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CVSL Inc. Table of Contents
Item 8. Financial Statements and Supplementary Data
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
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ý |
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2013 |
or |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period
from to |
Commission File Number: 000-52818
CVSL Inc.
(Exact name of registrant as specified in its charter)
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Florida
(State or other jurisdiction of
incorporation or organization) |
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98-0534701
(IRS Employer
Identification No.) |
2400 North Dallas Parkway, Suite 230, Plano, Texas
(Address of principal executive offices) |
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75093
(Zip Code) |
(972) 398-7120
(Registrant's telephone number, including area code)
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
"large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a
smaller reporting company) |
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Smaller reporting company ý |
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates based on the closing stock price reported on June 30, 2013 ($0.32 per share)
(prior to the effect of our October 16, 2014 reverse stock split) was $22,920,413.
The
number of shares outstanding of common stock as of October 21, 2014 was 24,398,814 shares.
FORM 10-K/A
EXPLANATORY NOTE
The Registrant has prepared this Amendment No. 1 ("Amendment") on Form 10-K/A to amend its Annual Report on Form 10-K for the
fiscal year ended December 31, 2013 (the "Original Form 10-K") which was originally filed on March 31, 2014. The Company is filing this Amendment in response to comments received
from the Securities and Exchange Commission (the "SEC"). This Amendment only amends and restates the information in Items 7, 8 and 9A of Part II and Item 15 of Part IV, as
permitted by the rules and regulations of the SEC and presents the share amounts and per share calculations throughout this Amendment on a retrospective and pro forma basis to reflect the reverse
stock split of our outstanding shares of common stock at a ratio of 1-for-20 which we effected on October 16, 2014.
Except
as described above, the Registrant has not modified or updated disclosures presented in the Original Form 10-K in this Amendment. Accordingly, this Amendment does not reflect events
occurring after the filing of the Registrant's Original Form 10-K or modify or update those disclosures, including the exhibits to the Original Form 10-K, affected by subsequent events.
Accordingly, this Amendment should be read in conjunction with the Original Form 10-K.
In
addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, currently dated certifications by our principal executive officer and principal financial officer
are filed as exhibits to this Amendment under Item 15 of Part IV hereof.
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CVSL Inc.
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PART I
Forward-Looking Statements
Certain of the matters discussed within this report include forward-looking statements on our current expectations and projections about future events. In some cases you can
identify forward-looking statements by terminology such as "may," "should," "potential," "continue," "expects," "anticipates," "intends," "plans," "believes," "estimates," and similar expressions.
These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our
control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted
under "Item 1A Risk Factors." We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to "CVSL," "we," "us," "our," and
refer to CVSL Inc. and its subsidiaries.
Item 1. Business
Overview
CVSL seeks to acquire companies primarily in the micro-enterprise (direct-selling) sector and companies potentially engaging in businesses related to
micro-enterprise and to build within this sector an interconnected "network of networks," in which social connections aided by the power of social media will be combined with relationship-based
commerce (that is, commerce conducted between friends, neighbors, relatives and colleagues). CVSL refers to this convergence as "social commerce." In making acquisitions, CVSL intends to acquire
millions of coordinates of sellers and their customers, out of which will be formed a virtual, online economy which will offer its members a myriad of benefits and advantages. CVSL's
acquisitions form the platform for this growing online economy.
In
considering appropriate acquisition targets, CVSL anticipates that it will evaluate companies of varying sizes in our targeted space, particularly companies that management believes are accretive
or otherwise add value to one or more of our businesses. CVSL plans to consider companies that are currently profitable and looking to enhance their growth, as well as companies that have experienced
financial and operational difficulties or limitations and can, in our opinion, be strengthened by improved strategic and tactical guidance. All of the acquisitions, large or small, profitable or
otherwise, will add additional coordinates of sellers and customers, thereby adding size and continually increasing the scope of CVSL's network of networks.
The
Company owns a 51.7% controlling interest in The Longaberger Company ("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 network of independent sales representatives. TLC also has showrooms
in various states, which offer merchandise and serve as sales force support centers.
The
Company substantially owns 100% of Agel Enterprises Inc. ("AEI"). Because of foreign ownership regulations in our Argentina, Colombia, Mexico and Panama subsidiaries, AEI is limited to 99%
ownership in these subsidiaries. An individual owns an approximately 1% noncontrolling interest in these subsidiaries of AEI. 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.
The
Company owns 100% 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.
The
Company owns 100% of CVSL TBT LLC which operates Tomboy Tools ("TBT"), a direct seller of a line of tools designed for women, as well as home security monitoring services.
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The
Company owns 100% of Paperly, Inc., 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.
The
Company owns a 90% controlling interest in My Secret Kitchen, Ltd ("MSK"), an award-winning United Kingdom-based direct seller of a unique line of food products.
The
Company owns 100% of 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.
During
the first quarter of 2014, the Company entered into a definitive agreement to acquire Golden Girls LLC, a direct seller of jewelry for cash and in March 2014 the Company completed the
acquisition of Uppercase Living, LLC, a direct seller of customizable vinyl expressions for display on walls.
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
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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.
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.
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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 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 1,625,000 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 372,330 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. 28,628 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 225,649 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 88,349 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
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Paperly
in exchange for total consideration of 7,797 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
substantially all the assets of MSK in exchange for total consideration of 15,891 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 28,920 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
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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 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 21,904,302 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 (prior to the Company's 1-for-20 reverse stock split effected on October 16, 2014) 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.
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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 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 financing for any of future acquisitions could dilute the
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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;
-
- to provide incentives to independent associates that are intended to help grow our business;
-
- to conform to local regulations; and
-
- 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 as
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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 that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.
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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:
-
- the safety and quality of the products, components and ingredients, as applicable;
-
- the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies'
representatives;
-
- the marketing program; and
-
- 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 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.
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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 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
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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.
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.
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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
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.
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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 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.
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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 3,200,000 shares. When the
Convertible Note 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.
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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 event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
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Table of Contents
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.
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
23
Table of Contents
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:
-
- the introduction of new products or services by us or our competitors;
-
- quarterly variations in our or our competitor's results of operations;
-
- the acquisition or divestiture of businesses, products, assets or technology;
-
- disputes, litigation or other developments with respect to intellectual property rights or other potential legal actions;
-
- 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;
-
- changes in earnings estimates or recommendations by securities analysts;
-
- market rumors; and
-
- 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.
24
Table of Contents
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
(250,000,000) shares (prior to the Company's 1-for-20 reverse stock split effected on October 16, 2014) of Common Stock. Pursuant to the Share Exchange Agreement dated August 24, 2012,
we have agreed to issue to Rochon Capital an additional 25,240,676 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
3,200,000 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.
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
25
Table of Contents
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 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
26
Table of Contents
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 500,000 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.
Item 1B. Unresolved Staff Comments
None.
27
Table of Contents
Item 2. Properties
Facilities
The following table sets forth the location and approximate square footage of our major manufacturing, distribution and office facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Entity |
|
Location |
|
Approximate
square footage
of facilities |
|
Land in
acres |
|
Description of property |
|
Own/Lease |
CVSL |
|
Plano, Texas |
|
|
14,139 |
|
|
|
|
CVSL Corporate Headquarters |
|
Lease |
CVSL |
|
Luzern, Switzerland |
|
|
350 |
|
|
|
|
European Headquarters |
|
Lease |
TLC |
|
Newark, Ohio |
|
|
180,000 |
|
|
22 |
|
TLC Corporate Headquarters |
|
Own |
TLC |
|
Frazeysburg, Ohio |
|
|
1,170,113 |
|
|
293 |
|
Manufacturing and Distribution Facilities |
|
Lease |
TLC |
|
Frazeysburg, Ohio |
|
|
121,300 |
|
|
32 |
|
Longaberger Homestead (retail, restaurants and historic structures) |
|
Lease |
TLC |
|
Hagerstown, Maryland |
|
|
3,051 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Aurora, Ohio |
|
|
2,587 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Williamsburg, Virginia |
|
|
2,512 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Jeffersonville, Ohio |
|
|
2,475 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Edinburgh, Indiana |
|
|
2,400 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Rehoboth Beach, Delaware |
|
|
1,865 |
|
|
|
|
Retail Showroom |
|
Lease |
Agel |
|
Pleasant Grove, UT |
|
|
10,656 |
|
|
|
|
Agel Corporate Headquarters |
|
Lease |
Agel |
|
Spanish Fork, Utah |
|
|
10,350 |
|
|
|
|
Distribution Center |
|
Lease |
Agel |
|
Moscow, Russia |
|
|
4,166 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Kiev, Ukraine |
|
|
3,610 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Kuala Lumpur, Malaysia |
|
|
2,900 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Milan, Italy |
|
|
1,399 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Astana, Kazakhstan |
|
|
1,086 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
YIAH |
|
Gold Coast, Australia |
|
|
6,997 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
HCG |
|
Clark's Summit, Pennsylvania |
|
|
2,080 |
|
|
|
|
HCG Corporate Headquarters |
|
Lease |
Uppercase Living |
|
Sandy, UT |
|
|
41,920 |
|
|
|
|
Uppercase Living Headquarters, manufacturing and distribution |
|
Lease |
Our
corporate headquarters are located in Plano, Texas where we rent 14,139 square feet of office space for annual rent of $351,492. TLC owns a 180,000 square foot facility that serve as its corporate
headquarters, and leases a 1,170,113 square foot manufacturing and distribution facility and a 121,300 square foot facility that houses retail stores and restaurants, all located in Ohio for aggregate
annual payments of $2,207,088. TLC leases retail outlets in Maryland, Virginia, Ohio, Indiana and Delaware for aggregate annual lease payments of $296,904 in the aggregate. Agel's corporate
headquarters is located in Pleasant Grove, Utah where Agel rents 10,656 square feet of space for annual rent of $154,512. Age1 also rents 10,350 sq. ft. of distribution space in Spanish
Fork, Utah for annual rent of $55,890 per year. In addition, Agel rents warehousing, distribution and office space in Russia, Ukraine, Malaysia, Italy and Kazakhstan for annual rent of $346,176 in the
aggregate. YIAH rents warehousing, distribution and office space in Australia for annual rent of $90,540 and the HCG corporate headquarters in Pennsylvania are leased for an annual rent of $20,560.
CVSL leases 350 square feet for monthly rent of $3,380 in Luzern, Switzerland which serves as our European Headquarters. Uppercase Living rents 41,920 square feet for monthly rent of $14,249 in Sandy,
UT which serves as the company's headquarters. Uppercase Living also subleases some of the space to the third party manufacturer and distributor of its products.
28
Table of Contents
Item 3. Legal Proceedings
Prior
to AEI's acquisition of the assets of Agel Enterprises LLC ("Agel"), Agel was assessed withholding taxes and income taxes along with penalties by the Spanish Tax Authorities, which
asserted that Agel had maintained permanent establishment in Spain for the years 2008-2010. As part of the acquisition, AEI agreed to assume this liability. Agel, and now AEI, has vigorously disputed
these claims on the basis that Agel believes they did not have permanent establishment, and therefore, any compensation paid to independent representatives should not have been subject to withholding
taxes. AEI has recently filed an appeal in Tribunal Económico-Administrativo Regional de Cataluña. The ultimate resolution of the dispute cannot be determined at this
time. Agel paid the income tax due and AEI has paid approximately $260,000 in good faith towards the disputed withholding tax liability to preserve the appeal process. AEI maintains a liability of
$1.0 million in accrued liabilities for this disputed amount, which is reflected in CVSL's 2013 financial statements.
Other
than the above, we are not aware of any material, active, pending or threatened proceeding against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.
Item 4. Mine Safety Disclosures
None.
29
Table of Contents
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Since
February 2014 our Common Stock has been quoted on the OTC Markets OTCQX under the symbol "CVSL." From February 2008 until February 2014, our Common Stock had been quoted on the OTC Bulletin
Board and the OTC Markets OTCQB under the symbol "CVSL." Our Common Stock currently is traded on the OTC Markets OTCQX. The last reported sale price of our common stock on the OTCQX on
March 28, 2014 was $7.60 (revised to reflect the Company's 1-for-20 reverse stock split effected on October 16, 2014). We are actively looking to seek a national listing of our Common
Stock.
The
following table sets forth, for the periods indicated, the high and low closing bid price quotations for our Common Stock. The quotes represent inter-dealer prices, without adjustment for retail
mark-up, markdown or commission and may not represent actual transactions.
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
Quarterly Periods for the Year 2013 |
|
|
|
|
|
|
|
Ended March 31 |
|
$ |
12.60 |
|
$ |
1.20 |
|
Ended June 30 |
|
$ |
7.00 |
|
$ |
4.00 |
|
Ended September 30 |
|
$ |
7.60 |
|
$ |
4.40 |
|
Ended December 31 |
|
$ |
14.60 |
|
$ |
7.20 |
|
Quarterly Periods for the Year 2012 |
|
|
|
|
|
|
|
Ended March 31 |
|
$ |
8.00 |
|
$ |
2.00 |
|
Ended June 30 |
|
$ |
5.00 |
|
$ |
1.00 |
|
Ended September 30 |
|
$ |
2.60 |
|
$ |
0.80 |
|
Ended December 31 |
|
$ |
4.80 |
|
$ |
0.40 |
|
Holders
As
of March 31, 2014, we had 24,409,301 shares of Common Stock outstanding held by approximately 54 holders of record.
Dividends
We
have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the
development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends. Even if
our Board of Directors decides to pay dividends, the form, frequency and amount of any dividends will depend upon our future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.
Equity Compensation Plans
We
currently do not have an equity compensation plan for our employees. We have two share based compensation plans, further described in footnote 12 of our financial statements, but
compensation under these plans will be paid to participants in cash, so they will not result in the issuance of any shares of our Common Stock.
Unregistered Sales of Equity Securities and Use of Proceeds
On
June 14, 2013, CVSL issued 1,625,000 shares of Common Stock to a trust of which Tamala Longaberger is the trustee (the "Trust") upon conversion of the Convertible Subordinated
Unsecured
30
Table of Contents
Promissory
Note in the principal amount of $6,500,000 issued to the Trust. The issuance qualified for exemption under Section 3(a)(9) of the Securities Act of 1933.
On
October 2, 2013, CVSL issued 88,349 shares of Common Stock to Tomboy Tools Inc. CVSL relied on an exemption from registration provided under Section 4(a)(2) of the
Securities Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the Securities were not offered pursuant to a general solicitation and the status of the
purchasers of the Securities as "accredited investors" as defined in Regulation D under the Securities Act of 1933.
On
October 14, 2013, CVSL issued 225,649 shares of Common Stock to Inspired Portfolio Pty, Ltd. CVSL relied on an exemption from registration provided under Section 4(a)(2)
of the Securities Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the Securities were not offered pursuant to a general solicitation and the status
of the purchasers of the Securities as "accredited investors" as defined in Regulation D under the Securities Act of 1933.
On
October 22, 2013, CVSL issued 186,165 shares of Common Stock to Lega Enterprises, LLC. CVSL relied on an exemption from registration provided under Section 4(a)(2) of
the Securities Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the securities were not offered pursuant to a general solicitation and the status of
the purchaser of the securities as "accredited investors" under the Securities Act of 1933.
On
November 27, 2013, CVSL issued 157,538 shares of Common Stock to Lega Enterprises, LLC and TPark One LLC. CVSL relied on an exemption from registration provided under
Section 4(a)(2) of the Securities Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the securities were not offered pursuant to a general
solicitation and the status of the purchaser of the securities as "accredited investors" under the Securities Act of 1933.
On
January 6, 2014, CVSL issued 15,891 shares of Common Stock to the five former shareholders of My Secret Kitchen Ltd. CVSL relied on an exemption from registration provided
under Section 4(a)(2) of the Securities Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the Securities were not offered pursuant to a general
solicitation and the status of the purchasers of the Securities as "accredited investors" as defined in Regulation D under the Securities Act of 1933.
On
January 6, 2014, CVSL issued 7,797 shares of Common Stock to Paperly, Inc. CVSL relied on an exemption from registration provided under Section 4(a)(2) of the Securities
Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the Securities were not
offered pursuant to a general solicitation and the status of the purchasers of the Securities as "accredited investors" as defined in Regulation D under the Securities Act of 1933.
On
January 7, 2014, CVSL issued 28,628 shares of Common Stock to Lega Enterprises, LLC. CVSL relied on an exemption from registration provided under Section 4(a)(2) of the
Securities Act of 1933 for the issuance of the securities, which exemption CVSL believes is available because the securities were not offered pursuant to a general solicitation and the status of the
purchaser of the securities as "accredited investors" under the Securities Act of 1933.
Item 6. Selected Financial Data
Because
we are a smaller reporting company, we are not required to provide the information required by this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements ("forward-looking statements") that involve risks and uncertainties. For this purpose, any
statements contained in this Annual
31
Table of Contents
Report
that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Annual Report and in documents incorporated by reference herein, forward-looking
statements include, without limitation, statements regarding our expectations, beliefs, or intentions that are signified by terminology such as "subject to," "believes," "anticipates," "plans,"
"expects," "intends," "estimates," "may," "will," "should," "can," the negatives thereof, variations thereon and similar expressions. Such forward-looking statements reflect our current views with
respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. Our actual results may differ materially from
those anticipated in any forward-looking statements due to known and unknown risks, uncertainties and other factors. We disclaim any intention or obligation to update or review any forward-looking
statements or information, whether as a result of new information, future events or otherwise. We undertake no obligation to comment on analyses, expectations or statements made by third-parties in
respect of us or our operations and operating results.
Overview
CVSL seeks to acquire companies primarily in the micro-enterprise (direct-selling) sector and companies potentially engaging in businesses related to
micro-enterprise and to build within this sector an interconnected "network of networks," in which social connections aided by the power of social media will be combined with relationship-based
commerce (that is, commerce conducted between friends, neighbors, relatives and colleagues). CVSL refers to this convergence as "social commerce." In making acquisitions, CVSL intends to acquire
millions of coordinates of sellers and their customers, out of which will be formed a virtual, online economy which will offer its members a myriad of benefits and advantages. CVSL's
acquisitions form the platform for this growing online economy.
In
considering appropriate acquisition targets, CVSL anticipates that it will evaluate companies of varying sizes in our targeted space, particularly companies that management believes are accretive
or otherwise add value to one or more of our businesses. CVSL plans to consider companies that are currently profitable and looking to enhance their growth, as well as companies that have experienced
financial and operational difficulties or limitations and can, in our opinion, be strengthened by improved strategic and tactical guidance. All of the acquisitions, large or small, profitable or
otherwise, will add additional coordinates of sellers and customers, thereby adding size and continually increasing the scope of CVSL's network of networks.
The
Company owns a 51.7% controlling interest in The Longaberger Company ("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 network of independent sales representatives. TLC also has showrooms in various states, which offer merchandise and serve as sales force support centers.
The
Company substantially owns 100% of Agel Enterprises Inc. ("AEI"). Because of foreign ownership regulations in our Argentina, Colombia, Mexico and Panama subsidiaries, AEI is limited to 99%
ownership in these subsidiaries. An individual owns an approximately 1% noncontrolling interest in these subsidiaries of AEI. 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.
The
Company owns 100% 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.
The
Company owns 100% of CVSL TBT LLC which operates Tomboy Tools ("TBT"), a direct seller of a line of tools designed for women, as well as home security monitoring services.
32
Table of Contents
The
Company owns 100% of Paperly, Inc., 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.
The
Company owns a 90% controlling interest in My Secret Kitchen, Ltd ("MSK"), an award-winning United Kingdom-based direct seller of a unique line of food products.
The
Company owns 100% of 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.
During
the first quarter of 2014, the Company entered into a definitive agreement to acquire Golden Girls LLC, a direct seller of jewelry for cash and in March 2014 the Company completed the
acquisition of Uppercase Living, LLC, a direct seller of customizable vinyl expressions for display on walls.
Paperly
On
December 31, 2013, CVSL acquired substantially all 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.
My Secret Kitchen
On
December 20, 2013, CVSL 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.
Happenings Communications Group
As
part of the Share Exchange Agreement, CVSL acquired 100% of 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.
Strategic Initiatives
Assets
One
of the many aspects of TLC's operation that was attractive to CVSL was its abundance of assets. For example, TLC has $15.6 million in inventory as of December 31, 2013, compared to
$19.3 million at December 31, 2012, with further reductions planned in future quarters. CVSL has worked with TLC to begin reducing its inventory through selling more items online,
through TLC's showrooms and by opening up new territories. The sale of excess inventory generates cash to reduce debt and fund operations.
Another
attractive aspect of acquiring TLC was the variety of fixed assets and real estate that are under-utilized in TLC's current operations. CVSL intends to utilize certain of these assets with
future acquisitions. For example, YIAH has now begun operations in North America, operating out of our Newark, Ohio office building. TBT has shifted inventory and distribution to TLC's facilities.
While we
33
Table of Contents
intend
to find new uses for certain under-utilized assets, other assets owned by TLC are non-core assets that can be sold to further reduce debt and generate positive cash. During the fourth quarter
of 2013, TLC sold the Longaberger Golf Club for $4.0 million and the proceeds were used to reduce TLC term debt to $0.4 million.
TLC
owns and operates its manufacturing and distribution facilities near Frazeysburg, Ohio at the East Central Ohio (ECO) Business Park. TLC owns and operates ECO Business Park, which has warehouse
buildings ranging from 35,000 square feet to 814,000 square feet, along with other facilities. TLC does not need all the space it currently owns in the Business Park, so CVSL intends to utilize it for
other acquisitions and/or sell or structure sale/leaseback transactions to generate additional cash.
Results of Operations
As
a result of our 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. 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's
substantial growth during 2013 provides challenges for the comparison of year over year results. As described above we acquired TLC during the first quarter 2013, YIAH during the third quarter
2013 and TBT, AEI, MSK and Paperly during the fourth quarter of 2013. Inasmuch as all of the acquisitions were consummated in 2013, any comparison between our year end numbers for the year ended
December 31, 2013 and December 31, 2012 would not be meaningful on a quantitative or qualitative basis.
During
the year ended 2013, CVSL's gross sales increased $84.0 million to $84.9 million compared to $0.9 million for the year ended 2012.
CVSL's
operating losses were $8.7 million compared to $1.7 million for the years ended 2013 and 2012, respectively. The dramatic increases were the result of six acquisitions completed
throughout 2013.
Commissions and incentives
CVSL
incurred $16.4 million in commissions and incentives costs that are associated with operating in the direct selling industry. The costs represent commissions and incentive trips earned by
the independent sales force. Commissions and incentives represented 37% of our operating expenses for the year ended December 31, 2013
Selling, General and Administrative
Our
selling, general and administrative costs increased by $25.6 million when comparing year ended 2013 to year ended 2012. The year over year increase is primarily the result of various
administrative departments at each of the acquired companies, including human resources, legal, information technology, finance and executive, as well as costs associated with leased buildings.
Additionally, we incurred professional fees associated with the acquisition and pursuit of companies in the direct selling industry. Selling, general and administrative expenses represented 63% of our
operating expenses for the year ended December 31, 2013. Included in selling, general and administrative expenses for the years ended December 31, 2013 and 2012 are $1.9 million
and $450 thousand, respectively of fees paid to Richmont Holdings pursuant to a Reimbursement of Services Agreement for due diligence, financial analysis, legal, travel and other services
provided by Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring and negotiating potential transactions.
Interest expense
Interest
expense of $1.6 million during year ended 2013 compared to $43 thousand during year ended 2012. CVSL's interest expense is primarily associated with the $20 million
convertible note issued to
34
Table of Contents
Richmont
Capital Partners V L.P. and debt assumed in the TLC acquisition. The $20 million convertible note and accrued interest will likely be converted to Common Stock during the second
quarter of 2014.
Liquidity and Capital Resources
At
December 31, 2013, we had cash and cash equivalents of approximately $3.9 million, marketable securities of $11.8 million, total current assets of $38.2 million and
working capital of approximately $3.3 million as compared to cash and cash equivalents of $19 million, no marketable securities, total current assets of $19.2 million and a
working capital of approximately $18.2 million as of December 31, 2012. The 2012 cash and cash equivalents reflect the $20 million proceeds we received in the sale of a
Convertible Note to Richmont Capital Partners V L.P. in December 2012.
Net
cash used by operating activities for the year ended December 31, 2013 was $4.6 million, as compared net cash used in operating activities of $1 million for the year ended
December 31, 2012.
Our
principal uses of cash have included legal and professional fees associated with the acquisitions, legal, due diligence and other fees related to other potential acquisitions and the cost of
buying inventory. The Company plans to acquire additional businesses engaged in direct-selling and intends to fund such acquisitions primarily by issuing shares of our Common Stock as consideration
for any such acquisition. To the extent that cash will need to be paid as some portion of the acquisition consideration, we expect, to the extent necessary, to use our cash on hand and if necessary to
raise cash through debt and/or equity financing. We believe that additional debt or equity financing will be available to us based on the assets and financials of the acquisition candidate and based
on management's experience with respect to debt financing and equity financing. We expect to be able to raise capital from lenders and equity investors who will understand our direct-selling
acquisition strategy.
As
of December 31, 2013, the Company had an $11.8 million investment in marketable securities. The investments are readily available to provide liquidity for acquisitions, debt service
and operating expenses. The Company also has a line of credit available for its TLC operations.
Net
cash used in investing activities for the year ended December 31, 2013 was approximately $5.7 million, as compared to $0 the year ended December 31, 2012. Net cash used in
investing activities consisted primarily of investment in marketable securities of $16.5 million offset by proceeds from sale of property plant and equipment of $4.6 million, primarily
the sale of the TLC golf course. We also sold certain equity securities and attained cash through our acquisitions.
Net
cash used in financing activities was $4.8 million for the year ended December 31, 2013 as we paid down the term loan with the sale of the TLC golf course. During 2013, we received
$20 million from Richmont Capital Partners V L.P. through the sale of Convertible Notes.
At
December31, 2013, we had total long-term borrowings of which consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
December 31,
2013 |
|
December 31,
2012 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
20,881,096 |
|
$ |
20,041,644 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,734,695 |
|
|
|
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,649,880 |
|
|
|
|
Term loanKeyBank |
|
|
7.70 |
%* |
|
427,481 |
|
|
|
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,723,396 |
|
|
20,041,644 |
|
Less current maturities |
|
|
|
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,594,722 |
|
$ |
20,041,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Table of Contents
The
schedule of maturities of our long-term debt are as follows:
|
|
|
|
|
2014 |
|
$ |
1,128,674 |
|
2015 |
|
|
696,406 |
|
2016 |
|
|
722,928 |
|
2017 |
|
|
750,565 |
|
2018 |
|
|
714,939 |
|
Thereafter |
|
|
1,828,788 |
|
|
|
|
|
|
|
|
|
|
Total excluding convertible note |
|
|
5,842,300 |
|
Convertible note |
|
|
20,881,096 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt including current maturities |
|
$ |
26,723,396 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P.
On
December 12, 2012 (the "Issuance Date"), we received cash proceeds of 20,000,000 and issued to Richmont Capital Partners V L.P., a Texas limited partnership ("RCP V"), a
Convertible Subordinated Unsecured Promissory Note, in the original principal amount of $20,000,000 (the "Note"), The Note is (i) an unsecured obligation of ours and (ii) subordinated to
any bank, financial institution, or other lender providing funded debt to us or any direct or indirect subsidiary of ours, including any seller debt financing provided by the owners of any entity(ies)
that may be acquired by us. Principal payments of $1,333,333 are due and payable on each anniversary of the Issuance Date beginning on the third anniversary of the Issuance Date. A final principal
payment, equal to the then unpaid principal balance of the Note, is due and payable on the 10th anniversary of the Issuance Date. The Note bears interest at an annual rate of 4%, which interest is
payable on each anniversary of the Issuance Date; provided, however, that interest payable through the third anniversary of the Issuance Date may, at our option, be paid in kind ("PIK Interest") and
any such PIK Interest will be added to the outstanding principal amount of the Note. Beginning 380 days from the Issuance Date, the Note may be prepaid, in whole or in part, at any time without
premium or penalty.
On
June 17, 2013, the Note was amended to extend the date of mandatory conversion of the Note to provide that the Note be mandatorily convertible into shares of Common Stock (subject to a
maximum of 3,200,000 shares being issued) within ten days of June 17, 2014. The full amount of the Note (including any and all accrued interest thereon, whether previously converted to
principal or otherwise) will be converted (the "Conversion"), into no more than 3,200,000 shares of Common Stock at a price of $6.60 per share of Common Stock.
John
Rochon, Jr., one of our directors and the son of our Chief Executive Officer, is the 100% owner and is in control of Richmont Street LLC, the sole general partner of RCP V. Michael
Bishop, one of our directors, is a limited partner of RCP V.
Promissory NoteLega Enterprises, LLC
On
October 22, 2013, we issued a $1,700,000 Promissory Note to Lega Enterprises, LLC in connection with the Asset Purchase Agreement between AEI and Agel Enterprises, LLC. The
Promissory Note bears interest at 5% per annum, and is payable in equal monthly installments of outstanding principal and interest.
Promissory Notepayable to former shareholder of TLC
On
March 14, 2013, we issued a $4,000,000 Promissory Note in connection with the Purchase Agreement with TLC. The Promissory Note bears interest at 2.63% per annum, has a ten-year maturity, and
is payable in equal monthly installments of outstanding principal and interest.
36
Table of Contents
Term loanKey Bank
In
conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6,500,000 term loan from Key Bank. The interest rate on the term loan is either Key Bank's prime
rate plus 5.75% or LIBOR plus 7.50%. The term note is due in monthly installments beginning April 1, 2013 and due in full on October 23, 2015. As of March 1, 2014, TLC has paid in
full the outstanding balance of the term note through monthly amortization payments beginning April 1, 2013 and proceeds of the sale of non-core assets, primarily real estate. The line of
credit described below is collateralized by substantially all assets of TLC. Under the agreement, TLC is subject to certain financial covenants, including a fixed charge coverage ratio and limitations
on capital expenditures, additional indebtedness, and incurrence of liens. TLC was in compliance with the financial covenants at December 31, 2013.
Line of Credit Payable
Key Bank
TLC
has a line of credit agreement which expires on October 23, 2015. Under the agreement, TLC has available borrowings up to $12,000,000, limited to a formula primarily based on accounts
receivable and inventory. The agreement provides for interest based on Key Bank's prime rate plus 1.75% or LIBOR plus 3.50%. Interest at December 31, 2013 was 3.94%. The line of credit balance
was $8,067,573 of December 31, 2013.
UBS Margin Loan
We
have a margin loan agreement with UBS that allows us to purchase investments. The maximum loan amount is based on a percentage of marketable securities held by the Company. Interest on the
outstanding balance of $1,663,534 was 1.67% at December 31, 2013. The loan is included in the line of credit on our consolidated balance sheets.
Critical Accounting Policies
The
following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimations and assumptions, including those related to the valuation
allowances for receivables, inventory and sales returns and allowances, the carrying value of non-current assets and income taxes, on an ongoing basis. Estimates and assumptions are based on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Accordingly, actual results in future periods could differ materially from these estimates. Significant judgments and estimates
used in the preparation of the consolidated financial statements apply to the following critical accounting policies:
Revenue Recognition and Deferred Revenue
CVSL
receives payment, primarily via credit card, for the sale of products at the time customers place orders. Sales and related fees such as shipping and handling, net of applicable sales discounts,
are recorded as revenue when the product is shipped and when title and the risk of ownership passes to the customer. Payments received for undelivered products are recorded as deferred revenue and are
included in other current liabilities. Certain incentives offered on the sale of our products, including sales discounts, are classified as a reduction of revenue. A provision for product returns and
allowances is recorded and is founded on historical experience.
37
Table of Contents
Income Taxes
CVSL
and its U.S. subsidiaries excluding TLC file a consolidated Federal income tax return. Deferred income taxes are provided for temporary differences between accrual basis and tax bases of asset
and liabilities. The principal differences are described in footnote (11), income taxes. Benefits from tax credits are reflected currently in earnings. CVSL records income tax positions based
on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.
Impairment of Long-Lived Assets
CVSL
reviews long-lived assets, including property, plant and equipment and other intangibles with definite lives for impairment or whenever events or changes in circumstances indicated that the
carrying amount of such an asset might not be recoverable. When indicators are present, management determines whether there has been an impairment of long-lived assets held for use in the business by
comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or asset group to the carrying value of the asset. The amount of any resulting impairment is
calculated by comparing the carrying value to the fair value. Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value. Assets or
asset groups are determined at the lowest level possible for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets whose aggregate
undiscounted cash flows are less than its carrying value, the assets are considered potentially impaired and actual impairments, if any, would be determined to the extent the assets carrying value
exceeds its aggregate fair value.
Goodwill and Other Intangibles
CVSL
performs its goodwill and other indefinite-lived intangible impairment test annually or when changes in circumstances indicate an impairment event may have occurred by estimating the fair value
of each reporting unit compared to its carrying value. CVSL's reporting units represent an operating segment or a reporting level below an operating segment.
Additionally,
the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods.
CVSL uses a discounted cash flow model and a market approach to calculate the fair value of its reporting units. The model includes a number of significant assumptions and estimates regarding future
cash flows and these estimates could be materially impacted by adverse changes in market conditions.
Other Accounting Policies and Recent Accounting Pronouncements
See
footnote (2), Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.
Off-Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Because
we are a smaller reporting company, we are not required to provide the information required by this Item.
38
Table of Contents
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
39
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of CVSL, Inc.:
We
have audited the accompanying consolidated balance sheets of CVSL, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss,
stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CVSL, Inc. as of December 31, 2013 and 2012,
including the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As
further discussed in Note 16, on October 20, 2014 the Company executed a 1 to 20 reverse stock split, the effects of which on share and per share amounts have been reflected in the
consolidated financial statements as of and for the years ended December 31, 2013 and 2012.
PMB
Helin Donovan, LLP
/s/ PMB Helin Donovan, LLP
Dallas,
Texas
October 20, 2014
40
Table of Contents
CVSL Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2012 |
|
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,876,708 |
|
$ |
19,032,392 |
|
Marketable securities |
|
|
11,830,252 |
|
|
|
|
Accounts receivable, net |
|
|
780,237 |
|
|
100,769 |
|
Inventory |
|
|
18,734,294 |
|
|
|
|
Other current assets |
|
|
2,948,717 |
|
|
20,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
38,170,208 |
|
|
19,154,020 |
|
Property, plant and equipment, net of accumulated depreciation |
|
|
22,847,854 |
|
|
1,514 |
|
Goodwill |
|
|
4,422,928 |
|
|
|
|
Intangibles, net |
|
|
3,764,063 |
|
|
|
|
Other assets |
|
|
617,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
69,822,848 |
|
$ |
19,155,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity (deficit) |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payabletrade |
|
$ |
10,471,121 |
|
$ |
409,643 |
|
Accounts payablerelated party |
|
|
181,858 |
|
|
416,670 |
|
Line of credit payable |
|
|
9,806,002 |
|
|
22,653 |
|
Accrued commissions |
|
|
3,740,846 |
|
|
|
|
Deferred revenue |
|
|
1,661,851 |
|
|
60,548 |
|
Current portion of long-term debt |
|
|
1,128,674 |
|
|
|
|
Other current liabilities |
|
|
7,881,994 |
|
|
18,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
34,872,346 |
|
|
927,889 |
|
Long-term debt |
|
|
25,594,722 |
|
|
20,041,644 |
|
Other long-term liabilities |
|
|
499,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
60,966,708 |
|
|
20,969,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments & contingencies |
|
|
|
|
|
|
|
Stockholders' equity (deficit): |
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share, 500,000 authorized-0-issued and outstanding |
|
|
|
|
|
|
|
Common stock, par value $0.0001 per share, 250,000,000 and 24,500,000 shares authorized; 24,356,989 and 24,385,617 shares issued and outstanding, at
December 31, 2013 and at December 31, 2012 respectively |
|
|
2,436 |
|
|
2,439 |
|
Additional paid-in capital |
|
|
14,408,770 |
|
|
2,738,274 |
|
Accumulated other comprehensive loss |
|
|
(767,569 |
) |
|
|
|
Accumulated deficit |
|
|
(13,085,777 |
) |
|
(4,554,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit) attributable to common stockholders |
|
|
557,860 |
|
|
(1,813,999 |
) |
Stockholders' equity attributable to noncontrolling interest |
|
|
8,298,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit) |
|
|
8,856,140 |
|
|
(1,813,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
69,822,848 |
|
$ |
19,155,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
41
Table of Contents
CVSL Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013 |
|
2012 |
|
Revenues |
|
$ |
84,850,502 |
|
$ |
930,073 |
|
Program costs and discounts |
|
|
(20,139,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
64,711,161 |
|
|
930,073 |
|
Costs of sales |
|
|
29,027,643 |
|
|
324,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35,683,518 |
|
|
605,150 |
|
Commissions and incentives |
|
|
16,432,061 |
|
|
|
|
Impairment of goodwill |
|
|
|
|
|
2,488,708 |
|
Selling, general and administrative |
|
|
27,918,877 |
|
|
2,291,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(8,667,420 |
) |
|
(4,175,549 |
) |
Gain on marketable securities |
|
|
(499,949 |
) |
|
|
|
Interest expense, net |
|
|
1,609,313 |
|
|
42,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision |
|
|
(9,776,784 |
) |
|
(4,218,222 |
) |
Income tax provision |
|
|
273,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(10,049,784 |
) |
|
(4,218,222 |
) |
Loss from discontinued operations, net of income taxes of $0 |
|
|
|
|
|
(184,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(10,049,784 |
) |
|
(4,402,947 |
) |
Net loss attributable to non-controlling interest |
|
|
(1,518,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders |
|
$ |
(8,531,065 |
) |
$ |
(4,402,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
49,705,125 |
|
|
22,563,720 |
|
Loss from continuing operations* |
|
$ |
(0.20 |
) |
$ |
(0.19 |
) |
Loss from discontinued operations |
|
|
(0.00 |
) |
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(0.17 |
) |
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Excludes
loss attributable to non-controlling interest.
See notes to consolidated financial statements.
42
Table of Contents
CVSL Inc.
Consolidated Statements of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013 |
|
2012 |
|
Net loss |
|
$ |
(10,049,784 |
) |
$ |
(4,402,947 |
) |
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
Unrealized loss on marketable securities |
|
|
(636,778 |
) |
|
|
|
Foreign currency translation adjustment |
|
|
(142,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(779,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(10,828,926 |
) |
|
(4,402,947 |
) |
Comprehensive loss attributable to non-controlling interests |
|
|
(1,530,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common stockholders |
|
$ |
(9,298,634 |
) |
$ |
(4,402,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
43
Table of Contents
CVSL Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013 |
|
2012 |
|
Operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,049,784 |
) |
$ |
(4,402,947 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
Goodwill impairment |
|
|
|
|
|
2,488,708 |
|
Depreciation and amortization |
|
|
1,799,993 |
|
|
1,042 |
|
Interest expense |
|
|
903,007 |
|
|
41,644 |
|
Write-down of inventory |
|
|
124,000 |
|
|
|
|
Provision for losses on receivables, net |
|
|
141,801 |
|
|
|
|
Loss on discontinued operations |
|
|
|
|
|
184,725 |
|
Loss on sales of assets |
|
|
9,027 |
|
|
|
|
Deferred income tax benefit |
|
|
(22,000 |
) |
|
|
|
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
(414,911 |
) |
|
(5,216 |
) |
Inventory |
|
|
3,980,288 |
|
|
|
|
Other current assets |
|
|
690,228 |
|
|
(20,359 |
) |
Accounts payable and accrued expenses |
|
|
867,105 |
|
|
365,394 |
|
Accounts payablerelated party |
|
|
(392,315 |
) |
|
391,429 |
|
Deferred revenue |
|
|
(2,721,864 |
) |
|
(18,665 |
) |
Other long-term liabilities |
|
|
484,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(4,600,573 |
) |
|
(974,245 |
) |
Investing activities: |
|
|
|
|
|
|
|
Capital expenditures |
|
|
(454,188 |
) |
|
|
|
Proceeds from the sale of property, plant and equipment |
|
|
4,642,522 |
|
|
|
|
Investment in marketable securities |
|
|
(16,486,736 |
) |
|
|
|
Sale of marketable securities |
|
|
4,019,706 |
|
|
|
|
Cash acquired in acquisitions |
|
|
2,548,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(5,730,529 |
) |
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Proceeds from sale of convertible notes |
|
|
|
|
|
20,000,000 |
|
Line of credit, net change |
|
|
421,159 |
|
|
(1,971 |
) |
Repayments on long-term debt |
|
|
(5,215,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(4,793,936 |
) |
|
19,998,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(30,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
(15,155,684 |
) |
|
19,023,784 |
|
Cash and cash equivalents at beginning of year |
|
|
19,032,392 |
|
|
8,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,876,708 |
|
$ |
19,032,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
Interest |
|
$ |
706,306 |
|
|
|
|
Income taxes |
|
|
221,779 |
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
Convertible note converted to stock |
|
|
6,563,555 |
|
|
|
|
Convertible note issued related to acquisition |
|
|
6,500,000 |
|
|
|
|
Promissory note issued related to acquisition |
|
|
4,000,000 |
|
|
|
|
Stock issued related to acquisitions |
|
|
5,106,938 |
|
|
|
|
See notes to consolidated financial statements.
44
Table of Contents
CVSL Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
|
|
|
|
|
|
|
|
Additional
Paid-In
Capital |
|
Accumulated
Deficit |
|
Non-controlling
Interest |
|
Total
Stockholders'
Equity |
|
|
|
Shares |
|
Amount |
|
Balance at December 31, 2011 |
|
|
50 |
|
$ |
|
|
$ |
66,104 |
|
$ |
|
|
$ |
(151,765 |
) |
$ |
|
|
$ |
(85,661 |
) |
Issuance of shares to HCG owners in connection with the Share Exchange |
|
|
21,904,252 |
|
|
2,191 |
|
|
(2,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of assumption of CVSL asset and liabilities |
|
|
2,481,315 |
|
|
248 |
|
|
2,674,361 |
|
|
|
|
|
|
|
|
|
|
|
2,674,609 |
|
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,402,947 |
) |
|
|
|
|
(4,402,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
|
24,385,617 |
|
$ |
2,439 |
|
$ |
2,738,274 |
|
$ |
|
|
$ |
(4,554,712 |
) |
$ |
|
|
$ |
(1,813,999 |
) |
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,531,065 |
) |
|
(1,518,719 |
) |
|
(10,049,784 |
) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
(767,569 |
) |
|
|
|
|
(11,573 |
) |
|
(779,142 |
) |
Contribution of noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,828,572 |
|
|
9,828,572 |
|
Issuance of stock for convertible note |
|
|
1,625,000 |
|
|
163 |
|
|
6,563,393 |
|
|
|
|
|
|
|
|
|
|
|
6,563,555 |
|
Issuance of stock for investment in subsidiaries |
|
|
657,700 |
|
|
66 |
|
|
5,106,872 |
|
|
|
|
|
|
|
|
|
|
|
5,106,938 |
|
Contribution of stock with no consideration |
|
|
(2,311,328 |
) |
|
(231 |
) |
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013 |
|
|
24,356,989 |
|
$ |
2,436 |
|
$ |
14,408,770 |
|
$ |
(767,569 |
) |
$ |
(13,085,777 |
) |
$ |
8,298,280 |
|
$ |
8,856,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
45
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements
(1) Business Overview and Current Plans
CVSL seeks to acquire companies primarily in the micro-enterprise (direct-selling) sector and companies potentially engaging in businesses related to micro-enterprise and to build within this sector
an interconnected "network of networks," in which social connections aided by the power of social media will be combined with relationship-based commerce (that is, commerce conducted between friends,
neighbors, relatives and colleagues). CVSL refers to this convergence as "social commerce." In making acquisitions, CVSL intends to acquire millions of coordinates of sellers and their customers, out
of which will be formed a virtual, online economy which will offer its members a myriad of benefits and advantages. CVSL's acquisitions form the platform for this growing online
economy.
In
considering appropriate acquisition targets, CVSL anticipates that it will evaluate companies of varying sizes in our targeted space, particularly companies that management believes are accretive
or otherwise add value to one or more of our businesses. CVSL plans to consider companies that are currently profitable and looking to enhance their growth, as well as companies that have experienced
financial and operational difficulties or limitations and can, in our opinion, be strengthened by improved strategic and tactical guidance. All of the acquisitions, large or small, profitable or
otherwise, will add additional coordinates of sellers and customers, thereby adding size and continually increasing the scope of CVSL's network of networks.
The
Company owns a 51.7% controlling interest in The Longaberger Company ("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 network of independent sales representatives. TLC also has showrooms in
various states, which offer merchandise and serve as sales force support centers.
The
Company substantially owns 100% of Agel Enterprises Inc. ("AEI"). Because of foreign ownership regulations in our Argentina, Colombia, Mexico and Panama subsidiaries, AEI is limited to 99%
ownership in these subsidiaries. An individual owns an approximately 1% noncontrolling interest in these subsidiaries of AEI. 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.
The
Company owns 100% 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.
The
Company owns 100% of CVSL TBT LLC which operates Tomboy Tools ("TBT"), a direct seller of a line of tools designed for women, as well as home security monitoring services.
The
Company owns 100% of Paperly, Inc., 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.
The
Company owns a 90% controlling interest in My Secret Kitchen, Ltd ("MSK"), an award-winning United Kingdom-based direct seller of a unique line of food products.
The
Company owns 100% of 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
46
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(1) Business Overview and Current Plans (Continued)
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.
(2) Summary of Significant Accounting Policies
Consolidation
CVSL consolidates all entities in which it owns or controls more than 50% of the voting shares, including any investments where we have determined to
have control. The portion of the entity not owned by us is reflected as a non-controlling interest within the equity section of the consolidated balance sheets. As of December 31, 2013, the
non-controlling interest consisted of minority shareholder interests in TLC, certain international subsidiaries of AEI and MSK. As of December 31, 2012, there was no non-controlling interest.
All inter-company balances and transactions have been eliminated in consolidation.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting as of the acquisition date, which is the date on which control of
the acquired company is transferred to CVSL. Control is assessed by considering the legal transfer of voting rights that are currently exercisable and managerial control of the entity. Goodwill is
measured at the acquisition date as the fair value of the consideration transferred less the net fair value of identifiable assets acquired and liabilities assumed. Any contingent consideration is
measured at fair value at the acquisition date. Transaction costs, other than those associated with the issuance of debt or equity securities, related to a business combination are expensed as
incurred.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the
consolidated financial statements. Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
Cash equivalents are short-term, highly-liquid instruments with original maturities of 90 days or less. We maintain our cash primarily with
major U.S. domestic banks. The amounts held in interest bearing accounts periodically exceed the Federal Deposit Insurance Corporation insured limit of $250,000 at December 31, 2013 and
December 31, 2012. The amounts held in these banks exceeded the insured limit of $250,000 as of December 31, 2013 and December 31, 2012
totaling $898,077 and $19,032,392, respectively. We have not incurred any losses related to these deposits.
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Marketable Securities
CVSL invests in the ordinary course of business, and such investments may include equity securities, debt instruments and mutual funds. The
investments are classified as available-for-sale investments that are considered temporary. The investments are recorded at fair value with unrealized gains and losses included in accumulated other
comprehensive income and realized gains and losses reported separately on the income statement.
Accounts Receivable
The carrying value of our accounts receivable, net of allowance for doubtful accounts, represents their estimated net realizable value. We estimate
the allowance for doubtful accounts based on type of customer, age of outstanding receivable, historical collection trends, and existing economic conditions. If events or changes in circumstances
indicate that a specific receivable balance may be unrealizable, further consideration is given to the collectibility of those balances, and the allowance is adjusted accordingly. Receivable balances
deemed uncollectible are written off against the allowance. We have recorded an allowance for doubtful accounts of $132,976 and $8,500 at December 31, 2013 and 2012, respectively.
Inventory
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The Company records provisions for
obsolete, excess and unmarketable inventory in cost of goods sold.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Provisions
for amortization of leasehold improvements are made at annual rates based upon the lesser of the estimated useful lives of the assets or terms of the leases. Expenditures for maintenance and repairs
are expensed as incurred.
At
December 31, 2013, the useful lives used for depreciation and amortization were as follows:
|
|
|
Buildings |
|
7 to 40 years |
Land improvements |
|
3 to 25 years |
Leasehold improvements |
|
3 to 15 years |
Equipment |
|
3 to 25 years |
Impairment of Long-Lived Assets
CVSL management reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives for impairment in
accordance with accounting guidance. Management determines whether there has been an impairment of long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow
from the use and eventual disposition of the asset or asset group to the carrying value of the asset. The amount of any resulting impairment is calculated by comparing the carrying value to the fair
value. Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value. Assets or asset groups are determined at the lowest level
possible for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets whose aggregate undiscounted cash flows are less than its carrying
value,
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
the
assets are considered potentially impaired and actual impairments, if any, would be determined to the extent the assets carrying value exceeds its aggregate fair value computed as the aggregate of
discounted cash flow.
Goodwill and Other Intangibles
CVSL management performs its goodwill and other indefinite-lived intangible impairment test annually or when changes in circumstances indicate an
impairment event may have occurred by estimating the fair value of each reporting unit compared to its carrying value. Our reporting units represent an operating segment or a reporting level below an
operating segment.
Additionally,
the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods.
We use a discounted cash flow model and a market approach to calculate the fair value of our reporting units. The model includes a number of significant assumptions and estimates regarding future cash
flows and these estimates could be materially impacted by adverse changes in market conditions.
Goodwill
is measured for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying
value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference
is recorded. After the Share Exchange Agreement in 2012, we determined that the goodwill associated with that acquisition was impaired. As a result, we recorded $2,488,708 in goodwill impairment that
represented all goodwill associated with the Share Exchange Agreement. The impairment charge is included in the consolidated statements of operations.
Indefinite-lived
assets are measured for impairment by comparing the fair value of the indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible
asset is lower than its carrying value, an impairment charge equal to the difference is recorded.
Income Taxes
CVSL and its U.S. subsidiaries (excluding TLC) file a consolidated Federal income tax return. Deferred income taxes are provided for temporary
differences between financial statement and tax bases of asset and liabilities. Benefits from tax credits are reflected currently in earnings. We record income tax positions based on a more likely
than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.
Translation of Foreign Currencies
The functional currency of our foreign subsidiaries is the local currency of their country of domicile. Assets and liabilities of the foreign
subsidiaries are translated into U.S. dollar amounts at month-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates for the monthly accounting period to which
they relate. Equity accounts are translated at historical rates. Foreign currency translation adjustments are accumulated as a component of other comprehensive income.
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Fair Value
We established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These
levels are determined based on the lowest level input that is significant to the fair value measurement. Level 1 represents unadjusted quoted prices in active markets for identical assets and
liabilities. Level 2 represents quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or
indirectly. Level 3 represents valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Comprehensive Income (Loss)
We report comprehensive income (loss) in our consolidated statements of comprehensive income (loss). Comprehensive income (loss) consists of net
earnings (loss) plus gains and losses affecting stockholders' equity that, under generally accepted accounting principles, are excluded from net earnings (loss), such as gains and losses related to
available for sale marketable securities and the translation effect of foreign currency assets and liabilities, net of taxes.
Revenue Recognition and Deferred Revenue
In the ordinary course of business we receive payments, primarily via credit card, for the sale of products at the time customers place orders. Sales
and related fees such as shipping and handling, net of applicable sales discounts, are recorded as revenue when the product is shipped and when title and the risk of ownership passes to the customer.
The Company presents revenues net of any taxes collected from customers which are remitted to governmental authorities. Payments received for undelivered products are recorded as deferred revenue and
are included in current liabilities on the Company's consolidated balance sheets. Certain incentives offered on the sale of our products, including sales discounts, described in the paragraph below
are classified as program costs and discounts. A provision for product returns and allowances is recorded and is founded on
historical experience and is classified as a reduction of revenues and costs of sales. At December 31, 2013 and 2012, our allowance for sales returns totaled $221,396 and $0, respectively.
Program costs and discounts
Program costs and discounts represent the various methods of promoting our products. We offer benefits such as discounts on starter kits for new
consultants, promotional pricing for the host of a home show, which vary depending on the value of the orders placed and general discounts on our products.
Cost of Sales
Cost of sales includes the cost of raw materials, finished goods, shipping expenses, and the direct and indirect costs associated with the personnel,
resources and property, plant and equipment related to the manufacturing, warehousing, inventory management and order fulfillment functions.
Commissions and Incentives
Commissions and incentives include all forms of commissions, overrides and incentives related to the sales force. We accrue expenses for incentive
trips over qualification periods as they are earned. The Company
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
analyzes
incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could result
in liabilities being more or less than the amounts recorded.
In
order to more closely conform to the financial presentation of other companies involved in direct selling, we reclassified certain amounts previously reported in interim financial information
totaling $8.2 million from program costs and discounts and $3.5 million selling, general and administrative expenses, $0.5 million in costs of sales to commissions and incentives
for the year ended 2013.
The
intial presentation relating to commissions and incentives were included in both program costs and discounts and in selling, general and administrative expenses in the consolidated financial
statements of operations. Certain personal sales incentives were presented in program costs and discounts as they represent what are referred to as retained commissions in the party plan segment in
direct selling industry. Other commissions related to a consultant's downline (override commissions) were recorded and presented in selling, general and administrative expenses. As we acquired other
companies in the direct selling industry, we noticed variations of compensation plans and presentation in the statements of operations. As a result, we decided to standardize our presentation of
commissions and incentives. We added the commissions and incentives category for the year-ended December 31, 2013. We did not reclassify any amounts for the year-ended December 31, 2012,
as we did not operate any companies in the direct selling industry during that year.
Selling, General and Administrative
Selling, general and administrative expenses include wages and related benefits associated with various administrative departments, including human
resources, legal, information technology, finance and executive, as well as professional fees and administrative facility costs associated with leased buildings, depreciation related to owned
buildings, office equipment and supplies.
In
order to more closely conform to the financial presentation of other companies involved in direct selling, we reclassified certain amounts previously reported in interim financial information
totaling $1.4 million that offset selling, general and administrative expenses to revenues.
Loss per Share of Common Stock
The computation of basic earnings (loss) per common share is based upon the weighted average number of shares outstanding in accordance with current
accounting guidance.
Outstanding
Stock Warrants and shares issuable upon the conversion of the Convertible Note issued to Richmont Capital Partners V L.P. are not included in the computation of dilutive loss per
common share because we have experienced operating losses in all periods presented and, therefore, the effect would be anti-dilutive. The 25,240,676 shares available to Rochon Capital are included in
the December 31, 2013 basic and diluted share calculation as the conditions have been met for the shares to be available for issuance.
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In the fourth quarter of 2013, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring an entity to disclose
additional information about reclassifications out of accumulated other comprehensive income (loss), including (1) changes in accumulated other comprehensive income (loss) balances by component
and (2) significant items reclassified out of accumulated other comprehensive income (loss) and the effect on the respective line items in net income if the amounts are required to be
reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to
cross-reference to other disclosures that provide additional detail about those amounts. The adoption of this guidance only impacts our disclosures and has no impact on its consolidated financial
position, results of operations or cash flows. As a result of the adoption of the new guidance, we disclosed this information within the notes to the consolidated financial statements.
In
the third quarter of 2013, we adopted guidance issued by the FASB on disclosure requirements for the presentation of comprehensive income (loss). This guidance requires entities to report total
comprehensive income (loss), the components of net income (loss), and the components of comprehensive income (loss) in either (1) a continuous statement of comprehensive income (loss) or
(2) two separate but consecutive statements. As a result of the adoption, the Company's financial statements now include a separate consolidated statement of comprehensive income (loss)
immediately following the consolidated statements of operations.
In
the first quarter of 2013, we adopted guidance that simplifies how entities test indefinite-lived intangible assets for impairment and improves consistency in impairment testing guidance among
long-lived asset categories. The guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as
a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with U.S. generally accepted accounting principles. An entity will have an option not to
calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. The adoption of this guidance did not
have a material impact on our consolidated financial statements. We did not elect the qualitative option in testing goodwill in 2013.
In
July 2013, the FASB issued guidance requiring entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit
carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction
to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does
not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax
assets. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect this guidance to have a
material impact on its consolidated financial statements.
In
July 2013, the FASB issued guidance permitting the Fed Funds Effective Swap Rate ("Overnight Index Swap Rate" or OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes in
addition to interest rates on direct obligations of the U.S. Treasury (UST) and the London Interbank Offered Rate (LIBOR) swap rate. The guidance also removed the restriction on using different
benchmark rates for similar hedges. The new guidance is effective prospectively for qualifying new or redesignated
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
hedging
relationships entered into on or after July 17, 2013. We did not have any new or redesignated interest rate hedging transactions during the period from July 17, 2013 to
December 31, 2013. We will evaluate the impact of this guidance on its consolidated financial statements when applicable.
In
April 2013, the FASB issued guidance requiring an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. In addition, the guidance
provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The new guidance is
effective prospectively for entities that determine liquidation is imminent during fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. We do not
expect this guidance to have a material impact on its consolidated financial statements.
In
March 2013, the FASB issued guidance requiring an entity to release any related cumulative translation adjustment into net income when it either sells a part or all of its investment in a foreign
entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the guidance resolves the
diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The new guidance is effective prospectively for fiscal years, and interim reporting
periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In
February 2013, the FASB issued guidance requiring an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at
the reporting date. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about the obligation. The new guidance is effective
retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.
In
December 2011, the FASB issued guidance requiring an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative
instruments. The objective is to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards. The new disclosures will
give financial statement users information about both gross and net exposures. In January 2013, the FASB issued an update and clarified the scope of transactions that are subject to disclosures
concerning offsetting. These disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and
should be applied retrospectively for all comparative periods presented. The adoption of these disclosure requirements did not have a material impact on its consolidated financial statements.
(3) Acquisitions, Dispositions and Other Transactions
Paperly Acquisition
On December 31, 2013, we completed the asset purchase of 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. CVSL assumed $45,376 of seller's liabilities that existed prior to the transaction and issued
7,797 shares of our common stock, par value $0.0001 ("Common Stock") to Paperly at a fair value of $73,269 on the acquisition date. We also agreed to an earn-out based on 10% of Earnings before
Interest, Taxes, Depreciation and Amortization ("EBITDA") from 2014 to
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
2016.
We recorded $8,639 in other long-term liabilities associated with the earn-out. As a result, the total fair value of the consideration was $81,908. Since we did not deliver the shares of our
common stock until January 2014, we recorded a payable totaling $73,269 at December 31, 2013. Goodwill arising from the transaction totaled $113,279 at December 31, 2013. We recognized
goodwill in the acquisition as the business had management in place, established distribution methods, an established consultant base and brand recognition. In addition to these factors, goodwill was
recognized in this transaction because of the expected synergies that management anticipates and the overall benefits of bringing additional consultants into the CVSL network.
The Longaberger Golf Club Sale
On December 30, 2013, we completed the sale of The Longaberger Golf Club for $4,036,000 that resulted in a gain of $2,000 which is included in
selling, general and administrative expenses. We used the proceeds from the sale to pay down the Key Bank term loan. See footnote (7) for further details regarding the Key Bank term loan.
My Secret Kitchen Acquisition
On December 20, 2013, we completed the acquisition of MSK, an award-winning United Kingdom-based direct seller of a unique line of food
products. As consideration for the acquisition, CVSL assumed $35,028 of seller's liabilities that existed prior to the transaction and issued 15,891 shares of our Common Stock at a fair value of
$133,446 on the acquisition date for 90% ownership in MSK and agreed to an earn-out based on 5% of EBITDA from 2014 to 2016. We recorded $5,894 in other long-term liabilities associated with the
earn-out. As a result, the total fair value of the consideration was $139,340. Since we did not deliver the shares of our common stock until January 2014, we recorded a payable of $133,446 at
December 31, 2013. Goodwill arising from the transaction totaled $155,856 at December 31, 2013. We recognized goodwill in the acquisition as the business had management in place,
established distribution methods, an established consultant base and brand recognition. In addition to these factors, goodwill was recognized in this transaction because of the expected synergies that
management anticipates and the overall benefits of bringing additional consultants into the CVSL network.
Agel Acquisition
On October 22, 2013, Agel Enterprises, Inc. ("AEI"), a wholly-owned subsidiary of CVSL completed the acquisition of substantially all
the assets of Agel Enterprises, LLC (later renamed Lega Enterprises, LLC). AIE sells nutritional supplements and skin care products through a worldwide network of independent sales
representatives. AEI's products are sold in over 40 countries. Consideration for the acquisition consisted of 372,330 shares of Common Stock at a fair value of $3.4 million on the acquisition
date and, the delivery of a Purchase Money Note, dated on the closing date, in the original principal amount of $1,700,000 and the assumption of certain liabilities. Since we did not deliver 28,628 of
the 372,330 shares of our Common Stock until January 2014, we recorded a payable totaling $263,373 at December 31, 2013. Goodwill arising from the transaction totaled $1.9 million. We
recognized goodwill and intangible assets related to the acquisition as the business had management in place globally, established distribution methods, an established consultant base and brand
recognition.
Pursuant
to the acquisition, AEI purchased Agel's trade name, certain trademarks and other intellectual property. The fair value of the trademarks and trade name at December 31, 2013 totaled
$3.4 million and
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
is
estimated to have a useful life of 20 years. The fair value of the other intellectual property at December 31, 2013 totaled $0.3 million and is estimated to have a useful life
of 5 years.
Tomboy Tools Acquisition
On October 1, 2013, we completed the asset purchase of Tomboy Tools Inc. ("TBT"), a direct seller of a line of tools designed for women
as well as home security monitoring services. As consideration for the acquisition, we assumed certain liabilities and issued 88,349 shares of our Common Stock at a fair value of $0.6 million
at the acquisition date. Goodwill arising from the acquisition totaled $0.6 million at December 31, 2013. We recognized goodwill in the acquisition as the business had management in
place, established distribution methods, an established consultant base and brand recognition.
Your Inspiration At Home Acquisition
On August 22, 2013, we completed the asset purchase of award-winning YIAH, a direct seller of hand-crafted spice blends and gourmet foods from
around the world in consideration of the issuance of 225,649 shares of our Common Stock at a fair value of $1.4 million at the acquisition date. Goodwill arising from the acquisition totaled
$1.4 million at December 31, 2013. We recognized goodwill in the acquisition as the business had management in place globally, established distribution methods, an established consultant
base and brand recognition.
Happenings Communications Group, Inc. Acquisition
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 21,904,302 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 (prior to the Company's 1-for-20 reverse stock split effected on October 16, 2014 (see
Note 16)) and changed our name to CVSL Inc.
Possible Issuance of Additional Common Stock under Share Exchange Agreement
Under the Share Exchange Agreement, Rochon Capital also purchased and has the right to an additional 25,240,676 shares of Common Stock (the
"Additional Shares"). The second closing of the transactions and the issuance of the Additional Shares contemplated by the Share Exchange Agreement (the "Second Tranche Closing") was to occur on the
date that was the later of: (i) the 20th calendar day following the date on which we first mailed an Information Statement to our shareholders; (ii) the date the
Financial Industry Regulatory Authority ("FINRA") approved the Amendment; or (iii) the first business day following the satisfaction or waiver of all other conditions and obligations of the
parties to consummate the transactions contemplated by the Share Exchange Agreement, or on such other date and at such other time as the parties may mutually determine.
On
April 12, 2013, the Company filed Articles of Amendment to its Articles of Incorporation with the Florida Secretary of State to effect: (i) an increase in the number of authorized
shares of the Corporation's
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
common
stock from 490,000,000 to 5,000,000,000 shares (prior to the Company's 1-for-20 reverse stock split effected on October 16, 2014 (see Note 16)) (the "Increase") and (ii) a
change in the name of the Corporation to CVSL Inc. (the "Name Change") on May 27, 2013. The Company's shareholders holding a majority of its outstanding shares of common stock have
approved the Increase and the Name Change and the Articles of Amendment (the "Amendment") effecting such transactions.
However,
at the time of the filing of the Amendment, Rochon Capital and CVSL each determined that it was not in the best interests of CVSL to consummate the Second Tranche Closing and the issuance of
the Additional Shares at that time. As a result, the Share Exchange Agreement was amended on April 10, 2013 to provide that, among other things, the Second Tranche Closing will occur on the
date specified in a written notice provided by Rochon Capital, which date shall not be prior to the 20th calendar day following the date on which we first mailed our Information
Statement to our shareholders and the date the FINRA approves the Amendment.
The
amendment to the Share Exchange Agreement also (a) clarifies and redefines the number of shares that are to be issued at the Second Tranche Closing as 25,240,676 shares of our Common Stock,
or any portion thereof provided for in the notice from Rochon Capital and (b) modifies the date tied to certain restrictions set forth in Section 7.08, since the Second Tranche Closing
Date cannot be determined at this time. We have the ability to issue the Additional Shares to Rochon Capital, as agreed to in the Share Exchange Agreement, as amended, upon our receipt of written
notice from Rochon Capital.
Convertible Note Settlement
On June 14, 2013, in accordance with the mandatory conversion provisions of the Convertible Subordinated Unsecured Promissory Note in the
principal amount of $6,500,000 (the "Note") that we issued to the Tamala L. Longaberger Trust (the "Trust") as part of the consideration of the acquisition of TLC, we issued the Trust 1,625,000 shares
of our Common Stock upon conversion of the Note.
Equity Contribution
On June 18, 2013, Rochon Capital Partners, Ltd. entered into an Equity Contribution Agreement with CVSL pursuant to which Rochon
Capital Partners, Ltd. contributed to CVSL for no consideration 1,625,000 shares of our Common Stock to offset the shares issued to the Trust. During the fourth quarter of 2013, Rochon Capital
Partners, Ltd. contributed and CVSL cancelled a total of 686,328 shares, which consisted of 225,649 shares related to the YIAH acquisition, 88,349 shares related to the TBT acquisition, 372,330
shares related to the Agel acquisition. The cancelled shares are not being held as treasury shares.
The Longaberger Acquisition
On March 18, 2013, we acquired a controlling interest in TLC, a direct-selling business based in Newark, Ohio. The transaction resulted in the
Company acquiring 64.6% of the voting stock and 51.7% of all the stock in TLC in return for a $6,500,000 convertible note and a $4,000,000 promissory note. We incurred acquisition related costs of
approximately $338,000 recorded during the fourth quarter of 2012, $138,000 during the first quarter of 2013 and $165,000 during the second quarter of 2013. The costs were recorded in selling, general
and administrative expenses in the consolidated income statements. The acquisition is being accounted for under the purchase method of accounting and as of March 18, 2013 TLC is a consolidated
subsidiary of CVSL. No Goodwill was recorded relating to this transaction.
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CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
TLC Results from Operations
The following table presents the operating results of TLC included in the Company's consolidated statements of operations for the period beginning
March 19, 2013 to December 31, 2013.
|
|
|
|
|
Revenues |
|
$ |
72,666,018 |
|
|
|
|
|
|
|
|
|
|
Net loss attributed to CVSL |
|
$ |
(1,623,461 |
) |
|
|
|
|
|
|
|
|
|
Pro forma Results
The following table presents the unaudited pro forma consolidated results as if the business combination occurred as of January 1, 2013 and
2012, respectively. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition taken
place as of January 1, 2013 and 2012, respectively.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013* |
|
2012** |
|
Revenues |
|
$ |
101,330,694 |
|
$ |
116,046,062 |
|
Net loss attributed to CVSL |
|
|
(9,699,450 |
) |
|
(9,544,932 |
) |
Basic and diluted loss per share: |
|
|
|
|
|
|
|
Weighted average common share outstanding |
|
|
49,705,125 |
|
|
22,563,720 |
|
Net loss per share attributable to CVSL |
|
$ |
(0.20 |
) |
$ |
(0.42 |
) |
- *
- Includes
a pro forma adjustments including reduced depreciation and amortization expense because the fair value of certain fixed assets was reduced at the
time of the transaction, reduced acquisition costs and increased interest expense associated with the $6.5 million convertible note and $4.0 million promissory note for the time period
January 1, 2013 to March 18, 2013.
- **
- We
increased revenues by $2,245,907 to reflect the reclassifications made during the year-ended December 31, 2013, discussed in footnote (2). We
removed one time nonrecurring expenses for impairment of property, plant and equipment for $12,144,038 and loss on disposal of assets for $11,324,399. The adjustments were made to properly reflect
TLC's operating results. We increased interest expense by $360,948 to reflect the interest expense associated with the $6.5 million convertible note and $4.0 million promissory note.
57
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
Opening balance sheets
The following summary represents the fair value of TLC, YIAH, TBT, AEI, MSK and Paperly balance sheets as of the respective acquisition dates and is
subject to change following management's final evaluation of the fair value assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLC |
|
AEI |
|
All Other |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
84,062 |
|
$ |
2,454,236 |
|
$ |
9,869 |
|
$ |
2,548,167 |
|
Accounts receivable |
|
|
259,602 |
|
|
70,656 |
|
|
43,458 |
|
|
373,716 |
|
Inventory |
|
|
19,892,740 |
|
|
2,642,320 |
|
|
410,884 |
|
|
22,945,944 |
|
Prepaid expenses and other |
|
|
1,074,420 |
|
|
2,287,575 |
|
|
7,696 |
|
|
3,369,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
21,310,824 |
|
|
7,454,787 |
|
|
471,907 |
|
|
29,237,518 |
|
Property, plant and equipment |
|
|
28,469,390 |
|
|
241,089 |
|
|
51,208 |
|
|
28,761,687 |
|
Goodwill |
|
|
|
|
|
1,937,801 |
|
|
2,487,535 |
|
|
4,425,336 |
|
Intangibles, net |
|
|
|
|
|
3,764,102 |
|
|
|
|
|
3,764,102 |
|
Other assets |
|
|
3,946,570 |
|
|
553,194 |
|
|
44,335 |
|
|
4,544,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
53,726,784 |
|
$ |
13,950,973 |
|
$ |
3,054,985 |
|
$ |
70,732,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payabletrade |
|
$ |
6,383,107 |
|
$ |
1,952,801 |
|
$ |
202,922 |
|
$ |
8,538,830 |
|
Accounts payablerelated party |
|
|
|
|
|
6,091 |
|
|
251,931 |
|
|
258,022 |
|
Line of credit payable |
|
|
9,319,612 |
|
|
|
|
|
40,615 |
|
|
9,360,227 |
|
Accrued commissions |
|
|
204,042 |
|
|
4,476,382 |
|
|
|
|
|
4,680,424 |
|
Deferred revenue |
|
|
4,132,386 |
|
|
196,504 |
|
|
|
|
|
4,328,890 |
|
Current portion of long-term debt |
|
|
354,390 |
|
|
306,965 |
|
|
|
|
|
661,355 |
|
Other current liabilities |
|
|
3,758,003 |
|
|
2,401,793 |
|
|
585,426 |
|
|
6,745,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
24,151,540 |
|
|
9,340,536 |
|
|
1,080,894 |
|
|
34,572,970 |
|
Long-term debt |
|
|
9,265,766 |
|
|
1,393,035 |
|
|
|
|
|
10,658,801 |
|
Other long-term liabilities |
|
|
|
|
|
50,928 |
|
|
14,533 |
|
|
65,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
33,417,306 |
|
|
10,784,499 |
|
|
1,095,427 |
|
|
45,297,232 |
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity attributable to CVSL |
|
|
10,500,000 |
|
|
3,162,063 |
|
|
1,944,875 |
|
|
15,606,938 |
|
Stockholders' equity attributable to noncontrolling interest |
|
|
9,809,478 |
|
|
4,411 |
|
|
14,683 |
|
|
9,828,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
20,309,478 |
|
|
3,166,474 |
|
|
1,959,558 |
|
|
25,435,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
53,726,784 |
|
$ |
13,950,973 |
|
$ |
3,054,985 |
|
$ |
70,732,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Marketable Securities
Our marketable securities as of December 31, 2013 include fixed income and equity investments classified as available for sale. At December 31, 2013, the fair value of the equity
securities totaled $1,390,355 and
58
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(4) Marketable Securities (Continued)
the
fair value of the fixed income securities totaled $10,439,897. The gross proceeds from sales of our marketable securities during the years ended December 31, 2013 and 2012 totaled
$4.0 million and $-0-, respectively. Unrealized losses on the investments included in consolidated statements of other comprehensive income were $636,778 and $-0- for the years ended
December 31, 2013 and 2012, respectively. Our realized gains from the sale of our marketable securities totaled $499,949 and $-0- for the years ended December 31, 2013 and 2012,
respectively. The unrealized loss has been in that position for less than one year. Accordingly, management does not believe that the investments have experienced any other than temporary losses.
(5) Inventory
Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out method. Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
December 31, 2012 |
|
Raw material and supplies |
|
$ |
2,640,842 |
|
$ |
|
|
Work in process |
|
|
339,581 |
|
|
|
|
Finished goods |
|
|
15,753,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,734,294 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
reserve for inventory obsolesence at December 31, 2013 and 2012 totaled at $124,000 and $0, respectively.
(6) Property, plant and equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
December 31, 2012 |
|
Land and improvements |
|
$ |
3,049,765 |
|
$ |
|
|
Buildings and improvements |
|
|
19,788,447 |
|
|
|
|
Equipment |
|
|
1,306,597 |
|
|
34,562 |
|
Construction in progress |
|
|
425,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,570,233 |
|
|
34,562 |
|
Less accumulated depreciation |
|
|
1,722,379 |
|
|
33,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,847,854 |
|
$ |
1,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $1,799,993 and $1,042 for years ended December 31, 2013 and 2012, respectively. Certain assets disposed of in 2013 reduced accumulated depreciation at
December 31, 2013.
59
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(7) Long-term debt and other financing arrangements
The Company's long-term borrowing consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest rate |
|
December 31, 2013 |
|
December 31, 2012 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
20,881,096 |
|
$ |
20,041,644 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,734,695 |
|
|
|
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,649,880 |
|
|
|
|
Term loanKeyBank |
|
|
7.70 |
%* |
|
427,481 |
|
|
|
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,723,396 |
|
|
20,041,644 |
|
Less current maturities |
|
|
|
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,594,722 |
|
$ |
20,041,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Represents
the weighted average interest rate at December 31, 2013. The interest rate is variable based on the agreement described below.
The
schedule of maturities of the Company's long-term debt are as follows:
|
|
|
|
|
2014 |
|
$ |
1,128,674 |
|
2015 |
|
|
696,406 |
|
2016 |
|
|
722,928 |
|
2017 |
|
|
750,565 |
|
2018 |
|
|
714,939 |
|
Thereafter |
|
|
1,828,788 |
|
|
|
|
|
|
|
|
|
|
Total excluding convertible note |
|
|
5,842,300 |
|
Convertible note |
|
|
20,881,096 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt including current maturities |
|
$ |
26,723,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. was separated in the schedule of maturities as it will likely be converted into Common Stock
as discussed below.
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P.
On December 12, 2012 (the "Issuance Date"), we signed, closed, and received, as the maker, $20,000,000 in cash proceeds from Richmont Capital
Partners V L.P., a Texas limited partnership ("RCP V"), pursuant to a Convertible Subordinated Unsecured Promissory Note, in the original principal amount of $20,000,000 (the "Note"), issued
pursuant to a Convertible
Subordinated Unsecured Note Purchase Agreement between CVSL and RCP V (the "Purchase Agreement"). The Note is (i) an unsecured obligation of the Company and (ii) subordinated to any
bank, financial institution, or other lender providing funded debt to CVSL or any direct or indirect subsidiary of CVSL, including any seller debt financing provided by the owners of any entity(ies)
that may be acquired by us. Principal payments of $1,333,333 are due and payable on each anniversary of the Issuance Date beginning on the third
60
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(7) Long-term debt and other financing arrangements (Continued)
anniversary
of the Issuance Date. A final principal payment, equal to the then unpaid principal balance of the Note, is due and payable on the 10th anniversary of the Issuance Date. The Note
bears interest at an annual rate of 4%, which interest is payable on each anniversary of the Issuance Date; provided, however, that interest payable through the third anniversary of the Issuance Date
may, at our option, be paid in kind ("PIK Interest") and any such PIK Interest will be added to the outstanding principal amount of the Note. Beginning 380 days from the Issuance Date, the Note
may be prepaid, in whole or in part, at any time without premium or penalty.
On
June 17, 2013, the Note was amended to extend the date of mandatory conversion of the Note to provide that the Note be mandatorily convertible into shares of Common Stock (subject to a
maximum of 3,200,000 shares being issued) within ten days of June 17, 2014. The full amount of the Note (including any and all accrued interest thereon, whether previously converted to
principal or otherwise) will be converted (the "Conversion"), into no more than 3,200,000 shares of Common Stock at a price of $6.60 per share of Common Stock.
John
Rochon, Jr. is the 100% owner, and is in control, of Richmont Street LLC, the sole general partner of RCP V. Michael Bishop, a director of the Company, is a limited partner of RCP V. John
Rochon, Jr. is a director of the Company and the son of John P. Rochon, the Company's Chairman and Chief Executive Officer.
Promissory NoteLega Enterprises, LLC
On October 22, 2013, we issued a $1,700,000 Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) in
connection with AEI's acquisition of assets from Agel Enterprises LLC. The Promissory Note bears interest at 5% per annum, and is payable in equal monthly installments of outstanding principal
and interest and matures on October 22, 2018.
Promissory Notepayable to former shareholder of TLC
On March 14, 2013, the Company issued a $4,000,000 Promissory Note in connection with the Purchase Agreement with TLC. The Promissory Note
bears interest at 2.63% per annum, has a ten-year maturity, and is payable in equal monthly installments of outstanding principal and interest.
Term loanKey Bank
In conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6,500,000 term loan from Key Bank. The interest
rate on the term loan is either Key Bank's prime rate plus 5.75% or LIBOR plus 7.50%. The term note is due in monthly installments beginning April 1, 2013 and due in full on October 23,
2015. As of March 1, 2014 TLC has paid in full the outstanding balance of the term note through monthly amortization payments beginning April 1, 2013 and proceeds of the sale of non-core
assets, primarily real estate. The line of credit described below is collateralized by substantially all assets of TLC. Under the agreement, TLC is subject to certain financial covenants, including a
fixed charge coverage ratio and limitations on capital expenditures, additional indebtedness, and incurrence of liens. TLC obtained a waiver for the fixed charge coverage calculation as the term loan
had been reduced to $427,481, and was in compliance with the financial covenants at December 31, 2013.
61
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(7) Long-term debt and other financing arrangements (Continued)
Line of Credit Payable
Key Bank
TLC has a line of credit agreement which expires on October 23, 2015. Under the agreement, TLC has available borrowings up to $12,000,000,
limited to a formula primarily based on accounts receivable and inventory. The agreement provides for interest based on Key Bank's prime rate plus 1.75% or LIBOR plus 3.50%. Interest at
December 31, 2013 was 3.94%. The line of credit balance was $8,067,573 of December 31, 2013.
UBS Margin Loan
CVSL has a margin loan agreement with UBS that allows us to purchase investments. The maximum loan amount is based on a percentage of marketable
securities held by us. Interest on the outstanding balance of $1,663,534 was 1.67% at December 31, 2013. The loan is included in the line of credit on our consolidated balance sheets.
Outstanding Warrants
On May 15, 2012, we issued 133,333 shares of our restricted Common Stock to an investor in satisfaction of $250,000 principal and $16,666
interest due pursuant to a convertible note. In connection with the conversion of that note, we granted 63,877 warrants to the investor. Each warrant is exercisable into one share of our Common Stock
at the price of $10.00 per share. The warrants are exercisable for a term of two years from the date of grant. Both the restricted common stock and warrants were assumed upon the Share Exchange
Agreement dated August 24, 2012 by and among the Company, HCG and Rochon Capital Partners, Ltd. (the "Share Exchange Agreement").
On
May 16, 2012, we issued 119,000 shares of our restricted Common Stock to an investor in satisfaction of $225,000 principal and $13,000 interest due pursuant to a convertible note. In
connection with the conversion of this note, we granted 50,507 warrants to the investor. Each warrant is exercisable into one share of the Company's Common Stock at the price of $10.00 per share. The
warrants are exercisable for a term of two years from the date of grant. Both the restricted common stock and the warrants were assumed upon the Share Exchange Agreement.
(8) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of taxes, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation |
|
Unrealized Gain
(Loss) on
Available-for-Sale
Securities |
|
Total
Accumulated
Other
Comprehensive
Income (Loss) |
|
Balance at December 31, 2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Other comprehensive income (loss) before reclassifications |
|
|
(142,364 |
) |
|
(136,829 |
) |
|
(279,193 |
) |
Amount reclassified from AOCI |
|
|
|
|
|
(499,949 |
) |
|
(499,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss) at December 31, 2013 |
|
$ |
(142,364 |
) |
$ |
(636,778 |
) |
$ |
(799,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(8) Accumulated Other Comprehensive Loss (Continued)
|
|
|
|
|
Components of AOCI
|
|
Amounts
reclassified
from AOCI |
|
Realized gain/(loss) on sale of marketable securities |
|
$ |
499,949 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of income taxes |
|
$ |
499,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) Fair Value
We established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input
that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
Level 1Unadjusted
quoted prices in active markets for identical assets and liabilities;
Level 2Quoted
prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and
Level 3Valuations
derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The
carrying values of cash and cash equivalents, accounts receivable, accounts payable trade and related party and line of credit payable are considered to be representative of their respective fair
values. Our available for sale securities (Level 1) was $1,390,355 and (Level 2) $10,439,897. We do not have other assets or intangible assets measured at fair value on a non-recurring
basis at December 31, 2013. We did not record any impairment charges for property, plant and equipment for the years ended December 31, 2013 and 2012.
(10) Commitments and Contingencies
Minimum lease commitments for noncancelable leases for the years ended December 31, are as follows:
|
|
|
|
|
2014 |
|
$ |
1,301,497 |
|
2015 |
|
|
596,498 |
|
2016 |
|
|
236,918 |
|
2017 |
|
|
23,660 |
|
2018 |
|
|
5,360 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,163,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rental expense was $792,553 and $19,560 for the years ended 2013 and 2012, respectively.
Contingencies
The Company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon
advice of counsel, the likelihood of an adverse outcome against the Company is remote. As such, management believes that the ultimate outcome of these lawsuits will not have a material impact on the
Company's financial position or results of operations.
63
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(10) Commitments and Contingencies (Continued)
Worker's Compensation Liability
Certain of the Company's employees are covered under a self-insured worker's compensation plan. The Company estimates its worker's compensation
liability based on current employee levels and past claims experience, and has an accrued liability to cover estimated future costs. At December 31, 2013, the accrued liability was
approximately $1.1 million. There can be no assurance that the Company's estimates are accurate, and any differences could be material.
(11) Income Taxes
The income tax expense from continuing operations for the years ended December 31, 2013 and December 31, 2012 differs from the U.S statutory rate of 34% primarily due the Company's
valuation allowance. The Company's income tax expense for 2013 and 2012 of $273,000 and $0, respectively reflect the valuation allowance established during 2012 followed by the current year tax
expense related to operations in new tax jurisdictions due to asset acquisitions. The Company has fully reserved its net deferred tax assets in both years due to the uncertainty of future taxable
income.
Notes to Consolidated Financial Statements: Income Taxes
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Current: |
|
|
|
|
|
|
|
U.S. |
|
$ |
|
|
$ |
|
|
State |
|
|
|
|
|
|
|
Foreign |
|
|
251,000 |
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
U.S. |
|
|
22,000 |
|
|
|
|
State |
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
273,000 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
Reconciliation of the expected U.S. tax expense/(benefit) to income taxes related to continuing operations is as follows:
|
|
|
|
|
|
|
2013 |
|
Expected tax expense at U.S. statutory rate |
|
$ |
(2,651,000 |
) |
Permanent Adjustments |
|
|
89,000 |
|
Foreign Income Taxes |
|
|
238,000 |
|
Increase in Valuation Allowance |
|
|
2,690,000 |
|
Rate DifferenceU.S. to Foreign |
|
|
(93,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
273,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
64
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(11) Income Taxes (Continued)
purposes.
Components of the Company's deferred income taxes as of December 31, 2013 and 2012 are as follows.
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Deferred Tax Assets |
|
|
|
|
|
|
|
Fixed Assets |
|
$ |
9,901,000 |
|
$ |
|
|
Net Operating LossesU.S. |
|
|
3,358,000 |
|
|
|
|
Net Operating LossesForeign |
|
|
140,000 |
|
|
|
|
Foreign Tax Credit |
|
|
251,000 |
|
|
|
|
Deferred Tax Liabilities |
|
|
|
|
|
|
|
Intangibles |
|
|
(36,000 |
) |
|
|
|
Prepaid Expenses |
|
|
(406,000 |
) |
|
|
|
Valuation Allowance |
|
|
(13,230,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset/Liability |
|
$ |
(22,000 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has fully reserved its U.S. and Foreign net deferred tax assets in 2013 due to an inability to project future taxable income. The Company has U.S. net operating loss carryforwards of
approximately $9,878,000 which begin to expire in 2032. The Company has net operating losses of approximately $497,000 in several foreign countries which will begin to expire at various times. The
Company has foreign tax credits of approximately $ 251,000 which will begin to expire in 2023.
|
|
|
|
|
|
|
2013 |
|
Unrecognized Tax Benefits |
|
|
|
|
Unrecognized Tax Benefits, December 31, 2012 |
|
$ |
|
|
Gross IncreasesTax Positions in Prior Period |
|
|
|
|
Gross DecreasesTax Positions in Prior Period |
|
|
|
|
Gross IncreasesCurrent Period Tax Positions |
|
|
168,000 |
|
Settlements |
|
|
|
|
Lapse of Statute of Limitations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits, December 31, 2013 |
|
$ |
168,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Unrecognized Tax Benefits shown here relate to an ongoing audit of one entity acquired by the Company during 2013 in Spain. This audit is ongoing and is in dispute. It is reasonable that the
Company's existing liability for Unrecognized Tax Benefits may increase or decrease within the next twelve months primarily due to resolution of this audit. The Company cannot reasonably estimate a
range of potential changes in such benefits due to the unresolved nature of the Spanish audit.
(12) Share-based compensation plans
We have two share-based compensation plans, the 2013 Director Smart Bonus Unit Plan and 2013 Smart Bonus Unit Award Plan. These plans provide for the issuance of a cash bonus for stock appreciation. A
Committee comprised of members of the Board of Directors approves all awards that are granted under our share-based compensation plan. We classify the awards as a liability as the value of the award
will be settled in cash, notes, or stock. The Company awarded 235,000 equivalent shares of stock appreciation
65
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(12) Share-based compensation plans (Continued)
rights
("SARs") that are remeasured each reporting period and is recognized ratably over the contractual term. The SARs vest over a period of three years and have a contractual term of five years. The
liability related to these awards is included in other long-term liabilities on our consolidated balance sheets. Share-based compensation expense for the years ended December 31, 2013 and 2012
of $339,661 and $-0-, respectively, is included in selling, general and administrative expenses on the Company's consolidated income statements. As of December 31, 2013, total unrecognized
compensation cost related to unvested share-based compensation was $1,534,689, which is expected to be recognized over a three-year period.
(13) Earnings per share attributable to CVSL
In calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for any periods presented. We included the additional 25,240,676 shares available to Rochon Capital
as discussed in footnote (3) in the calculation of basic and diluted shares as the conditions were met during the year-ended December 31, 2013 for the shares to be available for
issuance. We did not include the outstanding warrants nor the shares issuable upon the conversion of the Convertible Note Issued to Richmont Capital Partners V L.P. as discussed in footnote
(7) in the calculation of dilutive shares because we recorded losses from continuing operations, therefore, the effect would be anti-dilutive.
(14) Segment Information
CVSL operates in a single reporting segment as a direct selling company that sells a wide range of products sold primarily by independent sales force across many countries around the world. For the
year ended December 31, 2013, approximately $10.3 million or 16% of our net revenues were generated in international markets with 13% or $8.3 million comprised of countries in
Europe including Russia and Ukraine. We do not view any product groups as segments but have grouped similar products into the following five categories for disclosure purposes only: gourmet foods,
nutritional and wellness,
home décor, publishing and printing and other. For the year ended December 31, 2013, approximately $1.5 million or 1.7% of our revenues were derived from the sale of
gourmet food products, $9.3 million or 11.0% of our revenues were derived from the sale of nutritional and wellness products, $72.7 million or 85.6% of our revenues were derived from the
sale of home décor products, $1.0 million or 1.1% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.5%
of our revenues were derived from the sale of our other products. During the year ended December 31, 2012, all of our revenues were derived from the sale of our publishing and printing services
and products. Substantially all our long-lived assets are located in the US. Our chief operating decision-maker is our Chief Executive Officer who reviews financial information presented on a
consolidated basis. Accordingly, we have determined that we operate in one reportable business segment.
Revenues
by product groups for the years ended December 31 are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Gourmet Food Products |
|
$ |
1,483 |
|
$ |
|
|
Home Décor |
|
$ |
72,666 |
|
$ |
|
|
Nutritionals and Wellness |
|
$ |
9,312 |
|
$ |
|
|
Publishing & Printing |
|
$ |
951 |
|
$ |
930 |
|
Other |
|
$ |
439 |
|
$ |
|
|
66
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(15) Related party transactions
During the fourth quarter of 2013, we renewed a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings. CVSL has begun to establish an infrastructure of personnel and
resources necessary to identify, analyze, negotiate and conduct due diligence on direct-selling acquisition candidates. However, we continue to need 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 and we wish to draw upon such experience. In
addition, Richmont Holdings had already developed a strategy of acquisitions in the direct-selling industry and has assigned and transfered to us the opportunities it has previously analyzed and
pursued. CVSL has agreed to pay Richmont Holdings a reimbursement fee (the "Reimbursement Fee") each month equal to One Hundred Sixty Thousand dollars ($160,000) and we agreed to reimburse or pay the
substantial due diligence, financial analysis, legal, travel and other costs Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring and negotiating potential
transactions. During the years ended December 31, 2013 and 2012, we recorded $1,870,000 and $450,000, respectively in Expense Reimbursement Fees that were included in selling, general and
administrative expense.
Other
related party transactions include the following discussed at footnote (3) and (7):
-
- Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (Note 7)
-
- Conversion of Convertible Subordinated Unsecured Promissory NoteTamala L. Longaberger Trust (Note 7)
-
- Equity contribution by Rochon Capital Partners, Ltd. (Note 3)
(16) Subsequent Events
On January 23, 2014, we announced the signing of a definitive agreement to acquire Golden Girls LLC, which offers women a safe and trusted way to sell their
jewelry for cash. Founded in 2008, Golden Girls LLC purchases precious metals from guests at Golden Girls LLC home parties. Hosts and buyers earn commissions on all jewelry purchased at
the parties. The company provides training to buyers, enabling them to pay fair value for jewelry on the spot. As of the date of this filing, this transaction has not yet closed and we are currently
unable to ascertain the consideration to be paid by us in connection with such acquisition as the consideration is based upon achievement of a certain EBITDA at the end of 2014, 2015 and 2016 and
other milestones that are not expected to occur prior to closing.
On
March 14, 2014, we completed the acquisition of Uppercase Living LLC ("Uppercase Living"). Salt Lake City-based Uppercase Living offers an extensive line of customizable vinyl
expressions for display on walls. Its independent sales force sells throughout the United States. Consideration for the acquisition consists of 28,920 shares of our Common Stock. The shares of our
Common Stock have not been issued as of March 31, 2014.
67
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not
applicable.
Item 9A. Controls and Procedures
The
term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods,
including controls and disclosures designed to ensure that this information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this period covered by this Annual Report on Form 10-K, and they have concluded that as of that date, our disclosure controls and
procedures were not effective because of the material weaknesses in our internal controls over financial reporting described below.
Management's Annual Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in
the United States.
Management
emphasizes that our stated growth strategy is to acquire companies. In some cases, the companies we acquire 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. Because of this, we have purchased and begun implementation of a new global Enterprise Resource Planning (ERP) system which includes accounting for all
subsidiaries. Each acquired company's accounting systems will be converted over time, allowing for easier comparison across companies and quicker consolidations. The process to transition all
companies to the new platform is underway and will be ongoing throughout 2014.
Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
Company's annual or interim financial statements will not be prevented or detected on a timely basis.
In
performing this evaluation, management determined that one of the subsidiaries acquired during 2013 failed to employ a sufficient number of staff in its finance and accounting department to
maintain an optimal segregation of duties and to provide optimal levels of oversight. In addition, the accounting system being used was outdated. The lack of personnel was particularly acute during
the audit, which has resulted in certain audit adjustments.
Based
on its assessment, our management concluded that, as of December 31, 2013, our internal control over financial reporting was not effective. However, management believes that the
identified weaknesses have not affected our ability to present GAAP-compliant financial statements in this Form 10-K. During the year-end financial statement close we were able to recognize and
adjust our financial records to properly present our financial statements and we were therefore able to present GAAP-compliant financial statements. Management does not believe that its weakness with
respect to its procedures and controls
68
Table of Contents
have
had a pervasive effect upon our financial reporting and the overall control environment due to our ability to make the necessary reconciling adjustments to our financial statements.
Management's Remediation Initiatives
Management
has conducted a number of activities to address the material weaknesses noted above, including but not limited to the following:
-
- Appointed a Controller for all CVSL subsidiaries and parent company;
-
- Hired additional staff at the subsidiary;
-
- 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;
-
- Evaluated control procedures on an ongoing basis, and, where possible, modified those control procedures to improve
oversight;
-
- Begun the transition to a single, global reporting system as management expects to continue to make additional
acquisitions.
Because
of our rapid growth and the reporting issues that maybe involved in any new companies we acquire, elements of our remediation plan can only be accomplished over time and we can offer no
assurances that those initiatives will ultimately have the intended effects. Management will continue the process of implementing our new system and reviewing existing controls, procedures and
responsibilities to more closely identify financial reporting risks and the required controls to address them. Key control and compensating control procedures will be developed to ensure that material
weaknesses are properly addressed and related financial reporting risks are mitigated. Periodic control validation and testing will also be implemented to ensure that controls continue to operate
consistently and as designed.
This
Annual Report on Form 10-K does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's
report was not subject to attestation by our registered public accounting firm pursuant to SEC rules pertaining to smaller reporting companies that permit us to provide only management's report in
this annual report.
Limitations of the Effectiveness
Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or
all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.
69
Table of Contents
Changes in Internal Controls over Financial Reporting
No
other changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) occurred during our fiscal quarter ended December 31,
2013 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
70
Table of Contents
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Below
is certain information regarding our directors and executive officers.
|
|
|
|
|
|
Name
|
|
Age |
|
Current Title & Position |
John P. Rochon |
|
|
62 |
|
Chief Executive Officer, President and Chairman of the Board of Directors |
Kelly L. Kittrell |
|
|
55 |
|
Chief Financial Officer and Treasurer and Director |
Russell Mack |
|
|
62 |
|
Vice President and Director |
Michael Bishop |
|
|
65 |
|
Director |
Tamala L. Longaberger |
|
|
52 |
|
Director |
William H. Randall |
|
|
68 |
|
Director |
Julie Rasmussen |
|
|
49 |
|
Director |
John Rochon Jr |
|
|
37 |
|
Director |
Kay Bailey Hutchison |
|
|
70 |
|
Director |
Our
directors and officers serve until their successor is elected and qualified, or until their earlier resignation or removal.
John P. Rochon (Chairman)
John
P. Rochon has had four decades of wide-ranging success in finance, operations, business planning, sales, brand-building and marketing. He is an accomplished investor and business strategist. By
the time he was 40 years old, Mr. Rochon was chairman and CEO of a Fortune 500 global consumer goods company, serving in that role for nearly a decade.
Mr. Rochon
is founder and chairman of Richmont Holdings, a private investment and business holding company based in Dallas, Texas. His career has included hundreds of business transactions
across multiple industries. His team has achieved arguably the best investment track record in its category over three decades. Richmont uses its own patented diagnostic system to build the top line
of a company.
Mr. Rochon
was a leader in bringing the power of the Internet to consumer sales. With Mr. Rochon as its General Partner, Richmont Capital Partners I and II became the largest shareholder
in Avon Products, Inc., which subsequently experienced tremendous growth. As chairman and CEO of Mary Kay Inc., he led that company to global growth and pioneered the use of Internet
technology in the micro-enterprise/direct selling sector.
He
also managed the growth of a portfolio of Richmont companies, in financial services, marketing, international trading, food services and other sectors. Major investments included Armor Holdings,
Royal Appliance/Dirt Devil, The Dial Corp., Harvey's Casinos, Black and Decker, RealPage Inc. and Maybelline.
In
addition to CVSL, Mr. Rochon's companies today include a nationwide network of supplies and services to businesses and a line of gourmet products. He has founded several investment funds,
including a hedge fund, a fund of funds and a debt investment fund.
Mr. Rochon
holds a B.Sc. and an MBA from the University of Toronto and began his career as a chemist before moving on to management positions in manufacturing, operations, marketing and
finance.
Kelly L. Kittrell
Kelly
L. Kittrell was appointed our Chief Financial Officer and Treasurer on November 20, 2012 and a director effective December 3, 2012. Mr. Kittrell has served as the Chief
Investment Officer of Richmont Holdings since January 2005. Mr. Kittrell has more than 25 years of experience in corporate finance, investments, and mergers and acquisitions. Prior to
his position at Richmont Holdings, he provided
71
Table of Contents
financial
advisory services to clients while at Bank of America as a Managing Director in the Private Company Advisory Services practice and as a Director in the Mergers & Acquisitions practice
at Ernst & Young Capital Advisors LLC. Mr. Kittrell is a member of the CFA Institute and obtained the Chartered Financial Analyst designation in 1996. Mr. Kittrell obtained
a Master of Business Administration degree from the University of Texas at Austin and a Bachelor of Science degree from the University of Alabama.
Mr. Kittrell
brings a strong business background to us, having worked in corporate finance, investments and mergers and acquisitions. Mr. Kittrell brings to the Board significant
strategic, business and financial experience and a broad understanding of the operational, financial and strategic issues that we will face in pursuing our goals. Mr. Kittrell qualifies as an
"audit committee financial expert" as such term is defined under applicable SEC rules.
Russell Mack
Russell
R. Mack was appointed our Vice President on November 20, 2012 and a director effective December 3, 2012. Mr. Mack has been the Executive Vice President and Chief Marketing
Officer at Richmont Holdings for more than ten years. Mr. Mack is a former member of President Ronald Reagan's White House staff with 40 years of experience in the field of
communications and marketing. He has served as a senior executive in such companies as Mary Kay Inc., American Airlines, and United Airlines and as a legislative assistant and press secretary
in the U.S. Senate and the U.S. House of
Representatives. His career also included positions in the U.S. Department of Health and Human Services, the U.S. Department of Education and Temerlin McClain Advertising. He received a Juris Doctor
degree from George Washington University Law School and a Bachelor of Arts from American University.
Mr. Mack
brings to our Board extensive executive and senior management experience. He is further qualified for service on our Board because of his relevant direct-selling business expertise and
leadership experience acquired through his experience working for Mary Kay Inc.
Michael Bishop
Michael
Bishop became a director on December 3, 2012 and is the Chairman of our Audit Committee. Since 2011, he has served as the president of Actiprime, a personal care and healthy lifestyle
product development and marketing company and president of ActiTech, a full service third party manufacturer of items such as creams, hair products, OTC drugs, certified NOP Organic food and personal
care products, energizing and relaxing drinks and owner of a decontamination process for herbs and other products. The company owns a state-of-the-art, 600,000 square foot manufacturing and warehouse
facility, serving customers such as Unilever, TIGI and Estee Lauder. He co-founded Actifirm, a marketer of anti-aging skin care sold in physicians' offices and medi-spas. He founded Active Organics, a
leading natural ingredient supplier to the personal care industry, serving as president from 1981 to 2011 before the company was sold to Berkshire Hathaway's Lubrizol Corporation. A chemist holding
nine patents, he held development roles with Max Factor, Redken Laboratories, Life Laboratories and Rachel Perry cosmetics. He received his BS and BA degrees from the University of California at
Irvine.
Mr. Bishop
brings to the Board extensive knowledge about the personal care industry as well as extensive business knowledge having founded, owned and operated, and sold multiple businesses
during his career. In addition, his knowledge of chemistry will be invaluable when determining products to support.
Tamala L. Longaberger
Tamala
L. Longaberger became a director on December 3, 2012. From 1999 to the present, Ms. Longaberger has served as the Chief Executive Officer and Chairman of the Board of The
Longaberger Company, a 40 year old direct-selling company that offers hand-crafted baskets and other home furnishings. In 2006, President George W. Bush, appointed her chair of the National
Women's Business Council, a bipartisan advisory council that recommends policy to the President, Congress and the
72
Table of Contents
U.S.
Small Business Administration on economic issues important to women business owners. She served as a member of the U.S. delegation to the United Nations Commission on Human Rights and last year
was part of a delegation of distinguished Americans who served as observers during free elections in Tunisia. She served on the board of the Woodrow Wilson Center for International Scholars, chaired
the U.S. Executive Committee for the 2002 Helsinki Women Leaders Summit, was a board member of the John Glenn Public Policy Institute and has chaired the Direct-Selling Association. She is a member of
Ohio Business Roundtable and serves on the Board of the International Republican Institute. She holds a BS degree in business administration from The Ohio State University and is a past chair of the
University's board of trustees and recipient of the University's Distinguished Service Award.
We
believe that Ms Longaberger's extensive industry experience in the direct-selling industry provides us with insight into important issues that we face in the industry. Her experience is very
useful in operating TLC.
William H. Randall
William
Randall became a director on December 3, 2012 and is the Chairman of our Compensation Committee. He is a 35-year veteran of the direct-selling industry who has served in sales,
marketing and other senior executive positions in such companies as Mary Kay Inc., BeautiControl Cosmetics and start-up enterprises funded by Sur la Table and Ross Simons. He is a past board
member of the Direct Selling Association and is founder and chairman of Hatch Holdings LLC which, since 1990, has provided strategic planning and tactical support to senior management of
direct-selling companies. He received his MBA from Harvard Business School.
We
believe that Mr. Randall's extensive experience in the direct-selling industry, and his executive positions held in direct-selling companies will provide us with insight into important
issues that we will face.
John Rochon, Jr.
John
Rochon, Jr. became a director on December 3, 2012. Since 2006, he has served as the Vice Chairman and CEO of Richmont Holdings. He has expertise in capital markets and is experienced in
financial analysis, mergers and acquisitions, technology and the review, structuring and management of new business opportunities. After receiving his degree in Business Administration from Southern
Methodist University, he worked at JP Morgan Chase in New York before returning to Dallas, where for more than a decade he has run the Rochon's family office. He now oversees Richmont Holdings'
financial analysis of potential business transactions and plays a leading role in guiding strategic planning for Richmont Holdings.
Mr. Rochon
brings a strong business background to us, having worked in the financial industry for many years. We believe his contacts and relationships in the financial industry and his
experience in financial analysis and acquisitions will assist us in executing our strategy to acquire companies in the direct-selling industry.
Julie Rasmussen
Julie
Rasmussen became a director on February 8, 2013. During the past five years, she has been the majority owner of Hertz Russia and CEO of Dagmar Associates, a consulting and real estate
holding company. From 1992 to 2002 she worked at Mary Kay Cosmetics, serving as the President of Mary Kay Europe and prior thereto as the President of Mary Kay Russia. She has advised companies on
doing business in Russia, including RJR Nabisco, Kodak, Johnson & Johnson and Chevron, and has served on the board of the American Chamber of Commerce in Russia as well as president of the
Russian Federation of Direct-Selling Companies. She has received numerous awards and honors for her international business achievements.
73
Table of Contents
She
received her BA from the University of Virginia and her MA in international affairs from Columbia University, where she was editor of the Journal of International Affairs.
We
believe that Ms Rasmussen's extensive industry experience in the direct-selling industry, as well as her experience in business experience and contacts in Europe and in particular Russia,
provide us with insight into important issues that we face.
Kay Bailey Hutchison
Kay
Bailey Hutchison became a director on February 18, 2014. Senator Hutchison served for two decades as a U.S. Senator from Texas, from 1993 to 2013. She is the only woman ever elected to
represent the state in the U.S. Senate.
In
the Senate, she served on the Appropriations Committee and was ranking Republican on the Commerce, Science and Transportation Committee.
Before
being elected to the Senate, she served in the Texas House of Representatives from 1972 to 1976 and served on the National Transportation Safety Board from 1976 to 1978. After holding positions
as a bank executive and general counsel, and a small business owner, she served as Texas State Treasurer from 1990 to 1993 and was temporary co-chair of the Republican National Convention in 1992.
She
holds a degree from the University of Texas at Austin and a law degree from the School of Law at the University of Texas.
We
believe that Senator Hutchison is a strong addition to our Board and will add value through her extensive government, business and legal knowledge and relationships.
Family Relationships
Ms. Mackarey,
the President, Publisher and a member of the Board of Directors of HCG, is the sister of our Chief Executive Officer, President and Chairman of the Board, Mr. Rochon.
John
Rochon Jr. is the son of Mr. Rochon. Heidi Rochon Hafer, CVSL Secretary, is the daughter of Mr. Rochon.
Ms. Claire
Kaido, daughter of our TLC CEO and Director, Tamala L. Longaberger, is employed in the Sales and Marketing Department at TLC.
Mr. Ryan
Mack, son of our Vice President and Director, Russell Mack, is employed by us as a Senior Financial Analyst at CVSL.
There
are no other family relationships between any of our directors or officers.
Certain Legal Proceedings
In
June 2009, Nukote International, Inc. ("Nukote"), a privately owned Delaware corporation, and certain of its subsidiaries and its affiliates voluntarily filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. Mr. Rochon was Chief Executive Officer, President and a director of Nukote at the time of that filing and held an approximate 59% equity interest
in Nukote and its subsidiaries and affiliates.
Corporate Governance and Board Committees
Our
Board of Directors has established an Audit Committee, a Compensation Committee and a Corporate Governance Committee. Our Board of Directors has not established an executive or nominating
committees as standing committees, nor has our Board of Directors established other committees performing equivalent functions. Our Board of Directors will perform activities normally handled by those
committees.
74
Table of Contents
Because
we may apply for listing on the NYSE, the Board recently appointed all independent directors to committees, as required by NYSE. The Audit Committee is comprised of Mr. Bishop and
Ms. Rasmussen, each of whom we have determined is a "financial expert", and Mr. Randall. The Compensation Committee is chaired by Mr. Randall and has Mr. Bishop and
Ms. Rasmussen as members. The Corporate Governance Committee is chaired by Senator Hutchison and has Mr. Bishop and Mr. Randall as members.
Code of Ethics
We
adopted a Code of Ethics. Our Code of Ethics obligates our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in
conflict-of-interest transactions without our consent. Our Code of Ethics is included in our the Investor Relations section of our Internet website, http://www.cvsl.us.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934 requires our executive officers, directors and persons who beneficially own more than 10 percent of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Such officers, directors and persons are required by SEC regulation to furnish us
with copies of all Section 16(a) forms that they file with the SEC.
Based
solely on a review of the copies of such forms that were received by us, or written representations from certain reporting persons that no Form 5s were required for those persons, we are
not aware of any failures to file reports or report transactions in a timely manner during the year ended December 31, 2013 other than Rochon Capital Partners, our majority shareholder, was
late in filing a Form 4 related to two transactions, each transaction related to the cancellation or transfer of shares of our Common Stock for the benefit of the Company while maintaining a
consistent number of shares outstanding, and William Randall, one of our directors, was late in filing a Form 4 showing his purchases of our Common Stock.
Item 11. Executive Compensation
Summary Compensation Table
The
following Summary Compensation Table sets forth information concerning the compensation paid to or earned by:
(1)
our principal executive officer;
(2)
each of our two most highly compensated executive officers who were serving as executive officers at the end of the fiscal year ended December 31, 2013 and 2012; and
(3)
up to two additional individuals for whom disclosure would have been provided under (2) but for the fact that the individual was not serving as our executive officer at the end of the
fiscal year ended December 31, 2013, whom we will collectively refer to as the named executive officers of our company, except that no disclosure is provided for any named executive officer,
other than our
75
Table of Contents
principal
executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year |
|
Salary
($) |
|
Bonus
($) |
|
Stock
Awards
($) |
|
Option
Awards
($) |
|
Incentive
Plan
Compensation
($) |
|
Deferred
Compensation
Earnings
($) |
|
All Other
Compensation
($) |
|
Total
($) |
|
John P. Rochon(1) |
|
2013 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Chief Executive Officer, President and |
|
2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Chairman of our Board of Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelly L. Kittrell(2) |
|
2013 |
|
$ |
95,542 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
95,542 |
|
Chief Financial Officer, Treasurer and |
|
2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Mack(3) |
|
2013 |
|
$ |
97,919 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
40,000 |
|
$ |
137,919 |
|
Vice President and Director |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Tamala L. Longaberger(4) |
|
2013 |
|
$ |
670,685 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
670,685 |
|
Chief Executive Officer of The |
|
2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Longaberger Company and Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Mr. Rochon
was appointed as our Chief Executive Officer and President immediately after the consummation of the Initial Share Exchange on
September 25, 2012. Mr. Rochon currently is not receiving, and has not received, compensation for service as our Chief Executive Officer.
- (2)
- Mr. Kittrell
was appointed as our Chief Financial Officer on November 20, 2012. Mr. Kittrell began receiving compensation for his
services as Chief Financial Officer in 2013, but may receive additional compensation from Richmont Holdings.
- (3)
- Mr. Mack
was appointed as our Vice President on November 20, 2012. Mr. Mack began receiving compensation for his services as Vice
President in 2013, but may receive additional compensation from Richmont Holdings.
- (4)
- Ms.
Longaberger is compensated pursuant to her Employment Agreement, as further described below.
Options Grants During the Last Fiscal Year/Stock Option Plans
No
individual grants of stock options, whether or not in tandem with stock appreciation rights known as SARs or freestanding SARs, have been made to any executive officer or director during the fiscal
years ended December 31, 2013 and 2012 or, as of the date of this Annual Report, during the current fiscal year.
Aggregated Options Exercises in Last Fiscal Year
No
stock options were exercised by any of our officers or directors during the fiscal year ended December 31, 2013 and 2012 or, as of the date of this Annual Report, during the current fiscal
year.
Long-Term Incentive Plans and Awards
None
of our executive officers are a participant in any long-term incentive plans.
On
March 18, 2013, we entered into an employment agreement with Tamala L. Longaberger (the "Agreement"), pursuant to which Ms. Longaberger will continue to serve as Chief
Executive Officer of TLC, our majority-owned subsidiary. The Agreement contains a ten-year term that provides Ms. Longaberger with eight weeks of paid vacation each year, which, if not taken,
does not carry over to subsequent years. Upon termination of her employment for any reason, any unused vacation days are forfeited. Ms. Longaberger is entitled to a vehicle allowance and
reimbursement for her business expenses in accordance with TLC's standard policies. Ms. Longaberger's initial base salary is $850,000, subject to adjustment by the Board, and she is entitled to
an incentive bonus based on, among other things, TLC's operating results for and Ms. Longaberger's performance during each fiscal year. The incentive bonus is a percentage of
Ms. Longaberger's base salary, and her target bonus is 50% of her base salary, subject to adjustment by the Board.
76
Table of Contents
DIRECTOR COMPENSATION
Beginning
in March 2013, we began compensating certain directors at a rate of $50,000 per year, payable monthly, which may be taken in cash or stock. In addition, we have agreed to compensate certain
directors who have served as a director for at least one year with $50,000 worth of shares of our Common Stock on an annual basis. Although our Common Stock is not listed on any national securities
exchange, for purposes of independence we use the definition of independence applied by the NYSE, as we may apply for listing there. In addition to their director compensation, Ms. Rasmussen
received consulting fees in 2013 and Mr. Bishop's company ActiTech, Inc. received payments from a CVSL subsidiary for production services, but in neither case did the amounts received exceed
the thresholds established by NYSE. Therefore, we consider Michael Bishop, William Randall and Julie Rusmussen independent directors and have recently elected Kay Bailey Hutchison as director for
fiscal year 2014, who also qualifies as independent under NYSE guidelines.
77
Table of Contents
DIRECTOR COMPENSATION TABLE FISCAL YEAR 2013
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned or
Paid in Cash(1) |
|
All Other
Compensation |
|
Total |
|
William Randall |
|
$ |
41,666 |
|
|
|
|
$ |
41,666 |
|
Julie Rasmussen |
|
$ |
41,666 |
|
$ |
37,193 |
|
$ |
78,859 |
|
- (1)
- In
March 2013, we commenced cash payments of $4,166 per month ($50,000 annually) to certain non-employee directors for their service as directors.
Long-Term Incentive Plans and Awards
The
2013 Director Smart Bonus Unit Plan provides for the issuance of a cash bonus tied to stock price appreciation for non-employee directors. The Compensation Committee of the Board of Directors
approves all awards that are granted under the plan. During 2013, we awarded a total of 25,000 equivalent shares of stock appreciation rights ("SARs") among all eligible directors that are
remeasured each reporting period and are recognized ratably over the contractual term. We recognized $42,000 in compensation expense in 2013 related to this Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table lists the number of shares of our Common Stock that are beneficially owned as of March 31, 2014 by (i) each of our officers and directors; (ii) all officers
and directors as a group, and (iii) each person or entity known to us to then be the beneficial owner of more than 5% of our outstanding Common Stock. The address for each beneficial owner is
2400 North Dallas Parkway, Suite 230, Plano, Texas 75093.
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Table of Contents
The
percentages below are calculated based on 24,409,303 shares of our Common Stock being issued and outstanding as of March 31, 2014.
|
|
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Positions |
|
Number of Shares
of Common Stock
Beneficially
Owned or Right
to Direct Vote |
|
Percent of
Common Stock
Beneficially
Owned or
Right to Direct
Vote |
|
Directors and Named Executive Officers |
|
|
|
|
|
|
|
|
|
John P. Rochon(1) |
|
Chief Executive Officer/Chairman of the Board of Directors |
|
|
13,030,474 |
|
|
53 |
% |
Kelly Kittrell(2) |
|
Chief Financial Officer |
|
|
13,030,474 |
|
|
53 |
% |
Russell Mack(3) |
|
Vice President |
|
|
13,030,474 |
|
|
53 |
% |
Michael Bishop |
|
|
|
|
0 |
|
|
|
* |
Tamala Longaberger(4) |
|
|
|
|
1,625,000 |
|
|
7 |
% |
William Randall |
|
|
|
|
3,250 |
|
|
|
* |
John Rochon, Jr.(5) |
|
|
|
|
2,487,500 |
|
|
10 |
% |
Julie Rasmussen |
|
|
|
|
0 |
|
|
|
* |
Kay Bailey Hutchison |
|
|
|
|
0 |
|
|
|
* |
All directors, named executive officers and other officers as a group(9) |
|
|
|
|
17,146,224 |
|
|
70 |
% |
5% Shareholders |
|
|
|
|
|
|
|
|
|
Rochon Capital Partners, Ltd.(6) |
|
|
|
|
13,030,474 |
|
|
53 |
% |
John Rochon Management, Inc.(7) |
|
|
|
|
13,030,474 |
|
|
53 |
% |
Richmont Street LLC(8) |
|
|
|
|
0 |
|
|
|
* |
Richmont Capital Partners V LP(8) |
|
|
|
|
0 |
|
|
|
* |
The William John Philip Rochon 2010 Dynasty Trust(9) |
|
|
|
|
1,237,500 |
|
|
5 |
% |
The Heidi Rochon Hafer 2010 Dynasty Trust(10) |
|
|
|
|
1,237,500 |
|
|
5 |
% |
Heidi Rochon Hafer(10) |
|
|
|
|
1,237,500 |
|
|
5 |
% |
The Lauren Rochon Eidsvig 2010 Dynasty Trust(11) |
|
|
|
|
1,237,500 |
|
|
5 |
% |
Lauren Rochon Eidsvig(11) |
|
|
|
|
1,237,500 |
|
|
5 |
% |
- (1)
- Includes
37,500 shares of common stock issued directly to John Rochon Management, Inc. ("JRMI") and 12,692,974 shares issued to Rochon Capital
Partners, Ltd ("Rochon Capital"). The limited partnership interests of Rochon Capital are owned 79% by Mr. Rochon, 20% by his wife and 1% by the general partner, JRMI. JRMI has control
over the voting and disposition of the shares held by Rochon Capital and as the owner of all of the equity of JRMI, Mr. Rochon has control over the decision making of JRMI. As such,
Mr. Rochon may be considered to have control over the voting and disposition of the shares registered in the name of Rochon Capital, and therefore, such shares are also included in the shares
listed as held by Mr. Rochon. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI may be deemed a group due to certain actions taken by them in
connection with the Share Exchange Agreement, the beneficial ownership number for John Rochon
79
Table of Contents
also
includes an additional 150,000 shares issued directly to each of Mr. Kittrell and Mr. Mack. Does not include an additional 25,240,676 shares of common stock that are
to be issued at the second closing under the Share Exchange Agreement. Does not include 1,625,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which
shares are subject to a voting agreement entered into between the trust and Rochon Capital.
- (2)
- Includes
150,000 shares owned by Mr. Kittrell. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI
may be deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement, the beneficial ownership number for Mr. Kittrell also includes an additional
150,000 shares issued directly to Mr. Mack, 37,500 shares of common stock issued directly to JRMI and 12,692,974 shares issued to Rochon Capital. JRMI is the general
partner of Rochon Capital and John Rochon has decision making power with respect to JRMI. Mr. Kittrell disclaims ownership of all shares other than the 150,000 shares directly owned by
him. Does not include an additional 25,240,676 shares of common stock that are to be issued at the Second Tranche Closing under the Share Exchange Agreement. Does not include
1,625,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into between the trust and Rochon
Capital.
- (3)
- Includes
150,000 shares owned by Mr. Mack. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI may be
deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement, the beneficial ownership number for Mr. Mack also includes an additional
150,000 shares issued directly to Mr. Kittrell, 37,500 shares of common stock issued directly to JRMI and 12,692,974 shares issued to Rochon Capital. JRMI is the general
partner of Rochon Capital and John Rochon has decision making power with respect to JRMI. Mr. Mack disclaims ownership of all shares other than the 150,000 shares directly owned by him.
Does not include an additional 25,240,676 shares of common stock that are to be issued at the Second Tranche Closing under the Share Exchange Agreement. Does not include 1,625,000 shares
of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into between the trust and Rochon Capital.
- (4)
- Shares
of common stock issued upon conversion of a convertible subordinated unsecured note in the principal amount of $6,500,000 bearing interest at the
rate of 4% per annum issued to a trust of which Ms. Longaberger is the trustee. The note converted into 1,625,000 shares of common stock at a conversion price of $.20 per share.
- (5)
- Includes
1,250,000 shares held directly by John Rochon, Jr. and 1,237,500 shares of common stock held by The William John Philip Rochon 2010
Dynasty Trust, of which John Rochon, Jr. is the sole trustee. Does not include shares of common stock to be issued upon conversion of a subordinated unsecured note in the principal amount of
$20,000,000 bearing interest at the rate of 4% per annum issued to RCP V. The note is convertible into shares of common stock at a conversion price of $6.60 per share with the maximum number of
shares of common stock that may be issued upon conversion of the note is 3,200,000.
- (6)
- Includes
12,692,974 shares of common stock issued directly to Rochon Capital. The limited partnership interests of Rochon Capital are owned 79% by
Mr. Rochon, 20% by his wife and 1% by the general partner, JRMI. JRMI has control over the voting and disposition of the shares held by Rochon Capital and as the owner of all of the equity of
the JRMI. Mr. Rochon has control over the decision making of JRMI. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI may be deemed a group due to
certain actions taken by them in connection with the Share Exchange Agreement the beneficial ownership number for Rochon Capital also includes an additional 37,500 shares issued directly to
JRMI, and an additional 150,000 shares issued directly to each of Mr. Kelly Kittrell and Mr. Russell Mack. Does not include an additional 25,240,676 shares of common stock
that are to be issued at the second closing under the Share Exchange Agreement. Does not
80
Table of Contents
include
1,625,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into between the trust and
Rochon Capital.
- (7)
- Includes
37,500 shares of common stock issued directly to JRMI and 12,692,974 shares issued to Rochon Capital. The limited partnership
interests of Rochon Capital are owned 79% by Mr. Rochon, 20% by his wife and 1% by the general partner, JRMI. JRMI has control over the voting and disposition of the shares held by Rochon
Capital and as the owner of all of the equity of JRMI, Mr. Rochon has control over the decision making of JRMI. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon
Capital and JRMI may be deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement, the beneficial ownership number for JRMI also includes an additional
150,000 shares issued directly to each of Mr. Kittrell and Mr. Mack. Does not include an additional 25,240,676 shares of common stock that are to be issued at the Second
Tranche Closing. Does not include 1,625,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into
between the trust and Rochon Capital.
- (8)
- Does
not include, shares of common stock to be issued upon conversion of a subordinated unsecured note in the principal amount of $20,000,000 bearing
interest at the rate of 4% per annum issued to RCP V. The note is convertible into shares of common stock at a conversion price of $6.60 per share with the maximum number of shares of common
stock that may be issued upon conversion of the note is 3,200,000. Richmont Street LLC is the sole general partner of RCP V and John Rochon Jr. has decision making power with respect to
Richmont Street LLC.
- (9)
- Includes
1,237,500 shares of common stock held by The William John Philip Rochon 2010 Dynasty Trust, of which John Rochon, Jr. is the sole trustee.
Does not include, shares of common stock to be issued upon conversion of a subordinated unsecured note in the principal amount of $20,000,000 bearing interest at the rate of 4% per annum issued to
RCP V. The note is convertible into shares of common stock at a conversion price of $6.60 per share with the maximum number of shares of common stock that may be issued upon conversion of the
note is 3,200,000. Richmont Street LLC is the sole general partner of RCP V and John Rochon Jr. has decision making power with respect to Richmont Street LLC.
- (10)
- Heidi
Rochon Hafer is the sole trustee of The Heidi Rochon Hafer 2010 Dynasty Trust and as such is deemed to be the beneficial owner of such shares.
- (11)
- Lauren
Rochon Eidsvig is the sole trustee of The Lauren Rochon Eidsvig 2010 Dynasty Trust and as such is deemed to be the beneficial owner of such shares.
Item 13. Certain Relationships and Related Transactions
On
March 18, 2013 we completed our acquisition of a controlling stake in the voting stock of TLC. The President and CEO of TLC is Tamala Longaberger, a member of our Board of Directors.
In
consideration of our acquisition of a majority of the shares of TLC stock, we issued to a trust of which Tamala Longaberger is the trustee a $6,500,000 Convertible Subordinated Unsecured Promissory
Note, which was later converted into 1,625,000 shares of our Common Stock and, we issued to TLC, a $4,000,000 Unsecured Promissory Note, dated March 14, 2013, payable in monthly installments.
On
March 18, 2013, we entered into an employment agreement with Tamala L. Longaberger, pursuant to which Ms. Longaberger will continue to serve as Chief Executive Officer of TLC, our
majority-owned subsidiary.
Mr.
Bishop is the controlling shareholder of ActiTech, Inc., which provides production services to certain CVSL subsidiaries. Ms. Rasmussen has provided paid consulting services to CVSL and certain of
its subsidiaries regarding operations and international expansion.
81
Table of Contents
Director Independence
Although
our common stock is not listed on any national securities exchange, for purposes of independence our Board of Directors has adopted NYSE guidelines regarding director independence and has
determined that Michael Bishop, William Randall, Julie Rasmussen and Kay Bailey Hutchison
are "independent" directors under the definition set forth in the listing standards of the NYSE.
Item 14. Principal Accountant Fees and Services
Audit Committee Pre-Approval Policy
The
Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from
the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of
the independent auditors to audit the Company's financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee's responsibilities
under the Exchange Act.
Service Fees Paid to the Independent Registered Public Accounting Firm
The
Audit Committee of our Board has appointed PMB Helin Donovan ("PMBHD") as the independent registered public accounting firm for the fiscal year ended December 31, 2013. Fees billed by PMBHD
to us for services during the fiscal years ended December 31, 2013 and 2012 were:
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2013 |
|
Year Ended
December 31,
2012 |
|
Audit fees |
|
$ |
115,638 |
|
$ |
12,600 |
|
Audit-related fees |
|
|
900 |
|
|
|
|
Tax fees |
|
|
2,335 |
|
|
|
|
All other fees |
|
|
89,980 |
|
|
|
|
|
|
$ |
208,853 |
|
$ |
12,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
"Audit
Fees" are fees billed by PMBHD for professional services for the audit of our consolidated financial statements included in our Annual Report on Form 10-K and review of financial
statements included in our Quarterly Reports on Forms 10-Q, or for services that are normally provided by the accounting firm in connection with statutory and regulatory filings or engagements.
"Audit-Related
Fees" are fees billed by PMBHD for assurance and related services that are reasonably related to the performance of the audit and review of our financial statements.
"Tax
Fees" are fees primarily for tax compliance in connection with filing US and state income tax returns.
"All
Other Fees" consisted of fees billed for due diligence reports for various acquisition candidates.
82
Table of Contents
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Exhibits required by Item 601 of Regulation S-K:
|
|
|
|
|
2.1 |
|
Share Exchange Agreement, dated August 24, 2012, by and among Computer Vision Systems Laboratories, Corp., Happenings Communications Group, Inc. and Rochon Capital Partners, Ltd. (incorporated by reference to
Exhibit 10.10 of our Current Report on Form 8-K filed with the Commission on August 30, 2012). |
|
3.2 |
|
Bylaws of Computer Vision Systems Laboratories, Corp. (incorporated by reference to Exhibit 3.4 of our Current Report on Form 8-K filed with the Commission on June 28, 2011). |
|
3.3 |
|
Amendment to Bylaws of Computer Vision Systems Laboratories, Corp., effective as of September 28, 2012 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K filed with the Commission on
October 1, 2012). |
|
3.4 |
|
Articles of Incorporation of Happenings Communications Group, Inc., filed with the Texas Secretary of State on March 4, 1996, as amended (incorporated by reference to Exhibit 3.4 of our Current Report on
Form 8-K filed with the Commission on October 1, 2012). |
|
3.5 |
|
Amended and Restated Bylaws of Happenings Communications Group, Inc. (incorporated by reference to Exhibit 3.5 of our Current Report on Form 8-K filed with the Commission on October 1, 2012). |
|
3.6 |
|
Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed with the Commission on May 30, 2013). |
|
3.7 |
|
Articles of Amendment to the Articles of Incorporation. (incorporated by reference to Exhibit 3.7 of our Current Report on Form 10-Q for the period ended June 30, 2013 and filed with the Commission on
August 14, 2013). |
|
10.1 |
|
Registration Rights Agreement, dated September 25, 2012, by and between Computer Vision Systems Laboratories, Corp. and Rochon Capital Partners, Ltd. (incorporated by reference to Exhibit 10.1 of our Current Report
on Form 8-K filed with the Commission on October 1, 2012). |
|
10.2 |
|
Indemnification Agreement entered into between Computer Vision Systems Laboratories, Corp. and John P. Rochon (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on
October 1, 2012). |
|
10.3 |
|
Purchase Agreement, dated March 15, 2013, by and among Computer Vision Systems Laboratories, Corp., The Longaberger Company, TMRCL Holding Company, TMRCL Holding LLC, and The Longaberger Company Canada (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the Commission on March 20, 2013). |
|
10.4 |
|
Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6,500,000, issued by Computer Vision Systems Laboratories, Corp. to The Longaberger Company (incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on March 20, 2013). |
|
10.5 |
|
Subscription Agreement, dated March 14, 2013, by and between the Company and The Longaberger Company (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed with the Commission on
March 20, 2013). |
83
Table of Contents
|
|
|
|
|
10.6 |
|
Promissory Note, dated March 14, 2013, in the original principal amount of $4,000,000, issued by Computer Vision Systems Laboratories, Corp. to The Longaberger Company (incorporated by reference to Exhibit 10.4 of our
Current Report on Form 8-K filed with the Commission on March 20, 2013). |
|
10.7 |
|
Guarantee Agreement, dated March 14, 2013, made by Computer Vision Systems Laboratories, Corp (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed with the Commission on March 20,
2013). |
|
10.8 |
|
Employment Agreement, dated March 18, 2013, by and between Computer Vision Systems Laboratories, Corp. and Tamala L. Longaberger. Canada (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K
filed with the Commission on March 22, 2013).* |
|
10.9 |
|
Convertible Subordinated Unsecured Promissory Note, dated December 12, 2012, in the original principal amount of $20,000,000, from Computer Vision Systems Laboratories, Corp., a Florida corporation (as Maker), to Richmont
Capital Partners V LP, a Texas limited partnership (as Payee) (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the Commission on December 18, 2012). |
|
10.10 |
|
Convertible Subordinated Unsecured Note Purchase Agreement, dated December 12, 2012, by and between Computer Vision Systems Laboratories, Corp., a Florida corporation, and Richmont Capital Partners V LP, a Texas limited
partnership (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on December 18, 2012). |
|
10.11 |
|
Reimbursement of Services Agreement between Computer Vision Systems Laboratories Corp., a Florida corporation and Richmont Holdings, Inc., a Texas corporation (incorporated by reference to Exhibit 10.11 of our Annual
Report on Form 10-K filed with the Commission on March 29, 2013). |
|
10.13 |
|
First Amendment to Convertible Subordinated Unsecured Promissory Note, dated as of June 17, 2013, between CVSL Inc. and Richmont Capital Partners V LP. (incorporated by reference to Exhibit 10.1 of our Current
Report on Form 8-K filed with the Commission on June 21, 2013). |
|
10.14 |
|
Equity Contribution Agreement, dated as of June 18, 2013, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the
Commission on June 21, 2013). |
|
10.15 |
|
Asset Purchase Agreement, dated September 25, 2013, between Agel Enterprises, Inc. and Agel Enterprises LLC. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the
Commission on October 1, 2013). |
|
10.16 |
|
Purchase Money Note issued by Agel Enterprises, Inc. in the principal amount of $1,700,000. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on October 1,
2013). |
|
21 |
|
List of Subsidiaries.** |
|
31.1 |
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.** |
|
31.2 |
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.** |
|
32.1 |
|
Certification pursuant to 18 U.S.C. Section 1350.** |
|
32.2 |
|
Certification pursuant to 18 U.S.C. Section 1350.** |
84
Table of Contents
|
|
|
|
|
101.INS |
|
Instance Document.*** |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document.*** |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document.*** |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document.*** |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document.*** |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document.*** |
- *
- Management
contract
- **
- Filed
herewith
- ***
- As
provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to liability of that section, and shall not be incorporated by reference into any registration statement or other
document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressed set forth by specific reference in such filing.
85
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned.
|
|
|
|
|
|
|
CVSL Inc. |
|
|
By: |
|
/s/ JOHN P. ROCHON
John P. Rochon Chief Executive Officer, President and Chairman
(Principal Executive Officer) |
|
|
Date: October 22, 2014 |
|
|
By: |
|
/s/ KELLY L. KITTRELL
Kelly L. Kittrell Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
|
|
Date: October 22, 2014 |
86
Table of Contents
INDEX TO EXHIBITS
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
2.1 |
|
Share Exchange Agreement, dated August 24, 2012, by and among Computer Vision Systems Laboratories, Corp., Happenings Communications Group, Inc. and Rochon Capital Partners, Ltd. (incorporated by reference to
Exhibit 10.10 of our Current Report on Form 8-K filed with the Commission on August 30, 2012). |
|
3.2 |
|
Bylaws of Computer Vision Systems Laboratories, Corp. (incorporated by reference to Exhibit 3.4 of our Current Report on Form 8-K filed with the Commission on June 28, 2011). |
|
3.3 |
|
Amendment to Bylaws of Computer Vision Systems Laboratories, Corp., effective as of September 28, 2012 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K filed with the Commission on
October 1, 2012). |
|
3.4 |
|
Articles of Incorporation of Happenings Communications Group, Inc., filed with the Texas Secretary of State on March 4, 1996, as amended (incorporated by reference to Exhibit 3.4 of our Current Report on
Form 8-K filed with the Commission on October 1, 2012). |
|
3.5 |
|
Amended and Restated Bylaws of Happenings Communications Group, Inc. (incorporated by reference to Exhibit 3.5 of our Current Report on Form 8-K filed with the Commission on October 1, 2012). |
|
3.6 |
|
Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed with the Commission on May 30, 2013). |
|
3.7 |
|
Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.7 of our Current Report on Form 10-Q for the period ended June 30, 2013 and filed with the Commission on August 14,
2013). |
|
10.1 |
|
Registration Rights Agreement, dated September 25, 2012, by and between Computer Vision Systems Laboratories, Corp. and Rochon Capital Partners, Ltd. (incorporated by reference to Exhibit 10.1 of our Current Report
on Form 8-K filed with the Commission on October 1, 2012). |
|
10.2 |
|
Indemnification Agreement entered into between Computer Vision Systems Laboratories, Corp. and John P. Rochon (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on
October 1, 2012). |
|
10.3 |
|
Purchase Agreement, dated March 15, 2013, by and among Computer Vision Systems Laboratories, Corp., The Longaberger Company, TMRCL Holding Company, TMRCL Holding LLC, and The Longaberger Company Canada (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the Commission on March 20, 2013). |
|
10.4 |
|
Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6,500,000, issued by Computer Vision Systems Laboratories, Corp. to The Longaberger Company (incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on March 20, 2013). |
|
10.5 |
|
Subscription Agreement, dated March 14, 2013, by and between the Company and The Longaberger Company (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed with the Commission on
March 20, 2013). |
87
Table of Contents
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
10.6 |
|
Promissory Note, dated March 14, 2013, in the original principal amount of $4,000,000, issued by Computer Vision Systems Laboratories, Corp. to The Longaberger Company (incorporated by reference to Exhibit 10.4 of our
Current Report on Form 8-K filed with the Commission on March 20, 2013). |
|
10.7 |
|
Guarantee Agreement, dated March 14, 2013, made by Computer Vision Systems Laboratories, Corp (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed with the Commission on March 20,
2013). |
|
10.8 |
|
Employment Agreement, dated March 18, 2013, by and between Computer Vision Systems Laboratories, Corp. and Tamala L. Longaberger. Canada (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K
filed with the Commission on March 22, 2013).* |
|
10.9 |
|
Convertible Subordinated Unsecured Promissory Note, dated December 12, 2012, in the original principal amount of $20,000,000, from Computer Vision Systems Laboratories, Corp., a Florida corporation (as Maker), to Richmont
Capital Partners V LP, a Texas limited partnership (as Payee) (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the Commission on December 18, 2012). |
|
10.10 |
|
Convertible Subordinated Unsecured Note Purchase Agreement, dated December 12, 2012, by and between Computer Vision Systems Laboratories, Corp., a Florida corporation, and Richmont Capital Partners V LP, a Texas limited
partnership (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on December 18, 2012). |
|
10.11 |
|
Reimbursement of Services Agreement between Computer Vision Systems Laboratories Corp., a Florida corporation and Richmont Holdings, Inc., a Texas corporation (incorporated by reference to Exhibit 10.11 of our Annual
Report on Form 10-K filed with the Commission on March 29, 2013). |
|
10.13 |
|
First Amendment to Convertible Subordinated Unsecured Promissory Note, dated as of June 17, 2013, between CVSL Inc. and Richmont Capital Partners V LP. (incorporated by reference to Exhibit 10.1 of our Current
Report on Form 8-K filed with the Commission on June 21, 2013). |
|
10.14 |
|
Equity Contribution Agreement, dated as of June 18, 2013, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the
Commission on June 21, 2013). |
|
10.15 |
|
Asset Purchase Agreement, dated September 25, 2013, between Agel Enterprises, Inc. and Agel Enterprises LLC. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the
Commission on October 1, 2013). |
|
10.16 |
|
Purchase Money Note issued by Agel Enterprises, Inc. in the principal amount of $1,700,000. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the Commission on October 1,
2013). |
|
21 |
|
List of Subsidiaries.** |
|
31.1 |
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.** |
|
31.2 |
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.** |
|
32.1 |
|
Certification pursuant to 18 U.S.C. Section 1350.** |
|
32.2 |
|
Certification pursuant to 18 U.S.C. Section 1350.** |
88
Table of Contents
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
101.INS |
|
Instance Document.*** |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document.*** |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document.*** |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document.*** |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document.*** |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document.*** |
- *
- Management
contract
- **
- Filed
herewith
- ***
- As
provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to liability of that section, and shall not be incorporated by reference into any registration statement or other
document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressed set forth by specific reference in such filing.
89
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Exhibit 21
|
|
|
|
|
|
|
Name of Subsidiary
|
|
Incorporated |
|
Owned |
|
Happenings Communications Group, Inc. |
|
Texas |
|
|
100 |
% |
The Longaberger Company |
|
Ohio |
|
|
51.7 |
% |
TMRCL Holding Company |
|
Ohio |
|
|
100 |
% |
TMRCL Holding LLC |
|
Ohio |
|
|
100 |
% |
Spice Jazz LLC |
|
Texas |
|
|
100 |
% |
Your Inspiration at Home Pty Ltd |
|
Australia |
|
|
100 |
% |
CVSL TBT LLC |
|
Texas |
|
|
100 |
% |
Agel Enterprises Inc. |
|
Delaware |
|
|
100 |
% |
Agel Agility LLC |
|
Utah |
|
|
100 |
% |
Agel Enterprises Mexico S de RL de CV |
|
Mexico |
|
|
99 |
% |
Importadora, Exploratada y Distribuidora ASGT Global Mexico Dde RLdeCV |
|
Mexico |
|
|
99 |
% |
Agel Enterprises (Canada) ULC |
|
Canada |
|
|
100 |
% |
Agel Enterprises Argentina SRL |
|
Argentina |
|
|
99 |
% |
Agel International SRL |
|
Argentina |
|
|
99 |
% |
Agel Enterprises Colombia LTDA |
|
Colombia |
|
|
99 |
% |
Agel Panama LLC |
|
Panama |
|
|
99 |
% |
Agel Enterprises (Netherlands), B.V. |
|
Netherlands |
|
|
100 |
% |
Agel Enterprises Denmark ApS |
|
Denmark |
|
|
100 |
% |
Agel Italy SRL |
|
Italy |
|
|
100 |
% |
Agel Enterprises RS LLC |
|
Russia |
|
|
100 |
% |
Agel Enterprises Hungary Medical-Nutritional Products Distributor Limited Liability Company |
|
Hungary |
|
|
100 |
% |
Agel Enterprises Ukraine |
|
Ukraine |
|
|
100 |
% |
Agel Israel LTD |
|
Israel |
|
|
100 |
% |
Agel Enterprises Kazakhstan (LLC) |
|
Kazakhstan |
|
|
100 |
% |
Agel Enterprises International SDN BHD |
|
Malaysia |
|
|
100 |
% |
Agel Enterprises (Malaysia) SDN BHD |
|
Malaysia |
|
|
100 |
% |
Agel Enterprises, PTE. LTD. |
|
Singapore |
|
|
100 |
% |
Agel Japan GK |
|
Japan |
|
|
100 |
% |
Agel Enterprises Australia PTY., LTD. |
|
Australia |
|
|
100 |
% |
CVSL AG |
|
Switzerland |
|
|
100 |
% |
My Secret Kitchen Ltd. |
|
United Kingdom |
|
|
90 |
% |
Paperly, Inc. |
|
Delaware |
|
|
100 |
% |
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 OR RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I,
John P. Rochon, certify that:
- 1.
- I
have reviewed this annual report on Form 10-K/A of CVSL Inc.;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
- a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
|
|
|
|
|
|
|
Date: October 22, 2014 |
|
By: |
|
/s/ JOHN P. ROCHON
|
|
|
|
|
Name: |
|
John P. Rochon |
|
|
|
|
Title: |
|
Chief Executive Officer and Chairman (Principal Executive Officer) |
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OR RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 OR RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I,
Kelly L. Kittrell, certify that:
- 1.
- I
have reviewed this annual report on Form 10-K/A of CVSL Inc.;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
- a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
|
|
|
|
|
|
|
Date: October 22, 2014 |
|
By: |
|
/s/ KELLY L. KITTRELL
|
|
|
|
|
Name: |
|
Kelly L. Kittrell |
|
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Title: |
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Chief Financial Officer (Principal Executive Officer) |
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OR RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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EXHIBIT 32.1
CERTIFICATION PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of CVSL
Inc. (the "Registrant") hereby certifies, to such officer's knowledge, that:
- (1)
- the
accompanying Annual Report on Form 10-K of the Registrant for the year ended December 31, 2013 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
- (2)
- the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date:
October 22, 2014
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By: |
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/s/ JOHN P. ROCHON
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Name: |
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John P. Rochon |
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Title: |
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Chief Executive Officer and Chairman (Principal Executive Officer) |
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CERTIFICATION PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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EXHIBIT 32.2
CERTIFICATION PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of CVSL
Inc. (the "Registrant") hereby certifies, to such officer's knowledge, that:
- (1)
- the
accompanying Annual Report on Form 10-K of the Registrant for the year ended December 31, 2013 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
- (2)
- the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date:
October 22, 2014
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By: |
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/s/ KELLY L. KITTRELL
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Name: |
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Kelly L. Kittrell |
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Title: |
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Chief Financial Officer (Principal Financial Officer) |
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CERTIFICATION PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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