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Table of Contents
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
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ý |
|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the quarterly period ended June 30, 2014 |
or |
o |
|
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 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
preceding 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 Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ý No 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.
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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 Exchange
Act). Yes o No ý
As of October 21, 2014, 24,398,814 shares of the common stock, $0.0001 par value per share, of the registrant were issued and outstanding.
FORM 10-Q/A
EXPLANATORY NOTE
The Registrant has prepared this Amendment No. 1 ("Amendment") on Form 10-Q/A to amend its Quarterly Report on Form 10-Q for the
quarter ended June 30, 2014 (the "Original Form 10-Q") which was originally filed on August 14, 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 1 and 2 of Part 1 and Items 1A, 2, and 6 of Part II of
the Original Form 10-Q, as permitted by the rules and regulations of the SEC.
Except
as described above, the Registrant has not modified or updated disclosures presented in the Original Form 10-Q in this Amendment. Accordingly, this Amendment does not reflect events
occurring after the filing of the Registrant's Original Form 10-Q or modify or update those disclosures, including the exhibits to the Original Form 10-Q, affected by subsequent events.
Accordingly, this Amendment should be read in conjunction with the Original Form 10-Q.
All
share amounts and per share calculations in this Amendment 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.
In
addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, currently dated certifications by the Registrant's principal executive officer and principal
financial officer are filed as exhibits to this Amendment under Item 6 of Part II hereof.
Table of Contents
CVSL Inc.
Table of Contents
2
Table of Contents
PART I. Financial Information
Item 1. Financial Statements
CVSL Inc.
Consolidated Balance Sheets
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(Unaudited)
June 30,
2014 |
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(Audited)
December 31,
2013 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
|
$ |
4,176,351 |
|
$ |
3,876,708 |
|
Marketable securities |
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5,223,472 |
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|
11,830,252 |
|
Accounts receivable, net |
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|
777,871 |
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|
780,237 |
|
Inventory, net |
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|
17,607,749 |
|
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18,734,294 |
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Other current assets |
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2,983,941 |
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2,948,717 |
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Total current assets |
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30,769,384 |
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38,170,208 |
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Property, plant and equipment, net of accumulated depreciation |
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21,025,616 |
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22,847,854 |
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Goodwill |
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4,736,771 |
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4,422,928 |
|
Intangibles, net |
|
|
3,660,930 |
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|
3,764,063 |
|
Other assets |
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|
955,769 |
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|
617,795 |
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|
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Total assets |
|
$ |
61,148,470 |
|
$ |
69,822,848 |
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Liabilities and stockholders' equity (deficit) |
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Current liabilities: |
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Accounts payabletrade |
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$ |
10,767,036 |
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$ |
10,471,121 |
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Accounts payablerelated party |
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181,858 |
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Lines of credit |
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7,944,270 |
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9,806,002 |
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Accrued commissions |
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4,485,547 |
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3,740,846 |
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Deferred revenue |
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3,154,541 |
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1,661,851 |
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Current portion of long-term debt |
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711,398 |
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1,128,674 |
|
Other current liabilities |
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5,621,187 |
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7,881,994 |
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|
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Total current liabilities |
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32,683,979 |
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34,872,346 |
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Long-term debt |
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25,694,232 |
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25,594,722 |
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Other long-term liabilities |
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889,164 |
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499,640 |
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Total liabilities |
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59,267,375 |
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60,966,708 |
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Commitments & contingencies |
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Stockholders' equity |
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Preferred stock, par value $0.001 per share, 500,000 authorized-0-issued and outstanding |
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Common stock, par value $0.0001 per share, 250,000,000 and 250,000,000 shares authorized; 24,385,617 and 24,356,989 shares issued and
outstanding, at June 30, 2014 and December 31, 2013, respectively |
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2,439 |
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2,436 |
|
Additional paid-in capital |
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|
15,098,690 |
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14,408,770 |
|
Accumulated other comprehensive loss |
|
|
(80,481 |
) |
|
(767,569 |
) |
Accumulated deficit |
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|
(19,767,575 |
) |
|
(13,085,777 |
) |
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Total stockholders' equity (deficit) attributable to CVSL stockholders' |
|
|
(4,746,927 |
) |
|
557,860 |
|
Stockholders' equity attributable to noncontrolling interest |
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6,628,022 |
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8,298,280 |
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Total stockholders' equity |
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|
1,881,095 |
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|
8,856,140 |
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Total liabilities and stockholders' equity |
|
$ |
61,148,470 |
|
$ |
69,822,848 |
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See notes to unaudited consolidated financial statements.
3
Table of Contents
CVSL Inc.
Consolidated Statements of Operations (Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2014 |
|
2013 |
|
2014 |
|
2013 |
|
Revenues |
|
$ |
24,586,118 |
|
$ |
20,575,794 |
|
$ |
51,257,039 |
|
$ |
24,843,804 |
|
Program costs and discounts |
|
|
(5,220,414 |
) |
|
(5,327,012 |
) |
|
(10,196,353 |
) |
|
(6,358,982 |
) |
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Net revenues |
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19,365,704 |
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15,248,782 |
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41,060,686 |
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18,484,822 |
|
Costs of sales |
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5,862,635 |
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7,756,963 |
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13,878,643 |
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9,153,149 |
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Gross profit |
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|
13,503,069 |
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|
7,491,819 |
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27,182,043 |
|
|
9,331,673 |
|
Commissions and incentives |
|
|
6,004,515 |
|
|
2,689,836 |
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|
12,978,029 |
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|
3,203,947 |
|
Gain on sale of assets |
|
|
(140,985 |
) |
|
|
|
|
(406,912 |
) |
|
|
|
Selling, general and administrative |
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11,745,831 |
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8,140,390 |
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21,455,360 |
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10,454,806 |
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|
Operating loss |
|
|
(4,106,292 |
) |
|
(3,338,407 |
) |
|
(6,844,434 |
) |
|
(4,327,080 |
) |
Loss on marketable securities |
|
|
58,289 |
|
|
|
|
|
552,085 |
|
|
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|
Interest expense, net |
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|
213,459 |
|
|
367,052 |
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|
479,378 |
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|
604,048 |
|
|
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|
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|
|
|
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|
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|
Loss before income tax provision |
|
|
(4,378,040 |
) |
|
(3,705,459 |
) |
|
(7,875,897 |
) |
|
(4,931,128 |
) |
Income tax provision |
|
|
212,921 |
|
|
|
|
|
491,921 |
|
|
|
|
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|
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|
|
|
|
|
|
|
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|
|
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|
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|
Net loss |
|
|
(4,590,961 |
) |
|
(3,705,459 |
) |
|
(8,367,818 |
) |
|
(4,931,128 |
) |
Net loss attributable to noncontrolling interest |
|
|
(1,046,175 |
) |
|
(808,117 |
) |
|
(1,686,020 |
) |
|
(784,672 |
) |
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Net loss attributed to CVSL stockholders |
|
$ |
(3,544,786 |
) |
$ |
(2,897,342 |
) |
$ |
(6,681,798 |
) |
$ |
(4,146,456 |
) |
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Basic and diluted loss per share: |
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|
Weighted average common shares outstanding |
|
|
49,641,569 |
|
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49,626,292 |
|
|
49,644,148 |
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49,626,292 |
|
Net loss per share attributable to CVSL stockholders |
|
$ |
(0.07 |
) |
$ |
(0.06 |
) |
$ |
(0.13 |
) |
$ |
(0.08 |
) |
See notes to unaudited consolidated financial statements.
4
Table of Contents
CVSL Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2014 |
|
2013 |
|
2014 |
|
2013 |
|
Net loss |
|
$ |
(4,590,961 |
) |
$ |
(3,705,459 |
) |
$ |
(8,367,818 |
) |
$ |
(4,931,128 |
) |
Other comprehensive income, net of tax: |
|
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|
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|
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|
|
|
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Unrealized gain on marketable securities |
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|
183,824 |
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|
652,761 |
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Foreign currency translation adjustment |
|
|
43,929 |
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|
34,327 |
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|
|
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|
Other comprehensive income |
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|
227,753 |
|
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|
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|
687,088 |
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Comprehensive loss |
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|
(4,363,208 |
) |
|
(3,705,459 |
) |
|
(7,680,730 |
) |
|
(4,931,128 |
) |
Comprehensive loss attributable to noncontrolling interest |
|
|
(1,046,175 |
) |
|
(808,117 |
) |
|
(1,686,020 |
) |
|
(784,672 |
) |
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Comprehensive loss attributable to CVSL stockholders |
|
$ |
(3,317,033 |
) |
$ |
(2,897,342 |
) |
$ |
(5,994,710 |
) |
$ |
(4,146,456 |
) |
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|
See notes to unaudited consolidated financial statements.
5
Table of Contents
CVSL Inc.
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended June 30, |
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2014 |
|
2013 |
|
Operating activities: |
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|
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|
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|
Net loss |
|
$ |
(8,367,818 |
) |
$ |
(4,931,128 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
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|
|
|
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|
Depreciation and amortization |
|
|
1,223,820 |
|
|
765,237 |
|
Loss on marketable securities |
|
|
552,085 |
|
|
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|
Interest expense |
|
|
400,001 |
|
|
604,048 |
|
Share-based compensation |
|
|
397,965 |
|
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|
Provision for losses on receivables, net |
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|
139,800 |
|
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Provision for obsolete inventory |
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|
41,000 |
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Gain on sales of assets |
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(406,912 |
) |
|
|
|
Deferred income tax |
|
|
89,462 |
|
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|
|
Changes in certain assets and liabilities: |
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|
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|
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Accounts receivable |
|
|
(135,692 |
) |
|
(143,076 |
) |
Inventory |
|
|
1,182,042 |
|
|
1,087,672 |
|
Other current assets |
|
|
(161,122 |
) |
|
(472,713 |
) |
Accounts payable and accrued expenses |
|
|
(833,273 |
) |
|
2,054,336 |
|
Accounts payablerelated party |
|
|
(277,195 |
) |
|
12,449 |
|
Deferred revenue |
|
|
1,288,582 |
|
|
475,450 |
|
Other long-term liabilities |
|
|
(145,896 |
) |
|
113,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net cash (used in) provided by operating activities |
|
|
(5,013,151 |
) |
|
(433,975 |
) |
Investing activities: |
|
|
|
|
|
|
|
Capital expenditures |
|
|
(644,773 |
) |
|
|
|
Proceeds from the sale of property, plant and equipment |
|
|
1,831,315 |
|
|
|
|
Sale of marketable securities |
|
|
6,238,219 |
|
|
|
|
Cash acquired in acquisition |
|
|
2,000 |
|
|
84,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
7,426,761 |
|
|
84,062 |
|
Financing activities: |
|
|
|
|
|
|
|
Line of credit, net change |
|
|
(1,861,732 |
) |
|
80,886 |
|
Proceeds from long-term debt issuance |
|
|
42,000 |
|
|
|
|
Repayments on long-term debt |
|
|
(799,630 |
) |
|
(316,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(2,619,362 |
) |
|
(235,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
505,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
299,643 |
|
|
(585,339 |
) |
Cash and cash equivalents at beginning of year |
|
|
3,876,708 |
|
|
19,032,392 |
|
Cash and cash equivalents at end of period |
|
$ |
4,176,351 |
|
$ |
18,447,053 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
Interest |
|
$ |
130,382 |
|
$ |
|
|
Income taxes |
|
|
516,602 |
|
|
|
|
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 for purchase of subsidiary |
|
|
607,148 |
|
|
|
|
See notes to unaudited consolidated financial statements.
6
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements
(1) General
Interim Financial Information
The consolidated financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"), reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows for the
interim periods on a basis consistent with the annual audited statements. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for any other interim period or for a full year. Certain information, accounting policies and footnote disclosures normally included in condensed
consolidated financial statements prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP") have been omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction
with our audited consolidated financial statements included in our Annual Report on Form 10-K filed by CVSL Inc. ("CVSL," and together with its consolidated subsidiaries, the "Company"),
for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 31, 2014 ("Form 10-K").
Reclassifications
The Company reclassified certain amounts previously reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013
("Form 10-Q") to conform to our consolidated financial statements presented for the year ended December 31, 2013 on its Form 10-K/A and the quarter ended June 30, 2014.
These changes had no impact on operating or net income. The operating losses of $3,338,407 and $4,327,080 for the three and six months ended June 30, 2013, respectively, in this
Form 10-Q/A are the same as previously presented. For the three and six months ended June 30, 2013 commission and incentives expense of $2,689,836 and $3,203,947, respectively, is now
shown as a separate expense line item as opposed to being included in program costs and discounts. Program costs and discounts decreased $2,327,355 and $2,820,009 for the three and six months ended
June 30, 2013. Miscellaneous revenues of $458,926 and $554,602 that had previously been classified as an offset to selling, general and administrative costs has been reclassified as revenue for
the three and six months ended June 30, 2013, respectively. Gross profit increased $2,974,689 and $3,591,502 for the three and six months ended June 30, 2013 as a result of the
reclassification.
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 of
the 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. During the first quarter ended March 31, 2014 and 2013, and the second quarter ended June 30, 2014 and 2013, we presented the commissions and incentives based on the presentation
for the year-ended December 31, 2013.
7
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(1) General (Continued)
Significant Accounting Policies
CVSL has expanded its disclosure of the policies below in response to certain comments from the Securities and Exchange Commission. Other than the
expanded disclosure below there have been no material changes to the Company's significant accounting policies during the three and six months ended June 30, 2014, as compared to the
significant accounting policies disclosed in Note 2 of the Company's consolidated financial statements in the Form 10-K/A.
Revenue Recognition and Deferred Revenue
In the ordinary course of business, CVSL receives 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 to our independent sales representatives and their customers, 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 net revenues. At June 30, 2014 and December 31, 2013, our allowance for sales returns totaled $226,603 and $221,396, respectively.
Program Costs and Discounts
Program costs and discounts represent various methods of promoting our products. CVSL offers benefits such as discounts on starter kits for new
consultants, promotional pricing for the host of a home show, which may vary depending on the value of the orders placed and general discounts on our products.
Goodwill and Other Intangibles
CVSL management performs its goodwill and other indefinite-lived intangible impairment tests 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-
8
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(1) General (Continued)
lived
intangible asset is lower than its carrying value, an impairment charge equal to the difference is recorded.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples
include provisions for bad debts, useful lives of property and equipment, impairment of goodwill, other intangibles and property and equipment, deferred taxes, and the provision for and disclosure of
litigation and loss contingencies. Actual results may differ materially from those estimates.
Business Overview and Current Plans
CVSL operates a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce
strategies to drive a high-growth global business. CVSL is engaged in a long-term strategy to develop a large, diverse company in the micro-enterprise sector that combines the entrepreneurship,
innovation and relationship-based commerce of micro-enterprises with the infrastructure and operational excellence of a large scale company. CVSL seeks to acquire companies primarily in the
micro-enterprise (direct-selling) sector and companies potentially engaging in businesses related to micro-enterprise.
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 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. CVSL's acquisitions
include:
-
- 100% ownership of Uppercase Acquisition, Inc. ("UAI") in March 2014, which operates Uppercase Living ("Uppercase
Living"), a direct seller of an extensive line of customizable vinyl expressions for display on walls.
-
- 100% ownership of Paperly, Inc. in December 2013, 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.
-
- A 90% controlling interest in My Secret Kitchen, Ltd ("MSK") in December 2013, an award-winning United
Kingdom-based direct seller of a unique line of food products.
-
- Substantially 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 Pleasant Grove, 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.
9
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(1) General (Continued)
-
- 100% ownership of CVSL TBT LLC (which operates Project Home, formerly conducting business under the name Tomboy
Tools) in October 2013, a direct seller of a line of tools designed for women, as well as home security monitoring services.
-
- 100% ownership of Your Inspiration At Home Pty Ltd. ("YIAH") in August 2013, 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.
-
- A 51.7% controlling interest in The Longaberger Company ("TLC") in March 2013. 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.
-
- 100% of Happenings Communications Group, Inc. ("HCG") in September 2012. 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.
(2) Acquisitions, Dispositions and Other Transactions
Uppercase Living
On March 14, 2014, UAI, a wholly-owned subsidiary of CVSL, acquired substantially all the assets of Uppercase Living, LLC, a direct seller of
an extensive line of customizable vinyl expressions for display on walls. CVSL assumed $512,195 of seller's liabilities that existed prior to the transaction and agreed to issue 12,725 shares
of our common stock, par value $0.0001 ("Common Stock") to the seller at a fair value of $96,706 on the acquisition date. CVSL also delivered 16,195 shares of our common stock at a fair value
of $123,081 to escrow accounts for up to 24 months that will be issued to the seller upon remediation of certain closing conditions. CVSL also agreed to
pay the seller three subsequent contingent payments equal to 10% of Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") for each of the years ending 2014 to 2016. We have not
recorded any contingent earn-out as of June 30, 2014. Goodwill arising from the transaction totaled $469,065. CVSL 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.
10
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(2) Acquisitions, Dispositions and Other Transactions (Continued)
Opening balance sheet for Uppercase Living acquisition on March 14, 2014
The following summary represents the fair value of UAI as of the acquisition date and is subject to change following management's final evaluation of
the fair value assumptions.
|
|
|
|
|
|
|
UAI |
|
Assets |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
2,000 |
|
Accounts receivable |
|
|
1,742 |
|
Inventory |
|
|
96,497 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
100,239 |
|
Property, plant and equipment |
|
|
23,230 |
|
Goodwill |
|
|
469,065 |
|
Other assets |
|
|
16,366 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
608,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payabletrade |
|
$ |
267,337 |
|
Accrued commissions |
|
|
79,003 |
|
Deferred revenue |
|
|
28,399 |
|
Other current liabilities |
|
|
96,706 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
471,445 |
|
Other long-term liabilities |
|
|
137,455 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
608,900 |
|
Stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
608,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions
During the quarter ended March 31, 2014, TLC sold an industrial building at ECO Business Park in Frazeysburg, Ohio for gross proceeds of
$1,333,857 for a gain on sale of $271,970. During the quarter ended June 30, 2014, TLC sold three properties in Dresden, Ohio for gross proceeds of $497,458 for a gain on sale of $35,309. The
gain on sale is included in consolidated statements of operations. We also had net gain on sales of other assets of $99,633 for the six months ended June 30, 2014.
The Longaberger Company
On March 18, 2013, the Company acquired a controlling interest in TLC, a direct-selling business based in Newark, Ohio. The transaction
resulted in CVSL acquiring 64.6% of the voting stock and 51.7% of all the stock in TLC in return for a $6.5 million convertible note and a $4.0 million promissory note. The acquisition
was accounted for under the purchase method of accounting and TLC is a consolidated subsidiary of CVSL.
11
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(2) Acquisitions, Dispositions and Other Transactions (Continued)
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 $6.5 million (the "Note") that CVSL issued to the Tamala L. Longaberger Trust (the "Trust") as part of the consideration of the acquisition of TLC, CVSL issued the
Trust 1,625,000 shares of 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 Common Stock to offset the shares issued to the Trust. As a result, CVSL's issued and outstanding shares of Common
Stock remained at 24,385,617. The returned shares were cancelled and are not being held as treasury shares.
Possible Issuance of Additional Common Stock under Share Exchange Agreement
On August 24, 2012 CVSL entered into a Share Exchange Agreement (the "Share Exchange Agreement") with 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 CVSL's 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 CVSL's wholly-owned subsidiary.
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, CVSL 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 common stock from 490,000,000 to 5,000,000,000 shares (the "Increase" prior to the Company's 1-for-20 reverse stock split effected on October 16, 2014) and
(ii) a change in the name of the Corporation to CVSL Inc. (the "Name Change") which was effectuated on May 27, 2013. CVSL's shareholders holding a majority of its outstanding
shares of common stock 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 20 th calendar day
12
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(2) Acquisitions, Dispositions and Other Transactions (Continued)
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 of the Share Exchange
Agreement, since the Second Tranche Closing Date cannot be determined at this time. CVSL has the ability to issue the Additional Shares to Rochon Capital, as agreed to in the Share Exchange Agreement,
as amended, upon its receipt of written notice from Rochon Capital.
(3) Marketable Securities
The Company's marketable securities as of June 30, 2014 include fixed income and equity investments classified as available for sale. At June 30, 2014, the fair value of the equity
securities totaled $0 and the fair value of the fixed income securities totaled $5,223,472. At December 31, 2013, the fair value of the equity securities totaled $1,390,355 and the fair value
of the fixed income securities totaled $10,439,897. The gross proceeds from sales of our marketable securities were $2,820,515 and $6,238,219 for the three and six months ended June 30, 2014,
respectively, and $-0- for three and six months ended June 30, 2013. Unrealized gain on the investments for the three and six months ended June 30, 2014 was $183,824 and $652,761,
respectively. These amounts were included in the consolidated statements of comprehensive income. The Company's realized losses from the sale of marketable securities included in the consolidated
statements of operations were $58,289 and $552,085 for the three and six months ended June 30, 2014, respectively, and $-0- for the three and six months ended June 30, 2013.
(4) 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:
|
|
|
|
|
|
|
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Raw material and supplies |
|
$ |
2,896,445 |
|
$ |
2,640,842 |
|
Work in process |
|
|
254,016 |
|
|
339,581 |
|
Finished goods |
|
|
14,457,288 |
|
|
15,753,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,607,749 |
|
$ |
18,734,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's reserve for inventory obsolescence at June 30, 2014 and December 31, 2013 were $141,000 and $124,000, respectively.
13
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(5) Property, plant and equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Land and improvements |
|
$ |
2,884,462 |
|
$ |
3,049,765 |
|
Buildings and improvements |
|
|
18,325,355 |
|
|
19,788,447 |
|
Equipment |
|
|
2,313,515 |
|
|
1,306,597 |
|
Construction in progress |
|
|
170,013 |
|
|
425,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,693,345 |
|
|
24,570,233 |
|
Less accumulated depreciation |
|
|
2,667,729 |
|
|
1,722,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,025,616 |
|
$ |
22,847,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $554,194 and $1,065,838 for three and six months ended June 30, 2014, respectively, and was $525,660 and $765,237 for three and six months ended June 30, 2013,
respectively. Certain assets disposed of in 2014 reduced accumulated depreciation at June 30, 2014. See footnote (2) for dispositions.
(6) Long-term debt and other financing arrangements
The Company's long-term borrowing consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
June 30,
2014 |
|
December 31,
2013 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
21,281,097 |
|
$ |
20,881,096 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,555,293 |
|
|
3,734,695 |
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,496,996 |
|
|
1,649,880 |
|
Promissory Notepayable to Tamala L. Longaberger |
|
|
10.00 |
% |
|
42,000 |
|
|
|
|
Term loanKeyBank |
|
|
|
|
|
|
|
|
427,481 |
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,405,630 |
|
|
26,723,396 |
|
Less current maturities |
|
|
|
|
|
711,398 |
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,694,232 |
|
$ |
25,594,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P.
On December 12, 2012 (the "Issuance Date"), CVSL signed, closed, and received, as the maker, $20.0 million 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
$20.0 million (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 CVSL 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 CVSL. Principal payments of
14
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(6) Long-term debt and other financing arrangements (Continued)
$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 CVSL's 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.
On
June 12, 2014, CVSL and RCP V entered into a Second Amendment to Convertible Subordinated Unsecured Promissory Note (the "Second Amendment"), which amends the Note. The Second
Amendment amends the Note to extend the date of mandatory conversion of the Note. As amended by the Second Amendment, the original principal amount of, and all accrued interest under, the Note is
convertible mandatorily into shares of the Company's common stock (subject to a maximum of 3,200,000 shares being issued) within ten days after June 12, 2015, or such earlier time as may
be mutually agreed upon by the Company and RCP V. All other terms and conditions of the Note remain unchanged and in effect.
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 CVSL, is a limited partner of RCP V. John
Rochon, Jr. is a director of CVSL and the son of John P. Rochon, CVSL's Chairman, President, and Chief Executive Officer.
Promissory Notepayable to former shareholder of TLC
On March 14, 2013, CVSL issued a $4.0 million Promissory Note in connection with the purchase of 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.
Promissory NoteLega Enterprises, LLC
On October 22, 2013, CVSL issued a $1.7 million 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.
Term loan
In conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6.5 million term loan from Key Bank. As of
March 1, 2014, TLC had paid in full the outstanding balance of the term loan.
15
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(6) Long-term debt and other financing arrangements (Continued)
Promissory Notepayable to Tamala L. Longaberger
On June 27, 2014, Tamala L. Longaberger lent TLC $42,000 and in connection therewith TLC issued a promissory note in the principal
amount of $42,000 to her. The note bears interest at the rate of 10% per annum and matures on June 27, 2015. The company's failure to attain certain milestones, including specified operational
cost-savings, are considered a default under the note as is a default under other loan, security or similar agreements of TLC if the default materially affects any of TLC's property, or ability to
repay the note or perform its obligations under the note or any related document. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure
period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may
accelerate the time of payment of the note.
Lines of Credit
Key Bank
Prior to payoff in full on July 31, 2014, TLC had a line of credit agreement through October 23, 2015. Under the agreement, TLC had
available borrowings up to $12.0 million, limited to a formula primarily based on accounts receivable and inventory. The agreement provided for interest based on Key Bank's prime rate plus
1.75% or LIBOR plus 3.50%. Interest at June 30, 2014 and December 31, 2013 was 3.94% and 3.94%, respectively. The balance was $6,633,250 and $8,067,573 on June 30, 2014 and
December 31, 2013, respectively. The line of credit was collateralized by substantially all assets of TLC. TLC was 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 paid in
full, and was in compliance with all other the financial covenants for the period ended June 30, 2014. The loan is included in the lines of credit on our consolidated balance sheets.
On
July 31, 2014, TLC has repaid in full all remaining line of credit amounts with proceeds from a Sale Leaseback transaction, as described in Subsequent Events in footnote (15).
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. The interest rate at June 30, 2014 and December 31, 2013 was 1.65% and 1.67%, respectively. The outstanding balance was $1,174,174 and $1,663,534 on
June 30, 2014 and December 31, 2013, respectively. The loan is included in the lines of credit on our consolidated balance sheets.
Outstanding Warrants
On May 6, 2014, CVSL issued warrants to purchase up to 12,500 and 6,250 shares of its Common Stock, respectively, in connection with
exclusivity agreements. The warrants will be exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a
cashless exercise basis at an exercise price of $11.00 per share, representing the average closing price of our common stock for the ten days preceding the
issuance. In addition, the warrants provide for piggyback registration rights upon request, in certain cases. The exercise price and number of shares
16
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(6) Long-term debt and other financing arrangements (Continued)
issuable
upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. The fair value of the warrants on the
date of issuance approximated $116,000.
(7) 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, 2013 |
|
$ |
(130,791 |
) |
$ |
(636,778 |
) |
$ |
(767,569 |
) |
Other comprehensive income (loss) before reclassifications |
|
|
34,327 |
|
|
100,676 |
|
|
135,003 |
|
Amount reclassified from AOCI |
|
|
|
|
|
552,085 |
|
|
552,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss) |
|
|
34,327 |
|
|
652,761 |
|
|
687,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014 |
|
$ |
(96,464 |
) |
$ |
15,983 |
|
$ |
(80,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of AOCI
|
|
Amounts
reclassified
from AOCI |
|
Realized gain/(loss) on sale of marketable securities |
|
$ |
(552,085 |
) |
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of income taxes |
|
$ |
(552,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Fair Value
The Company 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. The Company's available for sale securities (Level 1) was $-0- and (Level 2) $5,223,472 at June 30, 2014. Our available for sale securities (Level 1) was $1,390,355
and (Level 2) $10,439,897 at December 31, 2013. The Company does not have other assets or intangible assets measured at fair value on a non-recurring basis at June 30, 2014 and
December 31, 2013.
17
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(9) Commitments and 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.
(10) Income Taxes
As of December 31, 2013, the Company lacked a history of earnings that would allow it to record any of its net deferred tax assets without a corresponding valuation allowance. Using the same
methodology, and updating the earnings history based on actual earnings for the six months ended June 30, 2014, the Company is unable to reduce its valuation allowance. Therefore, no net
deferred tax asset is reflected as of June 30, 2014. Additionally, due to some of its historical acquisitions which included indefinite lived intangibles, the Company continues to accumulate a
deferred tax liability which is recorded outside the net deferred tax asset and valuation allowance. This deferred tax liability increased by $44,731 and $89,462 during the three and six months ended
June 30, 2014, respectively. The Company recorded a similar amount of deferred tax expense. The Company records no current income tax expense related to its domestic activities due to
historical or current net operating losses. Current tax expense of $212,921 and $491,921 for the three and six months ended June 30, 2014 has been recorded based on the Company's activities in
certain foreign jurisdictions which are currently profitable and no loss carryover is available to offset the income.
(11) Share-based compensation plans
CVSL has 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 its incentive-based compensation plan. CVSL classifies the awards as a liability as the value of
the award will be settled in cash. As of June 30, 2014, we have 282,750 equivalent shares of stock appreciation rights ("SARs") outstanding. During the six months ended June 30, 2014,
CVSL has granted 752,499 SARs and have forfeitures of 27,500. The SARs are remeasured each reporting period and is recognized ratably over the vesting period of the award. The SARs vest over a period
of three years and are paid to the recipient in three annual payments of one-third the vested award amount. The liability related to these awards is included in other long-term liabilities on our
consolidated balance sheets. SARs expense for the three and six months ended June 30, 2014 was $311,453 and $397,965, respectively, as compared to $113,750 for the three and six months ended
June 30, 2013. The SARs are included in selling, general and administrative expenses in the Company's consolidated statement of operations. As of June 30, 2014, total unrecognized
compensation cost related to unvested SARs was $2,356,016.
(12) Loss 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. The Company included the additional 25,240,676 shares available to
Rochon Capital discussed in footnote (2) in the calculation of basic and diluted shares as the conditions were met for the shares to be available for issuance. The Company did not include the
outstanding warrants nor the shares issuable upon the conversion of the Convertible Note issued to RCP V discussed in footnote (6) in the calculation of dilutive shares because we
recorded losses from continuing operations; therefore, the effect would be anti-dilutive.
18
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(13) Related party transactions
During the fourth quarter of 2013, CVSL 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, CVSL continues 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 CVSL wishes 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 transferred 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 CVSL 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. CVSL recorded $480,000 and $960,000 during the three and six month ended
June 30, 2014 and 2013, respectively, and $460,000 and $910,000 for the three and six months ended June 30, 2013. The Expense Reimbursement Fees were included in selling, general and
administrative expense.
During
the three and six months ended June 30, 2014, we paid a total of $15,279 and $131,644, respectively, to Actitech, L.P., an entity owned by Michael Bishop, for the use of the entity's
production capabilities for the production of products for YIAH that are being sold in the United States. In addition, in 2014 CVSL began initial production runs of certain Agel products in this
facility and expect to continue to utilize this facility to meet some of AEI production needs in the future.
Tamala L.
Longaberger lent TLC $42,000 for the period ended June 30, 2014 and AEI $958,000 subsequent to June 30, 2014. The terms of these loans are described in
footnotes (6) and (14).
(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 an independent sales force around the world. For the six months ended
June 30, 2014, 32% of our revenues were generated in international markets with 29%, or $15.0 million derived from countries in Europe (primarily Russia and Italy). One hundred percent
of our revenues were domestically generated for the six months ended June 30, 2013. We do not view any product groups as segments but have grouped similar products into the following the
following five categories for disclosure purposes only: gourmet foods, nutritional and wellness, home décor, publishing and printing and other. For the six months ended June 30,
2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of our revenues were derived from the sale of
nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products, $0.6 million or 1.2% of our revenues were
derived from the sale of our publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale of our other products. For the six months ended
June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and $0.5 million or 2.0% 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 U.S. 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
19
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(14) Segment Information (Continued)
reportable
business segment. Revenues by product groups are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, |
|
|
|
2014 |
|
2013 |
|
Gourmet Food Products |
|
$ |
2,608 |
|
|
|
|
Home Décor |
|
$ |
27,458 |
|
$ |
24,349 |
|
Nutritionals and Wellness |
|
$ |
20,156 |
|
|
|
|
Publishing & Printing |
|
$ |
613 |
|
$ |
495 |
|
Other |
|
$ |
422 |
|
|
|
|
(15) Subsequent Events
On July 1, 2014, Tamala L. Longaberger lent AEI $158,000 and in connection there with AEI issued a promissory note in the principal amount of $158,000 to her. The note bears interest at the
rate of 10% per annum and matures on July 1, 2015 and is guaranteed by CVSL. The company's failure to comply with the obligations under the Note, insolvency or bankruptcy proceedings or a
default under any other loan, security or similar agreements of AEI if the default materially affects any of AEI property or AEI ability to repay the note or perform its obligations under this note,
is a default under the note. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure period for any nonpayment default that is curable so
long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
On
July 2, 2014, CVSL issued a warrant exercisable for 50,000 shares of our common stock at an exercise price of $12.80 per share in consideration of a two-year consulting agreement with
an individual with direct selling industry experience. The warrant is exercisable for a term of one year from its issuance date; provided, however, that the term will be extended for an additional
year if on July 1, 2015 the shares of common stock underlying the warrant are subject to an effective registration statement under the Securities Act or our common stock is listed on the Nasdaq
National Market or the NYSE MKT. In addition, the warrant provides for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of
the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation.
On
July 9, 2014, we issued 5,316 shares of common stock to a director as director compensation and an aggregate of 5,264 shares of restricted common stock (for which
restrictions lapse on July 8, 2015) to two newly appointed directors for compensation for their service as directors.
On
July 11, 2014, Tamala L. Longaberger lent AEI $800,000 and in connection therewith AEI issued a promissory note in the principal amount of $800,000 to her. The note bears interest at the
rate of 10% per annum and matures July 11, 2015 and is guaranteed by CVSL. The company's failure to comply
with the obligations under the note, insolvency or bankruptcy proceedings or a default under any other loan, security or similar agreements of AEI if the default materially affects any of AEI property
or AEI ability to repay the note or perform its obligation under the note, is a default under the note. The note may be prepaid in whole or in part at any time without premium or penalty. The note
also provides for a cure period for any nonpayment default that is curable so long as a notice of breach of the same provision has
20
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(15) Subsequent Events (Continued)
not
been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
On
July 31, 2014, TLC, a subsidiary of CVSL and CFI NNN Raiders, LLC. ("CFI"), entered into a Sale Leaseback Agreement (the "Sale Leaseback Agreement") pursuant to which TLC
agreed to sell to CFI certain real estate owned by TLC and used by TLC in its manufacturing, distribution and showroom activities. The real estate described in the Sale Leaseback Agreement was
purchased by CFI, for an aggregate purchase price of $15.8 million ($4.4 million of which is held with CFI as a security deposit and will be released to TLC over time as certain targets
are met).
Concurrently
with entering into the Sale Leaseback Agreement, CVSL and CFI entered into a Master Lease Agreement (the "Master Lease Agreement"). The Master Lease Agreement provides for a
15-year lease term and specifies the base quarterly rental for the real estate described in the rental schedule. The base quarterly rent in the first year is $551,772 and increases 3% annually each
year thereafter. During the lease term, all of the costs, expenses and liabilities associated with the real estate are to be borne by the Company, and the Company is entitled to the unlimited use of
the real estate. The Master Lease Agreement includes customary events of default, including non-payment by the Company of the quarterly rental or other charges due under any The Master Lease
Agreement. The Company intends to utilize the proceeds from the sale of the real estate to pay off outstanding bank debt and for working capital purposes.
On
October 10, 2014, the Company entered into a second amendment to that certain Share Exchange Agreement, as amended, with Rochon Capital (as further amended, the "Amended Share
Exchange Agreement"), which will become effective upon the consummation of the Company's proposed current public offering, and which limits Rochon Capital's right or the right of a Permitted
Transferee (as defined below) to be issued the 25,240,676 shares of the Company's common stock it is currently entitled to receive under the Share Exchange Agreement, as amended
(the "Second Tranche Parent Stock") solely upon the public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below), or
upon the commencement or announcement of a tender or exchange offer which would result in any person or group becoming an Acquiring Person. In such event, the Second Tranche Parent Stock will be
issued to Rochon Capital, or a Permitted Transferee to whom the right has been transferred, within ten (10) days of its written request, which request shall be in its sole discretion. A person
or group of affiliated or associated persons becomes an
"Acquiring Person," thus triggering the issuance of the Second Tranche Parent Stock to Rochon Capital, or a Permitted Transferee to whom the right has been transferred, upon acquiring, subsequent to
the date of the Amended Share Exchange Agreement, beneficial ownership of 15% or more of the shares of our common stock then outstanding. The term "Acquiring Person" shall not include (1) any
person who acquires 15% or more of the Company's shares of common stock in a transaction approved by John P. Rochon, (2) any affiliates of John P. Rochon or (3) any family members of
John P. Rochon.
In
addition, Rochon Capital has agreed to irrevocably waive its right to, and has agreed that it will not (i) sell, pledge, convey or otherwise transfer all or any part of the Second Tranche
Parent Stock or the right to received the Second Tranche Parent Stock to any person or entity other than to (x) John P. Rochon or his wife, or both, or William John Philip Rochon (each a
"Permitted Transferee") or (y) the Company, as set forth below, and (ii) be entitled to receive any cash dividends or cash distributions of any kind with respect to the Second Tranche
Parent Stock, except as specifically provided below. Rochon Capital further agreed that the Second Tranche Parent Stock shall be redeemed by the Company upon receipt of a cash payment by Rochon
Capital from the Company of One Million Dollars ($1,000,000) if any of the following
21
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(15) Subsequent Events (Continued)
events
occur: (i) the Company's liquidation or dissolution; (ii) the Company's merger with or into another entity where the holders of its common stock prior to the merger do not own a
majority of its common stock immediately after the merger (while specifically excluding the Second Tranche Parent Stock from such calculation); (iii) the sale of all or substantially all of the
Company's assets; (iv) the death of John P. Rochon, in which case the redemption shall be limited to Second Tranche Parent Stock that has not been transferred by Rochon Capital; (v) a
change of control of Rochon Capital such that a majority of the equity of Rochon Capital is not owned by John P. Rochon or immediate family members of John P. Rochon; and (vi) John P. Rochon
having been found guilty or having pled guilty or nolo contendere to any act of embezzlement, fraud, larceny or theft on or from the Company. Rochon Capital has also agreed that the Second Tranche
Parent Stock will be automatically redeemed by the Company for nominal consideration if any of the following events should occur: (i) the Company commences a voluntary case under Title 11 of
the United States Code or the corresponding provisions of any successor laws; (ii) an involuntary case against the Company is commenced under Title 11 of the United States Code or
the corresponding provisions of any successor laws and either (A) the case is not dismissed by midnight at the end of the 90th day after commencement or (B) the court before which
the case is pending issues an order for relief or similar order approving the case; or (iii) a court of competent jurisdiction appoints, or the Company makes an assignment of all or
substantially all of its assets to, a custodian (as that term is defined in Title 11 of the United States Code or the corresponding provisions of any successor laws) for the Company or
all or substantially all of its assets.
Rochon
Capital has agreed to irrevocably authorize and direct the Company's transfer agent to place a permanent stop order on the Second Tranche Parent Stock and to add a corresponding restrictive
legend on the certificate or certificates representing the Second Tranche Parent Stock.
On
October 10, 2014, pursuant to the Second Amendment entered into on June 12, 2014, the Company and Richmont Capital Partners V LP mutually agreed to convert the Convertible
Subordinated Unsecured Promissory Note, dated December 12, 2012, in the original principal amount of $20,000,000, into 3,200,000 shares of the Company's common stock which conversion
will become effective upon the consummation of the Company's proposed current public offering.
On
October 16, 2014, the Company effected a 1-for-20 reverse stock split of its issued and outstanding shares of common stock. The Company filed an amendment to its Articles of
Incorporation with the Secretary of State of Florida (the "Amendment") to effectuate the Stock Split and to reduce proportionately the number of its authorized shares of common stock from
5,000,000,000 shares of common stock to 250,000,000 shares of common stock and the number of its authorized shares of preferred stock from 10,000,000 shares of preferred stock to
500,000 shares of preferred stock. As of that date, each 20 shares of issued and outstanding common stock were converted into one share of common stock. No fractional shares will be
issued in connection with the Stock Split. Instead, any fractional shares that remain after the Stock Split have been rounded up to the nearest whole number of shares. All options, warrants and
convertible securities of the Company outstanding immediately prior to the Stock Split have been appropriately adjusted by dividing the number of shares of common stock into which the options,
warrants and convertible securities are exercisable or convertible by 20 and multiplying the exercise or conversion price thereof by 20, as a result of the Stock Split. Accordingly, all share and per
share amounts for all periods presented in the consolidated financial statements and notes thereto have been adjusted retrospectively, where applicable to reflect the reverse stock split.
22
Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the
related notes that appear elsewhere in this Form 10-Q/A. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual
results and the timing of certain events may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled
"Risk Factors."
Overview
We operate a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce
strategies to drive a high-growth global business. We are engaged in a long-term strategy to develop a large, global diverse company that combines the entrepreneurship, innovation and
relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a large scale company.
We
seek to acquire companies primarily in the direct selling (micro-enterprise) business 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). Our goal is to form a virtual, online economy with the sellers and customers, from the businesses we acquire, which will offer its members a myriad of benefits
and advantages. Our acquisitions form the platform for this growing online economy.
Through
a series of seven recent acquisitions of direct selling companies offering a diverse product mix, we have expanded our product offerings as well as our base of sales representatives and
customers. In addition to our acquisition of TLC, we completed the acquisition of the assets or stock of the following companies in 2013 and during the first quarter of 2014: Your Inspiration at Home,
Ltd., an Australian company ("YIAH") (a direct seller of hand-crafted spices from around the world), Tomboy Tools, Inc., a Colorado company ("TBT") (a direct seller of a line of tools designed for
women as well as home security monitoring services), Agel Enterprises, LLC ("Agel") (a direct seller of nutritional supplements and skin care products), My Secret Kitchen Limited ("MSK"), (a direct
seller of a unique line of gourmet food products), Paperly, LLC ("Paperly"), (a direct seller of custom stationery and paper products), and Uppercase Living, LLC ("Uppercase") (a direct seller of
customizable vinyl expressions for display on walls). During the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls LLC ("Golden Girls") (a direct seller and
purchaser of jewelry for cash), but have not yet closed this transaction. Each company we acquire maintains its own unique product line, independent sales representatives and culture. Our objective
with each acquisition is to maintain these unique elements, while reducing the cost of operations and goods for each acquired company through economies of scale, operating efficiencies.
We
have grown at a rapid pace as a result of our recent acquisitions. With each acquisition we have expanded our product base and our base of independent sales representatives and potential customers.
In this respect, we believe we have something valuable that social media companies wish they had. Social media companies help people stay connected, but have been unable to fully translate these
connections directly into commerce. In contrast, our companies' virtual communities of sellers and customers are already conducting commerce, much of it using our online business tools, such as
personalized web sites. This convergence of personal relationships, social media and relationship-based commerce is what gives us our unique blend of attributes for growth. As we scale up through
additional acquisitions and organic growth, we expect these attributes will be magnified.
Our
combined revenues have increased significantly as a result of the acquisitions we have made in the past 18 months. Our revenues increased by $84.0 million for the year ended
December 31, 2013 as compared to our revenues for the year ended December 31, 2012 and our operating losses for the year ended December 31, 2013 increased by $4.5 million
as compared to our operating losses for the year ended
23
Table of Contents
December 31,
2012. Our revenues were $24.6 million and $51.3 million for the three and six months ended June 30, 2014, respectively, as compared to our revenue of
$20.6 million and $24.8 million for the three and six months ended June 30, 2013, respectively. Our operating losses for the three and six months ended June 30, 2014
increased by $0.8 million and $2.5 million, respectively, as compared to our operating losses for the three and six months ended June 30, 2013. Collectively, TLC, Agel and YIAH
represented over 90% of our reported revenues in 2013. 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. For the six months ended June 30, 2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of
gourmet food products, $20.2 million or 39.3% of our revenues were derived from the sale of nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from
the sale of home décor products, $0.6 million or 1.2% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or
0.8% of our revenues were derived from the sale of our other products. For the six months ended June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home
décor products, and $0.5 million or 2.0% of our revenues were derived from the sale of our publishing and printing services and products.
We
expect that our revenue will continue to increase as we continue to acquire companies and we continue to integrate the companies we have acquired with newly-acquired companies. We believe that our
visibility in the direct selling industry increased during 2013, as news about us circulated through the industry and increasing numbers of people in the industry became more familiar with CVSL's
strategy and progress. We also believe that this visibility has made us more attractive to potential acquisition targets. At the same time, however, the costs of growth through acquisition, such as
legal costs and other due diligence-related costs, have been significant and have affected CVSL's profitability. In addition, conditions affecting each individual company have posed challenges to our
company as a whole. We anticipate that our operating losses and net loss will decrease over time as we are able to implement certain operating and administrative efficiencies for the acquired
companies as a whole.
Our
results are impacted by economic, political, demographic and business trends and conditions in the United States as well as globally. A rise or fall in economic conditions, including such factors
as inflation, economic confidence, recession and disposable income can affect the direct selling industry, as the independent sales representatives who comprise the sales forces of our various
companies make decisions based, at times, on those economic factors. A weak economy historically has been favorable to micro-enterprise/direct selling companies, because in times of economic distress,
increasing numbers of individuals look for ways to supplement or replace their income and becoming an independent sales representative can provide supplemental income. Similarly, when jobs are lost,
many are forced to seek independent means of earning a living or supplementing family income. However, economic distress can reduce customers' disposable income, making it more difficult to convince a
customer to buy a non-essential product or service from a direct seller and therefore negatively impacting our revenue.
Political
changes in a stable country like the United States do not generally have much impact on a direct selling business, unless there are significant regulatory changes that make it more difficult
for our companies to do business. Outside the United States, political instability can have a potential effect on our business in any particular country, if that country is a significant market for
one of our companies. For example, Ukraine and Russia are markets for one of our companies, Agel. To date, the instability in those countries has not had a major impact on Agel's ability to do
business; however, there can be no assurance that it will not have a negative impact in the future. As we grow, our presence in various international
24
Table of Contents
markets
could be affected by instability in any of those markets. Even amid instability, consumers still tend to buy and sell products.
The
largest demographic factor affecting our business is the aging of the population. As a sales force and customer base ages, in some cases their selling or buying power could decrease. Offsetting
this is the fact that aging also allows more free time to carry on a part-time business, and aging consumers often make purchases for children and grandchildren. As a sales force ages, it is necessary
to try to replace retiring members with younger recruits. We are attempting to do this by marketing more effectively to younger demographics, such as through the use of technology. The male/female
demographic's affect on our business depends upon the company: some CVSL companies are predominantly male, others female.
Various
business trends can affect our companies. For example, tightening of credit availability can affect our ability to raise capital for growth. In addition, tighter credit availability can impact
customer disposable income, thus negatively impacting spending. The trend toward greater reliance on Internet technology requires us to continually keep our internal and external Internet-based tools
in good order (financial management/web sites for sales forces, etc.). The trend toward greater speed and
personalization in business (through social media) requires us to put more emphasis on communicating within our businesses through those methods.
The
micro-enterprise sector also has the benefit of diversity, in the sense that it includes many different categories of products and services, spread across different demographics and across global
markets. When one segment of our direct selling company weakens, it is likely that another will strengthen or remain unaffected as independent sales representatives move around and follow
opportunities. We believe this diversification is a particular strength of ours, as we already have sales from seven different product categories and in multiple global markets. We expect that this
diversification should enable us to take advantage of changing trends in the industry. Further acquisitions are expected to increase this diversification.
In
considering appropriate acquisition targets, we anticipate that we will evaluate companies of varying sizes in our targeted space. We do not plan to limit our acquisition opportunities to companies
of any particular size, and we will periodically evaluate smaller companies in our targeted space, particularly companies that management believes are accretive or would otherwise add value to one or
more of our businesses. We will consider companies that are currently profitable and that are looking to enhance their growth by leveraging the global foundation for growth we have built, as well as
companies that can, in our opinion, be strengthened by improved strategic and tactical guidance. Companies that have experienced financial and operational difficulties are the best candidates to
benefit almost immediately from cost reductions that our shared resources can provide. 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 our network of networks.
Overview of Recently Acquired Companies and Companies to be Acquired
Happenings Communications Group
On September 25, 2012, we acquired 100% of HCG as part of the Share Exchange Agreement. HCG publishes a monthly magazine, Happenings Magazine
that highlights 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 HCG provides 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 an "in-house" resource for providing marketing and creative services to the direct selling companies that we have acquired and hope to acquire in the future.
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Table of Contents
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 which 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 support centers for independent sales representatives. 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 shares ("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, we 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 $6.5 million (the "Convertible
Note"), and, to TLC, we issued a ten year, $4.0 million 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. At the time of the acquisition, TLC had $22.9 million in liabilities, which after the transaction were reflected in our financial
statements in addition to the additional debt incurred as a result of the issuance of the notes to the Trust and TLC.
Along
with its well-respected brand, its hand-crafted products and its loyal sales force, one of the many aspects of TLC's operation that was attractive to us was its abundance of assets. TLC had
$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. We have worked with
TLC to begin reducing its inventory through selling more items online, through TLC's showrooms (which provide commissioned sales to members of its independent sales force) and by expanding into new
territories. Another challenge we have faced with TLC is bringing its costs and selling, general and administrative expenses under control. We believe the sale of excess inventory will help us to
generate cash, which will help us to reduce our liabilities and fund our operations.
Another
characteristic of TLC which we found attractive was the variety of fixed assets and real estate that were being underutilized in TLC's operations. We intend to make use of these assets at our
other CVSL companies (including those we own now and those we will acquire in the future). For example,
YIAH has begun operations in North America, operating out of TLC's Newark, Ohio office building and Project Home has shifted inventory and distribution to TLC's Ohio facilities. While we intend to
find new uses for certain under-utilized assets, other assets owned by TLC are non-core assets which can be sold to further reduce our liabilities and generate positive cash.
Your Inspiration At Home
In August 2013, we formed Your Inspiration At Home, Pty. Ltd., an Australian corporation, which acquired substantially all of the assets of
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 liabilities of $140,647 in
connection with the acquisition.
Project Home
In October 2013, we formed CVSL TBT, LLC, a Texas limited liability company, which acquired substantially all of the assets of Tomboy Tools,
Inc., a direct seller of a line of tools designed for women as well as home security systems. We acquired substantially all the assets of Tomboy Tools, Inc. in exchange for total consideration of
88,349 shares of our common stock and the assumption of liabilities of $471,477 in connection with the acquisition.
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Table of Contents
Agel Enterprises
In October 2013, we formed Agel Enterprises, Inc., a Delaware corporation which acquired substantially all of the assets of Agel Enterprises, LLC.
Agel is a direct selling business based in Utah that sells nutritional supplements and skin care products through a worldwide network of independent sales representatives. Agel's products are sold in
over 40 countries. Agel acquired substantially all the assets of Agel Enterprises, LLC in exchange for total consideration
of 372,330 shares of our common stock (of which 28,628 shares were issued in January 2014), the delivery of a purchase money note, dated the closing date, in the original principal
amount of $1.7 million and the assumption of $9.1 million in liabilities, which after the transaction were reflected in our financial statements in addition to the additional
$1.7 million purchase money note.
Paperly
In December 2013, we formed Paperly, Inc., a Delaware corporation, which acquired substantially all of the assets of Paperly, a direct seller that
allows its independent sales representatives to work with customers to design and create custom stationery through home parties, events and individual appointments. We acquired substantially all the
assets of Paperly in exchange for total consideration of 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 shares of our common stock for this acquisition were issued in 2014. We assumed liabilities of $110,022 in connection with the acquisition.
My Secret Kitchen
In December 2013, we formed CVSL A.G., a Switzerland company, which acquired a 90% controlling interest of MSK, an award-winning United
Kingdom-based direct seller of a unique line of food products. We acquired substantially all the stock of MSK in exchange for total consideration of 15,891 shares of our common stock and
payment of an earn-out of 5% of MSK's EBITDA from 2014 to 2016. The shares of our common stock for this acquisition were issued in January 2014. At the time of the acquisition, MSK had $168,515 in
liabilities, which after the transaction were reflected in our financial statements.
Uppercase Living
In March 2014, we formed Uppercase Acquisition, Inc. a Delaware corporation which acquired substantially all the assets of 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 acquired the assets for the years ended December 31, 2014, 2015 and 2016 payable in cash or shares of our common stock at our discretion. The shares of common stock for this
acquisition were issued in April and June 2014. We assumed liabilities of $471,445 in connection with the acquisition.
Golden Girls
During the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls, a direct seller and purchaser 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. We do not expect to assume any liabilities in connection with this acquisition.
Recent Developments
On July 31, 2014, TLC and CFI entered into the Sale Leaseback Agreement pursuant to which TLC agreed to sell to CFI certain real estate owned
by TLC and used by TLC in its manufacturing, distribution and showroom activities. The real estate described in the Sale Leaseback Agreement was purchased by
27
Table of Contents
CFI
and the aggregate purchase price was $15.8 million ($4.4 million of which is held with CFI as a security deposit and will be released to TLC over time as certain targets
are met).
Concurrently
with entering into the Sale Leaseback Agreement, we entered into the Master Lease Agreement with CFI. The Master Lease Agreement provides for a 15-year lease term and specifies the base
quarterly rental for the real estate leased. The base quarterly rent in the first year is $551,772 and increases 3% annually each year thereafter. During the lease term, all of the costs, expenses and
liabilities associated with the real estate are to be borne by us, and we are entitled to the unlimited use of the real estate. The Master Lease Agreement includes customary events of default,
including non-payment by us of the quarterly rental or other charges due under the Master Lease Agreement. We used the proceeds from the sale of the real estate to pay off outstanding bank debt and
intend to use the remaining proceeds for working capital purposes.
Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013
Revenues
Our substantial growth during 2013 results in significant challenges in the comparison of year over year results. As described above, we acquired TLC
during the first quarter of 2013, YIAH during the third quarter of 2013, Project Home, AEI, MSK and Paperly during the fourth quarter of 2013 and Uppercase Living in the first quarter of 2014. As
such, we caution that a comparative discussion of our results of operations for the three and six months ended June 30, 2014 and 2013, may not be meaningful on a quantitative or qualitative
basis.
In
addition, our consolidated financial statements for the six months ended June 30, 2013 reflect only partial-quarter revenue for TLC and no revenue for any other companies we acquired in
2013, as these companies were all acquired after June 30, 2013.
During
the three and six months ended June 30, 2014, our revenues were $24.6 million and $51.3 million, respectively, as compared to $20.6 million and $24.8 million
for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2014, TLC, Agel and YIAH collectively represented over 90% of the reported
revenues. For the six months ended June 30, 2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of
our revenues were derived from the sale of nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products,
$0.6 million or 1.2% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale
of our other products. For the six months ended June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and $0.5 or 2.0%
of our revenues were derived from the sale of our publishing and printing services and products. Revenues by product groups are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months ended
June 30, |
|
|
|
2014 |
|
2013 |
|
Gourmet Food Products |
|
$ |
2,608 |
|
|
|
|
Home Décor |
|
$ |
27,458 |
|
$ |
24,349 |
|
Nutritionals and Wellness |
|
$ |
20,156 |
|
|
|
|
Publishing & Printing |
|
$ |
613 |
|
$ |
495 |
|
Other |
|
$ |
422 |
|
|
|
|
Operating Losses
Our operating losses were $4.1 million and $6.8 million for the three and six months ended June 30, 2014, respectively, as
compared to $3.3 million and $4.3 for the three and six months ended June 30, 2013, respectively. The increase in operating losses was the result of the six acquisitions completed in
2013.
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Table of Contents
Operating Expenses
Commissions and Incentives
Commissions and incentives represent costs to compensate and incentivize members of our independent sales force. These expenses may include costs for
certain corporate sponsored events that contain qualification requirements in order for individuals to attend. During the three and six months ended June 30, 2014, we incurred approximately
$6.0 million and $13.0 million in commissions and incentives costs, respectively, as compared to $2.7 million and $3.2 million for the three and six months ended
June 30, 2013, respectively. The increase is primarily due to increased commissions paid as a result of the numerous companies that we acquired.
Selling, General and Administrative
Our selling, general and administrative costs were $11.7 million and $21.5 million for the three and six months ended June 30,
2014, respectively, as compared to $8.1 million and $10.5 million for the three and six months ended June 30, 2013, respectively. The increase is primarily the result of the
addition 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 and legal fees associated with the acquisitions and the pursuit of potential acquisitions. Included in selling, general and administrative
expenses are fees paid to Richmont Holdings pursuant to a Reimbursement of Services Agreement for services provided by Richmont Holdings incurred in identifying, analyzing, performing due diligence,
structuring and negotiating potential transactions. For the three and six months ended June 30, 2014, we recorded $0.5 million and $1.0 million in reimbursement expenses,
respectively, as compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2013, respectively.
Loss on Marketable Securities
Our loss on marketable securities for the three and six months ended June 30, 2014 totaled $58,000 and $0.6 million, respectively. We
did not have any investments for the three and six months ended June 30, 2013.
Non-controlling Interest
Non-controlling interest was a net loss of $1.0 million and $1.7 million for three and six months ended June 30, 2014,
respectively, as compared to $0.8 million and $0.8 million for the three and six months ended June 30, 2013, respectively. The increase is primarily the result of losses generated
at TLC. Additionally, the six months ended June 30, 2013 only included TLC results for the period beginning March 19, 2013 through June 30, 2013, which was the acquisition date of
TLC.
Liquidity and Capital Resources
See footnote (6), Long-term debt and other financing arrangements, included in the unaudited
consolidated financial statements included in this report for additional information.
The
table below reflects our highly liquid assets as of June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Cash |
|
$ |
4,176,351 |
|
$ |
3,876,708 |
|
Marketable Securities |
|
|
5,223,472 |
|
|
11,830,252 |
|
Accounts Receivable, net |
|
|
777,871 |
|
|
780,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,177,694 |
|
$ |
16,487,197 |
|
29
Table of Contents
At
June 30, 2014 we had cash and marketable securities of $9.4 million. In December 2012, we received $20.0 million in proceeds from the sale of a convertible note to RCP V
which provided working capital for our current operations and smaller acquisitions. Our investments in marketable securities enable us to also provide needed liquidity for acquisitions, debt service
and operating expenses.
Our
principal uses of cash have included legal and professional fees associated with our acquisitions, legal, due diligence and other fees related to other potential acquisitions and the cost of
buying inventory. We plan to continue acquiring additional businesses engaged in direct selling and intend to fund such acquisitions primarily by issuing shares of our common stock as consideration.
To the extent that we need to pay cash as a portion of the acquisition consideration, we expect to use our cash on hand and, to the extent necessary, to raise any additional cash through debt and/or
equity financing. We expect to fund any large acquisitions from a combination of the proceeds of our planned issuance of equity securities and potentially through other public or private equity or
debt offerings. We believe that additional debt or equity financing will be available to us based on the assets and financials of any potential acquisition candidate we would consider and based on
management's experience with debt and equity financings. We expect to be able to raise capital from lenders and equity investors who will understand our direct selling acquisition strategy, but there
is no assurance that we will be able to raise the capital.
Cash Flows
Cash used in operating activities for the six months ended June 30, 2014 was $5.0 million, as compared to net cash used in operating
activities of $0.4 million for the six months ended June 30, 2013. Our principal uses of cash have included legal and professional fees associated with our acquisitions, legal, due
diligence and other fees related to other potential acquisitions, the cost of buying inventory, labor and benefits costs and commissions and incentives.
Net
cash provided by investing activities for the six months ended June 30, 2014 was $7.4 million, as compared to $84,000 for the six months ended June 30, 2013. Net cash provided
by investing activities was the result of $6.2 million in sales of marketable securities in addition to $1.8 million associated with TLC's sale of a building in the ECO Business Park in
Frazeysburg, Ohio and three properties in Dresden, Ohio. The cash inflows were offset by $0.6 million in capital expenditures primarily associated with our information technology
implementation.
Net
cash used in financing activities was $2.6 million for the six months ended June 20, 2014 as we paid down $1.9 million on our lines of credit and paid $0.8 million in
debt primarily related to the payoff of the term loan with Key Bank. During the six months ended June 30, 2013, we used $0.2 million, primarily related to long-term debt payments.
The
Company's long-term borrowing consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
June 30,
2014 |
|
December 31,
2013 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
21,281,097 |
|
$ |
20,881,096 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,555,293 |
|
|
3,734,695 |
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,496,996 |
|
|
1,649,880 |
|
Promissory Notepayable to Tamala L. Longaberger |
|
|
10.00 |
% |
|
42,000 |
|
|
|
|
Term loanKeyBank |
|
|
|
|
|
|
|
|
427,481 |
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,405,630 |
|
|
26,723,396 |
|
Less current maturities |
|
|
|
|
|
711,398 |
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,694,232 |
|
$ |
25,594,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Table of Contents
Subsequent
to June 30, 2014, Agel issued two promissory notes in the aggregate principal amount of $958,000 to Tamala L. Longaberger. The two notes issued by Agel to Tamala L. Longaberger and
the note issued by TLC to Tamala L. Longaberger bear interest at 10% per annum. The note in the principal amount of $42,000 matures on June 27, 2015 and the other notes in the principal amounts
of $158,000 and $800,000 mature on July 1, 2015 and July 11, 2015, respectively. The notes may be prepaid in whole or in part at any time without premium or penalty. The notes also
provide for a cure period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the
note holder may accelerate the time of payment of the notes.
On
July 31, 2014, we entered into the Master Lease Agreement in connection with the Sale Leaseback Agreement. TLC used approximately $6.2 million from the proceeds of the sale of certain
real estate owned by TLC to repay the outstanding balance owed under the Key Bank Line of Credit.
The
schedule of maturities of our long-term debt is 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 $20.0 million and issued to RCP V, a Convertible Subordinated
Unsecured Promissory Note, in the original principal amount of $20.0 million. The note is an unsecured obligation and subordinated to any bank, financial institution, or other lender providing
funded debt to us (or any direct or indirect subsidiary of ours), including any debt financing provided by the sellers of any entity(ies) that we may acquire. 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%. Interest is payable on each anniversary of the Issuance Date; 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.
On
June 12, 2014, we and RCP V entered into a Second Amendment to Convertible Subordinated Unsecured Promissory Note (the "Second Amendment"), which amends the Note. The Second Amendment
amends the Note to extend the date of mandatory conversion of the Note. As amended by the Second Amendment, the original principal amount of, and all accrued interest under, the Note is convertible
mandatorily into shares of the Company's common stock (subject to a maximum of
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3,200,000 shares
being issued) within ten days after June 12, 2015, or such earlier time as may be mutually agreed upon by us and RCP V. All other terms and conditions of the Note
remain unchanged and in effect.
John
Rochon, Jr., our Vice Chairman and 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, a director of CVSL, is a limited partner of RCP V.
Promissory Notepayable to former shareholder of TLC
On March 14, 2013, we issued a $4.0 million Promissory Note pursuant to the terms of 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.
Promissory NoteLega Enterprises, LLC
On October 22, 2013, CVSL issued a $1.7 million Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) pursuant to
the Asset Purchase Agreement between AEI and Agel Enterprises LLC. The Promissory Note bears interest at 5% per annum, matures on October 22, 2018 and is payable in equal monthly installments
of outstanding principal and interest.
Term loan
In conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6.5 million term loan from Key Bank. As of
March 1, 2014, TLC had paid in full the outstanding balance of the term loan.
Promissory Notepayable to Tamala L. Longaberger
On June 27, 2014, Tamala L. Longaberger lent TLC $42,000 and in connection therewith TLC issued a promissory note in the principal
amount of $42,000 to her. The note bears interest at the rate of 10% per annum and matures on June 27, 2015. The company's failure to attain certain milestones, including specified operational
cost-savings, are considered a default under the note as is a default under other loan, security or similar agreements of TLC if the default materially affects any of TLC's property, or ability to
repay the note or perform its obligations under the note or any related document. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure
period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may
accelerate the time of payment of the note.
Line of Credit PayableKey Bank
In July 2014, we used the proceeds that we received under the Sale Leaseback Agreement to repay all amounts owed under the TLC line of credit with
Key Bank. TLC had a line of credit agreement through October 23, 2015. Under the agreement with Key Bank, TLC had available borrowings of up to $12.0 million, calculated in accordance
with a formula primarily based on accounts receivable and inventory. The interest rate for the line of credit was based on Key Bank's prime rate plus 1.75%, or LIBOR plus 3.50%. Interest at
June 30, 2014 and December 31, 2013 was 3.94%. The line of credit balance was $6,633,250, at June 30, 2014, and $8,067,573 at December 31, 2013. The line of credit was
collateralized by substantially all of the assets of TLC. Under the agreement, TLC was subject to certain financial covenants, including a fixed charge coverage ratio and limitations on capital
expenditures, additional indebtedness, and incurrence of liens. TLC was not in compliance with the fixed charge covenant for the period ended June 30, 2014. TLC obtained a waiver for the fixed
charge coverage calculation, as the term loan had been paid in full, and was in compliance with all other the financial covenants at June 30, 2014. The loan is included in the lines of credit
on our consolidated balance sheets.
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Term loanKey Bank
In conjunction with the Key Bank line of credit described above, on October 23, 2012, TLC obtained a $6.5 million term loan from Key
Bank. The interest rate on the term loan was either Key Bank's prime rate plus 5.75%, or LIBOR plus 7.50%. The term loan was repayable in monthly installments beginning April 1, 2013 and was
repayable in full on October 23, 2015. As of March 1, 2014, TLC had paid in full the outstanding balance of the term loan through monthly amortization payments and proceeds from our sale
of non-core assets, primarily real estate.
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 us. The interest rate at June 30, 2014 and December 31, 2013 was 1.65% and 1.67%, respectively. The outstanding balance was $1,174,174 and $1,663,534 on
June 30, 2014 and December 31, 2013, respectively. The loan is included in the line of credit on our consolidated balance sheets.
Outstanding Warrants
On May 6, 2014, CVSL issued warrants to purchase up to 12,500 and 6,250 shares of its common stock, respectively, in connection with
exclusivity agreements. The warrants will be exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a
cashless exercise basis at an exercise price of $11.00 per share, representing the average closing price of our common stock for the ten days preceding the issuance. In addition, the warrants provide
for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock
dividend or our recapitalization, reorganization, merger or consolidation. The fair value of the warrants on the date of issuance totaled $116,000.
Contractual Obligations
As a smaller reporting company, we are not required to disclose contractual obligations.
Critical Accounting Policies
The 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.
We
also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting
for revenue recognition, income taxes, and long-lived assets, have the greatest impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies.
Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
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There
have been no significant changes to our critical accounting policies and estimates during the three and six months ended June 30, 2014, as compared to the critical accounting policies and
estimates disclosed in Items 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K/A for the year ended
December 31, 2013, which was filed with the SEC on October 22, 2014.
Recent Accounting Pronouncements
See footnote (1) of our accompanying unaudited consolidated financial statements for a full description of recent accounting pronouncements
and our expectation of their impact, if any, on our results of operations and financial condition.
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.
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" included in this Form 10-Q/A. 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 3. Quantitative and Qualitative Disclosures about Market Risks
As a smaller reporting company, we are not required to disclose the information required by this Item.
Item 4. Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 ("Exchange Act"), the Company carried out an evaluation, with the
participation of the Company's management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company's CEO and CFO concluded that the
Company's disclosure controls and procedures are not effective as of June 30, 2014 to ensure that information required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including the Company's CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management
identified the following control deficiencies that constitute material weaknesses that are not fully remediated as of the filing date of this report: One of the subsidiaries acquired during
2013, TLC, 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.
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However,
during the quarter end financial statement close, we recognized certain adjustments to our financial records to properly present our financial statements in accordance with GAAP. Management
believes its existing procedures and controls have assisted in our ability to make the necessary reconciling adjustments to our financial statements.
The
Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the 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. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. The Company considered these limitations during the development of its disclosure controls and procedures, and will continually reevaluate them to ensure they
provide reasonable assurance that such controls and procedures are effective.
Changes in Internal Controls over Financial Reporting
As previously outlined in our Annual Report on Form 10-K, management has already begun addressing weaknesses in controls and procedures by
implementing a remediation plan, including appointing a Controller for all CVSL subsidiaries and parent company, hiring additional accounting staff and beginning the transition to a unified global
financial reporting system, which will allow for more consistent reporting across companies and faster consolidations. These efforts are ongoing.
Our
stated growth strategy is to acquire companies. Because of our rapid growth and the reporting issues that may be 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 new systems 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.
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 the quarter ended June 30, 2014 that
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
Item 1. Legal Proceedings
As disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, we are disputing a tax and
penalty assessment by the Spanish Taxing Authorities relating to Agel. 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.
Initially, 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.
During
the second quarter of 2014, AEI paid $420,000 to the Spanish Taxing Authorities toward its outstanding tax assessment. Although we have appealed this assessment by the Spanish Taxing
Authorities and are rigorously defending their position, this payment was made to prevent the Spanish Taxing Authorities from beginning certain legal proceedings that would have negatively affected
AEI's European operations. If the appeal is successful, the payments made to date will be refunded to us. As of June 30, 2014 AEI maintained a liability of $0.6 million in accrued
liabilities for this disputed amount, which is reflected in CVSL's 2013 consolidated 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 1A. Risk Factors
The following information updates and should be read in conjunction with the information previously disclosed in Item 1A Part I of the
Company's Annual Report on Form 10-K. Below we present the risk factors which reflect our modification and enhancements.
RISK FACTORS
Risks Relating To Our Business
We have suffered operating losses since inception and we may not be able to achieve profitability.
We had an accumulated deficit of $(19,767,575) as of June 30, 2014 and $(13,085,777) as of December 31, 2013 and we expect to continue
to incur increasing expenses in the foreseeable future related to our long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. As a result, we are
sustaining operating and net losses, and it is possible that we will never be able to achieve or sustain the revenue levels necessary to attain profitability.
Because we have recently acquired a large number of businesses, it is difficult to predict if we will continue to generate our current level of revenue.
Prior to March 2013, our primary business was publishing a monthly magazine, Happenings Magazine, and prior to September 2012, we were engaged in the
development and commercialization of medical devices. During 2013 and in the first quarter of 2014, we completed seven business acquisitions, changing our business focus away from that of the
publishing business and medical devices business towards the direct selling business. It is too early to predict whether consumers will accept, and continue to use, on a regular basis, the products
generated by the companies we acquired in these recent acquisitions or the direct
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selling
companies we hope to acquire in the future. We have had a very limited operating history as a combined entity and the impact of our recent acquisitions is difficult to assess. Therefore, our
ability to sustain our current revenue is uncertain and there can be no assurance that we will continue to be able to generate significant revenue or be profitable.
We rely upon our existing cash balances and cash flow from operations to fund our business and if our cash flow from operations is inadequate, we will need to raise money
through a debt or equity financing, if available, or curtail operations.
The adequacy of our cash resources to continue to meet our future operational needs depends, in large part, on our ability to increase product sales
and/or reduce operating costs. If we are unsuccessful in generating positive cash flow from operations, we could exhaust our available cash resources and be required to secure additional funding
through a debt or equity financing, significantly scale back our operations, and/or discontinue many of our activities which could negatively affect our business and prospects. Additional funding may
not be available or may only be available on unfavorable terms.
To service our debt obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Any failure to meet
our debt service obligations, or to refinance or repay our outstanding indebtedness as it matures, could materially adversely impact our business, prospects, financial condition, liquidity, results of
operations and cash flows.
Our ability to satisfy our debt obligations and repay or refinance our maturing indebtedness will depend principally upon our future operating
performance. We are required to make monthly payments under our promissory notes that mature on February 14, 2023 and October 22, 2018 in the principal amounts of $4.0 million and
$1.7 million, respectively. In addition, we have three term notes that total $1 million and we are obligated to repay the principal amount and accrued interest with respect to such notes
by July 2015. As a result, prevailing economic conditions and financial, business, legislative, regulatory and other factors, many of which are beyond our control, will affect our ability to make
payments on and to refinance our debt. If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as
refinancing or restructuring our debt, incurring additional debt, issuing equity or convertible securities, reducing discretionary expenditures and selling certain assets (or combinations thereof).
Our ability to execute such alternative financing plans will depend on the capital markets and our financial condition at such time. In addition, our ability to execute such alternative financing
plans may be subject to certain restrictions under our existing indebtedness. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants
compared to those associated with any debt that is being refinanced, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt service
obligations, or our inability to refinance our debt obligations on commercially reasonable terms or at all, would have a material adverse effect on our business, prospects, financial condition,
liquidity, results of operations and cash flows.
Our investments in marketable securities are subject to market risks, which may result in losses.
As of June 30, 2014, we had $5,223,472 in marketable securities, invested primarily in a diversified portfolio of corporate and government
bonds. At June 30, 2014 we did not have any investments in equity securities. However, we have from time to time and may in the future invest in equity securities. During the three and six
months ended June 30, 2014, our loss on marketable securities was $58,289 and $0.6 million, respectively. At December 31, 2013, the fair market value of equity securities totaled
$1,390,355 and the fair market value of the fixed income securities totaled $10,439,897. These investments are subject to general credit, liquidity, market and interest rate risks that could have a
negative impact on our results of operations.
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Our business is difficult to evaluate because we have recently expanded, and intend to continue to expand, our product offerings and customer base.
Although our business has grown rapidly, we are still in the early stages of the implementation of our primary growth strategy, which is to increase
our acquisitions of, and our number of strategic transactions with, other direct selling companies, and potentially companies engaged in other direct selling related businesses. As such, it may be
difficult for investors to analyze our results of operation, to identify historical trends or even to make quarter-to-quarter comparisons because we have operated many of these newly-acquired
businesses for a relatively limited time and intend to continue to expand our product offerings. Our growth strategy, as well as each business we acquire, is subject to many of the risks common to new
enterprises, including the ability to implement a business plan, market acceptance of proposed products and services, under-capitalization, cash shortages, limitations with respect to personnel,
financing and other resources, competition from better funded and experienced companies, and the ability to generate profits. In light of the stage of our development, no assurance can be given that
we will be able to consummate our business strategy and plans, as described herein, that our activities will be successful or that financial, technological, market, or other limitations will not force
us to modify, alter, significantly delay, or significantly impede the implementation of our plans.
We may be unsuccessful in identifying suitable acquisition candidates which may negatively impact our growth strategy.
There can be no assurance that we will be able to identify additional suitable acquisition candidates or consummate future acquisitions or strategic
transactions on acceptable terms. Our failure to successfully identify suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms could have an
adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price as our primary growth strategy is based on increasing our acquisitions of,
or entering into strategic transactions with direct selling companies, and potentially companies engaged in other direct selling related businesses. We are continually evaluating acquisition
opportunities available to us that we believe will fit our acquisition strategy, namely companies that can increase the size and geographic scope of our operations or otherwise offer us growth and
operating efficiency opportunities.
We may seek to finance acquisitions or develop strategic relationships which may dilute the interests of our shareholders.
The financing for future acquisitions could dilute the interests of our shareholders, result in an increase in our indebtedness, or both. In
addition, an acquisition or other strategic transaction could adversely impact our cash flows and/or operating results, and dilute shareholder interests, for a number of reasons,
including:
-
- interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business
venture; and
-
- any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current
holders of our common stock.
We may be unable to successfully integrate the businesses we have recently acquired and may acquire in the future with our current management and structure.
Our failure to successfully complete the integration of the businesses we acquire could have an adverse effect on our prospects, business activities,
cash flow, financial condition,
results of operations and stock price. Integration challenges may include the following:
-
- assimilating the acquired business' operations products and personnel with our existing operations, products and
personnel;
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-
- estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience
of management with the businesses they are familiar with;
-
- minimizing potential adverse effects on existing business relationships with other suppliers and customers;
-
- successfully developing and marketing the new products and services;
-
- entering markets in which we have limited or no prior experience; and
-
- coordinating our efforts throughout various distant localities and time zones, such as Italy and Australia currently.
The diversion of management's attention and costs associated with acquisitions may have a negative impact on our business.
If management's attention is diverted from the management of our existing businesses as a result of its efforts in evaluating and negotiating new
acquisitions and strategic transactions, the prospects, business activities, cash flow, financial condition and results of operations of our existing businesses may suffer. We also may incur
unanticipated costs in connection with pursuing acquisitions and strategic transactions.
Acquisitions may subject us to additional unknown risks which may affect our customer retention and cause a reduction in our revenues.
In completing prior acquisitions and any future acquisition, we have and will rely upon the representations and warranties and indemnities made by
the sellers with respect to each such acquisition as well as our own due diligence investigation. We cannot assure you that such representations and warranties will be true and correct or that our due
diligence will uncover all materially adverse facts relating to the operations and financial condition of the acquired companies or their customers. To the extent that we are required to pay the debt
obligations of an acquired company, or if material misrepresentations exist, we may not realize the expected benefit from such acquisition and we will have overpaid in cash and/or stock for the value
received in that acquisition.
We may have difficulty managing future growth.
Since we commenced operations in the direct selling business, our business has grown significantly. This growth has placed substantial strain on our
management, operational, financial and other resources. If we are able to continue to expand our operations, we may experience periods of rapid growth, including increased resource requirements. Any
such growth could place increased strain on our management, operational, financial and other resources, and we may need to train, motivate, and manage additional employees, as well as attract new
management, sales, finance and accounting, international, technical, and other professionals in order to oversee our expanded operations. Any failure to expand our workforce and implement appropriate
procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.
The beneficial ownership of a significant percentage of our common stock gives John Rochon effective control of us, and limits the influence of other shareholders on
important policy and management issues.
John P. Rochon, as our Chief Executive Officer and Chairman of our Board, and through his control of Rochon Capital, controls our Company and
important matters relating to us. As a result of his positions with the Company and his voting control of our company, John P. Rochon controls the outcome of all matters submitted to our
shareholders for approval, including the election of our directors, our business strategy, our day-to-day operations and any proposed merger, consolidation or sale of all or substantially all of our
assets. John P. Rochon's control of our company could discourage the acquisition of our common stock by potential investors and could have an anti-takeover effect, preventing a change in
control of our
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company
that might be otherwise beneficial to our shareholders, and possibly depressing the trading price of our common stock. There can be no assurance that conflicts of interest will not arise with
respect to John P. Rochon's ownership and control of our company or that any conflicts will be resolved in a manner favorable to the other shareholders of our Company. In connection with the
Share Exchange Agreement pursuant to which we acquired HCG, Rochon Capital acquired and has the right to receive an additional 25,240,676 shares of our common stock upon its request, the timing
of which is in Rochon Capital's sole discretion. In addition, Richmont Capital Partners V LP, an entity controlled by John Rochon, Jr., was issued a convertible note that converts into
3,200,000 shares of our common stock on or about June 22, 2015. If the additional 25,240,676 and 3,200,000 shares are issued, John P. Rochon together with John Rochon, Jr.
will control approximately 86% of our outstanding shares of common stock.
The issuance of the shares of our common stock in accordance with the Share Exchange Agreement and the conversion of any of our Convertible Notes into common shares will
have a dilutive effect that could cause the share price of our common stock to decline.
Following the issuance of the Second Tranche Stock and conversion of the convertible note described above, the number of outstanding shares of our
common stock will increase to in excess of 50,000,000, with approximately 200,000,000 shares of our common stock available for issuance and John P. Rochon together with John Rochon, Jr.
will beneficially own approximately 86% of our outstanding shares of common stock. When the Second Tranche Stock is issued and the convertible note is converted into common stock, our existing
shareholders will experience immediate dilution of voting rights and our common stock price may decline. Furthermore, the perception that such dilution could occur may cause the market price of our
common stock to decline.
We depend heavily on John P. Rochon, and we may be unable to find a suitable replacement for Mr. Rochon if we were to lose his services.
We are heavily dependent upon John P. Rochon, our Chief Executive Officer and Chairman of our Board. The loss or unavailability of
Mr. Rochon could have a material adverse effect on our prospects, business activities, cash flow, financial condition, results from operations and stock price.
We are dependent upon affiliated parties for the provisions of a substantial portion of our administrative services as we do not have the internal capabilities to provide
such services, and many of our employees are also employees of such affiliated entities.
During the fourth quarter of 2013, we renewed a reimbursement of services agreement for a minimum of one year with Richmont Holdings, Inc. ("Richmont
Holdings"), a private investment and business management company owned 100% by John Rochon, pursuant to which Richmont Holdings provides administrative services to us. CVSL has entered into an
agreement with Richmont Holdings to reimburse Richmont Holdings for a portion of its expenses incurred by us in connection with our use of its office space, access to its office equipment, access to
certain of its personnel, financial analysis personnel, strategy assistance, marketing advice and assorted other services related to our day-to-day operations and our efforts to acquire direct-selling
companies. Although we have begun to establish an infrastructure of personnel and resources necessary to identify, analyze, negotiate and conduct due diligence on direct selling acquisition
candidates, we have generally relied upon Richmont Holdings for advice and assistance in areas related to identification, analysis, financing, due diligence, negotiations and other strategic planning,
accounting, tax and legal matters associated with potential acquisitions. Richmont Holdings and its affiliates have experience in the above areas. There can be no assurance that we can successfully
develop the necessary infrastructure on our own without the assistance of these affiliated entities.
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Each of our subsidiaries is dependent on its key personnel.
The loss of the key executive officers of any of our subsidiaries would have a significant adverse effect on the operations of the affected
subsidiary and its prospects, business activities, cash flow, financial condition and results of operations. Although major decision making
policies are handled by CVSL's senior management, each subsidiary is primarily dependent upon its founder and/or Chief Executive Officer for their leadership roles with the respective sales forces.
For example, TLC is particularly dependent upon Tami Longaberger as the face of the Longaberger brand and her close interaction with the sales field. Agel is particularly dependent upon its Co-Chief
Executive Officers, Jeff Higginson and Jeremiah Bradley, who represent the Agel brand to their sales force and likewise YIAH is dependent upon Colleen Walters, its Chief Executive Officer and founder.
The loss of any of these individuals could have a negative impact on sales field recruiting and sales, which ultimately would impact our revenue. We believe it is critical to retain key leaders of
each of the businesses we acquire, however
there
can be no assurance that any business or company acquired by us will be successful in attracting and retaining its key personnel.
We experience a high level of competition for qualified representatives in the direct selling industry and the loss of key high-level independent sales representatives could
negatively impact our growth and our revenue.
As of June 30, 2014, we had over 40,000 active independent sales representatives, of which more than 600 were at the highest level under our
various compensation plans. These independent sales leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level independent sales representative or a group of
leading representatives could negatively impact our growth and our revenue.
In
the direct selling industry, sales are made to the ultimate consumer principally through independent sales representatives. Generally, there can be a high rate of turnover among a direct selling
company's independent sales representatives. Our independent sales representatives may terminate their service at any time.
Our
ability to remain competitive and maintain and expand our business depends, in significant part, on the success of our subsidiaries in recruiting, retaining, and incentivizing their independent
sales representatives through an appropriate compensation plan, the maintenance of an attractive product portfolio and other incentives, and innovating the direct selling model. We cannot ensure that
our strategies for soliciting and retaining the representatives of our subsidiaries or any direct selling company we acquire in the future will be successful, and if they are not, our prospects,
business activities, cash flow, financial condition, results of operations and stock price could be harmed.
Several
factors affect our ability to attract and retain independent sales representatives, including:
-
- on-going motivation of our independent sales representatives;
-
- 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 representatives.
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Changes to our compensation arrangements could be viewed negatively by some independent sales representatives and could cause failure to achieve desired long-term results
and increases in commissions paid could have a negative impact on profitability.
The payment of commissions and incentives, including bonuses and prizes, is one of our most significant expenses. We closely monitor the amount of
the commissions and incentives we pay as a percentage of net sales, and may periodically adjust our compensation plan to better manage these costs.
We
modify components of our compensation plans from time to time in an attempt to remain competitive and attractive to existing and potential independent sales representatives including modifications
to:
-
- address changing market dynamics;
-
- provide incentives to independent sales representatives that are intended to help grow our business;
-
- conform to local regulations; and
-
- address other business needs.
Because
of the size of our sales force and the complexity of our compensation plans, it is difficult to predict how independent sales representatives will view such changes and whether such changes
will achieve their desired results. Furthermore, any downward adjustments to commissions and incentives may make it difficult to attract and retain our independent sales representatives or cause us to
lose some of our existing independent sales representatives. There can be no assurance that changes to our compensation plans will be successful in achieving target levels of commissions and
incentives as a percentage of net sales and preventing these costs from having a significant adverse effect on our earnings.
Our business operates in an industry with intense competition.
Our business operates in an industry with numerous manufacturers, distributors and retailers of consumer goods. The market for our products is
intensely competitive. Many of our competitors, such as Avon Products Inc., Tupperware Brands Corp. and others are significantly larger, have greater financial resources, and have better name
recognition than we do. We also rely on our independent sales representatives to market and sell our products through direct marketing techniques. Our ability to compete with other direct marketing
companies depends greatly on our ability to attract and retain qualified independent sales representatives. In addition, we currently
do not have significant patent or other proprietary protection, and our competitors may introduce products with the same or similar ingredients that we use in our products. As a result, we may have
difficulty differentiating our products from our competitors' products and other competing products that enter the market. There can be no assurance that our future operations would not be harmed as a
result of changing market conditions and future competition.
We and our subsidiaries generally conduct business in one channel.
Our principal business segment is conducted worldwide in one channel, the direct selling channel. Products and services of direct selling companies
are sold to retail consumers. Spending by retail consumers is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and
consumer confidence, all of which are beyond our control. Our subsidiaries may face economic challenges because customers may continue to have less money for discretionary purchases as a result of job
losses, foreclosures, bankruptcies, reduced access to credit and falling home prices, among other things.
Changes
in consumer purchasing habits, including reducing purchases of a direct selling company's products, or reducing purchases from representatives or buying products in channels other than direct
selling, such as retail, could reduce our sales, impact our ability to execute our business strategy or have a
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material
adverse effect on our prospects, business activities, cash flow, financial condition, and results of operations.
Direct selling companies are subject to numerous laws.
The direct selling industry is subject to a number of federal and state regulations administered by the Federal Trade Commission (the "FTC") and
various state agencies in the United States, as well as regulations regarding direct selling activities in foreign markets. Laws specifically applicable to direct selling companies generally are
directed at preventing deceptive or misleading marketing and sales practices, and include laws often referred to as "pyramid" or "chain sales" scheme laws. These "anti-pyramid" laws are focused on
ensuring that product sales ultimately are made to end consumers and that advancement within a sales organization is based on sales of products and services rather than investments in the
organization, recruiting other participants, or other
non-retail sales-related criteria. The regulatory requirements concerning direct selling programs involve a high level of subjectivity and are subject to judicial interpretation. We and our
subsidiaries are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. Any direct selling
company that we own or we acquire in the future, could be found not to be in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting
our business in these markets and harm our prospects, business activities, cash flow, financial condition, results of operations and stock price. We are aware of pending judicial actions and
investigations against other companies in the direct selling industry. Adverse decisions in these cases could impact our business if direct selling laws or anti-pyramid laws are interpreted more
narrowly or in a manner that results in additional burdens or restrictions on direct selling. The implementation of such regulations may be influenced by public attention directed toward a direct
selling company, its products or its direct selling program, such that extensive adverse publicity could result in increased regulatory scrutiny. If any government were to ban or restrict our business
model, our prospects, business activities, cash flows, financial condition and results of operations may be materially adversely affected.
We are subject to numerous government regulations.
Our products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and
authorities, including the Food and Drug Administration (the "FDA"), the FTC, the Consumer Product Safety Commission, the Department of Agriculture, State Attorney Generals and other state regulatory
agencies in the United States, and similar government agencies in each market in which we operate. Government authorities regulate advertising and product claims regarding the efficacy and benefits of
our products. These regulatory authorities typically require adequate and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation
can vary widely from market to market and there is no assurance that the research and development efforts that we undertake to support our claims will be deemed adequate for any particular product or
claim. If we are unable to show adequate and reliable scientific substantiation for our product claims, or our marketing materials or the marketing materials of our sales force make claims that exceed
the scope of allowed claims for spices, dietary supplements or skin care products that we offer, the FDA or other regulatory authorities could take enforcement action requiring us to revise our
marketing materials, amend our claims or stop selling certain products, which could harm our business.
For
example, the FDA recently issued warning letters to several cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims
regarding gene activity, cellular rejuvenation, and rebuilding collagen. There is a degree of subjectivity in determining whether a claim is an improper structure/function claim. Given this
subjectivity and our research and development focus on skin care products and dietary supplements, there is a risk that we could receive a warning letter, be required to modify our product claims or
take other actions to satisfy the FDA if the FDA determines any of our marketing materials include improper structure/function claims for our cosmetic products. In addition, plaintiffs' lawyers have
filed class action lawsuits against some of our
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competitors
after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to governmental actions or class action lawsuits, which could harm our
business.
There
are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing
business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies.
As
a U.S. entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between us and
our subsidiaries and for product purchases, management services and contractual obligations, such as the payment of sales commissions.
The failure of the representatives of our subsidiaries to comply with laws, regulations and court decisions creates potential exposure for regulatory action or lawsuits
against us.
Because the representatives that market and sell our products and services are independent contractors, and not employees, we and our subsidiaries
have limited control over their actions. In the United States, the direct selling industry and regulatory authorities have generally relied on the implementation of a company's rules and policies
governing its direct sellers, designed to promote retail sales, protect consumers, prevent inappropriate activities and distinguish between legitimate direct selling plans and unlawful pyramid
schemes, to compel compliance with applicable laws. We maintain formal compliance measures to identify specific complaints against our representatives and to remedy any violations through appropriate
sanctions, including warnings, suspensions and, when necessary, terminations. Because of the significant number of representatives our subsidiaries have, it is not feasible for our subsidiaries to
monitor the representatives' day-to-day business activities. We and our subsidiaries must maintain the "independent contractor" status of our representatives and, therefore, have limited control over
their business activities. As a result, we cannot insure that our representatives will comply with all applicable rules and regulations, domestically or globally. Violations by our representatives of
applicable laws or of our policies and procedures in dealing with customers could reflect negatively on our prospects, business activities, cash flow, financial condition and results of operations,
including our business reputation, and could subject us to fines and penalties. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability
because of the actions of our representatives.
Although
the physical labeling of our products is not within the control of our representatives, our representatives must nevertheless advertise our products in compliance with the extensive
regulations
that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.
Our
foods, nutritional supplements and skin care products are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made about our products. The
treatment or cure of disease, for example, is not a permitted claim for these products. While we train our independent sales representatives and attempt to monitor our sales representatives' marketing
materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our independent sales representatives fail to comply with these
restrictions, then we and our independent sales representatives could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial
condition and operating results. Although we expect that our responsibility for the actions of our independent sales representatives in such an instance would be dependent on a determination that we
either controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our independent sales representatives.
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Our operations could be harmed if we are found not to be in compliance with Good Manufacturing Practices.
In the United States, FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements for the nutritional supplement
industry require us and our vendors to maintain good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping. The
ingredient identification requirement, which requires us to confirm the levels, identity and potency of ingredients listed on our product labels within a narrow range, is particularly burdensome and
difficult for us with respect to our cosmetic products which contains many different ingredients. We are also required to report serious adverse events associated with consumer use of our products.
Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are not in compliance with these regulations or public reporting of adverse events harms our
reputation for quality and safety. A finding of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling certain products. In addition,
compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance.
Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies could harm our prospects, business activities, cash
flow, financial condition and results of operations.
Our number of representatives and the results of our operations may be affected significantly by the public's perception of our subsidiaries and of
similar companies. This perception is dependent upon opinions concerning:
-
- the safety and quality of our products, components and ingredients, as applicable;
-
- the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies'
representatives;
-
- our marketing program; and
-
- the business of direct selling generally.
Adverse
publicity concerning any actual or purported failure of our subsidiaries or of their representatives to comply with applicable laws and regulations regarding product claims and advertising,
good manufacturing practices, the regulation of our marketing program, the licensing of our products for sale in our target markets or other aspects of our business, whether or not resulting in
enforcement actions or the imposition of penalties, could have an adverse effect on our goodwill and could negatively affect the ability to attract, motivate and retain representatives, which would
negatively impact our ability to generate revenue.
If we are unable to develop and introduce new products that gain acceptance from our customers and representatives, our business could be harmed.
Our continued success depends on our ability to anticipate, gauge, and react in a timely and effective manner to changes in consumer spending
patterns and preferences. We must continually work to discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach
as to how and where we market and sell our products. A critical component of our business is our ability to develop new products that create enthusiasm among our independent sales representatives and
ultimate customers. If we are unable to introduce new products, our independent sales representatives' productivity could be harmed. In addition, if any new products fail to gain market acceptance,
are restricted by regulatory requirements or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce new products 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
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protections
of competitors that may limit our ability to offer comparable products, and the difficulties in anticipating changes in consumer tastes and buying preferences.
A general economic downturn, a recession globally or in one or more of our geographic regions or other challenges may adversely affect our business and our access to
liquidity and capital.
A downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions, or the current global
macro-economic pressures, could adversely affect our business and our access to liquidity and capital. We could experience a decline in revenues, profitability and cash flow due to reduced orders,
payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity
and capital resources, including our ability to raise additional capital and maintain credit lines and offshore cash balances.
Consumer
spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally,
all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and
may impact sales of our products. We could face continued economic challenges in fiscal 2014 if
customers continue to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit or sharply falling home prices, among other things.
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
Some of the nutritional supplements we offer are made from vitamins, minerals, herbs, and other substances for which there is a long history of human
consumption. Other nutritional supplements we offer contain innovative ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience
with human consumption of certain of these ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have not
performed or sponsored any clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products
distributed by other companies, we could be adversely affected in the event that these products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity
associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.
We frequently rely on outside suppliers and manufacturers, and if those suppliers and manufactures fail to supply products in sufficient quantities and in a timely fashion,
our business could suffer.
We depend on outside suppliers for raw materials and finished goods. We also may use outside manufacturers to make all or part of our products. Our
profit margins and timely product delivery may be dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our contract
manufacturers acquire all of the raw materials for manufacturing our products from third-party suppliers. We do not believe we are materially dependent on any single supplier for raw materials or
finished goods, with the exception of Innovative FlexPak, LLC, which produces substantially all of Agel's finished goods. We believe that there are other suppliers who could produce these
products for Agel, if necessary; however, transitioning to other suppliers could result in delays or additional expense. In order to mitigate this risk, Agel has developed relationships with two
additional suppliers and has begun diversifying the source of its finished goods. In the event we were to lose any significant suppliers and experience delays in identifying or transitioning to
alternative suppliers, we could experience product shortages or product back orders, which could harm our business. There can be no assurance that suppliers will be able to provide our contract
manufacturers the raw materials or finished goods in the quantities and at the appropriate level of quality that we request or at a price that we
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are
willing to pay. We are also subject to delays caused by any interruption in the production of these materials including weather, crop conditions, climate change, transportation interruptions and
natural disasters or other catastrophic events. Our ability to enter new markets and sustain satisfactory levels of sales in each market may depend on the ability of our outside suppliers and
manufacturers to provide required levels of ingredients and products and to comply with all applicable regulations.
We
are dependent upon the uninterrupted and efficient operation of our manufacturers and suppliers of products. Those operations are subject to power failures, the breakdown, failure, or substandard
performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including
the FDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or
results of operations.
Disruptions to transportation channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those
markets.
We may experience disruptions to the transportation channels used to distribute our products, including increased airport and shipping port
congestion, a lack of transportation capacity, increased fuel expenses, and a shortage of manpower. Disruptions in our container shipments may result in increased costs, including the additional use
of airfreight to meet demand. Although we have not recently experienced significant shipping disruptions, we continue to watch for signs of upcoming congestion. Congestion to ports can affect
previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our profitability.
A failure of our information technology systems would harm our business.
Our IT systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters, telecommunication
failures, and human error or intentional acts of sabotage vandalism, break-ins and similar acts. Although we have adopted and implemented a business continuity and disaster recovery plan, which
includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting our
business and the results of our operations.
Our business is subject to online security risks, including security breaches.
Our businesses involve the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or
misuse of this information, litigation, and potential liability. An increasing number of websites, including those of several large companies, have recently disclosed breaches of their security, some
of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems,
change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to
circumvent our security measures could misappropriate our or our customers' proprietary information, cause interruption in our operations, damage our computers or those of our customers, or otherwise
damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation,
and a loss of confidence in our security measures, which could harm our business.
Our
servers are also vulnerable to computer viruses, physical or electronic break-ins, "denial-of-service" type attacks and similar disruptions that could, in certain instances, make all or portions
of our websites unavailable for periods of time. We may need to expend significant resources to protect against security 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
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information,
could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits, which may not be adequate to reimburse us
for losses caused by security breaches.
Our
web customers, as well as those of other prominent companies, may be targeted by parties using fraudulent "spoof" and "phishing" emails to misappropriate passwords, credit card numbers, or other
personal information or to introduce viruses or other malware through "trojan horse" programs to our customers' computers. These emails appear to be legitimate emails sent by us, but they may direct
recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to
mitigate "spoof" and "phishing" emails through product improvements and user education, "spoof" and "phishing" remain a serious problem that may damage our brands, discourage use of our websites, and
increase our costs.
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international
markets is exposed to risks associated with our international operations, including:
-
- the possibility that a foreign government might ban or severely restrict our business method of direct selling, or that
local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
-
- the lack of well-established or reliable legal systems in certain areas where we operate;
-
- the presence of high inflation in the economies of international markets in which we operate;
-
- the possibility that a government authority might impose legal, tax or other financial burdens on us or our sales force,
due, for example, to the structure of our operations in various markets;
-
- the possibility that a government authority might challenge the status of our sales force as independent contractors or
impose employment or social taxes on our sales force; and
-
- the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
Currency exchange rate fluctuations could reduce our overall profits.
In 2013, we recognized 16% of net sales in markets outside of the United States. This percentage will likely increase in 2014 when we include a full
year of results from our international acquisitions. In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the
United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales,
operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have
upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.
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.
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Regulators
closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer pricing
methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.
A
change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial
results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
Non-compliance with anti-corruption laws could harm our business.
Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA"). Any allegations that we
are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any
determination that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties.
Although we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are
aware that one of our competitors is under investigation in the United States for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse
publicity or increased scrutiny of our industry, our business could be harmed.
We may own, obtain or license intellectual property material to our business, and our ability to compete may be adversely affected by the loss of rights to use that
intellectual property.
The market for our products may depend significantly upon the value associated with product innovations and our brand equity. Many direct sellers
own, obtain or license material patents and trademarks used in connection with the marketing and distribution of their products. Those companies must expend time and resources in developing their
intellectual property and pursuing any infringers of that intellectual property. The laws of certain foreign countries may not protect a company's intellectual property rights to the same extent as
the laws of the United States. The costs required to protect a company's patents and trademarks may be substantial.
Challenges by private parties to the direct selling system could harm our business.
Direct selling companies have historically been subject to legal challenges regarding their method of operation or other elements of their business
by private parties, including their own representatives, in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting
over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire in the
future.
As a direct selling company, we may face product liability claims and could incur damages and expenses, which could affect our prospects, business activities, cash flow,
financial condition and results of operations.
As a direct selling company we may face financial liability from product liability claims if the use of our products results in significant loss or
injury. A substantial product liability claim could exceed the amount of our insurance coverage or could be excluded under the terms of our existing insurance policy, which could adversely affect our
prospects, business activities, cash flow, financial condition and results of operations.
Selling
products for human consumption such as nutritional supplements and spices as well as the sale of skin care products involve a number of risks. We may need to recall some of our products if
they become
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contaminated,
are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which
could have a material adverse effect on our business results and the value of our brands. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity
surrounding such assertions regarding our products could adversely affect our reputation and brand image.
If we fail to protect our trademarks and tradenames, then our ability to compete could be negatively affected, which would harm our financial condition and operating
results.
The market for our products depends upon the goodwill associated with our trademark and tradenames. We own, or have licenses to use, the material
trademark and trade name rights used in connection with the packaging, marketing and distribution of our products in the markets where those products are sold. Therefore, trademark and trade name
protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting
trademark or trade name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The loss or
infringement of our trademarks or tradenames could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
We
permit the limited use of our trademarks by our representatives to assist them in the marketing of our products. It is possible that doing so may increase the risk of unauthorized use or misuse of
our trademarks in markets where their registration status differs from that asserted by our independent sales representatives, or they may be used in association with claims or products in a manner
not permitted under applicable laws and regulations. Were this to occur, it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.
Our business is subject to intellectual property risks.
Many of our products are not protected by patents. Restrictive regulations governing the precise labeling of ingredients and percentages for
nutritional supplements, the large number of manufacturers that produce products with many active ingredients in common and the rapid change and frequent reformulation of products make patent
protection impractical. As a result, we enter into confidentiality agreements with certain of our employees in our research and development activities, our independent sales representatives,
suppliers, directors, officers and consultants to help protect our intellectual property, investment in research and development activities and trade secrets. There can be no assurance that our
efforts to protect our intellectual property and trademarks will be successful, nor can there be any assurance that third parties will not assert claims against us for infringement of intellectual
property rights, which could result in our business being required to obtain licenses for such rights, to pay royalties or to terminate our manufacturing of infringing products, all of which could
have a material negative impact on our financial position, results of operations or cash flows.
We have identified material weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional
material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report
our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in
our stock price.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act. Our stated growth strategy is to acquire companies, some of which may not have invested in adequate systems or staffing to meet public company financial
reporting standards. We review the financial reporting and other systems that each
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company
has. However, in many cases, especially in the case of private companies we acquire, the financial systems that are in place may not be as robust as needed. We have identified material
weaknesses in our internal controls with respect to our financial statement closing process of our financial statements for the year ended December 31, 2013. Our management discovered certain
conditions that we deemed to be material weaknesses and significant deficiencies in the internal controls of TLC, which was acquired during 2013 and which failed to employ a sufficient number of staff
in its finance and accounting department to maintain optimal segregation of duties and to provide optimal levels of oversight. This lack of personnel was acute during our 2013 audit which resulted in
certain audit adjustments.
We
have taken actions that we believe will substantially remediate the material weaknesses identified above. In response to the identification of these material weaknesses, we: (1) have
appointed a controller for all CVSL subsidiaries as well as the parent company; (2) hired additional staff at TLC; (3) arranged for key managers and accounting personnel to work closely
with our independent audit firm in evaluating our progress in remediating our material weaknesses with oversight by the audit committee; (4) evaluated control procedures and where possible
modified those control procedures to improve oversight; and (5) purchased and begun implementation of a new global ERP system which will provide accounting for all of our current and future
subsidiaries. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future. We will be required
to expend time and resources to further improve our internal controls over financial reporting, including by expanding our finance and accounting staff.
We may be held responsible for certain taxes or assessments relating to the activities of our independent sales representatives, which could harm our financial condition and
operating results.
Our independent sales representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us
to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar
taxes with respect to our representatives. In the event that local laws and regulations require us to treat our independent sales representatives as employees, or if our representatives are deemed by
local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related
assessments and penalties, which could harm our financial condition and operating results.
A majority of our directors will not be required to be "independent" and several of our directors and officers have other business interests.
We are not currently listed on a national securities exchange or an inter-dealer quotation system that requires a majority of our directors to be
independent. In the event our common stock is approved for listing on the NYSE MKT, we will qualify as a "controlled company" because Mr. Rochon, through his control of Rochon Capital, will
continue to hold in excess of 50% of our voting securities. As a controlled company, we will qualify for certain exemptions to the NYSE MKT listing requirements, including the requirement that a
majority of our directors be independent, and the requirements to have a compensation committee and a nominating/corporate governance committee, each composed of entirely independent directors.
Although a majority of our directors are currently "independent" under the NYSE MKT independence standards and our compensation committee and nominating and corporate governance committee are
currently composed of only independent directors, this may not always be the case. If at any point in the future, a majority of our directors are not independent, this lack of "independence" may
interfere with our directors' judgment in carrying out their responsibilities as directors.
Several
of our directors have other business interests, including Mr. Rochon, who controls Richmont Holdings. Those other interests may come into conflict with our interests and the interests
of our shareholders. Mr. Rochon and several of our other directors serve on the boards of directors of several
51
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other
companies and, as a result of their business experience, may be asked to serve on the boards of other companies. We may compete with these other business interests for such directors' time and
efforts.
CVSL
officers are currently working for us on a part-time basis and also work for Richmont Holdings or its affiliated entities. These part-time employees also work at other jobs and have discretion to
decide what time they devote to our activities, which may result in a lack of availability when needed due to their responsibilities at other jobs.
Impairment of goodwill and intangible assets is possible, depending upon future operating results and the value of our common stock.
We will test our goodwill and intangible assets for impairment during the fourth quarter of the current fiscal year and in future fiscal years, and
on an interim basis, if indicators of impairment exist. Factors which influence the evaluation of impairment of our goodwill and intangible assets include the price of our common stock and expected
future operating results. If the carrying value of a reporting unit or an intangible asset is no longer deemed to be recoverable, we potentially could incur material impairment charges. Although we
believe these charges would be non-cash in nature and would not affect our operations or cash flow, these charges would adversely affect shareholders' equity and reported results of operations in the
period charged.
Risks Related to our Securities
There currently is a limited liquid trading market for our common stock and we cannot assure investors that a robust trading market will ever develop or be sustained.
To date there has been a limited trading market for our common stock on the OTC Markets OTCQX. We cannot predict how liquid the market for our common
stock may become. We have applied for listing of our common stock on the NYSE MKT and believe such a listing would be beneficial to us and our shareholders. We currently do not satisfy the initial
listing standards of any exchange, and we cannot assure investors that we will be able to satisfy the listing standards of the NYSE MKT, or that our common stock will be accepted for listing on such
exchange. Should we fail to satisfy the initial listing requirements of the NYSE MKT, or if our common stock is otherwise rejected for listing and remains listed on the OTC Markets OTCQX, the trading
price of our common stock could be subject to increased volatility and the trading market for our common stock may be less liquid. A lack of an active market may impair investors' ability to sell
their shares at the time they wish to sell them or at a price they consider reasonable. The lack of an active trading market may impair our ability to raise capital by selling shares of capital stock
and may impair our ability to acquire other companies by using our common stock as consideration.
For
companies whose securities are traded in the OTC Markets OTCQX, it is generally more difficult to obtain accurate quotations, to obtain coverage for significant news events (because major wire
services generally do not publish press releases about such companies) and to obtain needed capital.
The NYSE MKT may not list our securities for quotation on its exchange which could limit investors' ability to make transactions in our securities and subject us to
additional trading restrictions.
Although we expect to meet, on a pro forma basis, the NYSE MKT's minimum initial listing standards, which generally mandate that we meet certain
requirements relating to shareholders' equity, market capitalization, aggregate market value of publicly held shares and distribution requirements and minimum share price, we cannot assure you that we
will be able to meet those initial listing requirements. If the NYSE MKT does not list our securities for trading on its exchange, we could face significant material adverse consequences,
including:
-
- a limited availability of market quotations for our securities;
-
- reduced liquidity with respect to our securities;
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-
- a determination that our shares of common stock are "penny stock" which will require brokers trading in our shares of
common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
-
- a limited amount of news and analyst coverage for our company; and
-
- a decreased ability to issue additional securities or obtain additional financing in the future.
The
National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as "covered
securities."
Because
we expect that our common stock will be listed on the NYSE MKT, our common stock will be covered securities. Although the states are preempted from regulating the sale of covered securities,
the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of
covered securities in a particular case. Further, if we are not listed on the NYSE MKT or another national securities exchange, then our common stock would not be considered covered securities and we
would be subject to regulation in each state in which we offer our securities.
Our failure to meet the continued listing requirements of the NYSE MKT could result in a de-listing of our common stock.
If after listing we fail to satisfy the continued listing requirements of the NYSE MKT, such as the corporate governance requirements or the minimum
stockholder's equity requirement, the NYSE MKT may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair our
shareholders' ability to sell or purchase our common stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the NYSE MKT's listing
requirements, but we can provide no assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve
the liquidity of our common stock.
There is no assurance of an established public trading market and our limited trading market may cause volatility in our share price.
The OTCQX, where our common stock is currently quoted, is an inter-dealer, over-the-counter market that provides significantly less liquidity than
the NYSE MKT. Our stock is thinly traded due to the limited number of shares available for trading on the OTCQX market thus causing large swings in price. As such, investors and potential investors
may find it difficult to obtain accurate stock price quotations, and holders of our common stock may be unable to resell their securities at or near their original purchase price or at any price. If
an active market for our stock develops and continues, our stock price may nevertheless be volatile. Sales of substantial amounts of our common stock, or the perception that such sales might occur,
could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our shareholders could suffer losses or be
unable to liquidate their holdings. Although we have applied for listing of our common stock on the NYSE MKT, no assurance can be
given that our application will be approved, or that, if the application is approved, the price of our common stock will become less volatile.
Market
prices for our common stock will be influenced by a number of factors, including:
-
- the issuance of new equity securities pursuant to a future offering, including issuances of preferred stock;
-
- the introduction of new products or services by us or our competitors;
-
- the acquisition of new direct selling businesses;
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-
- changes in interest rates;
-
- significant dilution caused by the anti-dilutive clauses in our financial agreements;
-
- competitive developments, including announcements by competitors of new products or services or significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
-
- variations in quarterly operating results;
-
- change in financial estimates by securities analysts;
-
- a limited amount of news and analyst coverage for our company;
-
- the depth and liquidity of the market for our shares of common stock;
-
- 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;
-
- investor perceptions of our company and the direct selling segment generally; and
-
- general economic and other national and international conditions.
Market
price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price
and trading volume.
Securities research analysts establish and publish their own periodic projections for our business. These projections may vary widely from one
another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research analysts' projections. Similarly, if one or
more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business or if one or more of these analysts ceases coverage of our company
or fails to publish reports on us regularly, our stock price or trading volume could decline. If no securities or industry analysts begin to cover us, the trading price for our stock and the trading
volume could be adversely affected.
Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management's attention and resources.
It is not uncommon for securities class action litigation to be brought against a company following periods of volatility in the market price of such
company's securities. Companies in certain industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Our common stock has experienced
substantial price volatility in the past. This may be a result of, among other things, variations in our results of operations and announcements by us and our competitors, as well as general economic
conditions. Our stock price may continue to experience substantial volatility. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in
substantial costs and could divert the attention and resources of our management.
We are obligated to issue additional securities in the future, which will reduce investors' ownership percentage in our outstanding securities and will dilute our share
value.
If future operations or acquisitions are financed through issuing equity securities, shareholders could experience significant dilution. In addition,
securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. The issuance of
shares of our common stock upon the exercise of options, which we may grant in the future, may result in dilution to our shareholders. Our articles of incorporation currently authorize us to issue
5,000,000,000 (prior to the company's 1-for-20 reverse stock split effected on
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October 16,
2014) shares of common stock. Following the issuance of the Second Tranche Stock and the 3,200,000 shares of our common stock upon conversion of the convertible note, the
number of outstanding shares of our common stock will increase to in excess of 50,000,000, with approximately 200,000,000 shares of our common stock available for issuance. The future issuance
of our common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may issue common stock in the future, including for services or
acquisitions or other corporate actions that may have the effect of diluting the value of the shares held by our shareholders, and might have an adverse effect on any trading market for our common
stock.
We have not paid and do not anticipate paying any dividends on our common stock.
We have not paid any dividends on our common stock to date and it is not anticipated that any dividends will be paid to holders of our common stock
in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of our businesses, it is currently anticipated that any earnings will be retained
to finance our future expansion and for the implementation of our business strategy. Our shareholders will not realize a return on their investment in us unless and until they sell shares after the
trading price of our common stock appreciates from the price at which a shareholder purchased shares of our common stock. As an investor, you should consider that a lack of a dividend can further
affect the market value of our common stock and could significantly affect the value of any investment in our company.
Complying with federal securities laws as a publicly traded company is expensive. Any deficiencies in our financial reporting or internal controls could adversely affect our
financial condition, ability to issue our shares in acquisitions and the trading price of our common stock.
Companies trading on the OTCQX, such as our company, must be reporting issuers under Section 12 of the Exchange Act, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation privileges. We file quarterly and annual reports containing our financial statements with the SEC. We may
experience difficulty in meeting the SEC's reporting requirements. Any failure by us to timely file our periodic reports with the SEC could harm our reputation, reduce the trading price of our common
stock, result in removal from the over-the-counter markets and cause sanctions or other actions to be taken by the SEC against us. A failure to timely file our periodic reports with the SEC could
cause additional harm, such as a default under an indenture or loan covenant that we may enter into from time to time. We will incur significant legal, accounting and other expenses related to
compliance with applicable securities laws.
Our articles of incorporation, bylaws and Florida law have anti-takeover provisions that could discourage, delay or prevent a change in control, which may cause our stock
price to decline.
Our articles of incorporation, bylaws and Florida law contain provisions which could make it more difficult for a third party to acquire us, even if
closing such a transaction would be beneficial to our shareholders. We are authorized to issue up to 500,000 shares of preferred stock. This preferred stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by our Board without further action by shareholders. The terms of any series of preferred stock may include preferential voting rights
(including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. The issuance of any preferred
stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.
Provisions
of our articles of incorporation, bylaws and Florida law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a
change in
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control,
including changes a shareholder might consider favorable. Such provisions may also prevent or frustrate attempts by our shareholders to replace or remove our management. In particular, the
articles of incorporation, bylaws and Florida law, as applicable, among other things, provide the Board with the ability to alter the bylaws without shareholder approval, and provide that vacancies on
the Board may be filled by a majority of directors in office, although less than a quorum.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 9, 2014, we issued 5,316 shares of common stock to a director as director compensation and an aggregate of 5,264 shares
of restricted common stock to two directors for which restrictions lapse on July 8, 2015. 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 as a transaction by an
issuer not involving any public offering. The securities were not offered pursuant to a general solicitation and the purchasers of the securities represented that they were "accredited investors" as
defined in Regulation D under the Securities Act of 1933. We also directed our transfer agent to issue the stock certificates for the shares of Common Stock with the appropriate restrictive
legend.
On
July 2, 2014, we issued a warrant exercisable for 50,000 shares of our common stock at an exercise price of $12.80 per share. In consideration of a two year consulting
agreement with an individual with direct selling industry experience. The warrant is exercisable for a term of one year from its issuance date; provided, however, that the term will be extended for an
additional year if on July 1, 2015 the shares of common stock underlying the warrant are subject to an effective registration statement under the Securities Act or our common stock is listed on
the Nasdaq National Market or the NYSE MKT. In addition, the warrant provides for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon
exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation.
On
June 5, 2014, pursuant to the acquisition of the assets of Uppercase Living, LLC, CVSL issued 16,195 shares of Common Stock to UL SLC, LLC, which shares have not yet been
released and are being held in escrow subject to certain closing conditions. 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 as a transaction by an issuer not involving any public offering. The securities were not offered pursuant to a general solicitation and the status of the purchaser of the
securities represented that they were "accredited investors" under the Securities Act of 1933. We also directed our transfer agent to issue the stock certificates for the shares of Common Stock with
the appropriate restrictive legend.
On
May 6, 2014, we issued warrants exercisable for an aggregate of 18,750 shares of our common stock at an exercise price of $11.00 per share. The warrants are exercisable for a term of
one year from their issuance date; provided, however, that the term will be extended for an additional year if on May 5, 2014 the shares of common stock underlying the warrant are subject to an
effective registration statement under the Securities Act or our common stock is listed on the Nasdaq National Market or the NYSE MKT. In addition, the warrants provide for piggyback registration
rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization,
reorganization, merger or consolidation. 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 as a
transaction by an issuer not involving any public offering. The securities were not offered pursuant to a general solicitation and the purchasers of the securities represented that they were
"accredited investors" as defined in Regulation D under the Securities Act of 1933. We also directed our transfer agent to issue the stock certificates for the shares of Common Stock with the
appropriate restrictive legend.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K:
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
3.1 |
|
Amendment to Bylaws effective July 9, 2014 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on July 15, 2014). |
|
4.1 |
|
Lockup Agreement between International Equities Group and Computer Vision Systems Laboratories dated February 15, 2013 (incorporated by reference to 99.10 to Schedule 13D/A (File No. 005-85515) filed with the
Commission on February 19, 2013). |
|
4.2 |
|
Amendment to Share Exchange Agreement to Defer Second Tranche Closing Indefinitely dated April 10, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 000-52818) filed April 12,
2013). |
|
4.3 |
|
Irrevocable Proxy between Computer Vision Systems Laboratories and Rochon Capital Partners Ltd. (incorporated by reference to Exhibit 99.12 to Schedule 13-D/A (File No. 005-85515) filed with the Commission on
June 27, 2013). |
|
4.4 |
|
Director Smart Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 000-52818) filed with the Commission on July 24, 2013). |
|
4.5 |
|
Form of Warrant issued in May 2014 (incorporated by reference to Exhibit 4.10 to Form S-1 (File No. 333-196155) filed with the Commission on May 22, 2014). |
|
4.6 |
|
Form of Warrant issued in July 2014 (incorporated by reference to Exhibit 4.11 to Form S-1/A (File No. 333-196155) filed with the Commission on July 15, 2014). |
|
4.7 |
|
Second Amendment to Convertible Subordinated Unsecured Promissory Note, dated as of June 12, 2014, between CVSL Inc. and Richmont Capital Partners V LP (incorporated by reference to Exhibit 10.1 of our Current
Report on Form 8-K (File No. 000-52818) filed with the Commission on June 16, 2014). |
|
4.8 |
|
Promissory note dated July 11, 2014 between Agel Enterprises, Inc. and Tamala L. Longaberger (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed with
the Commission on July 15, 2014). |
|
9.1 |
|
Voting Agreement by and among Tamala L. Longaberger Revocable Trust, Rochon Capital Partners Ltd, Computer Vision Systems Laboratories Corp. dated March 18, 2013 (incorporated by reference to Exhibit 99.11 to
Schedule 13D/A (File No. 005-85515) filed with the Commission on June 27, 2013). |
|
10.1 |
|
Amendment to Share Exchange Agreement to Defer Second Tranche Closing Indefinitely dated April 10, 2013 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed
with the Commission on April 12, 2013). |
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|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
10.2 |
|
Equity Contribution Agreement, dated as of November 11, 2013, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 13 to Schedule 13D/A (File No. 005-85515) filed with
the Commission on April 1, 2014 by Rochon Capital Partners, Ltd.). |
|
10.3 |
|
Satisfaction of Obligation dated December 3, 2013 between CVSL, Rochon Capital Partners Ltd. and International Equities Group, Inc. (incorporated by reference to Exhibit 14 to Schedule 13D/A (File
No. 005-85515) filed with the Commission on April 1, 2014 by Rochon Capital Partners, Ltd.). |
|
10.4 |
|
Equity Contribution Agreement, dated as of May 1, 2014, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 99.13 to Schedule 13D/A (File No. 005-85515) filed with
the Commission on May 7, 2014 by Rochon Capital Partners, Ltd.). |
|
10.5 |
|
Credit and Security Agreement dated October 23, 2012 among Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.15 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.6 |
|
First Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.16 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.7 |
|
Second Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.17 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.8 |
|
Third Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.18 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.9 |
|
Fourth Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.19 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.10 |
|
Fifth Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.20 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.11 |
|
Restricted Stock Agreement between CVSL Inc. and Roy Damary dated July 9, 2014 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission
on July 15, 2014). |
|
10.12 |
|
Restricted Stock Agreement between CVSL Inc. and Bernard Ivaldi dated July 9, 2014 (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K (File No. 000-52818) filed with the
Commission on July 15, 2014). |
|
10.13 |
|
Agreement for Purchase and Sale dated as of July 31, 2014 between The Longaberger Company and CFI NNN Raiders, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on August 1, 2014). |
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|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
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.* |
|
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.** |
- *
- 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.
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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/ KELLY L. KITTRELL
Kelly L. Kittrell Chief Financial Officer (Principal Financial and
Principal Accounting Officer) |
|
|
Date: October 22, 2014 |
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INDEX TO EXHIBITS
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
3.1 |
|
Amendment to Bylaws effective July 9, 2014 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on July 15, 2014). |
|
4.1 |
|
Lockup Agreement between International Equities Group and Computer Vision Systems Laboratories dated February 15, 2013 (incorporated by reference to 99.10 to Schedule 13D/A (File No. 005-85515) filed with the
Commission on February 19, 2013). |
|
4.2 |
|
Amendment to Share Exchange Agreement to Defer Second Tranche Closing Indefinitely dated April 10, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 000-52818) filed April 12,
2013). |
|
4.3 |
|
Irrevocable Proxy between Computer Vision Systems Laboratories and Rochon Capital Partners Ltd. (incorporated by reference to Exhibit 99.12 to Schedule 13-D/A (File No. 005-85515) filed with the Commission on
June 27, 2013). |
|
4.4 |
|
Director Smart Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 000-52818) filed with the Commission on July 24, 2013). |
|
4.5 |
|
Form of Warrant issued in May 2014 (incorporated by reference to Exhibit 4.10 to Form S-1 (File No. 333-196155) filed with the Commission on May 22, 2014). |
|
4.6 |
|
Form of Warrant issued in July 2014 (incorporated by reference to Exhibit 4.11 to Form S-1/A (File No. 333-196155) filed with the Commission on July 15, 2014). |
|
4.7 |
|
Second Amendment to Convertible Subordinated Unsecured Promissory Note, dated as of June 12, 2014, between CVSL Inc. and Richmont Capital Partners V LP (incorporated by reference to Exhibit 10.1 of our Current
Report on Form 8-K (File No. 000-52818) filed with the Commission on June 16, 2014). |
|
4.8 |
|
Promissory note dated July 11, 2014 between Agel Enterprises, Inc. and Tamala L. Longaberger (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed with
the Commission on July 15, 2014). |
|
9.1 |
|
Voting Agreement by and among Tamala L. Longaberger Revocable Trust, Rochon Capital Partners Ltd, Computer Vision Systems Laboratories Corp. dated March 18, 2013 (incorporated by reference to Exhibit 99.11 to
Schedule 13D/A (File No. 005-85515) filed with the Commission on June 27, 2013). |
|
10.1 |
|
Amendment to Share Exchange Agreement to Defer Second Tranche Closing Indefinitely dated April 10, 2013 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed
with the Commission on April 12, 2013). |
|
10.2 |
|
Equity Contribution Agreement, dated as of November 11, 2013, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 13 to Schedule 13D/A (File No. 005-85515) filed with
the Commission on April 1, 2014 by Rochon Capital Partners, Ltd.). |
|
10.3 |
|
Satisfaction of Obligation dated December 3, 2013 between CVSL, Rochon Capital Partners Ltd. and International Equities Group, Inc. (incorporated by reference to Exhibit 14 to Schedule 13D/A (File
No. 005-85515) filed with the Commission on April 1, 2014 by Rochon Capital Partners, Ltd.). |
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|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
10.4 |
|
Equity Contribution Agreement, dated as of May 1, 2014, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 99.13 to Schedule 13D/A (File No. 005-85515) filed with
the Commission on May 7, 2014 by Rochon Capital Partners, Ltd.). |
|
10.5 |
|
Credit and Security Agreement dated October 23, 2012 among Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.15 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
|
10.6 |
|
First Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.16 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
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10.7 |
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Second Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.17 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
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10.8 |
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Third Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.18 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
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10.9 |
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Fourth Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.19 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
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10.10 |
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Fifth Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company (incorporated by reference to Exhibit 10.20 of our Current Report on Form S-1 (File
No. 333-196155) filed with the Commission on May 22, 2014). |
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10.11 |
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Restricted Stock Agreement between CVSL Inc. and Roy Damary dated July 9, 2014 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission
on July 15, 2014). |
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10.12 |
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Restricted Stock Agreement between CVSL Inc. and Bernard Ivaldi dated July 9, 2014 (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K (File No. 000-52818) filed with the
Commission on July 15, 2014). |
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10.13 |
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Agreement for Purchase and Sale dated as of July 31, 2014 between The Longaberger Company and CFI NNN Raiders, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on August 1, 2014). |
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31.1 |
|
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
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31.2 |
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Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350.* |
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32.2 |
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Certification pursuant to 18 U.S.C. Section 1350.* |
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101.INS |
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Instance Document.** |
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101.SCH |
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XBRL Taxonomy Extension Schema Document.** |
62
Table of Contents
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|
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Exhibit No. |
|
Description of Exhibit |
|
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document.** |
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101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document.** |
|
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document.** |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document.** |
- *
- 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.
63
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-- Click here to rapidly navigate through this document
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 quarterly report on Form 10-Q/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.
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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) |
QuickLinks
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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-- Click here to rapidly navigate through this document
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL 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 quarterly report on Form 10-Q/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.
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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) |
QuickLinks
CERTIFICATION OF PRINCIPAL FINANCIAL 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 Quarterly Report on Form 10-Q/A of the Registrant for the period ended June 30, 2014 (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 |
|
|
|
|
Title: |
|
Chief Executive Officer and Chairman
(Principal Executive Officer) |
QuickLinks
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 Quarterly Report on Form 10-Q/A of the Registrant for the period ended June 30, 2014 (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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|
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Title: |
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Chief Financial Officer
(Principal Financial Officer) |
QuickLinks
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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