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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, 2014

 
[   ]
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 7, 2014, the issuer had 389,974,837 shares of its Common Stock issued and outstanding.
 
 
 
 
 


 
 
YOUNGEVITY INTERNATIONAL INC.
TABLE OF CONTENTS

   
Page
 
PART I. FINANCIAL INFORMATION
 
1
 
1
 
2
 
3
 
4
 
5
19
26
27
     
 
PART II. OTHER INFORMATION
 
28
28
30
30
30
30
30
  31
 
 
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,
2014
   
December 31,
2013
 
ASSETS
 
(Unaudited)
       
Current Assets:
           
Cash and cash equivalents
 
$
5,375
   
$
4,320
 
Accounts receivable, due from factoring company
   
1,144
     
1,051
 
Accounts receivable, trade
   
36
     
76
 
Inventory
   
11,302
     
5,973
 
Prepaid expenses and other current assets
   
3,455
     
1,209
 
Total current assets
   
21,312
     
12,629
 
                 
Property and equipment, net
   
9,646
     
4,669
 
Intangible assets, net
   
14,380
     
11,532
 
Goodwill
   
6,323
     
6,023
 
   
$
51,661
   
$
34,853
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Accounts payable
 
$
6,277
   
$
2,764
 
Accrued distributor compensation
   
3,857
     
2,711
 
Accrued expenses
   
1,379
     
1,238
 
Deferred revenues
   
5,180
     
3,308
 
Other current liabilities
   
390
     
148
 
Capital lease payable, current portion
   
47
     
95
 
Notes payable, current portion
   
228
     
245
 
Warrant derivative liability
   
3,970
     
-
 
Contingent acquisition debt, current portion
   
2,715
     
1,072
 
Total current liabilities
   
24,043
     
11,581
 
                 
Capital lease payable, net of current portion
   
5
     
27
 
Deferred tax liability
   
723
     
723
 
Notes payable, net of current portion
   
4,892
     
5,015
 
Convertible notes payable, net of debt discount
   
158
     
-
 
Contingent acquisition debt, net of current portion
   
7,831
     
6,008
 
  Total liabilities
   
37,652
     
23,354
 
                 
Commitments and contingencies
               
                 
Equity:
               
Youngevity International, Inc. stockholders' equity:
               
Convertible Preferred Stock, $0.001 par value: 100,000,000 shares authorized; 211,135 shares issued and outstanding at September 30, 2014 and December 31, 2013
   
-
     
-
 
Common Stock, $0.001 par value: 600,000,000 shares authorized; 389,872,923 and 388,686,445 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
   
390
     
389
 
Additional paid-in capital
   
167,224
     
165,759
 
Accumulated deficit
   
(153,125
)
   
(154,281
)
Accumulated other comprehensive loss
   
(277
)
   
(165
)
Total Youngevity International, Inc. stockholders' equity
   
14,212
     
11,702
 
Noncontrolling interest
   
(203
   
(203
)
Total equity
   
14,009
     
11,499
 
   
$
51,661
   
$
34,853
 
See accompanying notes to condensed consolidated financial statements.
 
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except share and per share amounts)
(Unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Revenues
 
$
37,619
   
$
21,212
   
$
96,740
   
$
62,932
 
Cost of revenues
   
16,641
     
8,325
     
40,984
     
24,930
 
Gross profit
   
20,978
     
12,887
     
55,756
     
38,002
 
Operating expenses
                               
Distributor compensation
   
14,470
     
8,540
     
38,172
     
24,584
 
Sales and marketing
   
2,167
     
1,071
     
5,434
     
3,267
 
General and administrative
   
3,103
     
2,341
     
8,712
     
6,688
 
Total operating expenses
   
19,740
     
11,952
     
52,318
     
34,539
 
Operating income
   
1,238
     
935
     
3,438
     
3,463
 
Other income (expense)
   
3
     
-
     
5
     
(1
)
Interest expense, net
   
(713
)
   
(300
)
   
(1,598
)
   
(855
)
Change in fair value of warrant derivative liability
   
(273
)
   
-
     
(273
)
   
-
 
Total other expense
   
(983
)
   
(300
)
   
(1,866
)
   
(856
)
Income before income taxes
   
255
     
635
     
1,572
     
2,607
 
Income tax provision
   
70
 
   
119
     
416
     
436
 
Net income
   
185
     
516
     
1,156
     
2,171
 
Net loss attributable to noncontrolling interest
   
-
     
-
     
-
     
(81
)
Net income attributable to Youngevity
   
185
     
516
     
1,156
     
2,252
 
Preferred stock dividends
   
(4
)
   
(4
)
   
(12
)
   
(12
 )
Net income available to common stockholders
 
$
181
   
$
512
   
$
1,144
   
$
2,240
 
                                 
Net income per share, basic
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.01
 
Net income per share, diluted
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.01
 
                                 
Weighted average shares outstanding, basic
   
390,219,932
     
389,082,677
     
389,235,633
     
389,227,156
 
Weighted average shares outstanding, diluted
   
392,139,155
     
393,541,049
     
389,839,584
     
393,172,875
 
                                 
See accompanying notes to condensed consolidated financial statements.

 
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net income
 
$
185
   
$
516
   
$
1,156
   
$
2,171
 
Foreign currency translation
   
(3
)
   
(14
   
(52
)
   
(35
)
Total other comprehensive loss
   
(3
)
   
(14
   
(52
)
   
(35
)
Comprehensive income
 
$
182
   
$
502
   
$
1,104
   
$
2,136
 
                   
See accompanying notes to condensed consolidated financial statements.

 
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, except share amounts)
(Unaudited)
 
   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
Cash Flows from Operating Activities:
           
Net Income
 
$
1,156
   
$
2,171
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,948
     
1,467
 
Stock based compensation expense
   
387
     
651
 
Amortization of deferred financing costs
   
16
     
-
 
Change in fair value of warrant derivative liability
   
273
     
-
 
Amortization of debt discount
   
190
     
37
 
Change in fair value of contingent acquisition debt
   
(429
)
   
45
 
Gain on disposal of assets
   
(1
)
   
-
 
Interest income accrued on note receivable, related party
   
-
     
(3
)
Changes in operating assets and liabilities, net of effect from business combinations:
               
Accounts receivable
   
(53
)
   
(89
Inventory
   
(5,329
)
   
(1,261
)
Prepaid expenses and other current assets
   
(1,772
)
   
(172
)
Accounts payable
   
3,513
     
569
 
Accrued distributor compensation
   
1,146
     
(201
Deferred revenues
   
1,872
     
427
 
Accrued expenses and other liabilities
   
49
 
   
(244
)
Net Cash Provided by Operating Activities
   
2,966
     
3,397
 
                 
Cash Flows from Investing Activities:
               
Acquisitions, net of cash acquired
   
(2,100
)
   
(22
Purchases of property and equipment
   
(2,120
)
   
(1,074
)
Net Cash Used in Investing Activities
   
(4,220
)
   
(1,096
)
                 
Cash Flows from Financing Activities:
               
Proceeds from issuance of convertible notes payable, net
   
4,260
     
-
 
Proceeds from the exercise of stock options and warrants, net
   
352
     
2
 
Proceeds from factoring company, net
   
2
     
67
 
Payments of notes payable, net
   
(172
)
   
(282
)
Proceeds for note receivable, related party, net
   
-
     
62
 
Payments of contingent acquisition debt
   
(1,637
)
   
(508
)
Payments of capital leases
   
(70
)
   
(94
)
Repurchase of common stock
   
(314
)
   
(144
)
Net Cash Provided by (Used) in Financing Activities
   
2,421
     
(897
)
Foreign Currency Effect on Cash
   
(112
)
   
(35
Net increase in cash and cash equivalents
   
1,055
     
1,369
 
Cash and Cash Equivalents, Beginning of Period
   
4,320
     
3,025
 
Cash and Cash Equivalents, End of Period
 
$
5,375
   
$
4,394
 
                 
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the period for:
               
Interest
 
$
1,640
   
$
855
 
Income taxes
 
$
594
   
$
473
 
                 
Supplemental Disclosures of Noncash Investing and Financing Activities
               
Acquisitions of net assets in exchange for contingent acquisition debt
 
$
5,532
   
$
-
 
 
During 2014, the Company issued certain convertible notes payable that included warrants. The related beneficial conversion feature, valued at approximately $1,053,000 was classified as an equity instrument and recorded as a discount to the carrying value of the related debt. The warrants, valued at approximately $3,697,000, were recognized as a derivative liability.
 
See accompanying notes to condensed consolidated financial statements.
 
Note 1. Basis of Presentation and Nature 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, 2014 and for the three and nine months ended September 30, 2014 and 2013 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 Form 10-K for the year ended December 31, 2013. 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.

Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of options granted under our stock based compensation plans, 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 the allowance for sales returns. Actual results may differ from previously estimated amounts and such differences may be material to the condensed consolidated financial statements.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected prospectively in the period they occur.

Nature of Business

    Youngevity International, Inc., founded in 1996, operates through the following domestic wholly owned subsidiaries: AL Global Corporation, which operates our direct selling networks, CLR Roasters, LLC (“CLR Roasters”), our commercial coffee business which includes our recently acquired Siles Plantation Family Group in Nicaragua, Financial Destinations, Inc., FDI Management, Inc., and MoneyTrax, LLC (collectively referred to as “FDI”), MK Collaborative LLC, Youngevity Global, LLC and the wholly owned foreign subsidiaries Youngevity Australia Pty. Ltd. and Youngevity NZ, Ltd. Effective July 23, 2013, the Company changed its name from AL International, Inc. to Youngevity International, Inc.
 
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, 2014, we derived approximately 87% of our revenue from our direct sales segment and approximately 13% of our revenue from our commercial coffee sales segment.

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.
 
New Accounting Pronouncements
 
In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the threshold for a disposal to qualify as a discontinued operation. To be considered a discontinued operation a disposal now must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. This ASU also requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
 
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new 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. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements.

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2014-12 “Compensation – Stock Compensation” (Topic 718). The ASU provides guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendment requires a performance target that affects vesting and that could be achieved after requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that such performance condition would be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. Those amendments are effective for annual reporting periods beginning after December 15, 2015, and interim periods therein. The Company is currently evaluating the potential impact that adoption of this standard may have on its financial statements.

Note 2.  Income Taxes

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.
 
Inventories consist of the following (in thousands):

 
As of
 
   
September 30,
2014
   
December 31,
2013
 
Finished goods
 
$
7,753
   
$
4,642
 
Raw materials
   
4,051
     
1,667
 
     
11,804
     
6,309
 
Reserve for excess and obsolete
   
(502
)
   
(336
)
Inventory, net
 
$
11,302
   
$
5,973
 
 
    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 as of the acquisition date. 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 of the 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, 2014, the Company entered into three acquisitions, which are detailed below.  All of the acquisitions were conducted in an effort to expand the Company’s distributor network, enhance and expand its product portfolio, diversify its product mix or expand the coffee business.  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. 

Good Herbs, Inc.

On April 28, 2014, the Company acquired certain assets and assumed certain liabilities of Good Herbs, Inc., (“Good Herbs”) a traditional natural herbal supplements company, whose primary sales channel has been targeted toward certified natural health professionals. As a result of this business combination, the Company’s distributors and customers have access to Good Herbs’ unique line of products and Good Herbs’ distributors and clients gained access to products offered by the Company. The purchase price consisted of a maximum purchase price of $1,900,000, of which approximately $120,000 was related to assumed liabilities. The Company has agreed to pay Good Herbs a monthly payment equal to five (5%) of all gross sales revenue generated by the Good Herbs’ distributor organization, regardless of products being sold within the Good Herbs’ distributor organization; provided, however, for the first six (6) months effective May 12, 2014 Good Herbs will receive a minimum guaranteed payment of $20,000 per month which will be applied to the maximum purchase price. In addition, the Company agreed to pay Good Herbs five percent (5%) of Good Herbs’ product sales generated outside the Good Herbs’ distributor organization. Payments will be made monthly until the earlier of the date that is ten (10) years from the closing or until such time the Company has paid aggregate cash payments equal to $1,900,000; however if the aggregate gross sales revenue generated by the Good Herbs’ distributor organization, regardless of the products being sold, received by the Company for the fifteen (15) 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 between $1,900,000 and the fifteen month revenue; provided that in no event will the maximum aggregate purchase price be reduced below $1,000,000. The contingent consideration’s estimated fair value at the date of acquisition was $800,000, 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 Good Herbs (in thousands) is as follows:

Trademarks and trade name
 
 $
200
 
Customer-related intangible
   
200
 
Distributor organization
   
520
 
Accrued expenses
   
(120
)
Total purchase price
 
$
800
 
 
 
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 (10) ten 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.
 
Revenue from the Good Herbs’ distributors included in the condensed consolidated statement of operations for the three and nine months ended September 30, 2014 was approximately $183,000 and $242,000, respectively.

The Company’s business combination related to Good Herbs did not have a material impact on the Company’s unaudited condensed consolidated financial statements as of September 30, 2014, and therefore pro forma disclosures have not been presented.

Beyond Organic, LLC

On May 1, 2014, the Company acquired certain assets and assumed certain liabilities of Beyond Organic, LLC, (“Beyond Organic”) a vertically integrated organic food and beverage company. The purchase price consisted of a maximum purchase price of $6,200,000, of which approximately $200,000 was related to assumed liabilities. The Company has agreed to pay Beyond Organic a monthly payment equal to ten (10%) of all gross sales revenue generated by the Beyond Organic distributor organization, regardless of products being sold within the Beyond Organic distributor organization; provided, however, for the first ten (10) months effective May 12, 2014 Beyond Organic will receive a minimum guaranteed payment of $92,500 per month which will be applied to the maximum purchase price. In addition, the Company agreed to pay Beyond Organic five percent (5%) of Beyond Organic product sales generated outside the Beyond Organic distributor organization. Payments will be made monthly until the earlier of the date that is seven (7) years from the closing or until such time the Company has paid aggregate cash payments equal to $6,000,000. The contingent consideration’s estimated fair value at the date of acquisition was $3,100,000, 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 their 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 Beyond Organic (in thousands) is as follows:

Goodwill
 
$
300
 
Trademarks and trade name
   
300
 
Customer-related intangible
   
1,300
 
Distributor organization
   
1,400
 
Accrued expenses
   
(200
)
Total purchase price
 
$
3,100
 
 
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 (10) ten 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.

Goodwill of $300,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. Goodwill is estimated to represent the synergistic values expected to be realized from the combination of the two businesses. The goodwill is expected to be deductible for tax purposes.
 
The Company expects to finalize the valuation within one (1) year from the acquisition date.
 
Revenue from the Beyond Organic distributors included in the condensed consolidated statement of operations for the three and nine months ended September 30, 2014 was approximately $1,202,000 and $1,957,000, respectively.
 
 
The Company’s business combination related to Beyond Organic did not have a material impact on the Company’s unaudited condensed consolidated financial statements as of September 30, 2014, and therefore pro forma disclosures have not been presented.

Siles Plantation Family Group SA (Sociedad Anonima), Nicaragua coffee plantations and dry-processing plant.
 
On May 13, 2014, the Company, through its wholly owned subsidiary CLR Roasters, LLC (“CLR”), completed the acquisition of the Siles Plantation Family Group SA (“Siles Plantation”), a Nicaraguan entity.  The results of Siles Plantation are included in the condensed consolidated financial statements of the Company from the date of acquisition. The transaction is being accounted for as a business combination.
 
The Siles Plantation is operated and managed by a Nicaraguan plantation group Hernandez, Hernandez Export Co., LTD (“H&H”). As an inducement to harvest the plantations and operate the dry-processing plant profitably, CLR and H&H entered into an Operating and Profit Sharing Agreement (“Agreement”).  In accordance with the Agreement, H&H shares equally (50%) in all profits and losses generated by the Siles Plantation, and profits from any subsequent sale of the plantation, after profits are first distributed to CLR equal to the amount of CLR’s cash contributions for the acquisitions, then after profits are distributed to H&H in an amount equal to their cash contributions, and after certain other conditions are met.

Concurrent with the acquisition of the Siles Plantation, the Siles Plantation acquired the assets of a dry-processing plant “La Pita”, a coffee plantation “El Paraiso” and has an option to purchase a second coffee plantation “El Paraisito” as follows:
 
1)  
“La Pita”, a dry-processing plant sitting on approximately 18 acres of land is located in Matagalpa, Nicaragua.  The property includes buildings, structures, machinery and equipment, and furnishings and fixtures. The total purchase price was $1,904,840, of which CLR paid $1,050,000 and H&H paid $854,840. The preliminary purchase price allocation for La Pita (in thousands) is as follows:
 
Buildings and structures
 
$
832
 
Machinery and equipment
   
417
 
Customer relationships, intangible
   
367
 
Land
   
289
 
Total purchase price
 
$
1,905
 
 
2)  
“EL Paraiso”, a coffee plantation located in Matagalpa, Nicaragua, consisting of approximately 450 acres of land and hundreds of thousands of coffee plants of various ages. The total purchase price was $1,400,000, of which CLR paid $1,050,000 and H&H paid $350,000. The purchase price allocation for El Paraiso (in thousands) is as follows:
 
Land
 
$
1,400
 
Total purchase price
 
$
1,400
 

 3)  
Additionally, the Siles Plantation has the option to purchase “El Paraisito”, an approximate 450 acre plantation located adjacent to El Paraiso.  The Company is currently in the process of completing final settlement of the purchase agreement. CLR and H&H has a deposit towards this purchase of $284,000, of which CLR paid $200,000 and H&H paid $84,000 towards the deposit and is recorded in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.
 
In connection with the acquisitions of the Siles Plantation, La Pita, and El Paraiso, the Company recognized a contingent liability of approximately $1,600,000, which is payable after certain working capital conditions are met and after CLR’s cash contributions for the acquisitions are fully paid.  This liability is included in the contingent acquisition debt balance as of September 30, 2014.

As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. Changes to the preliminary purchase price allocation are expected to occur, and may be significant, upon completion of the acquisition valuation. The Company expects to finalize the valuation within one (1) year from the acquisition date.
 
 
   Siles Family Plantation is a newly formed entity and does not have current or historical financial statements, therefore pro forma disclosures have not been presented.

Go Foods Global, LLC

During the quarter ended September 30, 2014, the Company entered into an amendment agreement related to the Go Foods Global, LLC business acquisition that was consummated in a prior year. The amendment agreement provides for the cancellation of certain obligations provided under the original asset purchase agreement, releasing the Company from certain royalty and commission payments. The Company retains all the rights pursuant to the original agreement. This resulted in the elimination of the related contingent acquisition debt of approximately $342,000, as of September 30, 2014. 
 
Financial Destinations, Inc., FDI Management, Inc., and MoneyTrax, LLC (collectively referred to as “FDI”)

During the nine months ended September 30, 2014, the Company entered into an amendment agreement related to its FDI business acquisition that was consummated in a prior year, which reduces the maximum amount that will be paid to the seller. This resulted in a reduction in the estimated fair value of the related contingent acquisition debt.

Note 5.  Intangible Assets and Goodwill

    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.
 
Intangible assets consist of the following (in thousands):

   
September 30, 2014
   
December 31, 2013
 
   
Cost
   
Accumulated
Amortization
   
Net
   
Cost
   
Accumulated
Amortization
   
Net
 
                                     
Distributor organizations
 
$
10,345
   
$
4,909
   
$
5,436
   
$
8,425
   
$
4,169
   
$
4,256
 
Trademarks and trade names
   
4,341
     
252
     
4,089
     
3,841
     
113
     
3,728
 
Customer relationships
   
6,000
     
1,733
     
4,267
     
4,133
     
1,248
     
2,885
 
Internally developed software
   
720
     
132
     
588
     
720
     
57
     
663
 
Intangible assets, net
 
$
21,406
   
$
7,026
   
$
14,380
   
$
17,119
   
$
5,587
   
$
11,532
 

Amortization expense related to intangible assets was approximately $480,000 and $396,000 for the three months ended September 30, 2014 and 2013, respectively. Amortization expense related to intangible assets was approximately $1,439,000 and $1,154,000 for the nine months ended September 30, 2014 and 2013, respectively.
 
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 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. During the nine months ending September 30, 2014 the Company recorded an increase in goodwill in the amount of $300,000 related to the acquisition of Beyond Organic. The goodwill balance as of September 30, 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, 2014 and 2013.

 
Note 6.  Stock Based Compensation
 
The Company accounts for stock based compensation in accordance with the guidance provided by 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.
 
Note 7. Convertible Notes Payable
 
Note Purchase Agreement

Between July 31, 2014 and September 10, 2014, the Company, entered into Note Purchase Agreements (the "Note" or "Notes") by way of completing a private placement offering (“2014 Private Placement”) with seven accredited investors pursuant to which the Company raised aggregate gross proceeds of $4,750,000 and sold units consisting of five year senior secured convertible Notes in the aggregate principal amount of $4,750,000, that are convertible into 13,571,429 shares of our common stock, at a conversion price of $0.35 per share, and warrants to purchase 18,586,956 shares of common stock at an exercise price of $0.23 per share, subject to adjustment as provided therein.

The convertible Notes bear interest at a rate of eight percent (8%) per annum to be paid quarterly in arrears starting September 30, 2014, with all principal and unpaid interest due at maturity on July 30, 2019.  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 any unpaid accrued interest. The Notes are secured by pledged assets of CLR Roasters and rank senior to all debt of CLR Roasters other than certain senior debt that has been previously defined in the agreement as senior to the convertible Notes debt. 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.  In addition, Mr. Wallach has agreed not to sell, transfer or pledge 30 million shares of the Common Stock that he owns so long as his personal guaranty is in effect.
 
With respect to the aggregate offering, the Company used one placement agent in the transactions and paid $490,000, in expenses, including a placement agent fee of $477,000 and miscellaneous other fees. We also issued the placement agent two five-year warrants exercisable in an aggregate amount of 1,357,143 shares of common stock at an exercise price of $0.35 per share and two five-year warrants exercisable in the aggregate amount of 1,858,694 shares of common stock at an exercise price of $0.23 per share. The placement agent fees have been capitalized as deferred financing costs and will be amortized to interest expense over the term of the Notes. There is approximately $474,000 in deferred financing costs as of September 30, 2014 that are included in prepaid expenses and other current assets on the condensed consolidated balance sheet.
 
We analyzed the nature of the warrants that were issued in the transaction and determined that because the exercise price of the warrants is protected against down-round financing throughout the term of the warrant agreement, the warrants 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 Notes totaled $3,697,000, and has been recorded as a derivative liability with a corresponding debt discount that will be amortized over the term of the Note to interest expense.
 
Additionally, upon issuance of the Notes, the Company recorded the discount for the beneficial conversion feature of $1,053,000. The beneficial conversion feature was recorded to equity and the debt discount associated with the beneficial conversion feature will be amortized to interest expense over the life of the Notes. The Company recorded approximately $158,000 of interest expense for the amortization of the debt discounts during the three and nine months ended September 30, 2014.

 
The following table summarizes information relative to the convertible note outstanding:
 
 
  
September 30, 2014
 
  
December 31, 2013
 
Convertible notes
  
$
4,750,000
  
  
$
-
  
Less: detachable warrants discount
  
 
(3,697,000
)  
  
 
-
 
Less: conversion feature discount
  
 
(1,053,000
)  
  
 
-
 
Amortization of debt discounts
  
 
158,000
  
  
 
-
 
Convertible notes, net of discounts
  
$
158,000
  
  
$
-
  
 
The balance of the unamortized debt discounts as of September 30, 2014 is approximately $4,592,000.
 
Registration Rights Agreement

The Company entered into a registration rights agreement (“Registration Rights Agreement”) with the investors in the 2014 Private Placement. Under the terms of the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale of the common stock underlying the units and the common stock that is issuable on exercise of the warrants within 90 days from the final closing date of the 2014 Private Placement (the “Filing Deadline”).

The Company has agreed to use reasonable efforts to maintain the effectiveness of the registration statement through the one year anniversary of the date the registration statement is declared effective by the Securities and Exchange Commission (the “SEC”), or until Rule 144 of the 1933 Act is available to investors in the 2014 Private Placement with respect to all of their shares, whichever is earlier. If the Company does not meet the Filing Deadline or Effectiveness Deadline, as defined in the Registration Rights Agreement, the Company will be liable for monetary penalties equal to one-half of one percent (1.0%) of each investor’s investment at the end of every 30 day period following such Filing Deadline or Effectiveness Deadline failure until such failure is cured.

The payment amount shall be prorated for partial 30 day periods. The maximum aggregate amount of payments to be made by the Company as the result of such shall be an amount equal to six (6%) of each investor’s investment amount. Notwithstanding the foregoing, no payments shall be owed with respect to any period during which all of the investor’s registrable securities may be sold by such investor under Rule 144 or pursuant to another exemption from registration.

The Company filed a registration statement on October 3, 2014 and an amended statement on October 17, 2014 and it was declared effective by the SEC on November 4, 2014.
 
Note 8. Derivative Liability

We accounted for the warrants issued in conjunction with our 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 9) 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 Fair Value Per Share as of September 30, 2014
   
Estimated Total
Fair Value in Aggregate $ as of September 30, 2014
   
Estimated Total Fair Value in Aggregate $ as of issuance dates
 
                         
July 31, 2014 Warrants
   
19,966,768
   
$
0.18
   
$
3,633,000
   
$
3,374,000
 
August 14, 2014 Warrants
   
1,721,273
     
0.18
     
316,000
     
300,000
 
September 10, 2014 Warrants
   
114,752
     
0.18
     
21,000
     
23,000
 
     
21,802,793
           
$
3,970,000
   
$
3,697,000
 
 
 
The change in the fair value of the derivative liability between the issuance dates and September 30, 2014, includes an increase to the derivate liability of $273,000, which was recognized through earnings in the condensed consolidated income statement. 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 values of the warrants were computed at issuance and as of September 30, 2014 by a third party valuation company using a Monte Carlo option pricing model based on the following assumptions:
 
Volatility
   
90.0
%
Risk-free interest rates
   
1.58 -1.79
%
Dividend yield
   
0.0
%
Expected term
 
5.0
 Yrs
 
In addition, as of the valuation dates, management assessed the probabilities of future assumptions in the Monte Carlo valuation models.

Note 9.   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 expenses 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 8.) 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. The estimated fair values were computed by a third party valuation company using a Monte Carlo option pricing model based on various assumptions. 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.

 
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, 2014
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Liabilities:
                               
Contingent acquisition debt, current portion
 
$
2,715
   
$
-
   
$
-
   
$
2,715
 
Contingent acquisition debt, less current portion
   
7,831
     
-
     
-
     
7,831
 
Warrant derivative liability
   
3,970
     
  -
     
  -
     
3,970
 
    Total liabilities
 
$
14,515
   
$
-
   
$
-
   
$
14,515
 
 
   
Fair Value at December 31, 2013
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Liabilities:
                       
Contingent acquisition debt, current portion
 
$
1,072
   
$
-
   
$
-
   
$
1,072
 
Contingent acquisition debt, less current portion
   
6,008
     
-
     
-
     
6,008
 
Warrant derivative liability
   
-
     
-
     
-
     
-
 
    Total liabilities
 
$
7,080
   
$
-
   
$
-
   
$
7,080
 
 
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 nine months ended September 30, 2014 and 2013, the net adjustment to the fair value of the contingent acquisition debt was a decrease of approximately $429,000 and an increase of approximately $45,000, respectively.

Note 10.  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. As of September 30, 2014, the balance in deferred revenues attributable to Heritage Makers was approximately $5,180,000.
 
Deferred costs relate to Heritage Makers prepaid commissions that are recognized in expense at the time the related revenue is recognized. As of September 30, 2014, the balance in deferred costs was approximately $1,679,000 and was included in prepaid expenses and current assets.

Note 11.  Earnings Per Share
 
Basic earnings per share is computed by dividing net income 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 stock options, warrants and convertible preferred stock.
 
 
Note 12.  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”.

The Company had 389,872,923 common shares outstanding as of September 30, 2014. The holders of Common Stock are entitled to one vote per share on matters brought before the shareholders. As of September 30, 2014, warrants to purchase 35,556,005 shares of Common Stock at prices ranging from $0.10 to $0.50 were outstanding, exercisable and expire at various dates through August 2019.  
             
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, 2014, the Company repurchased a total of 1,321,272 shares at a weighted-average cost of $0.23.  A total of 2,337,675 shares have been repurchased to date at a weighted-average cost of $0.23. The remaining number of shares authorized for repurchase under the plan as of September 30, 2014 is 12,662,325.

The Company had 211,135 shares of Series A Convertible Preferred Stock ("Series A Preferred") outstanding as of September 30, 2014 and December 31, 2013. 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.  
 
Note 13.  Stock Option Plan

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, 2014, the Company had 15,788,000 shares of Common Stock available for issuance under the Plan. 

The Company uses the Black-Scholes option-pricing model (“Black-Scholes 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 contractual term of the option. The expected life is based on the contractual term 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. 

A summary of the Plan Options for the nine months ended September 30, 2014 is presented in the following table:
 
   
Number of
 Shares
   
Weighted
 Average
 Exercise Price
   
Aggregate
Intrinsic
 Value
 (in thousands)
 
                         
Outstanding December 31, 2013
   
17,572,500
   
$
0.22
   
$
478
 
Granted
   
6,620,500
     
0.23
         
Canceled
   
(10,000
)
   
0.18
         
Exercised
   
(7,750
)
   
0.24
     
-
 
Outstanding September 30, 2014
   
24,175,250
     
0.22
     
795
 
Exercisable September 30, 2014
   
14,663,750
   
$
0.22
   
$
439
 
 



 
The weighted-average fair value per share of the granted options for the nine months ended September 30, 2014 and 2013 was $0.16 and $0.14, respectively.  

Stock-based compensation expense was approximately $141,000 and $388,000 for the three and nine months ended September 30, 2014, respectively, compared to approximately $224,000 and $651,000 for the three and nine months ended September 30, 2013, respectively.

As of September 30, 2014, there was approximately $1,234,000 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 4.92 years.

Note 14.   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 reportable segment. Under the terms of the Factoring Agreement, the Company effectively sells all of its accounts receivable to Crestmark with non-credit related recourse. The Company continues to be responsible for the servicing and administration of the receivables. In January 2013, the Company extended its Factoring Agreement through February 1, 2016, and modified certain of the terms.

The Factoring Agreement provides for the Company to receive advances against the purchase price of its receivables at a rate up to 85% of the aggregate purchase price of the receivable outstanding at any time less: receivables that are in dispute, receivables that are not credit approved within the terms of the Factoring Agreement and any fees or estimated fees related to the Factoring Agreement. Interest is accrued on all outstanding advances at the greater of 5.25% per annum or the Prime Rate (as identified by the Wall Street Journal) plus an applicable margin. The margin is based on the magnitude of the total outstanding advances and ranges from 2.50% to 5.00%. In addition to the interest accrued on the outstanding balance, the factor charges a factoring commission for each invoice factored which is calculated as the greater of $5.00 or 0.875% to 1.00% of the gross invoice amount and is recorded as interest expense. The minimum factoring commission payable to the bank is $90,000 during each consecutive 12-month period.

The Company accounts for the sale of receivables under the Factoring Agreement as secured borrowing 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 $1,144,000 and $1,051,000 as of September 30, 2014 and December 31, 2013, respectively, reflects the related collateralized accounts. Amounts advanced under the Factoring Agreement were approximately $2,000 and $0 as of September 30, 2014 and December 31, 2013, respectively. These balances are included in other current liabilities.
 
Note 15.  Segment and Geographic Information

The Company offers a wide variety of products including nutritional and health, sports and energy drinks, gourmet coffee, skincare and cosmetics, lifestyle, pharmaceutical discount card and pet related items. In addition, the Company offers health and wellness services. 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.


 
Segment revenue excludes intercompany revenue eliminated in the consolidation. The following tables present certain financial information for each segment (in thousands):
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Revenues
                       
    Direct selling
 
$
31,275
   
$
19,223
   
$
84,063
   
$
56,549
 
    Commercial coffee
   
6,344
     
1,989
     
12,677
     
6,383
 
        Total revenues
 
$
37,619
   
$
21,212
   
$
96,740
   
$
62,932
 
Gross profit
                               
    Direct selling
 
$
20,899
   
$
12,850
   
$
55,674
   
$
37,492
 
    Commercial coffee
   
79
     
37
     
82
     
510
 
        Total gross margin
 
$
20,978
   
$
12,887
   
$
55,756
   
$
38,002
 
Net income (loss)
                               
    Direct selling
 
$
668
   
$
918
   
$
2,740
   
$
2,979
 
    Commercial coffee
   
(483
)
   
(402
)
   
(1,584
)
   
(808
)
        Total net income
 
$
185
   
$
516
   
$
1,156
   
$
2,171
 
Capital expenditures
                               
    Direct selling
 
$
344
   
$
16
   
$
680
   
$
2,866
 
    Commercial coffee
   
528
     
102
     
4,806
     
775
 
        Total capital expenditures
 
$
872
   
$
118
   
$
5,486
   
$
3,641
 
 
 
As of
 
 
September 30,
2014
 
December 31,
2013
 
Total assets
       
    Direct selling
  $ 32,692     $ 24,887  
    Commercial coffee
    18,969       9,966  
        Total assets
  $ 51,661     $ 34,853  
         

Revenues are primarily derived from customers within the United States. International revenues represent 60 different countries. Revenues based on geographic location are summarized in the following table:
 
  
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
Revenues
               
    United States
 
$
35,296
   
$
19,752
   
$
90,927
   
$
58,292
 
    International
   
2,323
     
1,460
     
5,813
     
4,640
 
        Total revenues
 
$
37,619
   
$
21,212
   
$
96,740
   
$
62,932
 

  Distributor Compensation

In the direct selling segment, the Company utilizes a network of independent distributors, each of whom has signed an agreement with the Company, enabling them to purchase products at wholesale prices, enroll new distributors for their down-line and earn compensation on product purchases made by those down-line distributors.
 
Due to the multi-layer independent sales approach, distributor incentives are a significant component of the Company’s cost structure. The Company accrues all distributor compensation expense in the month earned and pays the compensation the following month.
 
 
Note 16.  Subsequent Events
           
Acquisition of Restart Your Life, LLC
 
On October 1, 2014, the Company acquired certain assets and assumed certain liabilities of Restart Your Life, LLC, a dietary supplement company and provider of immune system support products and therapeutic skin lotions. As a result of this business combination, the Company’s distributors and customers will have access to Restart Your Life’s unique line of products and Restart Your Life’s distributors and clients will gain access to products offered by the Company. The maximum consideration payable by the Company shall be $1,492,000, subject to adjustments. The Company will make monthly payments based on a percentage of Restart Your Life’s distributor revenue and royalty revenue until the earlier of the date that is 10 years from the closing date or such time as the Company has paid to Restart Your Life’s aggregate cash payments of Restart Your Life’s distributor revenue and royalty revenue equal to the maximum aggregate purchase price. The final purchase price allocation has not been determined as of the filing of this report. 
 
Line of Credit

Subsequent to September 30, 2014, the Company entered into a revolving line of credit agreement (“Line of Credit”), with Wells Fargo Bank, National Association (“Bank”), the Company’s principal banking partner. The Line of Credit provides the Company 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 Company intends to utilize the revolver to finance working capital. As of November 13, 2014, there were no amounts currently drawn against this facility.
 
 
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 27, 2014 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. 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.  Our direct sales are made through our network of independent distributors, which is a web-based global network of customers and distributors.  Our multiple independent selling forces sell a variety of products through friend-to-friend marketing and social networking.  Our direct selling products comprise a number of brand names that are in most part owned by Youngevity® Essential Life Sciences.  There are a smaller number of brands that are marketed under license agreements. We also engage in the commercial sale of one of our products, our coffee.  We own a traditional coffee roasting business CLR Roaster (“CLR”) that produces coffee under its own Cafe La Rica brand, as well as under a variety of private labels through major national sales outlets and major customers including cruise lines and office coffee service operators.
 
In May 2014, our coffee roasting business CLR acquired a coffee plantation and processing facility located in Matagalpa, Nicaragua – an ideal coffee growing region that is historically known for high quality coffee production. In addition, the Company plans to execute its option to acquire a second plantation under contract that would double the size of its land holdings in Nicaragua.
 
Each plantation is roughly 450-acres and produces 100 percent Arabica coffee beans that are shade grown, Rainforest Alliance Certified™ and Fair Trade Certified™. The two plantations are located on adjacent plots of land and when coupled with the Company’s recently acquired dry-processing facility and existing U.S. based coffee roaster facilities allows CLR to control the coffee production process from field to cup (see Note 4, to the Financial Statements.)
  
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, 2014 and 2013.
 
 
Three months ended September 30, 2014 compared to three months ended September 30, 2013
 
Revenues
 
For the three months ended September 30, 2014, our revenue increased 77.3% to $37,619,000 as compared to $21,212,000 for the three months ended September 30, 2013.  The increase in revenue is attributed primarily to the increase in our product offerings and the increase in the number of distributors selling our product and the increase in the number of customers consuming our products as well as $4,043,000 in additional revenues derived from the acquisitions of Beyond Organic, Inc., acquired on May 1, 2014, Heritage Makers, Inc., acquired on August 14, 2013, Good Herbs, Inc., acquired on April 28, 2014, Go Foods Global, LLC, acquired on October 1, 2013 and Biometics International Inc., acquired on November 19, 2013. The increase in revenues in commercial coffee is primarily due to the addition of green coffee business. The following table summarizes our revenue in thousands by segment:
 
   
For the three months ended
September 30,
   
Percentage change
 
Segment Revenues
 
2014
   
2013
     
Direct selling
 
$
31,275
   
$
19,223
     
62.7
%
Commercial coffee
   
6,344
     
1,989
     
219.0
%
Total
 
$
37,619
   
$
21,212
     
77.3
%
 

Cost of Revenue and Gross Profit
 
For the three months ended September 30, 2014, cost of revenue increased approximately 99.9% to $16,641,000 as compared to $8,325,000 for the three months ended September 30, 2013. 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 the Company 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 221%, primarily due to the addition of green coffee business, which is sold at wholesale, and set up costs associated with the Nicaragua operations.
 
For the three months ended September 30, 2014, gross profit increased approximately 62.8% to $20,978,000 as compared to $12,887,000 for the three months ended September 30, 2013. Below is a table of the gross margin percentages by segment:
 
   
Gross Profit %
For the three months
ended September 30,
 
Segment Gross Profit
 
2014
   
2013
 
Direct selling
   
66.8
%
   
66.8
%
Commercial coffee
   
1.2
%
   
1.9
%
Consolidated
   
55.8
%
   
60.8
%

Gross profit as a percentage of revenues in the direct selling segment remained approximately the same for the third quarter of 2014, compared with the same period last year. The decrease in gross margin in the commercial coffee segment was primarily due to expenses incurred in connection with a facility expansion, repairs and maintenance, and to a lesser extent, a small increase in raw materials fulfillment costs. The decrease in gross margin in the commercial coffee segment was also due to Nicaragua operations set up costs discussed above and the lower margin business from green coffee sales.
 
 
Operating Expenses

For the three months ended September 30, 2014, our operating expenses increased approximately 65.2% to $19,740,000 as compared to $11,952,000 for the three months ended September 30, 2013. Included in operating expense is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the three months ended September 30, 2014, distributor compensation increased 69.4% to $14,470,000 from $8,540,000 for the three months ended September 30, 2013. This increase was primarily attributable to the increase in revenues and distributors reaching higher rank levels. Distributor compensation as a percentage of direct selling revenues increased to 46.3% as compared to 44.4% for the three months ended September 30, 2013, primarily due to added incentive programs and higher level achievements by distributors. For the three months ended September 30, 2014, the sales and marketing expense increased 102.3% to $2,167,000 from $1,071,000 for the three months ended September 30, 2013 primarily due to the increase in revenues and additional selling costs related to the Heritage Makers acquisition, the Company’s first annual Youngevity summit held in September, start-up costs related to MK collaborative line of business that the Company launched in the first quarter of the current year and costs related to the international expansion efforts that the Company expects to start generating revenues towards the end of the current year. For the three months ended September 30, 2014, the general and administrative expense increased 32.6% to $3,103,000 from $2,341,000 for the three months ended September 30, 2013 primarily due to costs related to Heritage Makers, MK collaborative, Nicaragua set up costs, international expansion and increased legal, business insurance, investor relations and wages related to our rapid expansion plans.
 
Total Other Expense

For the three months ended September 30, 2014, total other expense, net increased 227.7% to $983,000 as compared to $300,000 for the three months ended September 30, 2013. The increase was primarily due to interest expense related to contingent acquisition debt, amortization of the debt discount and notes payable interest associated with our 2014 Private Placement transaction.
 
Change in Fair Value of Warrant Derivative Liability
 
Increases or decreases in fair value of the warrants for the three months ended September 30, 2014, and 2013 are included as a component of other income (expense) in the accompanying condensed consolidated statements of operations for the respective period. As of September 30, 2014, the liability for warrants increased from its original valuation by $273,000 (see Note 8, to the Financial Statements.) The Company did not have derivative liabilities during the same period in 2013.

Various factors are considered in the pricing models we use to value the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility of the Company’s 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 quarter to quarter.
 
The warrant liability and revaluations have not had a cash impact on the Company’s 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. As of September 30, 2014 we have recognized income tax expense of $70,000, which is our estimated federal and state income tax liability for the three months ended September 30, 2014. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. We continue to evaluate the realizability of the deferred tax asset, based upon achieved and estimated future results. If it is determined that it is more likely than not that the deferred tax asset will be realized, we will reverse all or a portion of the allowance as deemed appropriate. The difference between the effective rate of 26.7% and the Federal statutory rate of 35.0% is due to the change in our valuation allowance account, state income taxes (net of federal benefit), and certain permanent differences between our taxable and book income.
 
 
Net Income

For the three months ended September 30, 2014, net income decreased to $185,000 as compared to a net income of $516,000. The decrease of $331,000 was attributable to the decrease in income before income taxes of $380,000 and offset by a decrease in income tax provision of $49,000.
 
Nine months ended September 30, 2014 compared to nine months ended September 30, 2013
 
Revenues
 
For the nine months ended September 30, 2014, our revenue increased 53.7% to $96,740,000 as compared to $62,932,000 for the nine months ended September 30, 2013.  The increase in revenue is attributed primarily to the increase in our product offerings and the increase in the number of distributors selling our product and the increase in the number of customers consuming our products as well as $9,707,000 in additional revenues derived from the acquisitions of Good Herbs, Inc., acquired April 28, 2014, Beyond Organic, Inc., acquired on May 1, 2014, Heritage Makers, Inc., acquired on August 14, 2013, Go Foods Global, LLC, acquired on October 1, 2013 and Biometics International Inc., acquired on November 19, 2013. The increase in revenues in commercial coffee is primarily due to the addition of green coffee business. The following table summarizes our revenue in thousands by segment:
 
   
For the nine months ended
September 30,
   
Percentage change
 
Segment Revenues
 
2014
   
2013
     
Direct selling
 
$
84,063
   
$
56,549
     
48.7
%
Commercial coffee
   
12,677
     
6,383
     
98.6
%
Total
 
$
96,740
   
$
62,932
     
53.7
%
 
Cost of Revenue and Gross Profit
 
For the nine months ended September 30, 2014, cost of revenue increased approximately 64.4% to $40,984,000 as compared to $24,930,000 for the nine months ended September 30, 2013. 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 the Company 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 115%, primarily due to the addition of the green coffee business which is sold at wholesale and set up costs associated with the Nicaragua operations.
 
For the nine months ended September 30, 2014, gross profit increased approximately 46.7% to $55,756,000 as compared to $38,002,000 for the nine months ended September 30, 2013. Below is a table of the gross margin percentages by segment:
 
   
Gross Profit %
For the nine months
ended September 30,
 
Segment Gross Profit
 
2014
   
2013
 
Direct selling
   
66.2
%
   
66.3
%
Commercial coffee
   
0.6
%
   
8.0
%
Consolidated
   
57.6
%
   
60.4
%

Gross profit as a percentage of revenues in the direct selling segment remained approximately the same for the first nine months of 2014, compared with the same period in the prior year. The decrease in gross margin in the commercial coffee segment was primarily due to Nicaragua operations set up costs discussed above and the lower margin business from green coffee sales.
 
 
Operating Expenses

For the nine months ended September 30, 2014, our operating expenses increased approximately 51.5% to $52,318,000 as compared to $34,539,000 for the nine months ended September 30, 2013. Included in operating expense is distributor compensation, the compensation paid to our independent distributors in the direct selling segment. For the nine months ended September 30, 2014, distributor compensation increased 55.3% to $38,172,000 from $24,584,000 for the nine months ended September 30, 2013. This increase was primarily attributable to the increase in revenues and distributors reaching higher rank levels. Distributor compensation as a percentage of direct selling revenues increased to 45.4% as compared to 43.5% for the nine months ended September 30, 2013, primarily due to added incentive programs and higher level achievements by distributors. For the nine months ended September 30, 2014, the sales and marketing expense increased 66.3% to $5,434,000 from $3,267,000 for the nine months ended September 30, 2013 primarily due to the increase in revenues and additional selling costs related to the Heritage Makers acquisition, Beyond Organic acquisition, the Company’s annual national convention, first annual Youngevity summit held in September, and start-up costs related to MK collaborative line of business that the Company launched in the first quarter of the current year and costs related to the international expansion efforts that the Company expects to start generating revenues towards the end of the current year. For the nine months ended September 30, 2014, general and administrative expense increased 30.3% to $8,712,000 from $6,688,000 for the nine months ended September 30, 2013 primarily due to costs related to Heritage Makers, MK collaborative, Nicaragua set up costs, international expansion and increased legal, business insurance, investor relations and wages related to the rapid expansion.
 
Total Other Expense

For the nine months ended September 30, 2014, total other expense, net increased 118.0% to $1,866,000 as compared to $856,000 for the nine months ended September 30, 2013. The increase was primarily due to interest expense related to contingent acquisition debt, amortization of the debt discount and notes payable interest associated with our 2014 Private Placement transaction.  Other changes includes an increase in factoring costs and the interest expense on the long-term mortgage related to the acquisition of 2400 Boswell, LLC that occurred at the end of the first fiscal quarter of 2013.
 
Change in Fair Value of Warrant Derivative Liability
 
Increases or decreases in fair value of the warrants for the nine months ended September 30, 2014, and 2013 are included as a component of other income (expense) in the accompanying condensed consolidated statements of operations for the respective period. As of September 30, 2014, the liability for warrants increased from its original valuation by $273,000 (see Note 8, to the Financial Statements.) The Company did not have derivative liabilities during the same period in 2013.

Various factors are considered in the pricing models we use to value the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility of the Company’s 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 quarter to quarter.

The warrant liability and revaluations have not had a cash impact on the Company’s 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. As of September 30, 2014 we have recognized income tax expense of $416,000, which is our estimated federal and state income tax liability for the nine months ended September 30, 2014. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. We continue to evaluate the realizability of the deferred tax asset, based upon achieved and estimated future results. If it is determined that it is more likely than not that the deferred tax asset will be realized, we will reverse all or a portion of the allowance as deemed appropriate. The difference between the effective rate of 26.7% and the Federal statutory rate of 35.0% is due to the change in our valuation allowance account, state income taxes (net of federal benefit), and certain permanent differences between our taxable and book income.
 
 
Net Income

For the nine months ended September 30, 2014, net income decreased to $1,156,000 as compared to a net income of $2,171,000. The decrease of $1,015,000 was attributable to the decrease in income before income taxes of $1,035,000 offset by a decrease in income tax provision of $20,000.

Adjusted EBITDA

EBITDA (earnings before interest, 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 $5,778,000 for the nine months ended September 30, 2014 compared to $5,580,000 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.  The Company calculates adjusted EBITDA by taking net income, and adding back the expenses related to interest, 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 the Company’s operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.

A reconciliation of the Company's adjusted EBITDA to net income for the nine months ended September 30, 2014 and 2013 is included in the table below.

   
Nine months ended
 
   
September 30,
 
   
2014
   
2013
 
Net Income
 
$
1,156,000
   
$
2,171,000
 
Add
               
  Interest
   
1,598,000
     
855,000
 
  Taxes
   
416,000
     
436,000
 
  Depreciation
   
509,000
     
313,000
 
  Amortization
   
1,439,000
     
1,154,000
 
EBITDA
   
5,118,000
     
4,929,000
 
Add
               
   Stock based compensation
   
387,000
     
651,000
 
   Change in the fair value of warrant derivative
   
273,000
     
-
 
Adjusted EBITDA
 
$
5,778,000
   
$
5,580,000
 

Liquidity and Capital Resources

Sources of Liquidity  

At September 30, 2014 we had cash and cash equivalents of approximately $5,375,000 and negative working capital of approximately $2,731,000 as compared to cash and cash equivalents of $4,320,000 and working capital of approximately $1,048,000 as of December 31, 2013.
 
 
Cash Flows 

Net cash provided by operating activities for the nine months ended September 30, 2014 was $2,966,000, as compared to net cash provided by operating activities of $3,397,000 for the nine months ended September 30, 2013. Net cash provided by operating activities consisted of net income of $1,156,000, adjusted for depreciation and amortization of $1,948,000, stock based compensation expense of $387,000. Other changes include amortization of deferred financing costs of $16,000, and the change in the fair value of warrant liabilities of $273,000 as related to our 2014 Private Placement transaction. Amortization of debt discounts include $32,000 related to notes payable and $158,000 related to our 2014 Private Placement transaction convertible notes payable. Other adjustments to reconcile net income to net cash provided by operating activities are $430,000 and changes in working capital of $574,000.

Net cash used in investing activities for the nine months ended September 30, 2014 was $4,220,000, as compared to net cash used in investing activities of $1,096,000 for the nine months ended September 30, 2013.  Net cash used in investing activities of $2,120,000 consisted primarily of purchases of equipment to increase production capacity in the commercial coffee segment and expenditures related to leasehold improvements at the corporate facility, and $2,100,000 in cash paid for the acquisition of the Siles Family Plantation Group (see Note 4, to the Financial Statements.)

Net cash provided by financing activities was $2,421,000 for the nine months ended September 30, 2014 as compared to net cash used in financing activities of $897,000 in the same period in 2013. The increase in cash provided by financing activities was primarily due to the proceeds received from the Company’s 2014 Private Placement offering. Between July 31, 2014 and September 10, 2014, the Company, entered into Note Purchase  Agreements (the "Note" or "Notes") with seven accredited investors pursuant to which the Company raised aggregate gross proceeds of $4,750,000 and sold units consisting of five year senior secured convertible notes in the aggregate principal amount of $4,750,000, that are convertible into 13,571,429 shares of our common stock at a conversion price of $0.35 per share, and warrants to purchase 18,586,956 shares of common stock, at an exercise price of $0.23 per share, subject to adjustment as provided therein. The Company used one placement agent in the transactions and paid approximately $490,000 in expenses, including a placement fee of $477,000 and issued two five-year warrants exercisable in an aggregate amount of 1,357,143 shares of common stock at an exercise price of $0.35 per share and two five-year warrants exercisable in the aggregate amount of 1,858,694 shares of common stock at an exercise price of $0.23 per share.

The net proceeds related to the 2014 Private Placement of $4,260,000 are offset primarily due to payments to reduce notes payable and contingent acquisition debt including the addition of contingent debt related to Beyond Organic and Good Herbs acquisitions during the Company’s second quarter (see Note 4, to the Financial Statements.) This was offset by proceeds of $352,000 received from the exercise of warrants and proceeds of $2,000 from the factoring company.
 
Future Liquidity Needs

We believe that current cash balances, future cash provided by operations, and our accounts receivable factoring agreement 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 July 31, 2014 the Company entered into a Note Purchase Agreement with accredited investors (see Note 7, to the Financial Statements.) The net proceeds of approximately $4.3 million are currently being used to fund the purchase of K-Cup manufacturing capabilities, and will be used to execute its option to acquire a second coffee plantation and to fund capital improvements on its Nicaragua coffee plantations and processing plant.

If we experience an adverse operating environment or unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
 
 
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, 2013.

New Accounting Pronouncements
 
In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the threshold for a disposal to qualify as a discontinued operation. To be considered a discontinued operation a disposal now must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. This ASU also requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new 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. The Company is evaluating the potential impact of this adoption on its condensed consolidated financial statements.

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2014-12 “Compensation – Stock Compensation” (Topic 718). The ASU provides guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendment requires a performance target that affects vesting and that could be achieved after requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that such performance condition would be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. Those amendments are effective for annual reporting periods beginning after December 15, 2015, and interim periods therein. The Company is currently evaluating the potential impact that adoption of this standard may have on its financial statements.

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, 2014, 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, 2014, 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 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
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 27, 2014, and all of the information contained in our public filings before deciding whether to purchase our common stock. Except as set forth below, 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 27, 2014.

The failure to comply with the terms of our recently issued $4,750,000 of secured convertible notes could result in a default under the terms of the note and, if uncured, it could potentially result in action against the pledged assets of CLR.
 
We have issued $4,750,000 of convertible notes to investors in our recent private placement offering that are secured by the assets of CLR used in its coffee operations in Nicaragua, other than its inventory and accounts receivable. Stephan Wallach, our Chief Executive Officer, has also personally guaranteed the repayment of the notes, and has agreed not to sell, transfer or pledge 30 million shares of our common stock that he owns so long as his personal guaranty is in effect. The notes mature on July 30, 2019 and require us, among other things, to maintain the security interest given by CLR for the notes, make quarterly installments of interest, reserve a sufficient number of our shares of common stock for conversion requests and honor any conversion requests made by the investors to convert their notes into shares of our common stock. If we fail to comply with the terms of the notes, the note holders could declare a default under the notes and if the default were to remain uncured, as secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against CLR assets would likely have a serious disruptive effect on our coffee operations.
 
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
 
Our green coffee business in based in Nicaragua. We own one plantation and intend to purchase another in Nicaragua. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to the risks associated with international operations, including:
 
• The possibility that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
• the lack of well-established or reliable legal systems in certain areas;
• the presence of high inflation in the economies of international markets;
• the possibility that a foreign government authority might impose legal, tax or other financial burdens on us or our coffee operations, or sales force, due, for example, to the structure of our operations in various markets;
• the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
• the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
 
 
 Currency exchange rate fluctuations could reduce our overall profits.
 
In 2013, we recognized approximately 7% of net sales in markets outside of the United States. During the third quarter ended September 30, 2014, we recognized approximately 6% of net sales in markets outside of the United States. In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.
 
Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.
 
As a multinational corporation, in several countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.
 
A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
 
Non-compliance with anti-corruption laws could harm our business.
 
Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA"). Any allegations that we are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any determination that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties. Although we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are aware that one of our direct marketing competitors is under investigation in the United States for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse publicity or increased scrutiny of our industry, our business could be harmed.
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share repurchases activity during the three months ended September 30, 2014 was as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Three months ended September 30, 2014
 
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, 2014 to July 31, 2014
   
116,655
   
$
0.23
     
116,655
     
13,194,200
 
August 1, 2014 to August 31, 2014
   
312,375
   
$
0.23
     
312,375
     
12,881,825
 
September 1, 2014 to September 30, 2014
   
219,500
   
$
0.25
     
219,500
     
12,662,325
 
Total
   
648,530
   
$
0.24
     
648,530
         

(*)  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

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
 
 
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)
   
 
/s/ Stephan Wallach
 
Stephan Wallach
 
Chief Executive Officer
 
(Principal Executive Officer)
   
Date: November 13, 2014
 
   
 
/s/ David Briskie
 
David Briskie
 
Chief Financial Officer
 
(Principal Financial Officer)
   
Date: November 13, 2014