Item 1A. Risk Factors
The following information updates and should be read in conjunction with the information previously disclosed in Item 1A Part I of the
Company's Annual Report on Form 10-K. Below we present the risk factors which reflect our modification and enhancements.
RISK FACTORS
Risks Relating To Our Business
We have suffered operating losses since inception and we may not be able to achieve profitability.
We had an accumulated deficit of $(19,767,575) as of June 30, 2014 and $(13,085,777) as of December 31, 2013 and we expect to continue
to incur increasing expenses in the foreseeable future related to our long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. As a result, we are
sustaining operating and net losses, and it is possible that we will never be able to achieve or sustain the revenue levels necessary to attain profitability.
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 and in the first quarter of 2014, we completed seven business acquisitions, changing our business focus away from that of the
publishing business and medical devices 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 by the companies we acquired in these recent acquisitions or the direct
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selling
companies we hope to acquire in the future. We have had a very limited operating history as a combined entity and the impact of our recent acquisitions is difficult to assess. Therefore, our
ability to sustain our current revenue is uncertain and there can be no assurance that we will continue to be able to generate significant revenue or be profitable.
We rely upon our existing cash balances and cash flow from operations to fund our business and if our cash flow from operations is inadequate, 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.
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. We are required to make monthly payments under our promissory notes that mature on February 14, 2023 and October 22, 2018 in the principal amounts of $4.0 million and
$1.7 million, respectively. In addition, we have three term notes that total $1 million and we are obligated to repay the principal amount and accrued interest with respect to such notes
by July 2015. 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, 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. 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.
Our investments in marketable securities are subject to market risks, which may result in losses.
As of June 30, 2014, we had $5,223,472 in marketable securities, invested primarily in a diversified portfolio of corporate and government
bonds. At June 30, 2014 we did not have any investments in equity securities. However, we have from time to time and may in the future invest in equity securities. During the three and six
months ended June 30, 2014, our loss on marketable securities was $58,289 and $0.6 million, respectively. At December 31, 2013, the fair market value of equity securities totaled
$1,390,355 and the fair market value of the fixed income securities totaled $10,439,897. These investments are subject to general credit, liquidity, market and interest rate risks that could have a
negative impact on our results of operations.
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Our business is difficult to evaluate because we have recently expanded, and intend to continue to expand, our product offerings and customer base.
Although our business has grown rapidly, we are still in the early stages of the implementation of our primary growth strategy, which is to increase
our acquisitions of, and our number of strategic transactions with, other direct selling companies, and potentially companies engaged in other direct selling related businesses. As such, it may be
difficult for investors to analyze our results of operation, to identify historical trends or even to make quarter-to-quarter comparisons because we have operated many of these newly-acquired
businesses for a relatively limited time and intend to continue to expand our product offerings. Our growth strategy, as well as each business we acquire, is subject to many of the risks common to new
enterprises, including the ability to implement a business plan, market acceptance of proposed products and services, under-capitalization, cash shortages, limitations with respect to personnel,
financing and other resources, competition from better funded and experienced companies, and the ability to generate profits. In light of the stage of our development, no assurance can be given that
we will be able to consummate our business strategy and plans, as described herein, that our activities will be successful or that financial, technological, market, or other limitations will not force
us to modify, alter, significantly delay, or significantly impede the implementation of our plans.
We may be unsuccessful in identifying suitable acquisition candidates which may negatively impact our growth strategy.
There can be no assurance that we will be able to identify additional suitable acquisition candidates or consummate future acquisitions or strategic
transactions on acceptable terms. Our failure to successfully identify suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms could have an
adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price as our primary growth strategy is based on increasing our acquisitions of,
or entering into strategic transactions with direct selling companies, and potentially companies engaged in other direct selling related businesses. We are continually evaluating acquisition
opportunities available to us that we believe will fit our acquisition strategy, namely companies that can increase the size and geographic scope of our operations or otherwise offer us growth and
operating efficiency opportunities.
We may seek to finance acquisitions or develop strategic relationships which may dilute the interests of our shareholders.
The financing for future acquisitions could dilute the interests of our shareholders, result in an increase in our indebtedness, or both. 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:
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interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business
venture; and
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any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current
holders of our common stock.
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We may be unable to successfully integrate the businesses we have recently acquired and may acquire in the future with our current management and structure.
Our failure to successfully complete the integration of the businesses we acquire could have an adverse effect on our prospects, business activities,
cash flow, financial condition, results of operations and stock price. Integration challenges may include the following:
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assimilating the acquired business' operations products and personnel with our existing operations, products and
personnel;
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estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience
of management with the businesses they are familiar with;
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minimizing potential adverse effects on existing business relationships with other suppliers and customers;
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successfully developing and marketing the new products and services;
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entering markets in which we have limited or no prior experience; and
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coordinating our efforts throughout various distant localities and time zones, such as Italy and Australia currently.
The diversion of management's attention and costs associated with acquisitions may have a negative impact on our business.
If management's attention is diverted from the management of our existing businesses as a result of its efforts in evaluating and negotiating new
acquisitions and strategic transactions, the prospects, business activities, cash flow, financial condition and results of operations of our existing businesses may suffer. We also may incur
unanticipated costs in connection with pursuing acquisitions and strategic transactions.
Acquisitions may subject us to additional unknown risks which may affect our customer retention and cause a reduction in our revenues.
In completing prior acquisitions and any future acquisition, we have and will rely upon the representations and warranties and indemnities made by
the sellers with respect to each such acquisition as well as our own due diligence investigation. We cannot assure you that such representations and warranties will be true and correct or that our due
diligence will uncover all materially adverse facts relating to the operations and financial condition of the acquired companies or their customers. To the extent that we are required to pay the debt
obligations of an acquired company, or if material misrepresentations exist, we may not realize the expected benefit from such acquisition and we will have overpaid in cash and/or stock for the value
received in that acquisition.
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 additional employees, as well as attract new
management, sales, finance and accounting, international, technical, and other professionals in order to oversee our expanded operations. Any failure to expand our workforce 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.
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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.
John P. Rochon, as our Chief Executive Officer and Chairman of our Board, and through his control of Rochon Capital, controls our Company and
important matters relating to us. As a result of his positions with the Company and his voting control of our company, John P. Rochon controls the outcome of all matters submitted to our
shareholders for approval, including the election of our directors, our business strategy, our day-to-day operations and any proposed merger, consolidation or sale of all or substantially all of our
assets. John P. Rochon's control of our 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 our company that might be otherwise beneficial to our shareholders, 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 John P. Rochon's ownership and control of our company or that any conflicts will be resolved in a manner favorable to the other shareholders of our Company. In
connection with the Share Exchange Agreement pursuant to which we acquired HCG, Rochon Capital acquired and has the right to receive an additional 504,813,514 shares of our common stock upon
its request, the timing of which is in Rochon Capital's sole discretion. In addition, Richmont Capital Partners V LP, an entity controlled by John Rochon, Jr., was issued a convertible note
that converts into 64,000,000 shares of our common stock on or about June 22, 2015. If the additional 504,813,514 and 64,000,000 shares are issued, John P. Rochon together
with John Rochon, Jr. will control approximately 86% of our outstanding shares of common stock.
The issuance of the shares of our common stock in accordance with the Share Exchange Agreement and the conversion of any of our Convertible Notes into common shares will
have a dilutive effect that could cause the share price of our common stock to decline.
Following the issuance of the Second Tranche Stock and conversion of the convertible note described above, the number of outstanding shares of our
common stock will increase to in excess of 1,000,000,000, with approximately 4,000,000,000 shares of our common stock available for issuance and John P. Rochon together with John Rochon,
Jr. will beneficially own approximately 86% of our outstanding shares of common stock. When the Second Tranche Stock is issued and the convertible note is converted into common stock, our existing
shareholders will experience immediate dilution of voting rights and our common stock price may decline. Furthermore, the perception that such dilution could occur may cause the market price of our
common stock to decline.
We depend heavily on John P. Rochon, and we may be unable to find a suitable replacement for Mr. Rochon if we were to lose his services.
We are heavily dependent upon John P. Rochon, our Chief Executive Officer and Chairman of our Board. The loss or unavailability of
Mr. Rochon could have a material adverse effect on our prospects, business activities, cash flow, financial condition, results from operations and stock price.
We are dependent upon affiliated parties for the provisions of a substantial portion of our administrative services as 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, Inc. ("Richmont
Holdings"), a private investment and business management company owned 100% by John Rochon, pursuant to which Richmont Holdings provides administrative services to us. CVSL has entered into an
agreement with Richmont Holdings to reimburse Richmont Holdings for a portion of its expenses incurred by us in connection with our use of its office space, access to its office equipment, access to
certain of its personnel, financial analysis personnel, strategy assistance, marketing advice and assorted other services related to our day-to-day operations and our efforts to acquire direct-selling
companies. Although we have begun to establish an infrastructure of
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personnel
and resources necessary to identify, analyze, negotiate and conduct due diligence on direct selling acquisition candidates, we have generally 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 potential acquisitions.
Richmont Holdings and its affiliates have experience in the above areas. There can be no assurance that we can successfully develop the necessary infrastructure on our own without the assistance of
these affiliated entities.
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. Although major decision making policies are handled by CVSL's senior management, each
subsidiary is primarily dependent upon its founder and/or Chief Executive Officer for their leadership roles with the respective sales forces. For example, TLC is particularly dependent upon Tami
Longaberger as the face of the Longaberger brand and her close interaction with the sales field. Agel is particularly dependent upon its Co-Chief Executive Officers, Jeff Higginson and Jeremiah
Bradley, who represent the Agel brand to their sales force and likewise YIAH is dependent upon Colleen Walters, its Chief Executive Officer and founder. The loss of any of these individuals could have
a negative impact on sales field recruiting and sales, which ultimately would impact our revenue. We believe it is critical to retain key leaders of each of the businesses we acquire, however
there
can be no assurance that any business or company acquired by us will be successful in attracting and retaining its key personnel.
We experience a high level of competition for qualified representatives in the direct selling industry and the loss of key high-level independent sales representatives could
negatively impact our growth and our revenue.
As of June 30, 2014, we had over 40,000 active independent sales representatives, of which more than 600 were at the highest level under our
various compensation plans. These independent sales leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level independent sales representative or a group of
leading representatives could negatively impact our growth and our revenue.
In
the direct selling industry, sales are made to the ultimate consumer principally through independent sales representatives. Generally, there can be a high rate of turnover among a direct selling
company's independent sales representatives. Our independent sales representatives may terminate their service at any time.
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 their independent
sales 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
our strategies for soliciting and retaining the representatives of our subsidiaries or any direct selling company we acquire in the future 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:
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on-going motivation of our independent sales representatives;
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general economic conditions;
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significant changes in the amount of commissions paid;
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public perception and acceptance of the industry, our business and our products;
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our ability to provide proprietary quality-driven products that the market demands;
and
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competition in recruiting and retaining an independent sales representatives.
Changes to our compensation arrangements could be viewed negatively by some independent sales representatives and could cause failure to achieve desired long-term results
and increases in commissions paid could have a negative impact on profitability.
The payment of commissions and incentives, including bonuses and prizes, is one of our most significant expenses. We closely monitor the amount of
the commissions and incentives we pay as a percentage of net sales, and may periodically adjust our compensation plan to better manage these costs.
We
modify components of our compensation plans from time to time in an attempt to remain competitive and attractive to existing and potential independent sales representatives including modifications
to:
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address changing market dynamics;
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provide incentives to independent sales representatives that are intended to help grow our business;
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conform to local regulations; and
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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 sales representatives will view such changes and whether such changes
will achieve their desired results. Furthermore, any downward adjustments to commissions and incentives may make it difficult to attract and retain our independent sales representatives or cause us to
lose some of our existing independent sales representatives. There can be no assurance that changes to our compensation plans 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.
Our business operates 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 Products Inc., Tupperware Brands Corp. and others are significantly larger, have greater financial resources, and have better name
recognition than we do. We also rely on our independent sales representatives 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 qualified independent sales representatives. 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'
products and other competing products that enter the 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.
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Changes
in 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 as retail, could reduce our sales, impact our ability to execute our business strategy or have a material adverse effect on our prospects, business activities, cash flow, financial
condition, and results of operations.
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 (the "FTC") 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 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.
We are aware of pending judicial actions and investigations against other companies in the direct selling industry. Adverse decisions in these cases could impact our business if direct selling laws or
anti-pyramid laws are interpreted more narrowly or in a manner that results in additional burdens or restrictions on direct selling. 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. If any government
were to ban or restrict our business model, our prospects, business activities, cash flows, financial condition and results of operations may be materially adversely affected.
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 FTC, the Consumer Product Safety Commission, the Department of Agriculture, State Attorney Generals and other state regulatory
agencies in the United States, and similar government agencies in each market in which we operate. Government authorities regulate advertising and product claims regarding the efficacy and benefits of
our products. These regulatory authorities typically require adequate and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation
can vary widely from market to market and there is no assurance that the research and development efforts that we undertake to support our claims will be deemed adequate for any particular product or
claim. If we are unable to show adequate and reliable scientific substantiation for our product claims, or our marketing materials or the marketing materials of our sales force make claims that exceed
the scope of allowed claims for spices, dietary supplements or skin care products that we offer, the FDA or other regulatory authorities could take enforcement action requiring us to revise our
marketing materials, amend our claims or stop selling certain products, which could harm our business.
For
example, the FDA recently issued warning letters to several cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims
regarding gene activity, cellular rejuvenation, and rebuilding collagen. There is a degree of subjectivity in determining whether a claim is an improper structure/function claim. Given this
subjectivity and our
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research
and development focus on skin care products and dietary supplements, there is a risk that we could receive a warning letter, be required to modify our product claims or take other actions to
satisfy the FDA if the FDA determines any of our marketing materials include improper structure/function claims for our cosmetic products. In addition, plaintiffs' lawyers have filed class action
lawsuits against some of our competitors after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to governmental actions or class action
lawsuits, which could harm our business.
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 U.S. 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 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. We maintain formal compliance measures to identify specific complaints against our 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 our representatives will comply with all applicable rules and regulations,
domestically or globally. Violations by our representatives of applicable laws or of our policies and procedures in dealing with customers could reflect negatively on our prospects, business
activities, cash flow, financial condition and results of operations, including our business reputation, and could subject us to fines and penalties. In addition, it is possible that a court could
hold us civilly or criminally accountable based on vicarious liability because of the actions of our 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 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 skin care products are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made about our products. The
treatment or cure of disease, for example, is not a permitted claim for these products. While we train our independent sales representatives and attempt to monitor our sales representatives' marketing
materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our independent sales representatives fail to comply with these
restrictions, then we and our independent sales representatives 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 sales representatives in such an instance would be dependent on a determination that we
either controlled or condoned a noncompliant advertising
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practice,
there can be no assurance that we could not be held vicariously liable for the actions of our independent sales representatives.
Our operations could be harmed if we are found not to be in compliance with Good Manufacturing Practices.
In the United States, FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements for the nutritional supplement
industry require us and our vendors to maintain good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping. The
ingredient identification requirement, which requires us to confirm the levels, identity and potency of ingredients listed on our product labels within a narrow range, is particularly burdensome and
difficult for us with respect to our cosmetic
products which contains many different ingredients. We are also required to report serious adverse events associated with consumer use of our products. Our operations could be harmed if regulatory
authorities make determinations that we, or our vendors, are not in compliance with these regulations or public reporting of adverse events harms our reputation for quality and safety. A finding of
noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling certain products. In addition, compliance with these regulations has increased and
may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance.
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.
Our 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 our 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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our marketing program; and
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the business of direct selling generally.
Adverse
publicity concerning any actual or purported failure of our subsidiaries or 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 our products for sale in our target markets or other aspects of our 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 our ability to generate revenue.
If we are unable to develop and introduce new products that gain acceptance from our customers and representatives, our business could be harmed.
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 enthusiasm among our independent sales representatives and
ultimate customers. If we are unable to introduce new products, our independent sales 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
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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.
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 a decline 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 could face continued economic challenges in fiscal 2014 if customers continue to have less money for discretionary purchases as a result of job losses,
foreclosures, bankruptcies, reduced access to credit or sharply falling home prices, among other things.
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
Some of the nutritional supplements we offer are made from vitamins, minerals, herbs, and other substances for which there is a long history of human
consumption. Other nutritional supplements we offer contain innovative 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 ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have not
performed or sponsored any 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 these 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.
We 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,
our business could suffer.
We depend on outside suppliers for raw materials and finished goods. We also may use outside manufacturers to make all or part of our products. Our
profit margins and timely product delivery may be dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our contract
manufacturers acquire all of the raw materials for manufacturing our products from third-party suppliers. We do not believe we are materially dependent on any single supplier for raw materials or
finished goods, with the exception of Innovative FlexPak, LLC, which produces substantially all of Agel's finished goods. We believe that there are other suppliers who could produce these
products for Agel, if necessary; however, transitioning to other suppliers could result in delays or additional expense. In order to mitigate this risk, Agel has developed relationships with two
additional suppliers and has begun diversifying the source of its finished goods. In the event we were to lose any significant suppliers and experience delays in identifying or transitioning to
alternative suppliers, we could experience product shortages or product back orders, which could harm our business. There can
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be
no assurance that suppliers will be able to provide our contract manufacturers the raw materials or finished goods 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. Our ability to enter new markets and sustain satisfactory levels of sales in each market may depend on the ability of our 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.
Disruptions to transportation channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those
markets.
We may experience disruptions to the transportation channels used to distribute our products, including increased airport and shipping port
congestion, a lack of transportation capacity, increased fuel expenses, and a shortage of manpower. Disruptions in our container shipments may result in increased costs, including the additional use
of airfreight to meet demand. Although we have not recently experienced significant shipping disruptions, we continue to watch for signs of upcoming congestion. Congestion to ports can affect
previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our profitability.
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 those of 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 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
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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.
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international
markets is exposed to risks associated with our international operations, including:
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the possibility that a foreign government might ban or severely restrict our business method of direct selling, or that
local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
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the lack of well-established or reliable legal systems in certain areas where we operate;
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the presence of high inflation in the economies of international markets in which we operate;
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the possibility that a government authority might impose legal, tax or other financial burdens on us or our sales force,
due, for example, to the structure of our operations in various markets;
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the possibility that a government authority might challenge the status of our sales force as independent contractors or
impose employment or social taxes on our sales force; and
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the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
Currency exchange rate fluctuations could reduce our overall profits.
In 2013, we recognized 16% of net sales in markets outside of the United States. This 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.
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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 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.
We may own, obtain or license intellectual property material to our business, and our ability to compete may be adversely affected by the loss of rights to use that
intellectual property.
The market for our products may depend significantly upon the value associated with product innovations and our 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.
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Challenges by private parties to the direct selling system could harm our business.
Direct selling companies have historically 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 lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting
over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire in the
future.
As a direct selling company, we may face product liability claims and could incur damages and expenses, which could affect our prospects, business activities, cash flow,
financial condition and results of operations.
As a direct selling company we may face financial liability from product liability claims if the use of our products results in significant loss or
injury. A substantial product liability claim could exceed the amount of our insurance coverage or could be excluded under the terms of our existing insurance policy, which could adversely affect our
prospects, business activities, cash flow, financial condition and results of operations.
Selling
products for human consumption such as nutritional supplements and spices as well as the sale of skin care products 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. 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.
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 independent sales representatives, 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
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sales
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 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 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. However, in many cases, especially in the case of private companies we acquire, 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 the internal controls of TLC, which
was acquired during 2013 and which 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 above. In response to the identification of these material weaknesses, we: (1) have
appointed a controller for all CVSL subsidiaries as well as the parent company; (2) hired additional staff at TLC; (3) 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; (4) evaluated control procedures and where possible
modified those control procedures to improve oversight; and (5) purchased and begun implementation of a new global ERP system which will provide accounting for all of our current and future
subsidiaries. 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.
We may be held responsible for certain taxes or assessments relating to the activities of our independent sales representatives, which could harm our financial condition and
operating results.
Our independent sales 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 sales 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.
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A majority of our directors will not be required to be "independent" and several of our directors and officers have other business interests.
We are not currently listed on a national securities exchange or an inter-dealer quotation system that requires a majority of our directors to be
independent. In the event our common stock is approved for listing on the NYSE MKT, we will qualify as a "controlled company" because Mr. Rochon, through his control of Rochon Capital, will
continue to hold in excess of 50% of our voting securities. As a controlled company, we will qualify for certain exemptions to the NYSE MKT listing requirements, including the requirement that a
majority of our directors be independent, and the requirements to have a compensation committee and a nominating/corporate
governance committee, each composed of entirely independent directors. Although a majority of our directors are currently "independent" under the NYSE MKT independence standards and our compensation
committee and nominating and corporate governance committee are currently composed of only independent directors, this may not always be the case. If at any point in the future, a majority of our
directors are not independent, this lack of "independence" may interfere with our directors' judgment in carrying out their responsibilities as directors.
Several
of our directors have other business interests, including Mr. Rochon, who controls Richmont Holdings. Those other interests may come into conflict with our interests and the interests
of our shareholders. Mr. Rochon and several of our other directors serve on the boards of directors of several other companies and, as a result of their business experience, may be asked to
serve on the boards of other companies. We may compete with these other business interests for such directors' time and efforts.
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 their responsibilities at other jobs.
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 our operations or cash flow, these charges would adversely affect shareholders' equity and reported results of operations in the
period charged.
Risks Related to our Securities
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 on the OTC Markets OTCQX. We cannot predict how liquid the market for our common
stock may become. We have applied for listing of our common stock on the NYSE MKT and believe such a listing would be beneficial to us and our shareholders. We currently do not satisfy the initial
listing standards of any exchange, and we cannot assure investors that we will be able to satisfy the listing standards of the NYSE MKT, or that our common stock will be accepted for listing on such
exchange. Should we fail to satisfy the initial listing requirements of the NYSE MKT, 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. A lack of an active market may impair investors' ability to sell
their shares at the time they wish to sell them or at a price they consider reasonable. The lack
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of
an active trading market may impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using our common stock as consideration.
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.
The NYSE MKT may not list our securities for quotation on its exchange which could limit investors' ability to make transactions in our securities and subject us to
additional trading restrictions.
Although we expect to meet, on a pro forma basis, the NYSE MKT's minimum initial listing standards, which generally mandate that we meet certain
requirements relating to shareholders' equity, market capitalization, aggregate market value of publicly held shares and distribution requirements and minimum share price, we cannot assure you that we
will be able to meet those initial listing requirements. If the NYSE MKT does not list our securities for trading on its exchange, we could face significant material adverse consequences,
including:
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a limited availability of market quotations for our securities;
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reduced liquidity with respect to our securities;
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a determination that our shares of common stock are "penny stock" which will require brokers trading in our shares of
common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
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a limited amount of news and analyst coverage for our company; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
The
National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as "covered
securities."
Because
we expect that our common stock will be listed on the NYSE MKT, our common stock will be covered securities. Although the states are preempted from regulating the sale of covered securities,
the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of
covered securities in a particular case. Further, if we are not listed on the NYSE MKT or another national securities exchange, then our common stock would not be considered covered securities and we
would be subject to regulation in each state in which we offer our securities.
Our failure to meet the continued listing requirements of the NYSE MKT could result in a de-listing of our common stock.
If after listing we fail to satisfy the continued listing requirements of the NYSE MKT, such as the corporate governance requirements or the minimum
stockholder's equity requirement, the NYSE MKT may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair our
shareholders' ability to sell or purchase our common stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the NYSE MKT's listing
requirements, but we can provide no assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve
the liquidity of our common stock.
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There is no assurance of an established public trading market and our limited trading market may cause volatility in our share price.
The OTCQX, where our common stock is currently quoted, is an inter-dealer, over-the-counter market that provides significantly less liquidity than
the NYSE MKT. Our stock is thinly traded due to the limited number of shares available for trading on the OTCQX market thus causing large swings in price. As such, investors and potential investors
may find it difficult to obtain accurate stock price quotations, and holders of our common stock may be unable to resell their securities at or near their original purchase price or at any price. If
an active market for our stock develops and continues, our stock price may nevertheless be volatile. Sales of substantial amounts of our common stock, or the perception that such sales might occur,
could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our shareholders could suffer losses or be
unable to liquidate their holdings. Although we have applied for listing of our common stock on the NYSE MKT, no assurance can be given that our application will be approved, or that, if the
application is approved, the price of our common stock will become less volatile.
Market
prices for our common stock will be influenced by a number of factors, including:
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the issuance of new equity securities pursuant to a future offering, including issuances of preferred stock;
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the introduction of new products or services by us or our competitors;
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the acquisition of new direct selling businesses;
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changes in interest rates;
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significant dilution caused by the anti-dilutive clauses in our financial agreements;
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competitive developments, including announcements by competitors of new products or services or significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
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variations in quarterly operating results;
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change in financial estimates by securities analysts;
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a limited amount of news and analyst coverage for our company;
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the depth and liquidity of the market for our shares of common stock;
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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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investor perceptions of our company and the direct selling segment generally; and
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general economic and other national and international conditions.
Market
price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price
and trading volume.
Securities research analysts establish and publish their own periodic projections for our business. These projections may vary widely from one
another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research analysts' projections. Similarly, if one or
more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business or if one or more of these analysts ceases coverage of our company
or fails to publish reports on us regularly, our stock price or trading volume could
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decline.
If no securities or industry analysts begin to cover us, the trading price for our stock and the trading volume could be adversely affected.
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.
It is not uncommon for securities class action litigation to be brought against a company following periods of volatility in the market price of such
company's 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. 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 are obligated to issue additional securities in the future, which will reduce investors' ownership percentage in our outstanding securities and will 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, which we may grant in the future, may result in dilution to our shareholders. Our articles of incorporation currently authorize us to issue
5,000,000,000 shares of common stock. Following the issuance of the Second Tranche Stock and the 64,000,000 shares of our common stock upon conversion of the convertible note, the number
of outstanding shares of our common stock will increase to in excess of 1,000,000,000, with approximately 4,000,000,000 shares of our common stock available for issuance. 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 issue common stock in the future, 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.
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 us 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.
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.
Companies trading on the OTCQX, such as our company, must be reporting issuers under Section 12 of the Exchange Act, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation privileges. We file quarterly and annual reports containing our financial statements with the SEC. 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, reduce the trading price of our
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common
stock, result in removal from the over-the-counter markets and cause sanctions or other actions to be taken by the SEC against us. A failure to timely 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. We will incur significant legal, accounting and other expenses related to
compliance with applicable securities laws.
Our articles of incorporation, bylaws and Florida law have anti-takeover provisions that could discourage, delay or prevent a change in control, which may cause our stock
price to decline.
Our articles of incorporation, bylaws and Florida law contain provisions which could make it more difficult for a third party to acquire us, even if
closing such a transaction would be beneficial to our shareholders. We are authorized to issue up to 10,000,000 shares of preferred stock. This preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by our Board without further action by shareholders. The terms of any series of preferred stock may include preferential voting
rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. The issuance of any
preferred stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.
Provisions
of our articles of incorporation, bylaws and Florida law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a
change in control, including changes a shareholder might consider favorable. Such provisions may also prevent or frustrate attempts by our shareholders to replace or remove our management. In
particular, the articles of incorporation, bylaws and Florida law, as applicable, among other things, provide the Board with the ability to alter the bylaws without shareholder approval, and provide
that vacancies on the Board may be filled by a majority of directors in office, although less than a quorum.