396

Paid in cash issuance costs related to the Convertible Notes were approximately $490,000 and were recorded as deferred financing costs and are included in prepaid expenses and other current assets on the condensed consolidated balance sheets and are being amortized over the term of the Convertible Notes. As of September 30, 2015 and December 31, 2014 the remaining balance in deferred financing costs is approximately $376,000 and $449,000, respectively. The quarterly amortization of the deferred financing costs is approximately $25,000 and is recorded as interest expense.

Note 7. Derivative Liability

We accounted for the warrants issued in conjunction with our July 2014 Private Placement in accordance with the accounting guidance for derivatives ASC Topic 815. The accounting guidance sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock, which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ equity section of the entity’s balance sheet. We determined the warrants related to Notes are ineligible for equity classification due to anti-dilution provisions set forth therein.

Warrants classified as derivative liabilities are recorded at their estimated fair value (see Note 8, below) at the issuance date and are revalued at each subsequent reporting date. Warrants were determined to have an estimated fair value per share and in aggregate value as of the respective dates as follows:

Closing Dates:	Issued Warrants		Estimated Total Fair Value in Aggregate $ as of September 30, 2015		Estimated Total Fair Value in Aggregate $ as of December 31, 2014

July 31, 2014 Warrants		19,966,768	$	4,527,000	$	3,398,000
August 14, 2014 Warrants		1,721,273		390,000		294,000
September 10, 2014 Warrants		114,752		27,000		20,000
		21,802,793	$	4,944,000	$	3,712,000

Increases or decreases in fair value of the derivative liability are included as a component of other income (expense) in the accompanying condensed consolidated statements of operations for the respective period. During the three months ended September 30, 2015, the liability for warrants decreased approximately $1,069,000 from the previous quarter. For the nine months ended September 30, 2015 the liability for the warrants increased approximately $1,232,000. Changes in the fair value of the warrant valuation are primarily due to the market price of $0.33 of the Company’s stock as of September 30, 2015 compared to $0.24 as of December 31, 2014.

Various factors are considered in the pricing models we use to 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. Future changes in these factors may have a significant impact on the computed fair value of the warrant liability. As such, we expect future changes in the fair value of the warrants to continue and may vary significantly from year to year. The warrant liability and revaluations have not had a cash impact on our working capital, liquidity or business operations.

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We will continue to revalue the derivative liability on each subsequent balance sheet date until the securities to which the derivative liabilities relate are exercised or expire.

The estimated fair value of the warrants were computed as of September 30, 2015 and as of December 31, 2014 using a Black-Scholes and Monte Carlo option pricing model, respectively, using the following assumptions:

	September 30, 2015			December 31, 2014
Stock price volatility		86	%		90	%
Risk-free interest rates		1.15	%		1.65	%
Annual dividend yield		0	%		0	%
Expected life	3.7-3.8 years			4.6-4.7 years

In addition, Management assessed the probabilities of future financing assumptions in the valuation models.

Note 8. Fair Value of Financial Instruments

Fair value measurements are performed in accordance with the guidance provided by ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 defines fair value as the price that would be received from selling an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.

ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, capital lease obligations and deferred revenue approximate their fair values based on their short-term nature. The carrying amount of the Company’s long term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.

The estimated fair value of the contingent consideration related to the Company's business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

In connection with the 2014 Private Placement, we issued warrants to purchase shares of our common stock which are accounted for as derivative liabilities (see Note 6 and 7, above.) The estimated fair value of the warrants is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

We used Level 3 inputs for the valuation methodology of the derivative liabilities. Our derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of the derivative liabilities.

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The following table details the fair value measurement within the three levels of the value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities (in thousands):

	Fair Value at September 30, 2015
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent acquisition debt, current portion	$	2,681	$	-	$	-	$	2,681
Contingent acquisition debt, less current portion		6,370		-		-		6,370
Warrant derivative liability		4,944		-		-		4,494
Total liabilities	$	13,995	$	-	$	-	$	13,995

	Fair Value at December 31, 2014
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent acquisition debt, current portion	$	2,765	$	-	$	-	$	2,765
Contingent acquisition debt, less current portion		7,707		-		-		7,707
Warrant derivative liability		3,712		-		-		3,712
Total liabilities	$	14,184	$	-	$	-	$	14,184

The fair value of the contingent acquisition liabilities are evaluated each reporting period using projected revenues, discount rates, and projected timing of revenues. Projected contingent payment amounts are discounted back to the current period using a discount rate. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. In some cases, there is no maximum amount of contingent consideration that can be earned by the sellers. Increases in projected revenues will result in higher fair value measurements. Increases in discount rates and the time to payment will result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. During the three and nine months ended September 30, 2015, the Company recorded an increase of approximately $120,000 to the fair value of contingent acquisition liabilities. During the three and nine months ended September 30, 2014, the net adjustment to the fair value of the contingent acquisition debt was a decrease of approximately $429,000 to the fair value of contingent acquisition liabilities.

Note 9. Stockholders’ Equity

The Company’s Articles of Incorporation, as amended, authorize the issuance of two classes of stock to be designated “Common Stock” and “Preferred Stock”.

Convertible Preferred Stock

The Company had 161,135 shares of Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of September 30, 2015 and December 31, 2014, and accrued dividends of approximately $96,000 and $86,000, respectively. The holders of the Series A Preferred Stock are entitled to receive a cumulative dividend at a rate of 8.0% per year, payable annually either in cash or shares of the Company's Common Stock at the Company's election. Shares of Common Stock paid as accrued dividends are valued at $0.50 per share. Each share of Series A Preferred is convertible into two shares of the Company's Common Stock. The holders of Series A Preferred are entitled to receive payments upon liquidation, dissolution or winding up of the Company before any amount is paid to the holders of Common Stock. The holders of Series A Preferred shall have no voting rights, except as required by law.

Common Stock

The Company had 392,631,528 common shares outstanding as of September 30, 2015. The holders of Common Stock are entitled to one vote per share on matters brought before the shareholders.

As of September 30, 2015, warrants to purchase 29,079,559 shares of Common Stock at prices ranging from $0.10 to $0.50 were outstanding, exercisable and expire at various dates through August 2019, and have a weighted average remaining term of approximately 3.29 years as of September 30, 2015.

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Warrant Modification Agreements

During the three months ended September 30, 2015 the Company entered into agreements which extend the life of 2,418,750 warrants by two years after certain conditions were met. The warrants are exercisable into the Company’s common stock.

The Company recorded a warrant modification expense, as a result of the extension of the expiration dates of approximately $253,000, which is included in general and administrative expense. The expense was calculated using the Black-Scholes valuation method and using a risk-free rate of 0.67%, stock price of $0.31, exercise prices ranging from $0.30 to $0.40, expected life of 2.0 years and stock price volatility of 67.8%.

Repurchase of Common Stock

On December 11, 2012, the Company authorized a share repurchase program to repurchase up to 15 million of the Company's issued and outstanding common shares from time to time on the open market or via private transactions through block trades. Under this program, for the nine months ended September 30, 2015, the Company repurchased a total of 1,199,709 shares at a weighted-average cost of $0.31. A total of 3,661,659 shares have been repurchased to-date at a weighted-average cost of $0.26. The remaining number of shares authorized for repurchase under the plan as of September 30, 2015 is 11,338,341.

Stock Options

On May 16, 2012, the Company established the 2012 Stock Option Plan (“Plan”) authorizing the granting of options for up to 40,000,000 shares of Common Stock. The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people and consultants with incentives to improve stockholder value and to contribute to the growth and financial success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The Plan permits the granting of stock options, including non-qualified stock options and incentive stock options qualifying under Section 422 of the Code, in any combination (collectively, “Options”). At September 30, 2015, the Company had 11,469,425 shares of Common Stock available for issuance under the Plan.

A summary of the Plan Options for the nine months ended September 30, 2015 is presented in the following table:

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding December 31, 2014		28,918,500		$	0.21	$	786
Granted		917,500			0.31
Canceled/expired		(1,344,675	)		0.22
Exercised		(273,675	)		0.21		-
Outstanding September 30, 2015		28,217,650		$	0.22	$	3,199
Exercisable September 30, 2015		17,070,450		$	0.23	$	1,785

The weighted-average fair value per share of the granted options for the nine months ended September 30, 2015 and 2014 was approximately $0.15 and $0.16, respectively.

Stock based compensation expense included in the condensed consolidated statements of operations was $161,000 and $141,000 for the three months ended September 30, 2015 and 2014, respectively, compared to $436,000 and $388,000 for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, there was approximately $1,568,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plan. The expense is expected to be recognized over a weighted-average period of 4.54 years.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock option grants. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the expected term of the option. The expected life is based on the contractual life of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant.

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Advisory agreements

PCG Advisory Group. On September 1, 2015, the Company entered into an agreement with PCG Advisory Group (“PCG”), pursuant to which PCG agreed to provide investor relations services for six (6) months in exchange for fees paid in cash of $6,000 per month and 100,000 shares of restricted common stock issued in accordance with the agreement. In connection with this agreement, the Company has accrued for the estimated per share value of issuance at $0.32 per share, the price of Company’s common stock at September 1, 2015 for a total of $32,000 due to PCG. The fair values of the shares was recorded as prepaid advisory fees and are included in prepaid expenses and other current assets on the Company’s balance sheet and will be amortized on a pro-rate basis over the term of the contract.

During the three and nine months ended September 30, 2015, we recorded expense of approximately $5,000, in connection with amortization of the stock issuance. As of September 30, 2015, the total remaining balance of the prepaid investor relation services is approximately $27,000.

Shares Issued in Private Placement

On January 29, 2015, we completed our January 2015 Private Placement pursuant to which we entered into Notes Payable Agreements (see Note 6, above) and issued 2,450,000 shares of our common stock. The shares of common stock issued under the January 2015 Private Placement were offered and issued without registration under the Securities Act of 1933, as amended, (the “1933 Act”). The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transaction, that registration in required under the 1933 Act or unless sold pursuant to Rule 144 under the 1933 Act.

Note 10. Segment and Geographical Information

The Company offers a wide variety of products to support a healthy lifestyle including; Nutritional Supplements, Sports and Energy Drinks, Health and Wellness, Weight Loss, Gourmet Coffee, Skincare and Cosmetics, Lifestyle Services, digital products including Scrap books and Memory books, Packaged Foods, Pharmacy Discount Cards, and Clothing and Jewelry line. The Company’s business is classified by management into two reportable segments: direct selling and commercial coffee.

The Company’s segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker evaluates segment performance primarily based on revenue and segment operating income. The principal measures and factors the Company considered in determining the number of reportable segments were revenue, gross margin percentage, sales channel, customer type and competitive risks. In addition, each reporting segment has similar products and customers, similar methods of marketing and distribution and a similar regulatory environment.

The accounting policies of the segments are consistent with those described in the summary of significant accounting policies. Segment revenue excludes intercompany revenue eliminated in the consolidation. The following tables present certain financial information for each segment (in thousands):

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	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2014			2015			2014
Revenues
Direct selling	$	37,056		$	31,275		$	103,206		$	84,063
Commercial coffee		4,270			6,344			13,670			12,677
Total revenues	$	41,326		$	37,619		$	116,876		$	96,740
Gross profit
Direct selling	$	25,395		$	20,899		$	69,872		$	55,674
Commercial coffee		(362	)		79			(748	)		82
Total gross margin	$	25,033		$	20,978		$	69,124		$	55,756
Net income (loss)
Direct selling	$	986		$	668		$	3,329		$	2,740
Commercial coffee		(570	)		(483	)		(3,690	)		(1,584	)
Total net income (loss)	$	416		$	185		$	(361	)	$	1,156
Capital expenditures
Direct selling	$	477		$	344		$	1,326		$	680
Commercial coffee		302			528			1,556			4,806
Total capital expenditures	$	779		$	872		$	2,882		$	5,486

	As of
	September 30, 2015		December 31, 2014
Total assets
Direct selling	$	40,354	$	36,149
Commercial coffee		22,821		19,583
Total assets	$	63,175	$	55,732

Total tangible assets, net located outside the United States are approximately $4.6 million as of September 30, 2015. For the year ended December 31, 2014, total assets, net located outside the United States were approximately $4.2 million.

The Company conducts its operations primarily in the United States. The Company also sells its products in 70 different countries. The following table displays revenues attributable to the geographic location of the customer (in thousands):

	Three months ended					Nine months ended
	September 30,					September 30,
	2015		2014			2015		2014
Revenues
United States	$	38,351		$	35,296	$	108,306		$	90,927
International		2,975			2,323		8,570			5,813
Total revenues	$	41,326		$	37,619	$	116,876		$	96,740

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Note 11. Subsequent Events

October 2015 Private Placement

The Company is in the process of completing its third and final closing related to its October 2015 Private Placement and has entered into Note Purchase Agreements (the “Note” or “Notes”) with three (3) accredited investors. The Company offered for sale as units up to a maximum of $10,000,000 principal amount of Notes convertible at the initial conversion price of $0.35 into 28,571,428 shares of the Company’s common stock and 13,333,334 warrants. The Company raised cash proceeds of $3,187,500 in the offering and converted $4,000,000 of debt from the January 2015 Private Placement to this offering and sold aggregate units consisting of the Notes in the aggregate principal amount of $7,187,500, convertible into 20,535,714 shares of common stock, par value $0.001 per share, at a conversion price of $0.35 per share, subject to adjustment as provided therein; and Series C Warrants exercisable to purchase 9,583,333 shares of the Company’s common stock at a price per share of $0.45.

The Offering terminated on October 30, 2015. The Company intends to invest the net offering proceeds in its wholly owned subsidiary, CLR Roasters, LLC (“CLR”), to fund working capital for its Nicaragua plantation and for the purchase of green coffee to accelerate the growth on its newly formed green coffee division. For twelve (12) months following the Closing, the investors have the right to participate in any future equity financings by the Company up to their pro rata share of the maximum offering amount in the aggregate.

The Notes bear interest at a rate of eight percent (8%) per annum. The Company has the right to prepay the Notes at any time after the one year anniversary date of the issuance of the Notes at a rate equal to 110% of the then outstanding principal balance and accrued interest. The Notes rank senior to all debt of the Company other than certain debt owed to Wells Fargo Bank, Crestmark Bank, the investors in the Company's prior private placements, a mortgage on property, and any refinancing’s thereof. The Company and CLR, have provided collateral to secure the repayment of the Notes and have pledged their assets (which liens are junior to CLR’s line of credit and equipment lease and junior to the rights of note holders in the Company’s prior financings but senior to all of their other obligations), all subject to the terms and conditions of a security agreement among the Company, CLR and the investors. Stephan Wallach, the Company’s Chief Executive Officer, has also personally guaranteed the repayment of the Notes, subject to the terms of a Guaranty executed by him with the investors. In addition, Mr. Wallach has agreed not to sell, transfer or pledge the 30 million shares of the common stock that are currently pledged as collateral to a previous financing so long as his personal guaranty is in effect.

The Warrants contain cashless exercise provisions in the event a registration statement registering the common stock underlying the Warrants has not been declared effective by the Securities and Exchange Commission (the “SEC”) by specified dates and customary anti-dilution protection and registration rights. The Warrants expire sixty (60) months from the date of the closing and have an initial exercise price of $0.45 per share. Each warrant is exercisable for .60 of one (1) share of Common Stock, which resulted in the issuance of Series C Warrants exercisable to purchase 9,583,333 shares of common stock.

Resignation of William Andreoli

On October 28, 2015, William Andreoli, President of Youngevity International, Inc. resigned. On October 30, 2015, David Briskie, the Chief Financial Officer of the Company, was appointed to serve as the President of the Company. (For additional information, see Form 8-K filed by the Company on November 3, 2015).

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2015 and herein as reported under Part II Other Information, Item 1A. Risk Factors. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.

Overview

We operate in two segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors and the commercial coffee segment where products are sold directly to businesses. During the nine months ended September 30, 2015, we derived approximately 88% of our revenue from our direct sales and approximately 12% of our revenue from our commercial coffee sales.

In the direct selling segment we sell health and wellness products on a global basis and offer a wide range of products through an international direct selling network of independent distributors. Our multiple independent selling forces sell a variety of products through friend-to-friend marketing and social networking.

We also engage in the commercial sale of coffee. We own a traditional coffee roasting business, CLR that sells roasted and unroasted coffee and produces coffee under its own Cafe La Rica brand, Josie’s Java House brand and Javalution brands. CLR produces coffee under a variety of private labels through major national sales outlets and major customers including cruise lines and office coffee service operators. During fiscal 2014 CLR acquired the Siles Plantation Family Group, a coffee plantation and dry-processing facility located in Matagalpa, Nicaragua, an ideal coffee growing region that is historically known for high quality coffee production. The dry-processing facility is approximately 26 acres and the plantation is roughly 450 acres and produces 100 percent Arabica coffee beans that are shade grown, Rainforest Alliance Certified™ and Fair Trade Certified™. The plantation, dry-processing facility and existing U.S. based coffee roaster facilities allows CLR to control the coffee production process from field to cup.

During the nine months ended September 30, 2015, we derived approximately 93% of our revenues from sales within the United States.

Results of Operations

The comparative financials discussed below show the condensed consolidated financial statements of Youngevity International, Inc. for the three and nine months ended September 30, 2015 and 2014.

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Three months ended September 30, 2015 compared to the three months ended September 30, 2014

Revenues

For the three months ended September 30, 2015, our revenue increased 9.9% to $41,326,000 as compared to $37,619,000 for the three months ended September 30, 2014. During the three months ended September 30, 2015, we derived approximately 90% of our revenue from our direct sales and approximately 10% of our revenue from our commercial coffee sales. The increase of 18.5% in direct selling revenue was attributed primarily to the increase in our product offerings, the increase in the number of distributors selling our product and the increase in the number of customers consuming our products as well as $3,132,000 in additional revenues derived from the Company’s 2014 and 2015 acquisitions compared to the prior period. The decrease of 32.7% in revenues in the commercial coffee segment was primarily due to a decrease in the green coffee distribution business which was negatively impacted by the lower commodity prices for green coffee and a slight decrease in the roasted coffee business. The following table summarizes our revenue in thousands by segment:

	For the Three Months Ended September 30,				Percentage change
Segment Revenues	2015		2014		Percentage change
Direct selling	$	37,056	$	31,275		18.5	%
Commercial coffee		4,270		6,344		(32.7	)%
Total	$	41,326	$	37,619		9.9	%

Cost of Revenues and Gross Profit

For the three months ended September 30, 2015, overall cost of revenues decreased approximately 2.1% to $16,293,000 as compared to $16,641,000 for the three months ended September 30, 2014. The decrease in cost of revenues is primarily attributable to a decrease of 26.1% in commercial coffee costs primarily due to the decrease in green coffee revenues, offset by an increase of 12.4% in direct selling costs. Cost of revenues includes the cost of inventory, shipping and handling costs incurred by us in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets.

For the three months ended September 30, 2015, gross profit increased approximately 19.3% to $25,033,000 as compared to $20,978,000 for the three months ended September 30, 2014. Gross profit as a percentage of revenues increased to 60.6%, compared to 55.8% in the prior year. Below is a table of the gross margin percentages by segment:

	Gross Profit % For the Three Months Ended September 30,
Segment Gross Profit	2015			2014
Direct selling		68.5	%		66.8	%
Commercial coffee		(8.5	)%		1.2	%
Consolidated		60.6	%		55.8	%

Gross profit as a percentage of revenues in the direct selling segment increased by approximately 1.7% for the three months ended September 30, 2015, compared with the same period last year. This increase was primarily due to price increases on certain products that became effective as of the second quarter of the current year. The decrease in gross margin in the commercial coffee segment was primarily due to the lower revenues in green coffee business combined with lower commodity prices for green coffee and the impact of certain fixed costs at the roaster.

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Operating Expenses

For the three months ended September 30, 2015, our operating expenses increased approximately 21.5% to $23,976,000 as compared to $19,740,000 for the three months ended September 30, 2014. Included in operating expense is distributor compensation paid to our independent distributors in the direct selling segment. For the three months ended September 30, 2015, distributor compensation increased 20.2% to $17,387,000 from $14,470,000 for the three months ended September 30, 2014. This increase was primarily attributable to the increase in revenues. Distributor compensation as a percentage of direct selling revenues increased to 46.9% as compared to 46.3% for the three months ended September 30, 2014, primarily due to added incentive programs and the continuing higher level achievements by distributors.

For the three months ended September 30, 2015, the sales and marketing expense increased 9.6% to $2,374,000 from $2,167,000 for the three months ended September 30, 2014 primarily due to increased compensation costs and increased distributor event costs.

For the three months ended September 30, 2015, the general and administrative expense increased 35.8% to $4,215,000 from $3,103,000 for the three months ended September 30, 2014 primarily due to increases in consulting costs, employee compensation and international expansion efforts. In addition, the Company recorded an increase to the contingent acquisition liability of $120,000 during this quarter, compared to a decrease of $342,000 in the prior year. The Company also recorded $253,000 in the current quarter to recognize other stock based expense related to warrant modifications.

Total Other Expense

For the three months ended September 30, 2015, total other expense decreased by $951,000 to $32,000 as compared to $983,000 for the three months ended September 30, 2014. The decrease was primarily due to non-cash expense reduction of $1,069,000 as a result of the change in fair value of warrant derivative during the three months ended September 30, 2015 compared to the non-cash expense of $273,000 during the three months ended September 30, 2014. The primary reason for the change in the valuation of the warrant derivative liability was due to the decrease in the market price of the Company’s stock to $0.33 as of September 30, 2015, compared to $0.38 as of June 30, 2015. This reduction was offset by increased interest expense of $391,000 related to contingent acquisition debt and the interest associated with our 2014 and 2015 Private Placement transactions. Non-cash interest components include amortization of deferred financing costs related to the Private Placements and the amortization of the debt discount associated with the 2014 Private Placement transaction convertible note payable.

Change in Fair Value of Warrant Derivative Liability. Various factors are considered in the pricing models we use to 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. Future changes in these factors may have a significant impact on the computed fair value of the warrant liability. As such, we expect future changes in the fair value of the warrants to continue and may vary significantly from year to year (see Note 7, to the condensed consolidated financial statements.)

The warrant liability and revaluations have not had a cash impact on our working capital, liquidity or business operations.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. We have recognized income tax provision of approximately $609,000, which is our estimated federal and state and foreign income calculation for the three months ended September 30, 2015.

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Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions. It is determined that it is more likely than not that the deferred tax asset will be realized in the US Federal tax jurisdiction. A valuation allowance remains on the state and foreign tax attributes that are likely to expire before realization. The differences between the effective rate of 59.4% and the Federal statutory rate of 34% is due to certain permanent differences between our taxable and book income, change in state tax rates, the change in our valuation allowance account, and state income taxes (net of federal benefit).

Net Income

For the three months ended September 30, 2015, the Company reported net income of $416,000 as compared to a net income of $185,000 for the three months ended September 30, 2014. The increase of $231,000 was attributable to $770,000 increase in income before income taxes, offset by income tax expense increase of $539,000.

Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014

Revenues

For the nine months ended September 30, 2015, our revenue increased 20.8% to $116,876,000 as compared to $96,740,000 for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, we derived approximately 88% of our revenue from our direct sales and approximately 12% of our revenue from our commercial coffee sales. The increase in direct selling revenue is attributed primarily to the increase in our product offerings, the increase in the number of distributors selling our product and the increase in the number of customers consuming our products as well as $7,677,000 in additional revenues derived from the Company’s 2014 and 2015 acquisitions compared to the prior period. The increase in revenues in the commercial coffee segment is primarily due to the addition of green coffee business in April of 2014 and additional revenues from new customers for roasted coffee during the second quarter of 2015. The following table summarizes our revenues in thousands by segment:

	For the Nine Months Ended September 30,				Percentage change
Segment Revenues	2015		2014		Percentage change
Direct selling	$	103,206	$	84,063		22.8	%
Commercial coffee		13,670		12,677		7.8	%
Total	$	116,876	$	96,740		20.8	%

Cost of Revenues and Gross Profit

For the nine months ended September 30, 2015, cost of revenues increased approximately 16.5% to $47,752,000 as compared to $40,984,000 for the nine months ended September 30, 2014. The increase in cost of revenues is primarily attributable to the increase in revenues discussed above. Cost of revenues includes the cost of inventory, shipping and handling costs incurred by us in connection with shipments to customers, royalties associated with certain products, transaction banking costs and depreciation on certain assets. Cost of revenue in the commercial coffee segment increased approximately 14.5%, primarily due to the addition of green coffee business.

For the nine months ended September 30, 2015, gross profit increased approximately 24.0% to $69,124,000 as compared to $55,756,000 for the nine months ended September 30, 2014. Below is a table of the gross margin percentages by segment:

	Gross Profit % For the Nine Months Ended September 30,
Segment Gross Profit	2015		2014
Direct selling	67.7	%		66.2	%
Commercial coffee	(5.5	)%		0.6	%
Consolidated	59.1	%		57.6	%

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Gross profit as a percentage of revenues in the direct selling segment increased by approximately 1.5% for the nine months ended September 30, 2015, compared with the same period last year. This increase was primarily due to the price increases on certain products that became effective as of the second quarter of the current year. The decrease in gross margin in the commercial coffee segment was primarily due to lower commodity prices for green coffee and the impact of certain fixed costs at the roaster that have not yet started generating the anticipated revenues.

Operating Expenses

For the nine months ended September 30, 2015, our operating expenses increased approximately 25.0% to $65,404,000 as compared to $52,318,000 for the nine months ended September 30, 2014. Included in operating expenses is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the nine months ended September 30, 2015, distributor compensation increased 23.8% to $47,261,000 from $38,172,000 for the nine months ended September 30, 2014. This increase was primarily attributable to the increase in revenues. Distributor compensation as a percentage of direct selling revenues increased to 45.8% as compared to 45.4% for the nine months ended September 30, 2014. This increase was primarily due to added incentive programs and higher level achievements by distributors.

For the nine months ended September 30, 2015, the sales and marketing expense increased 12.0% to $6,087,000 from $5,434,000 for the nine months ended September 30, 2014 primarily due to our costs related to increases in costs related to distributor events, wages related to our expansion of customer service support and international staff.

For the nine months ended September 30, 2015, the general and administrative expense increased 38.4% to $12,056,000 from $8,712,000 for the nine months ended September 30, 2014 primarily due to increases in consulting, legal and accounting expenses, employee compensation and international expansion efforts. In addition, the Company recorded an increase to the contingent acquisition liability of $120,000 for the current year, compared to a decrease of $328,000 for the same period in the prior year. The Company also recorded $253,000 in the current year to recognize other stock based expense related to warrant modifications.

Total Other Expense

For the nine months ended September 30, 2015, total other expense increased to $4,512,000 as compared to $1,866,000 for the nine months ended September 30, 2014. The increase was primarily due to non-cash expense of $1,232,000 as a result of the change in fair value of warrant derivative compared to the non-cash expense of $273,000 during the nine months ended September 30, 2014. The primary reason for the change in the valuation of the warrant derivative liability was due to the increase in the market price of the Company’s stock to $0.33 as of September 30, 2015, compared to $0.24 as of December 31, 2014. Total other expense also increased due to the interest expense related to contingent acquisition debt and the interest associated with our 2014 and 2015 Private Placement transactions. Non-cash interest components include amortization of deferred financing costs related to the Private Placements and the amortization of the debt discount associated with the 2014 Private Placement transaction convertible note payable.

The warrant liability and revaluations have not had a cash impact on our working capital, liquidity or business operations.

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Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. As of September 30, 2015 we have recognized income tax benefit of approximately $431,000 which is our estimated federal and state and foreign income calculation for the nine months ended September 30, 2015.

Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions. It is determined that it is more likely than not that the deferred tax asset will be realized in the US Federal tax jurisdiction. A valuation allowance remains on the state and foreign tax attributes that are likely to expire before realization. The difference between the effective rate of 54.4% and the Federal statutory rate of 34% is due to the change in our valuation allowance account, state income taxes (net of federal benefit), change in state tax rates, and certain permanent differences between our taxable and book income.

Net Income (Loss)

For the nine months ended September 30, 2015, the Company reported a net loss of $361,000 as compared to a net income of $1,156,000 for the nine months ended September 30, 2014. The decrease of $1,517,000 was attributable to $2,364,000 decrease in income before income taxes, offset by income tax benefit of $847,000.

Adjusted EBITDA

EBITDA (earnings before interest, income taxes, depreciation and amortization) as adjusted to remove the effect of stock based compensation expense and the change in the fair value of the warrant derivative or "Adjusted EBITDA," was $6,629,000 for the nine months ended September 30, 2015 compared to $5,773,000 in the same period for the prior year.

Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.

Adjusted EBITDA is a non-GAAP financial measure. We calculate adjusted EBITDA by taking net income, and adding back the expenses related to interest, income taxes, depreciation, amortization, stock based compensation expense, change in the fair value of the warrant derivative and non-cash impairment loss, as each of those elements are calculated in accordance with GAAP. Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.

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A reconciliation of our adjusted EBITDA to net (loss) income for the nine months ended September 30, 2015 and 2014 is included in the table below (in thousands):

	Nine Months Ended
	September 30,
	2015			2014
Net (loss)	$	(361	)	$	1,156
Add
Interest		3,280			1,593
Income taxes		(431	)		416
Depreciation		895			509
Amortization		1,578			1,439
EBITDA		4,961			5,113
Add
Stock based compensation		436			387
Change in the fair value of warrant derivative		1,232			273
Adjusted EBITDA	$	6,629		$	5,773

Liquidity and Capital Resources

Sources of Liquidity

At September 30, 2015 we had cash and cash equivalents of approximately $1,980,000 as compared to cash and cash equivalents of $2,997,000 as of December 31, 2014. The decrease in cash was primarily due to an increase in inventory purchases and cash used for capital expenditures.

Cash Flows

Cash used in operating activities. Net cash used by operating activities for the nine months ended September 30, 2015 was $556,000, as compared to net cash provided by operating activities of $2,966,000 for the nine months ended September 30, 2014. Net cash used by operating activities consisted of net loss of $361,000 offset by an increase of $5,521,000 in net non-cash operating expenses, and reduced by $5,716,000 in changes in operating assets and liabilities.

Net non-cash operating expenses included $1,232,000 related to the change in the fair value of warrant derivative liability, $2,473,000 in depreciation and amortization, $436,000 in stock based compensation expense, $253,000 related to warrant modification expense, $639,000 related to the amortization of deferred costs associated with our Private Placements, $712,000 related to the amortization of debt discounts and $224,000 in other non-cash expenses, net.

Changes in operating assets and liabilities were attributable to decreases in working capital primarily related to changes in inventory of $5,738,000, prepaid expenses and other current assets, net of $668,000 (net of non-cash deferred costs), deferred revenues of $1,547,000 and $278,000 related to income tax receivable. Increases in working capital primarily related to changes in accounts receivable, net of $131,000 of which $428,000 related to a decrease in our factoring receivable and offset by an increase of $297,000 from trade related receivables, accounts payable of $907,000, accrued distributor compensation of $192,000 and accrued expenses and other liabilities of $1,285,000.

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Cash used in investing activities. Net cash used in investing activities for the nine months ended September 30, 2015 was $2,339,000, as compared to net cash used in investing activities of $4,220,000 for the nine months ended September 30, 2014. Net cash used in investing activities consisted of $32,000 in initial cash payments net of intangibles acquired related to our business acquisitions and $2,307,000 in purchases of property and equipment and leasehold improvements.

Cash provided by financing activities. Net cash provided by financing activities was $1,992,000 for the nine months ended September 30, 2015 as compared to net cash provided by financing activities of $2,421,000 for the nine months ended September 30, 2014. The increase in cash provided by financing activities was primarily due to the net proceeds related to the January 2015 Private Placement of approximately $5,080,000, proceeds from exercise of stock options and warrants of $259,000, offset by $214,000 in payments for the CLR factoring agreement, $163,000 in payments to reduce notes payable, $2,545,000 in payments related to contingent acquisition debt, $43,000 in payments to reduce capital lease obligations and $382,000 in payments related to the Company’s share repurchase program.

Future Liquidity Needs

We believe that current cash balances, future cash provided by operations, our accounts receivable factoring agreement and line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for at least the next 12 months. Though our operations are currently meeting our working capital requirements, on November 9, 2015 we completed a private placement offering (the “October 2015 Private Placement”), pursuant to which we had offered for sale as units up to a maximum of $10,000,000 principal amount of Notes convertible at the initial conversion price of $0.35 into 28,571,428 shares of the Company’s common stock and 13,333,334 warrants. We raised cash proceeds of $3,187,500 in the October 2015 Private Placement and converted $4,000,000 of debt from our January 2015 Private Placement to the October 2015 Private Placement and sold aggregate units consisting of the Notes in the aggregate principal amount of $7,187,500, convertible into 20,535,714 shares of our common stock, par value $0.001 per share, at a conversion price of $0.35 per share, subject to adjustment as provided therein; and Series C Warrants exercisable to purchase 9,583,333 shares of common stock from the Company at a price per share of $0.45. The Notes bear interest at a rate of eight percent (8%) per annum. (See Subsequent Events, Note 11 to the condensed consolidated financial statements.) We intend to invest the net offering proceeds in its wholly owned subsidiary, CLR Roasters, LLC (“CLR”), to fund working capital for its Nicaragua plantation and for the purchase of green coffee to accelerate the growth on its green coffee division.

On October 10, 2014, we entered into a revolving line of credit agreement with Wells Fargo Bank National Association “Wells Fargo”, our principal banking partner. The line of credit provides us with a $2.5 million revolving credit line. The outstanding principal balance of the line of credit shall bear interest at a fluctuating rate per annum determined by the bank to be two and three-quarter percent (2.75%) above daily one month LIBOR as in effect from time to time. The bank charges an unused commitment fee equal to five tenths of a percent (.5%) per annum on the daily unused amount of the Line of Credit and is payable quarterly. The Company intends to utilize the revolver to finance working capital. This revolving line of credit expired effective October 13, 2015. We are currently in the process of renewing the line of credit with Wells Fargo. As of October 13, 2015, there were no amounts currently drawn against this facility.

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Critical Accounting Policies

The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2014.

New Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2015, as compared to the recent accounting pronouncements described in the Annual Report that are of material significance, or have potential material significance, to the Company.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

ITEM 4. Controls and Procedures

(a)	Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2015, the end of the quarterly fiscal period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)	Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during our third quarter of fiscal year 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in its condensed consolidated balance sheets would not be material to the financial statements as a whole.

ITEM 1A. RISK FACTORS

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described in our Annual Report on Form 10-K as filed with the SEC on March 30, 2015, and all of the information contained in our public filings before deciding whether to purchase our common stock. There have been no material revisions to the “Risk Factors” as set forth in our Annual Report on Form 10-K as filed with the SEC on March 30, 2015.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share repurchases activity during the three months ended September 30, 2015 was as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Three months ended September 30, 2015	Total Number of Shares Purchased (*)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2015 to July 31, 2015		92,525	$	0.36		92,525		11,580,046
August 1, 2015 to August 31, 2015		164,135	$	0.31		164,135		11,415,911
September 1, 2015 to September 30, 2015		77,570	$	0.32		77,570		11,338,341
Total		334,230	$	0.33		334,230

(*) On December 11, 2012, the Company authorized a share repurchase program to repurchase up to 15 million of the Company's issued and outstanding common shares from time to time on the open market or via private transactions through block trades. The initial expiration date for the stock repurchase program was December 31, 2013. On October 7, 2013, the Board voted to extend the stock repurchase program until a date is set to revoke the program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

The following exhibits are filed as part of this Report:

EXHIBIT INDEX

Exhibit No.		Exhibit

31.01		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	YOUNGEVITY INTERNATIONAL INC.
	(Registrant)

Date: November 16, 2015	/s/ Stephan Wallach
	Stephan Wallach
	Chief Executive Officer
	(Principal Executive Officer)


Date: November 16, 2015	/s/ David Briskie
	David Briskie
	Chief Financial Officer
	(Principal Financial Officer)

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