Item 1. Business
Overview
We
are engaged in a long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. Our goal is to combine the proven power of micro-enterprise with the equally
proven power of social media, which links millions of interpersonal relationships in a virtual "community."
Management's
plan is to generate positive operating performance. The initial focus has been to create building blocks that will be the foundation for long-term growth. We currently operate in the
direct selling segment where we offer a variety of products for sale nationally and internationally through our network of independent representatives to their customers, our ultimate customers. We
commenced operations in the direct selling business in March 2013, with our acquisition of The Longaberger Company ("TLC"), a seller of premium hand-crafted baskets made in Ohio and a line of products
for the home, including pottery through a nationwide network of independent sales representatives.
After
the acquisition of TLC, we continued to execute our strategy of identifying desirable acquisitions in the micro-enterprise channel and successfully moved ahead with bringing six additional new
companies into the CVSL fold, each selling a variety of products in the direct selling segment. Each acquired company has its own unique product line, independent sales force and culture and our goal
of each acquisition is to maintain these unique elements while reducing the cost of operations and goods for each acquired company through economies of scale and operating efficiencies. During 2013,
we completed the acquisition of the assets or stock of Your Inspiration at Home, Pty. Ltd. (a direct seller of hand-crafted spices from around the world), Tomboy Tools, Inc. (a direct seller of a line
of tools designed for women as well as home security monitoring services), Agel Enterprises, LLC (a direct seller of nutritional supplements and skin care products), Paperly, Inc., (a direct seller of
custom stationery) and My Secret Kitchen Limited, (a direct seller of a unique line of food products). During
the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls LLC, (a direct seller of jewelry for cash) and in March 2014 we completed the acquisition of Uppercase Living,
LLC, a direct seller of customizable vinyl expressions for display on walls. For all of these acquisitions, the primary consideration paid by us was shares of our common stock, par value $0.0001
("Common Stock") convertible debt that converted to Common Stock and the issuance of seller notes.
As
a result of these acquisitions, we have grown at a rapid pace. With each acquisition we have expanded not only our product base but also our base of independent sales representatives. In this
respect, we have something valuable that we believe Facebook and other social media companies
wish
they had. The social media companies have the
social
aspect well in hand, in that people use their sites to stay connected. However, they have not been able to fully translate these connections
directly into
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commerce
. In contrast, our companies' virtual communities of sellers and customers are
already
conducting commerce, much of it
using our online business tools, such as personalized web sites. This convergence of personal relationships, social media and commerce is what gives us our unique blend of attributes. As we scale up,
we expect these attributes will be magnified.
Because
the acquisitions were made during the course of 2013 our financial statements for the year ended December 31, 2013 reflect only partial-year numbers for revenue derived from these
companies after their acquisition by us and do not capture the full-year impact of these transactions.
CVSL Strategy
We
are engaged in an ongoing acquisition strategy, which we expect will result in additional revenue being added as more companies are acquired. Management believes that profitability and cash flow
will continue to rapidly increase because fixed costs are not expected to increase at the same rate as the increases in revenues.
Our
team takes a systematic approach to growth: (1) determine which candidate companies among the dozens of companies in its potential acquisition "funnel" are ready for serious consideration;
(2) conduct financial analysis on the companies; (3) hold discussions with owners to determine whether a match is ripe; (4) sign a letter of intent; (5) conduct due
diligence; (6) finalize a transaction; and (7) begin the integration of the company into CVSL. We are product "agnostic" and attempt to add diverse products and services to our Company
through our acquisitions.
Throughout
this process and afterward, we give "brand respect" to each separate company, its product line, its corporate culture, its sales force and its employees. We recognize that each individual
CVSL company has its own brand identity, and our strategy involves preserving and protecting that identity.
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The
objective is to "build out" CVSL across multiple dimensions. In doing so, we attempt to maximize free cash flow for us and our shareholders through market share growth, aggressively managing costs
and finding synergies among the companies' back offices and operations.
Our
building out process is taking several forms:
Build
out categories.
Build out geography.
Build out the "consumer cloud."
Build out across both gender demographics.
Categories:
Each time we acquire another company, we gain a foothold in a fundamental category of products or services that has the
potential to be enlarged over time. No matter what the size of the acquired company, the key is to gain entry into the fundamental category.
Geography:
Each time we acquire a company in a new geographic market anywhere in the world, we gain a foothold in that country which has
the potential to be enlarged. Each new market becomes a pipeline through which all our companies can conduct commerce.
Consumer cloud:
Every micro-enterprise company brings with it attributes that include names and contacts that represent personal
relationships with current sellers, former sellers, current customers and past customers. These connections have significant value.
A
fundamental principle of our strategy is the fact that these millions of connections represent personal relationshipsbetween family members, friends, neighbors, co-workers, etc. As
such, we believe they carry far more weight than paid advertising. When a consumer recommends a product to a family member, that recommendation carries more credibility than even the most effective
advertising.
We
are in the process of developing an array of "member privileges" for persons in our virtual community. The most obvious of these is the ability to buy products or services from our other CVSL
companies at a discount. In addition, we have begun to seek partnerships with a wide range of companies who will agree to offer discounts on products and services to everyone in the CVSL extended
family (sellers, customers, employees, shareholders, etc.) The first of these is Hertz, and we plan to add a myriad of other partners over time, including such categories as travel, entertainment,
food, office products, insurance, and so forth. This "CVSL Connections" program will eventually make it extremely desirable to remain within the CVSL network of networks, in order to continue enjoying
these privileges.
Finally,
a centralized CVSL supply chain and distribution system, using excess manufacturing, warehouse, distribution and office space at CVSL's facility near Columbus, Ohio has the potential to
deliver efficiencies for all member companies. Building out CVSL's information technology ("IT") platform can reduce duplication of costs in each company's IT system. We recently announced that we
will launch this spring a new IT system to support our sales forces, as well as a new ERP system to manage our business processes.
In
sum, 2013 saw us launch our strategic plan, acquire multiple companies, establish a global presence and begin the process of building the consumer cloud of social commerce that we intend to
continue developing over the months and years ahead.
Overview of Recently Acquired Companies and Companies to Be Acquired
The Longaberger Company
In
March 2013, we acquired a 51.7% controlling interest in TLC. TLC is a direct-selling business based in Newark, Ohio that sells premium hand-crafted baskets and a line of products for the home,
including pottery, cookware, wrought iron and other home décor products, through a nationwide
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network
of independent sales representatives. TLC also has showrooms in various states, which offer merchandise and serve as sales force support centers. We acquired, in two separate transactions, a
total of 1,616 shares of TLC's Class A common stock ("TLC Class A Common Stock"), representing 64.6% of the issued and outstanding TLC Class A Common Stock, which Class has
sole voting rights at TLC, and acquired 968 shares of TLC's Class B common stock, which are non-voting ("TLC Class B Common Stock" and, together with the TLC Class A Common
Stock, the "TLC Stock"). Together, the two transactions resulted in CVSL acquiring 51.7% of all issued and outstanding TLC Stock. As consideration, CVSL issued to a trust of which Tamala Longaberger
is the trustee (the "Trust"), a Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6,500,000 (the "Convertible Note"), and, to TLC,
we issued a ten year, $4,000,000 unsecured promissory note, dated March 14, 2013, payable in monthly installments. On June 14, 2013, the Convertible Note was converted into 32,500,000
shares of our Common Stock.
Agel
In
October 2013, we formed Agel Enterprises, Inc. ("AEI") which acquired substantially all of the assets of Agel Enterprises LLC ("Agel"). AEI is a direct-selling business based in
Springville, Utah that sells nutritional supplements and skin care products through a worldwide network of independent sales representatives. AEI's products are sold in over 40 countries. AEI
acquired substantially all the assets of Agel in exchange for total consideration of 7,446,600 shares of our Common Stock, the delivery of a Purchase Money Note, dated the closing date, in the
original principal amount of $1,700,000 and the
assumption of certain liabilities of Agel. 572,549 of the common shares for this acquisition were issued in January 2014.
Your Inspiration At Home
In
August 2013, we acquired substantially all of the assets of Your Inspiration At Home Pty Ltd. ("YIAH"). YIAH is an innovative and award-winning direct seller of hand-crafted spices from
around the world. YIAH originated in Australia and has expanded its operations to North America during the third quarter of 2013. We acquired substantially all the assets of YIAH in exchange for total
consideration of 4,512,975 shares of our Common Stock and the assumption of certain liabilities of YIAH.
Tomboy Tools
In
October 2013, we acquired substantially all of the assets of Tomboy Tools, Inc. ("TBT"), a direct seller of a line of tools designed for women as well as home security monitoring services. We
acquired substantially all the assets of Tomboy Tools in exchange for total consideration of 1,766,979 shares of our Common Stock and the assumption of certain liabilities of TBT.
Paperly
In
December 2013, we acquired substantially all of the assets of Paperly LLC ("Paperly"), a direct seller that allows its independent sales consultants to work with customers to design and
create custom stationery through home parties, events and individual appointments. We acquired substantially all the
assets of Paperly in exchange for total consideration of 155,926 shares of our Common Stock and payment of an earn out of 10% of earnings before interest, taxes, depreciation and amortization
("EBITDA") from 2014 to 2016. The Common Stock for this acquisition was issued in 2014.
My Secret Kitchen
In
December 2013, we acquired a 90% controlling interest of My Secret Kitchen Ltd. ("MSK"), an award-winning United Kingdom-based direct seller of a unique line of food products. We acquired
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substantially
all the assets of MSK in exchange for total consideration of 317,804 shares of our common stock and payment of an earn out of 5% of EBITDA from 2014 to 2016. The Common Stock for this
acquisition was issued in January 2014.
Happenings Communications Group
Through
a share exchange that occurred in August 2012, we acquired Happenings Communications Group, Inc. ("HCG"). HCG publishes a monthly magazine, Happenings Magazine that references events
and attractions, entertainment and recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, and can provide such services
to direct-selling businesses. Services may include creating brochures, sales materials, websites and other communications for independent sales representatives and ultimate customers. As a result, HCG
is available to serve as a valuable "in-house" resource for providing marketing and creative services to the direct-selling companies that we expect to acquire.
Golden Girls
During
the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls LLC, a direct seller of jewelry for cash. Upon the closing of the acquisition, we will acquire
substantially all the assets of Golden Girls in exchange for shares of our Common Stock. As of the date of this filing, this transaction has not yet closed and there can be no assurance that it will
close.
Uppercase Living, LLC
In
March 2014, we acquired substantially all the assets of Uppercase Living, LLC ("Uppercase Living"), a direct seller of customizable vinyl expressions for display on walls. Consideration
consisted of 578,387 shares of our Common Stock and payment of an earn out equal to 10% of the EBITDA of the subsidiary that will acquire the assets for the years ended December 31, 2014, 2015
and 2016 payable in cash or common shares of CVSL at the Company's discretion. The common shares for this acquisition have not been issued as of the date of this report.
Marketing, Manufacturing and Distribution
We
presently have sales operations in over 40 countries and serve our customers through an independent sales force. For the year ended December 31, 2013, approximately 16% of our revenue
was derived from sales outside the U.S. The independent consultants utilize brochures and websites to advertise products offered by CVSL companies. Nearly all independent consultants have a
personalized website for ordering products which allows the consultant to run their business more efficiently and also to allow CVSL companies to improve our order-processing accuracy. Representatives
earn commissions by selling products to their customers, the ultimate consumer. We generally have no
arrangements with end users of our products beyond the distributors. No single distributor accounts for more than 1% of our net sales.
Orders
are placed using the internet, mail, telephone, fax and directly with our representatives at events that they host and payments are processed, often via credit cards, when orders are taken.
Once the order is processed, products are gathered at a distribution center and delivered to the customer through a combination of local and national delivery companies. Sufficient raw materials were
available during the year ended December 31, 2013 and we believe they will continue to be. We believe alternative suppliers of raw materials are readily available if our current suppliers were
to become unavailable. In some markets, we utilize retail locations to serve representatives and customers. We utilize third party manufacturers for some of our products and manufacture certain
products ourselves, such as food products sold in Australia and baskets. We purchase raw materials from numerous domestic and international suppliers. To achieve certain economies of scale, best
pricing and uniform
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quality,
we rely primarily on a few principal delivery companies for the delivery of our goods. However, we believe that there are several alternative delivery companies that could replace the current
delivery companies, and there are several alternative manufacturers that could replace our current manufacturers.
The
independent representatives are independent contractors compensated based on sales of products achieved by them, their down-line representatives and customers. The recruiting of new
representatives and the training are responsibilities of the existing representatives supported by in-house marketing staff. Due to the fact that representatives are compensated based on sales made by
other representatives that they recruit, they have an incentive to recruit additional representatives to increase their opportunities for increasing their total sales and related sales commissions
despite the fact that they are not paid a fee for recruiting additional representatives. The primary method of adding to CVSL's independent representatives and customer base has been the acquisitions
of other companies with such bases and personal contacts.
Intellectual Property
We
have acquired numerous registered trademarks in our business relating to the acquisitions that we have consummated and intend to maintain the trademarks of companies we acquire. We own trademarks
that are registered with the U.S. Patent and Trademark Office and in foreign jurisdictions. Registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the
registered trademark in connection with a similar product in the same channels of trade by any third-party in the respective country of registration, regardless of whether the registered owner has
ever used the trademark in the area where the unauthorized use occurs.
We
also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of protection
that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks,
whether registered or claimed under common law, constitute valuable assets, adding to recognition of our brands and the effective marketing of our products. We intend to maintain and keep current all
of our trademark registrations and to pay all applicable renewal fees as they become due. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including
their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. We therefore believe that these proprietary rights have been and
will continue to be important in enabling us to compete, and if for any reason we were unable to maintain our trademarks, our sales of the related products bearing such trademarks could be materially
and negatively affected. See "Risk Factors."
We
own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. Most of our products are not
protected by patents, and therefore, such agreements are often our only form of protection. Even where these agreements exist, there can be no assurance that these agreements will not be breached,
that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. Our proprietary product formulations are
generally considered trade secrets, but are not otherwise protected under intellectual property laws.
We
intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
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Governmental Regulation
The
direct-selling industry is subject to a number of federal and state regulations administered by the Federal Trade Commission and various state agencies in the United States, as well as regulations
regarding direct-selling activities in foreign markets. Laws specifically applicable to direct-selling companies generally are directed at preventing deceptive or misleading marketing and sales
practices. These laws are focused on ensuring that product sales ultimately are made to end consumers and that advancement within a sales organization is based on sales of products and services rather
than investments in the organization, recruiting other participants, or other non-retail sales-related criteria.
Our
products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and authorities, including the Food and Drug
Administration (the "FDA"), the Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission, the Department of Agriculture, State Attorneys General and other state regulatory
agencies in the United States, and the Ministry of Health, Labor and Welfare in Japan and similar government agencies in each market in which we operate.
There
are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing
business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies.
As
a United States entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between
us and our subsidiaries and for product purchases, management services and contractual obligations, such as the payment of sales commissions.
As
is the case with most companies that operate in our product categories, we receive from time to time inquiries from government regulatory authorities regarding the nature of our business and other
issues, such as compliance with local direct selling, transfer pricing, customs, taxation, foreign exchange control, securities and other laws.
Industry Overview/Competition
The
business of direct-selling is competitive. Not only does CVSL compete for customers but also for sales representatives. CVSL faces competition from products sold to customers by other
direct-selling companies and through the Internet, and products sold through the mass market and traditional retail channels.
Many
direct selling segment competitors such as Avon, Tupperware and others have longer operating histories, greater financial, technical, product development, marketing and sales resources, greater
name recognition, larger customer bases and better-developed distribution channels.
Seasonality
Although
we are not significantly affected by seasonality, we do experience slight variations in sales activity in the fourth quarter around Christmas.
Employees
As
of December 31, 2013 and 2012, we had worldwide approximately 393 and 5 employees, respectively, as measured by full-time equivalency. These numbers do not include our independent sales
force, which are independent contractors and are not considered employees. Our employees are not represented by a union or other collective bargaining group. We believe that we have a good
relationship with our employees.
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Independent Sales Force
As
of December 31, 2013, we had more than 40,000 active sales representatives across our direct selling companies. Our independent representatives are not salaried and earn commissions by
selling products to their customers, the ultimate consumer. They also earn revenue from the sales of products by
representatives that they recruit. Our largest expense is commissions paid to our independent representatives. For the year ended December 31, 2013, we paid $16.4 million to our
independent representatives.
Available Information
Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the
Investor Relations section of our Internet website, http://www.cvsl.us.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and
Exchange Commission ("SEC" or "the Commission"). Except as otherwise stated in these reports, the information contained on our website or available by hyperlink from our website is not incorporated
into this Annual Report on Form 10-K or other documents we file with, or furnish to, the SEC.
Our History
We
were incorporated in the State of Delaware in April 2007 under the name Cardio Vascular Medical Device, Inc. We converted to a Florida corporation in June 2011 and changed our name to Computer
Vision Systems Laboratories, Corp.
On
August 24, 2012 we entered into a Share Exchange Agreement (the "Share Exchange Agreement"), with, Happenings Communications Group, Inc. ("HCG") and Rochon Capital
Partners, Ltd. ("Rochon Capital"). Under the Share Exchange Agreement, in exchange for all of the capital stock of HCG, we issued 438,086,034 shares of our restricted common stock to
Rochon Capital (the "Initial Share Exchange"). The shares of our Common Stock received by Rochon Capital totaled approximately 90% of our issued and outstanding stock at the time of issuance. The
Initial Share Exchange was completed on September 25, 2012 and resulted in a change in control and HCG becoming our wholly owned subsidiary. In May 2013, we amended our Articles of
Incorporation to increase our authorized number of shares of Common Stock to 5,000,000,000 and changed our name to CVSL Inc.
Item 1A. Risk Factors
You should carefully consider the following risks in evaluating our Company and our business. The risks described below are the risks that we currently believe are material to
our business. However, additional risks not presently known to us, or risks that we currently believe are not material, may also impair our business operations. You should also refer to the other
information set forth in this report, including the information set forth in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as our
consolidated financial statements and the related notes. Our business prospects, financial condition or results of operations could be adversely affected by any of the following risks. If we are
adversely affected by such risks, then the market price of our common stock could decline.
We depend heavily on John P. Rochon, and we may be unable to replace Mr. Rochon if we lose his services.
We
are dependent upon Mr. Rochon, our Chief Executive Officer and Chairman of our Board of Directors. The loss or unavailability of Mr. Rochon could have a material adverse effect on our
prospects, business activities, cash flow, financial condition, results of operations and stock price.
There
can be no assurance that we will be successful in attracting and retaining additional personnel. The loss of the services of Mr. Rochon, or any key employees we employ from time to time,
or our
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failure
to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our prospects, business activities, cash flow, financial condition,
results of operations and stock price.
The beneficial ownership of a significant percentage of our Common Stock gives John Rochon effective control of us, and limits the influence of other shareholders on
important policy and management issues.
Mr. Rochon,
as our Chief Executive Officer and Chairman of our Board of Directors, and through his control of Rochon Capital, controls the Company and important matters relating to us. As a
result of his positions and his control of our Common Stock, Mr. Rochon controls the outcome of all matters submitted to our shareholders for approval, including the election of our directors,
our business strategy and our day-to-day operations. In addition, Mr. Rochon's ownership of our Common Stock and control of the Company could discourage the acquisition of our Common Stock by
potential investors and could have an anti-takeover effect, preventing a change in control of the Company and possibly depressing the trading price of our Common Stock. There can be no assurance that
conflicts of interest will not arise with respect to Mr. Rochon's ownership and control of the Company or that any conflicts will be resolved in a manner favorable to the other shareholders of
the Company.
Because we have recently acquired a large number of businesses, it is difficult to predict if we will continue to generate our current level of revenue.
Prior
to March 2013, our primary business was publishing a monthly magazine, Happenings Magazine, and prior to September 2012, we were engaged in the development and commercialization of medical
devices. During 2013, we completed 6 business acquisitions, changing our business focus away from that of the publishing business towards the direct-selling business. It is too early to predict
whether consumers will accept, and continue to use on a regular basis, the products generated from these new acquisitions since we have had very limited recent operating history as a combined entity
and the impact of all of the acquisitions is difficult to assess. Therefore, our ability to sustain our revenue is uncertain and there can be no assurance that we will continue to be able to generate
significant revenue or be profitable.
Our business is difficult to evaluate because we have recently expanded our product offering and customer base.
We
have recently acquired companies engaged in the sale of new products through new independent distributors. There is a risk that we will be unable to successfully integrate the newly acquired
businesses with our current management and structure. Although we are based in Texas, several of the businesses we acquired are based in other places such as Ohio and Utah and foreign countries such
as Italy and Australia, making the integration of our newly acquired businesses difficult. Our estimates of capital, personnel and equipment required for our newly acquired businesses are based on the
historical experience of management and businesses they are familiar with.
We may have difficulty managing future growth.
Since
we commenced operations in the direct-selling business, our business has grown significantly. This growth has placed substantial strain on our management, operational, financial and other
resources. If we are able to continue to expand our operations, we may experience periods of rapid growth, including increased resource requirements. Any such growth could place increased strain on
our management, operational, financial and other resources, and we may need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international,
technical, and other professionals. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives
could have a material adverse effect on our business and results of operations. In addition, the
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financing
for any of future acquisitions could dilute the interests of our stockholders; resulting in an increase in our indebtedness or both. Future acquisitions may entail numerous risks,
including:
-
-
difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses
and disruption to our direct selling channel;
-
-
diversion of management's attention from our core business;
-
-
adverse effects on existing business relationships with suppliers and customers; and
-
-
risks of entering markets in which we have limited or no prior experience.
Our
failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition, and operating results. In addition, there can
be no assurance that we will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms
If we cannot successfully implement our acquisitions strategy, it could have a material adverse effect on our operating results and stock price.
Our
current primary growth strategy is the acquisition of, or entering into strategic transactions involving direct-selling companies, and potentially companies engaged in businesses related to
direct-selling. We will review acquisition prospects that meet our strategic goals of investing in these companies that increase the size and geographic scope of our operations or otherwise offer us
growth and operating efficiency opportunities. Our failure to successfully complete the integration of any acquired business could have an adverse effect on our prospects, business activities, cash
flow, financial condition, results of operations and stock price. In addition, there can be no assurance that we will be able to identify additional suitable acquisition candidates or consummate
acquisitions or strategic transactions on acceptable terms. We are evaluating acquisition opportunities available to us that fit our acquisition strategy. We anticipate pursuing additional
opportunities, and we may pursue one or more of these opportunities simultaneously and we may pursue one or more of these opportunities in the very near future. Acquisitions and other strategic
transactions involve many risks, including:
-
-
the difficulty of integrating acquired operations and personnel with our existing operations and personnel;
-
-
the difficulty of developing and marketing new products and services;
-
-
the diversion of our management's attention as a result of evaluating, negotiating and integrating acquisitions;
-
-
our exposure to unforeseen liabilities of acquired companies; and
-
-
the loss of key employees of an acquired operation.
In
addition, an acquisition or other strategic transaction could adversely impact our cash flows and/or operating results, and dilute shareholder interests, for a number of reasons,
including:
-
-
interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business
venture;
-
-
any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current
holders of our Common Stock;
-
-
transaction expenses incurred in connection with pursuing such acquisitions and strategic transactions; and
-
-
unanticipated costs associated with making the acquisition and operating the acquired business or entering into the
strategic transaction.
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Although
Mr. Rochon has experience in executing and implementing such acquisitions and strategic transactions, as a company, these ventures may not be successful, and we may not succeed in the
future. The risks associated with acquisitions and other strategic transactions could have a material adverse impact on, among other things, our prospects, business activities, cash flows, financial
condition, results of operations and stock price.
Each of our subsidiaries is dependent on its key personnel.
The
loss of the key executive officers of any of our subsidiaries would have a significant adverse effect on the operations of the affected subsidiary and its prospects, business activities, cash
flow, financial condition and results of operations, and any material adverse effect on our subsidiaries could have a material adverse effect on us or our stock price. As part of our strategy, we
believe it is important to retain the leaders of each of the acquired companies. Each of our subsidiaries is dependent upon its executive management team. There can be no assurance that any subsidiary
will be successful in attracting and retaining additional personnel.
We experience a high level of competition in the direct-selling industry for representatives.
In
the direct-selling industry, sales are made to the ultimate consumer principally through independent representatives referred to by many different namesdistributors, associates and
team members are examples; we use the term "representatives" to cover all such persons. Generally, there can be a high rate of turnover among a direct-selling company's representatives.
Our
ability to remain competitive and maintain and expand our business depends, in significant part, on the success of our subsidiaries in recruiting, retaining, and incentivizing representatives
through an appropriate compensation plan, the maintenance of an attractive product portfolio and other incentives, and innovating the direct-selling model. We cannot ensure that the strategies for
soliciting and retaining
the representatives of our subsidiaries or any direct-selling company we acquire will be successful, and if they are not, our prospects, business activities, cash flow, financial condition, results of
operations and stock price could be harmed.
Several
factors affect our ability to attract and retain independent sales representatives, including:
-
-
on-going motivation of our independent sales force;
-
-
general economic conditions;
-
-
significant changes in the amount of commissions paid;
-
-
public perception and acceptance of the industry, our business and our products;
-
-
our ability to provide proprietary quality-driven products that the market demands; and
-
-
competition in recruiting and retaining an independent sales force.
The loss of key high-level independent sales force leaders could negatively impact our associate growth and our revenue.
As
of December 31, 2013, we had over 40,000 active independent sales force who purchased our products within the last 12 months, of which more than 600 occupied the highest level under
our various compensation plans. These independent sales force leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level independent sales force or a group of
leading associates in the independent associates' networks of downlines, whether by their own choice or through disciplinary actions by us for violations of our policies and procedures, could
negatively impact our associate growth and our revenue.
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Changes to our sales force compensation arrangements could be viewed negatively by some independent associates, could cause failure to achieve desired long-term results and
have a negative impact on revenue.
Our
sales force compensation plans include components that differ from market to market. We modify components of our compensation plans from time to time in an attempt to remain competitive and
attractive to existing and potential independent associates including such modifications:
-
-
to address changing market dynamics;
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to provide incentives to independent associates that are intended to help grow our business;
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to conform to local regulations; and
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to address other business needs.
Because
of the size of our sales force and the complexity of our compensation plans, it is difficult to predict how independent associates will view such changes and whether such changes will achieve
their desired results.
An increase in the amount of commissions and incentives paid to the independent sales force reduces our profitability.
The
payment of commissions and incentives, including bonuses and prizes, is one of our most significant expenses. We closely monitor the amount of commissions and incentives as a percentage of net
sales, and may periodically adjust our compensation plan to better manage these costs. There can be no assurance that changes to the compensation plan will be successful in achieving target levels of
commissions and incentives as a percentage of net sales and preventing these costs from having a significant adverse effect on our earnings. Furthermore, such changes may make it difficult to attract
and retain our independent sales force or cause us to lose some of our existing independent sales force.
Our business is involved in an industry with intense competition.
Our
business operates in an industry with numerous manufacturers, distributors and retailers of consumer goods. The market for our products is intensely competitive. Many of our competitors, such as
Avon, Tupperware and others, are significantly larger, have greater financial resources, and have better name recognition than we do. We also rely on our independent sales force to market and sell our
products through direct marketing techniques. Our ability to compete with other direct marketing companies depends greatly on our ability to attract and retain our independent sales force. In
addition, we currently do not have significant patent or other proprietary protection, and our competitors may introduce products with the same or similar ingredients that we use in our products. As a
result, we
may have difficulty differentiating our products from our competitors' product and other competing products that enter the nutritional market. There can be no assurance that our future operations
would not be harmed as a result of changing market conditions and future competition.
We and our subsidiaries generally conduct business in one channel.
Our
principal business segment is conducted worldwide in one channel, the direct selling channel. Products and services of direct-selling companies are sold to retail consumers. Spending by retail
consumers is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence, all of which are beyond our
control. Our subsidiaries may face economic challenges because customers may continue to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced
access to credit and falling home prices, among other things.
Consumer
purchasing habits, including reducing purchases of a direct-selling company's products, or reducing purchases from representatives or buying products in channels other than direct-selling,
such
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as
retail, could reduce a direct-selling company's sales, impact its ability to execute its business strategy or have a material adverse effect on its prospects, business activities, cash flow,
financial condition, and results of operations. If any government bans or severely restricts our model, our prospects, business activities, cash flow, financial condition and results of operations may
be materially adversely affected.
Direct-selling companies are subject to numerous laws.
The
direct-selling industry is subject to a number of federal and state regulations administered by the Federal Trade Commission and various state agencies in the United States, as well as regulations
regarding direct-selling activities in foreign markets. Laws specifically applicable to direct-selling companies generally are directed at preventing deceptive or misleading marketing and sales
practices,
and include laws often referred to as "pyramid" or "chain sales" scheme laws. These "anti-pyramid" laws are focused on ensuring that product sales ultimately are made to end consumers and that
advancement within a sales organization is based on sales of products and services rather than investments in the organization, recruiting other participants, or other non-retail sales-related
criteria. The regulatory requirements concerning direct-selling programs do not include "bright line" rules, involve a high level of subjectivity and are subject to judicial interpretation. We and our
subsidiaries are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. Any direct-selling
company that we own or we acquire in the future, could be found not to be in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting
our business in these markets and harm our prospects, business activities, cash flow, financial condition, results of operations and stock price. The implementation of such regulations may be
influenced by public attention directed toward a direct-selling company, its products or its direct-selling program, such that extensive adverse publicity could result in increased regulatory
scrutiny.
The failure of the representatives of our subsidiaries to comply with laws, regulations and court decisions creates potential exposure for regulatory action or lawsuits
against us.
Because
the representatives that market and sell our products and services are independent contractors, and not employees, we and our subsidiaries have limited control over their actions. In the
United States, the direct-selling industry and regulatory authorities have generally relied on the implementation of a company's rules and policies governing its direct-sellers, designed to promote
retail sales, protect consumers, prevent inappropriate activities and distinguish between legitimate direct-selling plans and unlawful pyramid schemes, to compel compliance with applicable laws.
Direct-selling companies maintain formal compliance measures to identify specific complaints against their representatives and to remedy any violations through appropriate sanctions, including
warnings, suspensions and, when necessary, terminations. Because of the significant number of representatives our subsidiaries have, it is not feasible for our subsidiaries to monitor the
representatives' day-to-day business activities. We and our subsidiaries must maintain the "independent contractor" status of our representatives and, therefore, have limited control over their
business activities. As a result, we cannot insure that the representatives we engage in business with will comply with all applicable rules and regulations, domestically or globally. Violations by
the representatives of applicable law or of the direct-selling company's policies and procedures in dealing with customers could reflect negatively on a direct-selling company's prospects, business
activities, cash flow, financial condition and results of operations, including its business reputation, and subject it to fines and penalties. In addition, it is possible that a court could hold a
direct-selling company civilly or criminally accountable based on vicarious liability because of the actions of its representatives.
Although
the physical labeling of our products is not within the control of our representatives, our representatives must nevertheless advertise our products in compliance with the extensive
regulations
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that
exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.
Our
foods, nutritional supplements and cosmetics, and are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made for our products. The treatment
or cure of disease, for example, is not a permitted claim for these products. While we train our independent representatives and attempt to monitor our sales force marketing materials, we cannot
ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our sales force fails to comply with these restrictions, then we and our sales force could
be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial condition and operating results. Although we expect that our
responsibility for the actions of our independent representatives in such an instance would be dependent on a determination that we either controlled or condoned a noncompliant advertising practice,
there can be no assurance that we could not be held vicariously liable for the actions of our independent representatives.
Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies could harm our prospects, business activities, cash
flow, financial condition and results of operations.
The
number of representatives and the results of our operations may be affected significantly by the public's perception of our subsidiaries and of similar companies. This perception is dependent upon
opinions concerning:
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-
the safety and quality of the products, components and ingredients, as applicable;
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the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies'
representatives;
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the marketing program; and
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the business of direct-selling generally.
Adverse
publicity concerning any actual or purported failure of our subsidiaries of their representatives to comply with applicable laws and regulations regarding product claims and advertising, good
manufacturing practices, the regulation of our marketing program, the licensing of its products for sale in its target markets or other aspects of its business, whether or not resulting in enforcement
actions or the imposition of penalties, could have an adverse effect on our goodwill and could negatively affect the ability to attract, motivate and retain representatives, which would negatively
impact its ability to generate revenue.
Direct-selling companies may own, obtain or license intellectual property material to their business, and their ability to compete may be adversely affected by the loss of
rights to use that intellectual property.
The
market for a direct-selling company's products may depend significantly upon the value associated with product innovations and a direct-seller's brand equity. Many direct-sellers own, obtain or
license material patents and trademarks used in connection with the marketing and distribution of their products. Those companies must expend time and resources in developing their intellectual
property and pursuing any infringers of that intellectual property. The laws of certain foreign countries may not protect a company's intellectual property rights to the same extent as the laws of the
United States. The costs required to protect a company's patents and trademarks may be substantial.
Challenges by private parties to the direct-selling system could harm our business.
Direct-selling
companies have been subject to legal challenges regarding their method of operation or other elements of their business by private parties, including their own representatives, in
individual
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lawsuits
and through class actions. We can provide no assurance that we would not be harmed if any such actions were brought against any of our subsidiaries or another direct-selling company we
acquired.
Direct-selling companies face product liability claims and incur damages and expenses, which could affect their prospects, business activities, cash flow, financial
condition and results of operations.
A
direct-selling company may face financial liability from product liability claims if the use of its products results in significant loss or injury. A substantial product liability claim could exceed
the amount of a direct-selling company's insurance coverage or could be excluded under the terms of an existing insurance policy, which could adversely affect a direct-selling company's prospects,
business activities, cash flow, financial condition and results of operations.
Selling
products for human consumption such as nutritional supplements and spices involve a number of risks. We may need to recall some of our products if they become contaminated, are tampered with
or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse
effect on our business results and the value of our brands. We also may incur significant liability if our products or operations violate applicable laws or regulations, or in the event our products
cause injury, illness or death. In addition, we could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including consumer
protection statutes of some states. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding our products
could adversely affect our reputation and brand image.
A general economic downturn, a recession globally or in one or more of our geographic regions or other challenges may adversely affect our business and our access to
liquidity and capital.
A
downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions, or the current global macro-economic pressures, could adversely affect our
business and our access to liquidity and capital. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors
caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital resources, including our ability to raise
additional capital and maintain credit lines and offshore cash balances.
Consumer
spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally,
all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and
may impact sales of our products. We face continued economic challenges in fiscal 2014 because customers may continue to have less money for discretionary purchases as a result of job losses,
foreclosures, bankruptcies, reduced access to credit and sharply falling home prices, among other things.
Our inability to develop and introduce new products that gain acceptance from our representatives and market acceptance could harm our business.
Our
continued success depends on our ability to anticipate, gauge, and react in a timely and effective manner to changes in consumer spending patterns and preferences. We must continually work to
discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products.
A critical component of our business is our ability to develop new products that create
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enthusiasm
among our independent representatives. If we are unable to introduce new products, our independent representatives' productivity could be harmed. In addition, if any new products fail to
gain market acceptance, are restricted by regulatory requirements or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce
new products include, among others, government regulations, the inability to attract and retain qualified research and development staff, the termination of third-party research and collaborative
arrangements, proprietary protections of competitors that may limit our ability to offer comparable products, and the difficulties in anticipating changes in consumer tastes and buying preferences.
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
Some
of our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Other products contain
innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of
certain of these product ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or
sponsored only limited clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products
distributed by other companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity
associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.
Inventory obsolescence due to finite shelf lives could adversely affect our business.
In
order to provide a high level of product availability to our independent representatives and customers, we maintain a considerable inventory of finished goods in most countries in which we sell our
products. Our inventories of finished goods have finite shelf lives. If we overestimate the demand for our products, we could experience significant write-downs of our inventory due to obsolescence.
Such write-downs could have a material negative impact on our financial position, results of operations or cash flows.
Direct-selling companies frequently rely on outside suppliers and manufacturers, and if those suppliers and manufactures fail to supply products in sufficient quantities and
in a timely fashion, a direct-selling company's business could suffer.
Many
direct-selling companies use outside manufacturers to make all or part of their products. A direct-selling company's profit margins and timely product delivery may be dependent upon the ability
of its outside suppliers and manufacturers to supply it with products in a timely and cost-efficient manner. A direct-selling company's ability to enter new markets and sustain satisfactory levels of
sales in each market may depend on the ability of its outside suppliers and manufacturers to provide required levels of ingredients and products and to comply with all applicable regulations.
We
are dependent upon the uninterrupted and efficient operation of our manufacturers and suppliers of products. Those operations are subject to power failures, the breakdown, failure, or substandard
performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including
the FDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or
results of operations.
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We are subject to numerous government regulations.
Our
products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and authorities, including the Food and Drug
Administration (the "FDA"), the Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission, the Department of Agriculture, State Attorneys General and other state regulatory agencies
in the United States, and the Ministry of Health, Labor and Welfare in Japan and similar government agencies in each market in which we operate.
There
are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing
business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies.
As
a United States entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between
us and our subsidiaries and for product purchases, management services and contractual obligations, such as the payment of sales commissions.
The loss of suppliers or shortages of raw materials could have an adverse effect on our business, financial condition, or results of operations.
We depend on outside suppliers for raw materials. Our contract manufacturers acquire all of the raw materials for manufacturing our
products from third-party suppliers. In the event we were to lose any significant suppliers and have trouble in finding or transitioning to alternative suppliers, it could result in product shortages
or product back orders, which could harm our business. There can be no assurance that suppliers will be able to provide our contract manufacturers the raw materials in the quantities and at the
appropriate level of quality that we request or at a price that we are willing to pay. We are also subject to delays caused by any interruption in the production of these materials including weather,
crop conditions, climate change, transportation interruptions and natural disasters or other catastrophic events.
A failure of our information technology systems would harm our business.
Our
IT systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters, telecommunication failures, and human error or intentional acts of
sabotage, vandalism, break-ins and similar acts. Although we have adopted and implemented a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and
storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting our business and the results of our operations.
Our business is subject to online security risks, including security breaches.
Our
businesses involve the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential
liability. An increasing number of websites, including several large companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted
attacks on
portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched
against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or
our customers' proprietary information, cause interruption in our operations, damage our computers or those of our customers, or otherwise damage our reputation and business. Any compromise of our
security could result in a violation of applicable privacy and other laws, significant legal and financial
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exposure,
damage to our reputation, and a loss of confidence in our security measures, which could harm our business.
Our
servers are also vulnerable to computer viruses, physical or electronic break-ins, "denial-of-service" type attacks and similar disruptions that could, in certain instances, make all or portions
of our websites unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the
unauthorized release of our users' personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits,
which may not be adequate to reimburse us for losses caused by security breaches.
Our
web customers, as well as those of other prominent companies, may be targeted by parties using fraudulent "spoof" and "phishing" emails to misappropriate passwords, credit card numbers, or other
personal information or to introduce viruses or other malware through "trojan horse" programs to our customers' computers. These emails appear to be legitimate emails sent by us, but they may direct
recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to
mitigate "spoof" and "phishing" emails through product improvements and user education, "spoof" and "phishing" remain a serious problem that may damage our brands, discourage use of our websites, and
increase our costs.
If we fail to protect our trademarks and tradenames, then our ability to compete could be negatively affected, which would harm our financial condition and operating
results.
The
market for our products depends upon the goodwill associated with our trademark and tradenames. We own, or have licenses to use, the material trademark and trade name rights used in connection
with the packaging, marketing and distribution of our products in the markets where those products are sold. Therefore, trademark and trade name protection is important to our business. Although most
of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection. In addition, the
laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The loss or infringement of our trademarks or tradenames could
impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
We
permit the limited use of our trademarks by our representatives to assist them in the marketing of our products. It is possible that doing so may increase the risk of unauthorized use or misuse of
our trademarks in markets where their registration status differs from that asserted by our sales force, or they may be used in association with claims or products in a manner not permitted under
applicable laws and regulations. Were this to occur, it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.
Our business is subject to intellectual property risks.
Many
of our products are not protected by patents. Restrictive regulations governing the precise labeling of ingredients and percentages for nutritional supplements, the large number of manufacturers
that produce products with many active ingredients in common and the rapid change and frequent reformulation of products make patent protection impractical. As a result, we enter into confidentiality
agreements with certain of our employees in our research and development activities, our independent representatives, suppliers, directors, officers and consultants to help protect our intellectual
property, investment in research and development activities and trade secrets. There can be no assurance that
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our
efforts to protect our intellectual property and trademarks will be successful, nor can there be any assurance that third parties will not assert claims against us for infringement of intellectual
property rights, which could result in our business being required to obtain licenses for such rights, to pay royalties or to terminate our manufacturing of infringing products, all of which could
have a material negative impact on our financial position, results of operations or cash flows.
We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm our financial condition and operating
results.
Our
independent representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to
maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our representatives. In the
event that local laws and regulations require us to treat our independent representatives as employees, or if our representatives are deemed by local regulatory authorities to be our employees, rather
than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial
condition and operating results.
We rely upon our existing cash balances and cash flow from operations to fund our business. In the event that we do not generate adequate cash flow from operations, we will
need to raise money through a debt or equity financing, if available, or curtail operations.
The
adequacy of our cash resources to continue to meet our future operational needs depends, in large part, on our ability to increase product sales and/or reduce operating costs. If we are
unsuccessful in generating positive cash flow from operations, we could exhaust our available cash resources and be required to secure additional funding through a debt or equity financing,
significantly scale back our operations, and/or discontinue many of our activities which could negatively affect our business and prospects. Additional funding may not be available or may only be
available on unfavorable terms.
The covenants in the existing indebtedness at one of our subsidiaries limits that subsidiary's discretion with respect to certain business matters.
One
of our subsidiaries has a credit facility that contains financial and operating covenants that restrict that subsidiary's ability to, among other
things:
-
-
pay dividends, redeem share capital or capital stock and make other restricted payments and investments;
-
-
incur or guarantee additional debt; and
-
-
merge, consolidate or sell all or substantially all of its assets.
In
addition, this credit facility requires that subsidiary to meet certain financial ratios and financial conditions. The ability to comply with these covenants may be affected by events beyond our
control, including prevailing economic, financial and industry conditions. Failure to comply with these covenants could result in a default causing all amounts to become due and payable under this
credit facility, which is secured by substantially all that subsidiary's assets, against which the lenders thereunder could proceed to foreclose.
The conversion of any Convertible Notes into common shares could have a dilutive effect that could cause our share price to go down.
The
$20 million Convertible Subordinated Unsecured Promissory Note is convertible into common shares within ten days of June 17, 2014 and is capped at 64,000,000 shares. When the
Convertible Note
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is
converted into common shares, our existing stockholders will experience immediate dilution of voting rights and our common share price may decline. Furthermore, the perception that such dilution
could occur may cause the market price of our common shares to decline.
To service our debt obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Any failure to meet
our debt service obligations, or to refinance or repay our outstanding indebtedness as it matures, could materially adversely impact our business, prospects, financial condition, liquidity, results of
operations and cash flows.
Our
ability to satisfy our debt obligations and repay or refinance our maturing indebtedness will depend principally upon our future operating performance. As a result, prevailing economic conditions
and financial, business, legislative, regulatory and other factors, many of which are beyond our control, will affect our ability to make payments on and to refinance our debt. If we do not generate
sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, incurring additional
debt, issuing equity or convertible securities, utilizing our revolving credit facility, reducing discretionary expenditures and selling certain assets (or combinations thereof). Our ability to
execute such alternative financing plans will depend on the capital markets and our financial condition at such time. In addition, our ability to execute such alternative financing plans may be
subject to certain restrictions under our existing indebtedness, including our revolving credit facility and our term loan. Any refinancing of our debt could be at higher interest rates and may
require us to comply with more onerous covenants compared to those associated with any debt that is being refinanced, which could further restrict our business operations. Our inability to generate
sufficient cash flow to satisfy our debt service obligations, or our inability to refinance our debt obligations on commercially reasonable terms or at all, would have a material adverse effect on our
business, prospects, financial condition, liquidity, results of operations and cash flows.
Currency exchange rate fluctuations could reduce our overall profits.
In
2013, we recognized 16% of net sales in markets outside of the United States. The percentage will likely increase in 2014 when we include a full year of results from our international acquisitions.
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 many 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
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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 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.
A majority of our directors are not "independent" and several of our directors and officers have other business interests.
A
majority of our directors are not "independent" under any independence standard available to us. This lack of "independence" may interfere with our directors' judgment in carrying out their
responsibilities as directors. We currently are not listed on a national securities exchange or an inter-dealer quotation system that requires a majority of our directors to be independent. However,
for the determinations of independence we use the definition of independence applied by NYSE.
Several
of our directors have other business interests, including Mr. Rochon who controls Richmont Holdings Inc. ("Richmont Holdings"). Those other interests may come into conflict with our
interests and the interests of our shareholders. Mr. Rochon, as do several of our other directors, serves on the board of directors of several companies and, as a result of his business
experience, may be asked to serve on the boards of other companies. We may compete with these other business interests for such director's time and efforts. We have not adopted a policy for resolving
such conflicts of interests.
We are dependent upon affiliated parties for the provisions of a substantial portion of our administrative services, we do not have the internal capabilities to provide such
services and many of our employees are also employees of such affiliated entities.
During
the fourth quarter of 2013, we renewed a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings, a private investment and business management company pursuant to
which Richmont Holdings provides administrative services to us. Although we have begun to establish an infrastructure of personnel and resources necessary to identify, analyze, negotiate and conduct
due diligence on direct-selling acquisition candidates, we have relied upon Richmont Holdings for advice and assistance in areas related to identification, analysis, financing, due diligence,
negotiations and other strategic planning, accounting, tax and legal matters associated with such potential acquisitions. Richmont Holdings and its affiliates have experience in the above areas.
CVSL
officers are currently working for us on a part-time basis and also work for Richmont Holdings or its affiliated entities. These part-time employees also work at other jobs and have discretion to
decide what time they devote to our activities, which may result in a lack of availability when needed due to responsibilities at other jobs.
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There currently is a limited liquid trading market for our Common Stock and we cannot assure investors that a robust trading market will ever develop or be sustained.
To
date there has been a limited trading market for our Common Stock. We cannot predict how liquid the market for our Common Stock may become. Our Common Stock trades on the OTC Markets OTCQX. In the
future, we may apply for listing of our Common Stock on the NYSE, The NASDAQ Stock Market or another national securities exchange, if we can satisfy the initial listing standards for such exchanges
and believe such a listing would be beneficial to us and our shareholders. We currently do not satisfy the initial listing standards of any such exchange, and we cannot assure investors that we will
be able to satisfy such listing standards, or that our Common Stock will be accepted for listing on any such exchange. Should we fail to satisfy the initial listing standards of such exchanges, or if
our Common Stock is otherwise rejected for listing and remains listed on the OTC Markets OTCQX, the trading price of our Common Stock could be subject to increased volatility and the trading market
for our Common Stock may be less liquid.
For
companies whose securities are traded in the OTC Markets OTCQX, it is generally more difficult to obtain accurate quotations, to obtain coverage for significant news events (because major wire
services generally do not publish press releases about such companies) and to obtain needed capital.
Our Common Stock currently is deemed a "penny stock," which makes it more difficult for our investors to sell their shares.
Our
Common Stock is subject to the "penny stock" rules adopted under Section 15(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The penny stock rules generally apply
to companies whose common stock is not listed on a national securities exchange and trades at less than $5.00 per share, other than companies that have had average revenue of at least $6,000,000 for
the last three years or that have a tangible net worth of at least $5,000,000 (or at least $2,000,000 if the company has been operating for three or more years).
These
rules require, among other things, that brokers who trade penny stock to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to
trade penny stocks because of the requirements of the penny stock rules, and as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain
subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules,
investors will find it more difficult to dispose of our securities.
We expect that the price of our Common Stock will fluctuate substantially.
The
market price of our Common Stock is likely to be highly volatile and subject to wide fluctuations in response to the following factors, most of which are beyond our control. These factors may
include:
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the introduction of new products or services by us or our competitors;
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quarterly variations in our or our competitor's results of operations;
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the acquisition or divestiture of businesses, products, assets or technology;
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disputes, litigation or other developments with respect to intellectual property rights or other potential legal actions;
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sales of large blocks of our Common Stock, including sales by Rochon Capital, any executive officers or directors
appointed in the future, or by other significant shareholders;
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changes in earnings estimates or recommendations by securities analysts;
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market rumors; and
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general market conditions and other factors, including factors unrelated to our operating performance or the operating
performance of our competitors.
Market
price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.
Sales of our Common Stock under Rule 144 could impact the price of our Common Stock.
In
general, under Rule 144 ("Rule 144"), as promulgated under the Securities Act of 1933, as amended (the "Securities Act"), persons holding restricted securities in an SEC reporting
company, including affiliates, must hold their shares for a period of at least six months, may not sell more than 1% of the total issued and outstanding shares in any 90-day period and must resell the
shares in an unsolicited brokerage transaction at the market price. Whenever a substantial number of shares of our Common Stock become available for resale under Rule 144, the market price for
our Common Stock will likely be impacted.
Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management's attention and resources.
In
the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. Companies in certain industries are
particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Our Common Stock has experienced substantial price volatility in the past. This may be a result of,
among other things, variations in our results of operations and announcements by us and our competitors, as well as general economic conditions, and our stock price may continue to experience
substantial volatility. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and could divert the attention and
resources of our management.
We may, in the future, issue additional securities, which would reduce investors' ownership percentage in our outstanding securities and may dilute our share value.
If
future operations or acquisitions are financed through issuing equity securities, shareholders could experience significant dilution. In addition, securities issued in connection with future
financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our Common Stock. The issuance of shares of our Common Stock upon the exercise of
options to purchase our securities, which we may grant in the future, may result in dilution to our shareholders. Our Articles of Incorporation currently authorize us to issue five billion
(5,000,000,000) shares of Common Stock. Pursuant to the Share Exchange Agreement dated August 24, 2012, we have agreed to issue to Rochon Capital an additional 504,813,514 shares of our
Common Stock. Following the issuance of the stock the number of outstanding shares of our Common Stock will increase to approximately one billion, with approximately four billion shares of our Common
Stock available for issuance. We have issued a Convertible Note which may be converted into as many as 64,000,000 shares of our Common Stock. If the Company issues shares of our Common Stock to
satisfy this Convertible Note, substantial dilution may result. The future issuance of our Common Stock may result in substantial dilution in the percentage of our Common Stock held by our then
existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis, including for services or acquisitions or other corporate actions that may have the effect of diluting
the value of the shares held by our shareholders, and might have an adverse effect on any trading market for our Common Stock.
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We have identified material weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional
material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report
our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in
our stock price.
Our
management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our stated growth
strategy is to acquire companies, some of which may not have invested in adequate systems or staffing to meet public company financial reporting standards. We review the financial reporting and other
systems that each company has and, in many cases, especially in the case of private companies, the financial systems that are in place may not be as robust as needed. We have identified material
weaknesses in our internal controls with respect to our financial statement closing process of our financial statements for the year ended December 31, 2013. Our management discovered certain
conditions that we deemed to be material weaknesses and significant deficiencies in our internal controls, in that one of our subsidiaries acquired during 2013 failed to employ a sufficient number of
staff in its finance and accounting department to maintain optimal segregation of duties and to provide optimal levels of oversight. This lack of personnel was acute during our 2013 audit which
resulted in certain audit adjustments.
We
have taken actions that we believe will substantially remediate the material weaknesses identified. In response to the identification of our material weaknesses, we: (i) have appointed a
controller for all CVSL subsidiaries and parent company; (ii) hired additional staff at the subsidiary; (iii) arranged for key managers and accounting personnel to work closely with our
independent audit firm in evaluating our progress in remediating our material weaknesses with oversight by the audit committee; (iv) evaluated control procedures and where possible modified
those control procedures to improve oversight and (v) purchased and begun implementation of a new global Enterprise Resource Planning (ERP) system which includes accounting for all
subsidiaries, which will be utilized as we make additional acquisitions. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or
avoid material weaknesses in the future. We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our finance and
accounting staff.
Complying with federal securities laws as a publicly traded company is expensive. Any deficiencies in our financial reporting or internal controls could adversely affect our
financial condition, ability to issue our shares in acquisitions and the trading price of our Common Stock.
We
file periodic reports containing our financial statements within the time periods following the completion of our quarterly and annual periods. We may experience difficulty in meeting the SEC's
reporting requirements. Any failure by us to timely file our periodic reports with the SEC could harm our reputation and reduce the trading price of our Common Stock and cause sanctions or other
actions to be taken by the SEC. Such failure to file our periodic reports with the SEC could cause additional harm, such as a default under an indenture or loan covenant that we may enter into from
time to time, or reputational damage. We will incur significant legal, accounting and other expenses related to compliance with applicable securities laws.
We
may identify deficiencies which would have to be remediated to satisfy the SEC's rules for certification of our internal controls over financial reporting. As a consequence, we may have to disclose
in periodic reports we file with the SEC material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal
controls over financial reporting are effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect
the trading
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price
of our Common Stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and
procedures or in our internal control over financial reporting, it may negatively impact our business activities, cash flow, financial condition, results of operations and stock price.
We have not paid and do not anticipate paying any dividends on our Common Stock.
We
have not paid any dividends on our Common Stock to date and it is not anticipated that any dividends will be paid to holders of our Common Stock in the foreseeable future. While our future
dividend policy will be based on the operating results and capital needs of our businesses, it is currently anticipated that any earnings will be retained to finance our future expansion and for the
implementation of our business strategy. Our shareholders will not realize a return on their investment in the Company unless and until they sell shares after the trading price of our Common Stock
appreciates from the price at which a shareholder purchased shares of our Common Stock. As an investor, you should consider that a lack of a dividend can further affect the market value of our Common
Stock and could significantly affect the value of any investment in our Company.
The issuance of our blank check preferred stock could harm our stock price or impact a possible change in control.
Our
Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine its rights, preferences, privileges and restrictions, including voting rights, without any
further vote or action by our shareholders. If we issue any of these shares of preferred stock in the future, the rights of holders of our Common Stock may be negatively affected. If we were to issue
shares of preferred stock, a change in control of our Company could be delayed, deferred or prevented.
Impairment of goodwill and intangible assets is possible, depending upon future operating results and the value of our Common Stock.
We
will test our goodwill and intangible assets for impairment during the fourth quarter of the current fiscal year and in future fiscal years, and on an interim basis, if indicators of impairment
exist. Factors which influence the evaluation of impairment of our goodwill and intangible assets include the price of our Common Stock and expected future operating results. If the carrying value of
a reporting unit or an intangible asset is no longer deemed to be recoverable, we potentially could incur material impairment charges. Although we believe these charges would be non-cash in nature and
would not affect the Company's operations or cash flow, these charges would adversely affect shareholders' equity and reported results of operations in the period charged.