UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March
31, 2015
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: 001-36755
CVSL Inc.
(Exact name of registrant as specified
in its charter)
Florida |
98-0534701 |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
|
2400 North Dallas Parkway, Suite 230, Plano, Texas |
75093 |
(Address of principal executive offices) |
(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 x
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
x 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.
Large accelerated filer o |
|
Accelerated filer x |
|
|
|
Non-accelerated filer o |
|
Smaller
reporting company o |
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
No x
As of May 11, 2015, 34,367,095 shares of the common stock, $0.0001
par value per share, of the registrant were issued and outstanding.
CVSL Inc.
Table of Contents
PART I. Financial Information
Item 1. Financial Statements
CVSL Inc.
Consolidated Balance
Sheets
(in thousands)
| |
(Unaudited) March 31, 2015 | | |
(Audited) December 31, 2014 | |
Assets | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 5,633 | | |
| 2,606 | |
Marketable securities | |
| 9,682 | | |
| 991 | |
Accounts receivable, net | |
| 3,488 | | |
| 450 | |
Inventory, net | |
| 20,331 | | |
| 14,759 | |
Other current assets | |
| 3,420 | | |
| 2,481 | |
| |
| | | |
| | |
Total current assets | |
| 42,554 | | |
| 21,288 | |
Restricted cash | |
| 3,000 | | |
| - | |
Sale leaseback security deposit | |
| 4,414 | | |
| 4,414 | |
Property, plant and equipment, net | |
| 8,775 | | |
| 8,191 | |
Leased property, net | |
| 15,098 | | |
| 15,361 | |
Goodwill | |
| 5,367 | | |
| 4,095 | |
Intangibles, net | |
| 3,510 | | |
| 3,558 | |
Other assets | |
| 543 | | |
| 400 | |
| |
| | | |
| | |
Total assets | |
$ | 83,261 | | |
$ | 57,307 | |
| |
| | | |
| | |
Liabilities and stockholders' equity | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 13,924 | | |
$ | 8,436 | |
Related party payables, net | |
| 531 | | |
| 127 | |
Lines of credit | |
| 112 | | |
| 105 | |
Accrued commissions | |
| 3,907 | | |
| 3,319 | |
Deferred revenue | |
| 3,582 | | |
| 2,982 | |
Current portion of long-term debt | |
| 905 | | |
| 974 | |
Other current liabilities | |
| 12,889 | | |
| 8,709 | |
| |
| | | |
| | |
Total current liabilities | |
| 35,850 | | |
| 24,652 | |
Long-term debt | |
| 7,081 | | |
| 4,316 | |
Lease liability | |
| 15,800 | | |
| 15,774 | |
Other long-term liabilities | |
| 1,905 | | |
| 3,582 | |
Total liabilities | |
| 60,636 | | |
| 48,324 | |
Commitments & contingencies | |
| - | | |
| - | |
Stockholders' equity: | |
| | | |
| | |
Preferred stock, par value $0.001 per share, 500,000 authorized | |
| - | | |
| - | |
Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 34,367,095 and 27,599,012 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively | |
| 4 | | |
| 3 | |
Additional paid-in capital | |
| 55,452 | | |
| 37,097 | |
Accumulated other comprehensive (loss) income | |
| 637 | | |
| 321 | |
Accumulated deficit | |
| (37,024 | ) | |
| (32,159 | ) |
| |
| | | |
| | |
Total stockholders' equity attributable to common stockholders | |
| 19,069 | | |
| 5,262 | |
Stockholders' equity attributable to non-controlling interest | |
| 3,556 | | |
| 3,721 | |
| |
| | | |
| | |
Total stockholders' equity | |
| 22,625 | | |
| 8,983 | |
| |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 83,261 | | |
$ | 57,307 | |
See notes to unaudited consolidated financial
statements.
CVSL Inc.
Consolidated Statements of Operations
(in thousands, except
share and per share data)
(unaudited)
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
Revenue | |
$ | 19,219 | | |
$ | 26,671 | |
Program costs and discounts | |
| (2,161 | ) | |
| (4,976 | ) |
| |
| | | |
| | |
Net revenue | |
| 17,058 | | |
| 21,695 | |
Costs of sales | |
| 5,411 | | |
| 8,016 | |
| |
| | | |
| | |
Gross profit | |
| 11,647 | | |
| 13,679 | |
Commissions and incentives | |
| 5,866 | | |
| 6,973 | |
Gain on sale of assets | |
| (43 | ) | |
| (266 | ) |
Selling, general and administrative | |
| 9,428 | | |
| 9,441 | |
Depreciation and Amortization | |
| 629 | | |
| 269 | |
| |
| | | |
| | |
Operating loss | |
| (4,233 | ) | |
| (2,737 | ) |
Loss on marketable securities | |
| 7 | | |
| 494 | |
Interest expense, net | |
| 597 | | |
| 266 | |
| |
| | | |
| | |
Loss from continuing operations before income tax provision | |
| (4,837 | ) | |
| (3,497 | ) |
Income tax provision | |
| 195 | | |
| 279 | |
| |
| | | |
| | |
Net loss | |
| (5,032 | ) | |
| (3,776 | ) |
Net loss attributable to non-controlling interest | |
| 166 | | |
| 640 | |
| |
| | | |
| | |
Net loss attributable to common stockholders | |
$ | (4,866 | ) | |
$ | (3,136 | ) |
| |
| | | |
| | |
Basic and diluted loss per share: | |
| | | |
| | |
Weighted average common shares outstanding | |
| 29,668,069 | | |
| 24,385,616 | |
Loss per common share attributable to common stockholders | |
$ | (0.16 | ) | |
$ | (0.13 | ) |
See notes to unaudited consolidated financial
statements.
CVSL Inc.
Consolidated Statements of Comprehensive
Loss
(in thousands)
(unaudited)
| |
| | |
| |
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
Net loss | |
$ | (5,032 | ) | |
$ | (3,776 | ) |
Other comprehensive gain, net of tax: | |
| | | |
| | |
Unrealized gain on marketable securities | |
| 17 | | |
| 469 | |
Foreign currency translation adjustment gain (loss) | |
| 310 | | |
| (10 | ) |
| |
| | | |
| | |
Other comprehensive gain | |
| 327 | | |
| 460 | |
| |
| | | |
| | |
Comprehensive loss | |
$ | (4,705 | ) | |
$ | (3,317 | ) |
Comprehensive loss attributable to non-controlling interests | |
| 166 | | |
| 640 | |
| |
| | | |
| | |
Comprehensive loss attributable to common stockholders | |
| (4,539 | ) | |
| (2,676 | ) |
See notes to unaudited consolidated financial
statements.
CVSL Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
Operating activities: | |
| | | |
| | |
Net loss | |
$ | (5,032 | ) | |
$ | (3,776 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 629 | | |
| 562 | |
(Gain) Loss on marketable securities | |
| 7 | | |
| 494 | |
Interest expense | |
| — | | |
| 200 | |
Share-based compensation | |
| — | | |
| 87 | |
Provision for doubtful accounts | |
| (7 | ) | |
| 63 | |
Provision for obsolete inventory | |
| — | | |
| 41 | |
Gain on sales of assets | |
| (43 | ) | |
| (266 | ) |
Stock Issued for Purchase of Subsidiaries | |
| — | | |
| 484 | |
Deferred income tax | |
| — | | |
| 45 | |
Changes in certain assets and liabilities: | |
| — | | |
| | |
Accounts receivable | |
| (21 | ) | |
| (269 | ) |
Inventory | |
| 858 | | |
| 1,266 | |
Other current assets | |
| 210 | | |
| 182 | |
Accounts payable | |
| 1,864 | | |
| (1,312 | ) |
Related party payables, net | |
| 404 | | |
| (132 | ) |
Accrued commissions | |
| 588 | | |
| — | |
Deferred revenue | |
| 600 | | |
| 1,205 | |
Other liabilities | |
| (1,670 | ) | |
| 86 | |
Net cash used in operating activities | |
| (1,613 | ) | |
| (1,040 | ) |
Investing activities: | |
| | | |
| | |
Capital expenditures | |
| (347 | ) | |
| (335 | ) |
Proceeds from the sale of property, plant and equipment | |
| 113 | | |
| 1,334 | |
Purchase of investments available for sale | |
| (18,876 | ) | |
| — | |
Sale of marketable securities | |
| 8,901 | | |
| 3,418 | |
Acquisitions, net of cash purchased | |
| (3,567 | ) | |
| - | |
Net cash (used in) provided by investing activities | |
| (13,776 | ) | |
| 4,417 | |
Financing activities: | |
| | | |
| | |
Borrowings on long-term debt and revolving credit facility | |
| 2,984 | | |
| (1,430 | ) |
Payments on debt | |
| (247 | ) | |
| (614 | ) |
Stock issuances | |
| 18,369 | | |
| — | |
Cash held as collateral | |
| (3,000 | ) | |
| — | |
Net cash (used in) provided by financing activities | |
| 18,106 | | |
| (2,044 | ) |
| |
| | | |
| | |
Effect of exchange rate changes on cash | |
| 310 | | |
| (10 | ) |
| |
| | | |
| | |
Increase in cash | |
| 3,027 | | |
| 1,323 | |
Cash and cash equivalents at beginning of period | |
| 2,606 | | |
| 3,877 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 5,633 | | |
$ | 5,200 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 595 | | |
| 65 | |
Income taxes | |
| — | | |
| 122 | |
See notes to unaudited consolidated
financial statements.
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 our
financial position, results of operations and cash flows for the interim periods on a consistent basis 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 that of 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/A filed by CVSL Inc.
("the Company," and together with the Company's consolidated subsidiaries, "we", "us" and
"our"), for the year ended December 31, 2014, filed with the SEC on March 23, 2015
("Form 10-K/A").
Significant Accounting Policies
There have been no material changes to the Company’s significant
accounting policies during the three months ended March 31, 2015, as compared with those disclosed in the Company’s consolidated
financial statements in the Annual Report on Form 10-K/A for the year ended December 31, 2014.
Reclassifications
Prior period financial statement amounts have been reclassified
to conform to current period presentation.
Use of Estimates
The preparation of financial statements
in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These
estimates are based on information available as of the date of the consolidated financial statements. Actual results could differ
significantly from those estimates.
Accounts Receivable
The carrying value of our accounts receivable,
net of allowance for doubtful accounts, represents their estimated net realizable value. We estimate the allowance for doubtful
accounts based on type of customer, age of outstanding receivable, historical collection trends, and existing economic conditions.
If events or changes in circumstances indicate that a specific receivable balance may be unrealizable, further consideration is
given to the collectability of those balances, and the allowance is adjusted accordingly. Receivable balances deemed uncollectible
are written off against the allowance. We have recorded an allowance for doubtful accounts of $128,985 and $170,295 at March 31,
2015 and December 31, 2014, respectively.
Income Taxes
CVSL and its U.S. subsidiaries (excluding
TLC) file a consolidated Federal income tax return. Deferred income taxes are provided for temporary differences between financial
statement and tax bases of asset and liabilities. Benefits from tax credits are reflected currently in earnings. We record income
tax positions based on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities
having full knowledge of all relevant information.
Translation of Foreign Currencies
The functional currency of our foreign
subsidiaries is the local currency of their country of domicile. Assets and liabilities of the foreign subsidiaries are translated
into U.S. dollar amounts at month-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates
for the monthly accounting period to which they relate. Equity accounts are translated at historical rates. Foreign currency translation
adjustments are accumulated as a component of other comprehensive income.
Revenue Recognition and Deferred Revenue
In the ordinary course of business we receive
payments, primarily via credit card, for the sale of products at the time customers place orders. Sales and related fees such as
shipping and handling, net of applicable sales discounts, are recorded as revenue when the product is shipped and when title and
the risk of ownership passes to the customer. The Company presents revenues net of any taxes collected from customers which are
remitted to governmental authorities. Payments received for undelivered products are recorded as deferred revenue and are included
in current liabilities on the Company’s consolidated balance sheets. Certain incentives offered on the sale of our products,
including sales discounts, described in the paragraph below are classified as program costs and discounts. A provision for product
returns and allowances is recorded and is founded on historical experience and is classified as a reduction of revenues. At March
31, 2015 and 2014, our allowance for sales returns totaled $85,523 and $257,189, respectively.
Recent Accounting Pronouncements
In January 2015 the FASB issued Accounting
Standards Update 2015-01 (ASU 2015-01) Amendments to the Consolidation Analysis. The ASU is effective for annual reporting periods,
including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new
consolidation standard eliminates the concept of extraordinary items from Generally Accepted Accounting Principles (“GAAP”).
We are in the process of assessing the effects of the application of the new guidance on our financial statements.
In February 2015 the FASB issued Accounting
Standards Update 2015-02 (ASU 2015-02) Amendments to the Consolidation Analysis. The ASU is effective for annual reporting periods,
including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new
consolidation standard changes the criteria a reporting enterprise uses to evaluate if certain legal entities, such as limited
partnerships and similar entities, should be consolidated. We are in the process of assessing the effects of the application of
the new guidance on our financial statements.
In April 2015 the FASB issued Accounting
Standards Update 2015-03 (ASU 2015-03) Simplifying Balance Sheet Presentation by Presenting Debt Issuance Costs as a Deduction
from Recognized Debt Liability. The ASU is effective for annual reporting periods, including interim reporting periods within those
periods, beginning after December 15, 2015. Early adoption is permitted. The new standard requires debt issuance costs to be classified
as reductions to the face value of the related debt. We do not expect ASU 2015-03 to materially affect our financial position until
we issue new debt.
(2) Acquisitions, Dispositions and Other Transactions
Kleeneze
On March 24, 2015, we completed the acquisition of
Kleeneze Limited (“Kleeneze”), a direct-to-consumer business based in the United Kingdom. Pursuant to the terms
of a Share Purchase Agreement with Findel plc (“Findel”), the Company purchased 100% of the shares of
Kleeneze from Findel for total consideration of $5.1 million. The consideration included $3.0 million of senior secured debt
provided by HSBC Bank PLC, which has a term of two years and an interest rate per annum of 0.60% over the Bank of England
Base Rate as published from time to time (an interest rate of approximately 1.1% at the time of the purchase). The remainder
was funded by a net cash contribution by the Company of approximately $785,000 after deducting $1.3 million in cash that
remained on the books of Kleeneze at closing.
Opening balance sheet for Kleeneze acquisition
on March 24, 2015
The following summary represents the fair
value of Kleeneze as of the acquisition date and is subject to change following management’s final evaluation of the fair
value assumptions.
| |
Kleeneze (in thousands) | |
Assets | |
| | |
Current assets: | |
| | |
Cash and cash equivalents | |
$ | 1,964 | |
Accounts receivable | |
| 2,986 | |
Inventory | |
| 6,283 | |
| |
| 931 | |
Total current assets | |
| 12,164 | |
Property, plant and equipment | |
| 619 | |
Goodwill | |
| 1,347 | |
Total assets | |
$ | 14,130 | |
| |
| | |
Liabilities and stockholders’ equity | |
| | |
Current liabilities: | |
| | |
Accounts payable—trade | |
$ | 3,635 | |
Other current liabilities | |
| 5,395 | |
Total current liabilities | |
| 9,030 | |
Other long-term liabilities | |
| - | |
Total liabilities | |
| 9,030 | |
Stockholders’ equity | |
| 5,100 | |
Total liabilities and stockholders’ equity | |
$ | 14,130 | |
Pro forma Consolidated Statement of Operations for the quarter
ended March 31, 2015.
The following summary presents the pro forma results of operations
for the current year up to the date of March 31, 2015 as though the companies had combined at the beginning of the reported period.
|
|
|
|
|
Pro
Forma |
|
|
|
Pro
Forma |
|
CVSL |
|
Kleeneze |
|
Adjustments |
|
Note |
|
CVSL |
Revenue |
18,850 |
|
13,181 |
|
- |
|
|
|
32,031 |
Program
costs and discounts |
(2,161) |
|
- |
|
- |
|
|
|
(2,161) |
Net
revenue |
16,689 |
|
13,181 |
|
- |
|
|
|
29,870 |
Costs
of sales |
5,215 |
|
5,250 |
|
- |
|
|
|
10,465 |
Gross
profit |
11,474 |
|
7,931 |
|
- |
|
|
|
19,405 |
Commissions
and incentives |
5,714 |
|
5,063 |
|
- |
|
|
|
10,777 |
Gain
on sale of assets |
(43) |
|
- |
|
- |
|
|
|
(43) |
Selling,
general and administrative |
9,141 |
|
3,430 |
|
- |
|
|
|
12,571 |
Amortization
and depreciation |
618 |
|
- |
|
- |
|
|
|
618 |
Operating
loss |
(3,956) |
|
(562) |
|
- |
|
|
|
(4,518) |
Loss
on marketable securities |
7 |
|
- |
|
- |
|
|
|
7 |
Interest
expense, net |
597 |
|
(106) |
|
- |
|
|
|
491 |
Loss
from continuing operations before income tax provision |
(4,560) |
|
(456) |
|
- |
|
|
|
(5,016) |
Income
tax provision |
191 |
|
4 |
|
- |
|
|
|
195 |
Loss
before extraordinary item |
(4,751) |
|
(460) |
|
- |
|
|
|
(5,211) |
Extraordinary
item, net of tax |
- |
|
33,638 |
|
(33,638) |
|
A |
|
- |
Net
loss |
(4,751) |
|
(34,098) |
|
33,638 |
|
|
|
(5,211) |
Net
loss attributable to non-controlling interest |
(166) |
|
- |
|
- |
|
|
|
(166) |
Net
loss attributable to common stockholders |
(4,585) |
|
(34,098) |
|
33,638 |
|
|
|
(5,045) |
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share: |
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding |
29,668,069 |
|
29,668,069 |
|
29,668,069 |
|
|
|
29,668,069 |
Gain (loss)
per common share attributable to common stockholders |
(0.15) |
|
(1.15) |
|
1.13 |
|
|
|
(0.17) |
Notes to Pro Forma Unaudited Condensed
Consolidated Financial Statement
A Losses were incurred as a result of the write down
of intercompany receivables that were forgiven prior to and in accordance with the transaction. As these losses were direct and
one-time events related specifically to the acquisition, we have excluded these items from the pro forma income statement shown
below.
Uppercase Living
On March 14, 2014, Uppercase Acquisition Inc. (“UAI”),
a wholly-owned subsidiary of the Company, acquired substantially all the assets of Uppercase Living, LLC, a direct seller of an
extensive line of customizable vinyl expressions for display on walls. UAI assumed certain liabilities and agreed to issue 254,490
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. The Company also agreed to deliver 323,897 shares of its common stock at a fair value of $123,081 to an escrow account for
up to 24 months that will be issued to the seller upon remediation of certain close conditions. Since the Company did not deliver
the shares of our Common Stock until April 2014, we recorded a payable as of the acquisition date totaling $219,787. The Company
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 which is recorded in other long-term liabilities
in the opening balance sheet. Goodwill arising from the transaction totaled $469,065.
Possible Issuance of Additional Common
Stock under Share Exchange Agreement
Under the Share Exchange Agreement, Rochon
Capital 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 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 became effective on December 1, 2014, 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 our
common stock which it is currently entitled to receive under the Share Exchange Agreement, as amended (the "Second
Tranche Parent Stock") based 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 our 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 receive the Second Tranche Parent Stock to any person or entity other than
to (x) John P. Rochon or his wife, or both, or John Rochon, Jr. (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 events occur: (i) our liquidation or dissolution; (ii) our 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 our 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 our 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.
Dispositions
On July 31, 2014, our subsidiary TLC
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. A gain on sale of approximately $2.5 million was recorded associated with the sale. Because the
transaction was part of a Sale Leaseback agreement that is being accounted for as a capital lease, the gain has been deferred and
will be recognized over the fifteen (15) year life of the Leaseback Agreement.
Public Offering
On March 4, 2015 the Company closed an underwritten
public offering of 6,667,000 shares of common stock and warrants to purchase up to an aggregate of 6,667,000 shares of
common stock at a combined offering price of $3.00. The warrants have a per share exercise price of $3.75, are
exercisable immediately and will expire fire years from the date of issuance. CVSL granted the underwriters a 45-day option
to purchase up to an additional 1,000,050 shares of common stock and/or warrants to purchase up to an aggregate of 1,000,050
shares of common stock to cover additional over-allotments and the underwriters. On March 4, 2015, the underwriters exercised
a portion of the over-allotment option with respect to 113,200 warrants. No options were exercised as it relates to shares of
common stock. As of the date of filing, May 11, 2015, the over-allotment option has expired and no additional shares of
common stock or warrants were exercised. In addition, warrants for an additional 166,675 shares with the same terms mentioned
previously were issued to CVSL’s underwriters per the terms of the Underwriting Agreement.
(3) Marketable Securities
Our marketable securities as of March 31,
2015 include fixed income and equity investments classified as available for sale. At March 31, 2015, the fair value of
the equity securities totaled $-0- and the fair value of the fixed income securities totaled $9.7 million. At December
31, 2014, the fair value of the equity securities totaled $-0- and the fair value of the fixed income securities
totaled approximately $1.0 million. The net cost of marketable securities purchases during the three months ended March 31, 2015
and 2014 totaled $17.3 million and $3.4 million, respectively. Unrealized gains on the investments included in consolidated
statements of other comprehensive income were $18,049 and $468,937 for the quarters ended March 31, 2015 and 2014,
respectively. Our realized losses from the sale of our marketable securities totaled $6,566 and $493,796 for the quarters
ended March 31, 2015 and 2014, respectively. The unrealized loss has been in that position for less than one
year. Accordingly, management does not believe that the investments have experienced any other than temporary losses.
(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:
| |
March 31, 2015 | | |
December 31, 2014 | |
Raw material and supplies | |
$ | 3,159 | | |
$ | 3,052 | |
Work in process | |
| 484 | | |
| 931 | |
Finished goods | |
| 20,610 | | |
| 14,852 | |
| |
| 24,254 | | |
| 18,835 | |
Inventory Reserve | |
| 3,923 | | |
| 4,076 | |
| |
| | | |
| | |
| |
$ | 20,331 | | |
$ | 14,759 | |
Our reserve for inventory obsolescence at March 31, 2015
and December 31, 2014 was $3.9 million and $4.1 million, respectively.
(5) Property, plant and equipment
Property, plant and equipment consisted of the following:
| |
March 31, 2014 | | |
December 31, 2014 | |
Land and improvements | |
$ | 609 | | |
$ | 699 | |
Buildings and improvements | |
| 6,446 | | |
| 6,351 | |
Equipment | |
| 3,873 | | |
| 2,816 | |
Construction in progress | |
| 0 | | |
| 10 | |
| |
| | | |
| | |
| |
| 10,928 | | |
| 9,877 | |
Less accumulated depreciation | |
| 2,153 | | |
| 1,686 | |
| |
| | | |
| | |
| |
$ | 8,775 | | |
$ | 8,191 | |
Depreciation expense was $629,183 for the three months ended
March 31, 2015, which relates solely to property plant, and equipment depreciation. Depreciation expense was $561,541 for three
months ended March 31, 2014, which includes $268,552 and $293,652 related to property, plant and equipment and cost of goods
sold, respectively.
In addition to owned property, the Company also has $15.1 million
in leased property due to the Sale Leaseback Agreement.
(6) Long-term debt and other financing arrangements
The Company's long-term borrowing consisted of the following:
Description | |
Interest rate | | |
March 31, 2015 | | |
December 31, 2014 | |
Senior Secured debt – HSBC Bank PLC | |
*1.10 | % | |
2,977 | | |
- | |
Promissory note—payable to former shareholder of TLC | |
| 2.63 | % | |
| 3,281 | | |
| 3,373 | |
Promissory Note—Lega Enterprises, LLC (formerly Agel Enterprises, LLC) | |
| 5.00 | % | |
| 1,261 | | |
| 1,367 | |
Other miscellaneous notes | |
| 4.00 | % | |
| 467 | | |
| 516 | |
| |
| | | |
| | | |
| | |
Total debt | |
| | | |
| 7,986 | | |
| 5,256 | |
Less current maturities | |
| | | |
| 905 | | |
| 940 | |
| |
| | | |
| | | |
| | |
Long-term debt | |
| | | |
$ | 7,081 | | |
$ | 4,316 | |
Senior Secured debt – HSBC Bank
PLC
* On March 24, 2015, the Company secured
$3.0 million in senior secured debt from HSBC Bank PLC, with a term of two years and an annual interest rate of 0.60% over the
Bank of England Base Rate as published from time to time.
Promissory Note—payable to former
shareholder of TLC
On March 14, 2013, we 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 Note—Lega Enterprises, LLC
On October 22, 2013, we 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.
Promissory Note – Other Miscellaneous
On December 4, 2014, we issued a $0.5 million
Promissory Note in connection with a settlement agreement. The Promissory Note bears interest at 4% per annum, and is payable in
equal monthly installments of outstanding principal and interest.
Capital Lease
On July 31, 2014, TLC entered into
the Sale Leaseback Agreement with CFI. The lease was deemed to qualify as a capital lease and the transaction is being accounted
for as a sales leaseback arrangement. The gain arising from the sale of the three buildings and related property was deferred and
is being recognized using the full accrual method over the term of the lease. The lease has been classified as a capital lease
since the condition was met whereby the term of the lease is greater than 75% of the estimated economic life of the property. TLC
has recorded the sale and removed the properties sold and related liabilities from the balance sheet. Since the lease is a capital
lease, a leased asset will be recorded and depreciated over 15 years using the straight-line method.
The payment under the lease will be accounted
for as interest and payments under capital lease using 15 year amortization. Interest expense of $551,772 associated with
the lease payments was recognized in the three months ended March 31, 2015. Depreciation expense of $263,333 was recorded
in the three months ended March 31, 2015. The gain on sales of real estate was $42,047, which represents three months of the
gain amortized over the life of the lease.
Outstanding Warrants
On March 4, 2015 the Company raised proceeds of
$20 million though the sale of 6,667,000 shares of its common stock and warrants to purchase up to an aggregate of
6,667,000 shares of its common stock at a combined offering price of $3.00 in an underwritten public offering (“Offering”). The warrants
have a per share exercise price of $3.75, are exercisable immediately and will expire five years from the date of issuance.
The Company granted the underwriters a 45-day option to purchase up to an additional 1,000,050 shares of common stock and/or
warrants to purchase up to an aggregate of 1,000,050 shares of common stock to cover additional over-allotments, if any. On
March 4, 2015, the underwriters exercised a portion of their over-allotment option with respect to 113,200 warrants. In
addition, 166,675 warrants were issued to the underwriters. The over-allotment option has expired as of the date of this
filing.
The gross proceeds to the Company, including the underwriters'
partial exercise of their over-allotment option, were approximately $20,000,000 before deducting underwriting discounts and commissions
and other estimated offering expenses payable by the Company. Assuming the exercise of all 6,667,000 warrants at the exercise price
of $3.75 each, and assuming the Company maintains the conditions necessary for a cash exercise, the total additional gross aggregate
proceeds to CVSL would be $25,001,250. However, there can be no assurance that any warrants will be exercised.
On May 6, 2014, the Company 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 approximated $116,000.
On July 2, 2014, the Company 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 ten day period
commencing 720 days after issuance, however, the warrant expires without an opportunity to exercise it on July 1, 2015,
unless the term is 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 of 1933, as amended (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.
(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, 2014 |
|
$ |
128 |
|
|
$ |
193 |
|
|
$ |
321 |
|
Other comprehensive income (loss) before reclassifications |
|
|
310 |
|
|
|
17 |
|
|
|
327 |
|
Amount reclassified from AOCI |
|
|
— |
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss) at March 31, 2015 |
|
$ |
438 |
|
|
$ |
199 |
|
|
$ |
637 |
|
Components of AOCI |
|
Amounts
reclassified
from AOCI |
|
Realized gain/(loss) on sale of marketable securities |
|
$ |
(11) |
|
Income tax (expense) benefit |
|
|
— |
|
|
|
|
|
|
Net of income taxes |
|
$ |
(11) |
|
(8) Fair Value
We established a fair value hierarchy which prioritizes the
inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest
level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
Level 1—Unadjusted quoted prices in active
markets for identical assets and liabilities;
Level 2—Quoted 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 3—Valuations derived from valuation
techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable trade and related party, and line of credit payable are considered to be representative of their respective fair
values. Our available for sale securities (Level 1) was $9,682,198 and (Level 2) $0 at March 31, 2015. Our available
for sale securities (Level 1) was $129,000 and (Level 2) $862,000 at December 31, 2014. We do not have other assets or
intangible assets measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014.
(9) 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.
Worker’s Compensation Liability
Certain of the Company’s employees
were covered under a self-insured worker’s compensation plan which was replaced by a fully insured plan in December, 2014.
The Company estimates its remaining self-insured worker’s compensation liability based on past claims experience, and has
an accrued liability to cover estimated future costs. At March 31, 2015, the accrued liability was approximately $0.7 million
compared to $1.0 million at December 31, 2014. There can be no assurance that the Company’s estimates are accurate, and any
differences could be material.
(10) Income Taxes
As of December 31, 2014, 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 first quarter 2015 actual earnings, the Company is unable to reduce its valuation allowance.
Therefore, no net deferred tax asset is reflected as of March 31, 2015. Additionally, due to some of its historical acquisitions
which included intangibles with an indefinite life, the Company continues to accumulate a deferred tax liability which is recorded
outside the net deferred tax asset and valuation allowance. Deferred tax expense for the quarter ended March 31, 2015 was $33,500.
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 $161,183 has been recorded in the first quarter of 2015 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
The Company 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 our share-based compensation plan. We classify the awards as a liability as the value of the award will be settled in
cash, notes, or stock. The Stock Appreciation Rights, (“SARs”) vest over a period of three years and have a
contractual term of five years. The liability related to these awards is included in other long-term liabilities on our
consolidated balance sheets. Share-based compensation expense for the quarter ended March 31, 2015 and 2014 of $50,250 and
$86,512, respectively, is included in selling, general and administrative expenses on the Company’s consolidated
income statements. As of March 31, 2015, total unrecognized compensation cost related to unvested share-based compensation
was $1.2 million, which is expected to be recognized over a three-year period
(12) Loss per share attributable to CVSL
In calculating loss per share, there were no adjustments to
net loss for any periods presented. Outstanding warrants were excluded from the fully diluted loss per share because inclusion
of the warrants in the loss per share computation would be anti-dilutive.
(13) Segment Information
CVSL operates in a single reporting segment as a direct
selling company that sells a wide range of products sold primarily by independent sales force across many countries around
the world. For the three months ended March 31, 2015 and March 31, 2014, respectively approximately $9.3 million or 49.3% and
$10.8 million or 40.4% of our revenues were generated in international markets. 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 three months ended March 31, 2015 and March 31,
2014, approximately $2.7 million or 14.1% and $1.0 million or 3.7% of our revenues, respectively, were derived from the sales
of gourmet food products, $6.8 million or 35.3% and $10.2 million or 38.3% of our revenues, respectively, were derived from
the sale of nutritional and wellness products, $9.3 million or 48.6% and $15.0 million or 56.3% of our revenues,
respectively, were derived from the sale of home décor products, $0.2 million or 1.2% and $0.3 million or 1.1% or our
revenues, respectively, were derived from the sale of our publishing and printing services and products and for the three
months ended March 31, 2015 and March 31, 2014 $0.2 million or 1.0% and $0.2 million or 0.7% of our revenues, respectively,
were derived from the sale of our other products. Substantially all of our long-lived assets are located in the US. Our chief
operating decision-maker is our Chief Executive Officer who reviews financial information presented on a consolidated basis.
Accordingly, we have determined that we operate in one reportable business segment.
Revenues by product groups for the three
months ended March 31, 2015 and March 31, 2014 are shown in the table below (dollars in thousands):
| |
March 31, 2015 | | |
March 31, 2014 | |
Gourmet Food Products | |
$ | 2,717 | | |
$ | 963 | |
Home Décor | |
$ | 9,340 | | |
$ | 15,021 | |
Nutritionals and Wellness | |
$ | 6,777 | | |
$ | 10,202 | |
Publishing & Printing | |
$ | 231 | | |
$ | 294 | |
Other | |
$ | 154 | | |
$ | 190 | |
(14) Related party transactions
During the fourth quarter of 2013, we renewed a Reimbursement
of Services Agreement for a minimum of one year with Richmont Holdings. CVSL has begun to establish an infrastructure of personnel
and resources necessary to identify, analyze, negotiate and conduct due diligence on direct-selling acquisition candidates. However,
we continue to need advice and assistance in areas related to identification, analysis, financing, due diligence, negotiations
and other strategic planning, accounting, tax and legal matters associated with such potential acquisitions. Richmont Holdings
and its affiliates have experience in the above areas and we wish to draw upon such experience. In addition, Richmont Holdings
had already developed a strategy of acquisitions in the direct-selling industry and has assigned and 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 and we agreed to reimburse or pay the substantial due diligence, financial analysis, legal, travel and other
costs Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring and negotiating potential transactions.
During the quarters ended March 31, 2015 and 2014, we recorded $504,000 and $480,000, respectively in Expense Reimbursement Fees
that were included in selling, general and administrative expense in the consolidated statements of operations.
On February 26, 2015 we received a loan from Richmont
Capital Partners V (“RCP V”) in the amount of $425,000. This amount is included in related-party payables within
current liabilities.
(15) Subsequent Events
On April 28, 2015, CVSL Inc. received notice from Tamala Longaberger
that she was resigning from her position as Chief Executive Officer of The Longaberger Company, effective thirty days from the
date of the notice.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Business 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 public
company.
We seek to acquire companies primarily in the direct selling
(micro-enterprise) business and companies potentially engaging in a business 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.
We have grown at a rapid pace as a result of our acquisitions
through March 31, 2015. 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.
We expect that our revenue will increase as we continue to acquire
companies, including our recently closed acquisition of Kleeneze, and we expect to continue to integrate them with our existing
companies. We believe that our visibility in the direct selling industry continues to increase, as news circulates through the
industry and increasing numbers of people in the industry became more familiar with our 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, the costs associated with our recent up-listing
to the NYSE MKT, systems implementation and other transitional operating costs have been significant and have affected our 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 losses will decrease over time as we are able to implement certain operating and administrative efficiencies
for the acquired companies as a whole.
However, 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.
Acquisitions
Our disciplined acquisition strategy
is derived from the industry knowledge and operating expertise of our management team, which we believe allows us to identify,
evaluate and integrate premium micro-enterprise companies that can benefit from our company’s resources, while contributing
to our overall growth strategy. We have grown at a rapid pace as a result of our recent acquisitions and intend to continue to
aggressively pursue additional acquisitions in the micro-enterprise space. As of the date of this filing, our micro-enterprise
portfolio is comprised of the following eight businesses:
Business |
|
Date of
Acquisition |
|
Number of
Countries with
Sales Presence |
|
Product Categories |
|
|
|
|
|
|
|
|
The Longaberger Company |
|
March 18, 2013 |
|
|
2 |
|
Home Décor |
Your Inspiration at Home |
|
August 22, 2013 |
|
|
3 |
|
Gourmet Foods and Spices |
Project Home |
|
October 1, 2013 |
|
|
1 |
|
Home Improvement, Home Security |
Agel |
|
October 22, 2013 |
|
|
40 |
|
Nutritional Supplements, Skin Care |
My Secret Kitchen |
|
December 20, 2013 |
|
|
1 |
|
Gourmet Foods and Spices |
Paperly |
|
December 31, 2013 |
|
|
1 |
|
Stationery |
Uppercase Living |
|
March 13, 2014 |
|
|
2 |
|
Home Décor |
Kleeneze |
|
March 24, 2015 |
|
|
2 |
|
Home Décor and Cleaning |
Through a series of eight 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.
We completed the acquisition of the assets or stock of the following seven companies in 2013 and 2014: The Longaberger Company
(“TLC”), (a direct seller of premium hand-crafted baskets and a line of products for the home) 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 (:Project Home”) (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 2015, we completed
the acquisition of our eighth direct selling company, Kleeneze Limited (“Kleeneze”), a direct-to-consumer
business based in the United Kingdom. With this acquisition, we have gained a large presence in an already strong United
Kingdom market. Kleeneze is one of the United Kingdom’s longest-operating, largest and best-known direct-to-consumer
businesses. Founded in 1923, Kleeneze has grown into a community of more than 7,000 independent distributorships, offering a
wide variety of several thousand cleaning, health, beauty, home, outdoor and other products to customers across the U.K. and
Ireland. Last, since Kleeneze currently operates in the United Kingdom and Ireland, opportunities to leverage our platform to
enter into other markets exists. With the addition of Kleeneze our portfolio expands to eight companies. 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.
Overview of Companies
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.
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 the Company 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. We have also worked with TLC to reduce its excess inventory. 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 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 Ohio distribution center and Project Home has shifted inventory
and distribution to TLC's Ohio facilities, as well. 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., ("TBT")
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.
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.
Kleeneze
In March 2015, we completed the
acquisition of Kleeneze Limited (“Kleeneze”), a direct-to-consumer business based in the United Kingdom. Pursuant
to the terms of a Share Purchase Agreement (the “SPA”) with Findel plc (“Findel”), the Company
purchased 100% of the shares of Kleeneze from Findel for total consideration of $5.1 million. The consideration included $3.0
million of senior secured debt provided by HSBC Bank PLC, which debt has a term of two years and an interest rate per annum
of 0.60% over the Bank of England Base Rate as published from time to time (an interest rate of 1.1% at the time of the
purchase). The remainder was funded by a net cash contribution by the Company of approximately $785,000 after deducting $1.3
million that remained on the books of Kleeneze at closing.
Our Results of Operations for the Three Months Ended
March 31, 2015 and 2014
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
Revenue | |
$ | 19,219 | | |
$ | 26,671 | |
Program costs and discounts | |
| (2,161 | ) | |
| (4,976 | ) |
| |
| | | |
| | |
Net revenue | |
| 17,058 | | |
| 21,695 | |
Costs of sales | |
| 5,411 | | |
| 8,016 | |
| |
| | | |
| | |
Gross profit | |
| 11,647 | | |
| 13,679 | |
Commissions and incentives | |
| 5,866 | | |
| 6,973 | |
Gain on sale of assets | |
| (43 | ) | |
| (266 | ) |
Selling, general and administrative | |
| 9,428 | | |
| 9,441 | |
Depreciation and amortization | |
| 629 | | |
| 269 | |
| |
| | | |
| | |
Operating loss | |
| (4,233 | ) | |
| (2,737 | ) |
Revenue
Total revenue for the quarter ended March 31, 2015,
decreased $7.4 million, or approximately 28%, primarily due to the short-term impact of turnaround actions taken at TLC such
as narrowing product lines, focusing on quality products, taking steps to close the company’s discount outlet stores
and reducing overall program discounts. We expected these changes to have a short-term negative effect on revenue but believe
that it is in the long-term best interest of TLC to focus on its core direct selling party-plan business. In addition to the
changes at TLC, we acquired our eighth direct selling company, Kleeneze, at the end of this reporting period and only had the
benefit of a few days of its revenue for the full quarter. Therefore, we believe that our pro forma revenue is a
better indication of our current revenue run-rate. We also believe that some of our subsidiaries, primarily those that relay
in part on product sourced from international markets that arrive into the U.S. through West Coast ports could have been
affected by delays in product shipments as a result of the labor strikes in the first quarter of 2015. This may have had a
negative impact on our ability to meet customer demand in the quarter and, in turn, affected revenue.
For the three months
ended March 31, 2015 and March 31, 2014, respectively, approximately $9.3 million or 49.3% and $10.8 million or 40.4% of our revenues
were generated in international markets. 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 three months ended March 31, 2015 and March 31, 2014, approximately $2.7 million or 14.1% and $1.0
million or 3.7% of our revenues, respectively, were derived from the sales of gourmet food products, $6.8 million or 35.3% and
$10.2 million or 38.3% of our revenues, respectively, were derived from the sale of nutritional and wellness products, $9.3 million
or 48.6% and $15.0 million or 56.3% of our revenues, respectively, were derived from the sale of home décor products, $0.2
million or 1.2% and $0.3 million or 1.1% or our revenues, respectively, were derived from the sale of our publishing and printing
services and products and for the three months ended March 31, 2015 and March 31, 2014 $0.2 million or 0.8% and $0.2 million or
0.7% of our revenues, respectively, were derived from the sale of our other products.
Operating Losses
Operating losses increased by
$1.5 million in the period ended March 31, 2015 compared to the same period in 2014. These results are in line with our
expectations at this stage in the execution of our strategy. We are focusing on the turnaround aspect of our business now. In
the last two years we have purchased eight direct-to-consumer companies, up-listed to the NYSE MKT and executed a $20.0
million equity raise. We are now poised for the next stage of our growth having built our current platform. We believe our
strategy will continue to have benefits from scale and will continue to aggressively pursue accretive acquisition targets to
improve our operating results.
Operating Expenses
Commissions and Incentives
Total commissions and incentives decreased $1.1 million, but
increased as a percentage of revenue to 26.1% from 30.5% for the period ended March 31, 2015 and 2014, respectively. However, as
a result of less discounting, primarily at TLC, commissions and incentives as a percentage of net revenue, after subtracting discounts
and program costs, was 34.4% compared to 32.1% for the period ended March 31, 2015 and 2014, respectively.
Selling, General and Administrative
Selling, general and administrative expenses incurred during
the three months ended March 31, 2015, remained relatively flat as compared with the selling, general and administrative expenses
for the three months ended March 31, 2014.
Gain/Loss on Marketable Securities
Our marketable securities as of March 31,
2015 include fixed income and equity investments classified as available for sale. At March 31, 2015, the fair value of the
equity securities totaled $-0- and the fair value of the fixed income securities totaled $9.7 million. At December 31, 2014, the
fair value of the equity securities totaled $-0- and the fair value of the fixed income securities totaled approximately $1.0 million.
The net cost of marketable securities purchases during the three months ended March 31, 2015 and 2014 totaled $17.3 million and
$3.4 million, respectively. Unrealized gains on the investments included in consolidated statements of other comprehensive income
were $18,049 and $468,937 for the quarters ended March 31, 2015 and 2014, respectively. Our realized losses from the sale
of our marketable securities totaled $6,566 and $493,796 for the quarters ended March 31, 2015 and 2014, respectively. The
unrealized loss has been in that position for less than one year. Accordingly, management does not believe that the investments
have experienced any other than temporary losses.
Non-controlling Interest
Non-controlling interest had losses of approximately $166,000
and $640,000 for the three months ended March 31, 2015 and 2014, respectively, primarily due to the short-term impact of turnaround
actions taken at TLC.
Additional Performance Indicators - EBITDA
We believe that having a reliable
measure of our company's financial health is invaluable both to us and to potential business partners and we believe that
Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA can be useful
performance indicators over time.
We have also included Adjusted EBITDA in
this Quarterly Report on Form 10-Q because it is a key metric used by our management and board of directors to measure operating
performance and trends in our business. In particular, the exclusion of certain one-time and non-cash expenses in calculating Adjusted
EBITDA facilitates operating performance comparisons on a period-to-period basis.
These measures are not defined by
U.S. Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and Adjusted EBITDA is not
intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures in
addition to operating income to be important to estimate the enterprise and stockholder values of the Company, and for making
strategic and operating decisions. Adjusted EBITDA should not be construed as a substitute for net income (loss) (as
determined in accordance with GAAP) for the purpose of analyzing our operating performance of financial position, as Adjusted
EBITDA is not defined by GAAP. In addition, analysts, investors and creditors use these measures when analyzing our
operating performance, financial condition and cash generating ability.
The following table presents a reconciliation of Net Loss to
EBITDA and Adjusted EBITDA for each of the periods presented:
Net Loss to Adjusted EBITDA Reconciliation (in thousands)
| |
Three Months Ended | |
| |
March 31, 2015 | | |
March 31, 2014 | |
| |
| | |
| |
Net Loss | |
$ | (4,865 | ) | |
$ | (3,776 | ) |
Interest, net | |
| 597 | | |
| 266 | |
Income tax expense | |
| 195 | | |
| 279 | |
Depreciation and amortization | |
| 618 | | |
| 562 | |
EBITDA | |
| (3,455 | ) | |
| (2,669 | ) |
One-Time Capital Market Expense | |
| 374 | | |
| - | |
One-Time M&A Expense | |
| 115 | | |
| 32 | |
Adjusted EBITDA | |
| (2,966 | ) | |
| (2,637 | ) |
One-Time Capital Market Expense
One-time Capital Market Expense includes
non-recurring expenses related to initial NYSE MKT listing fees, road show and other expenses related to out recent offering,
and fees associated with our S-3 filing that were expensed in the current quarter.
One-Time M&A Expense
Specific expenses related to certain legal and due
diligence costs for potential acquisition targets.
Our use of Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of
these limitations are:
|
• |
|
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
|
• |
|
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
|
• |
|
Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation; |
|
• |
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
|
• |
|
Adjusted EBITDA does not reflect acquisition-related costs; and |
|
• |
|
Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, you should consider Adjusted EBITDA
alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
Liquidity and Capital Resources
Cash Flows
Cash used in operating activities for the quarter ended March
31, 2015 was $1.6 million, as compared to net cash used in operating activities of $1.0 million for the quarter ended March 31,
2014. Our principal uses of cash have included legal and professional fees associated with the acquisitions, legal, due diligence
and other fees related to other potential acquisitions, the cost of buying inventory, labor and benefits costs and commissions
and incentives.
Net cash used in investing activities for the
quarter ended March 31, 2015 was $13.8 million, as compared to a net cash provided by investing activities of $4.4 million
for the quarter ended March 31, 2014. The Company used $18.9 million to buy marketable securities and had proceeds of $8.9
million from the sale of marketable securities. $0.3 million was used to upgrade the IT infrastructure.
Net cash provided by financing activities was $18.1 million
for the quarter ended March 31, 2015 compared to net cash used of $2.0 million for the quarter ended March 31, 2014. Through the
issuance of common stock and warrants, we raised net proceeds of $18.4 million. The cash inflows were offset by $3 million
held in collateral.
Outstanding Warrants
On March 4, 2015 we raised proceeds of approximately $20.0
million through the sale of 6,667,000 shares of our common stock and warrants to purchase up to an aggregate of
6,667,000 shares of our common stock at a combined offering price of $3.00 in an underwritten public offering. The warrants
have a per share exercise price of $3.75, are exercisable immediately and will expire five years from the date of issuance.
We granted the underwriters a 45-day option to purchase up to an additional 1,000,050 shares of common stock and/or warrants
to purchase up to an aggregate of 1,000,050 shares of common stock to cover additional over-allotments, if any. On March 4,
2015, the underwriters exercised a portion of their over-allotment option with respect to 113,200 warrants. In addition,
166,675 warrants were issued to the underwriters. The over-allotment option has expired as of the date of this filing.
The gross proceeds to us, including the
underwriters' partial exercise of their over-allotment option, were approximately $20.0 million before deducting underwriting
discounts and commissions and other estimated offering expenses payable by us. Assuming the exercise of all 6,667,000
warrants at the exercise price of $3.75 each, and assuming we maintain the conditions necessary for a cash exercise, the
total additional gross aggregate proceeds to CVSL would be $25 million. However, there can be no assurance that any warrants
will be exercised.
On May 6, 2014, we issued warrants
to purchase up to 12,500 and 6,250 shares of our 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 approximated $116,000.
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 ten day period
commencing 720 days after issuance, however, the warrant expires without an opportunity to exercise it on July 1, 2015,
unless the term is 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 of 1933, as amended (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.
Contractual Obligations
See Footnote (6) “Long-term debt and other financing arrangements”
of our accompanying unaudited consolidated financial statements for a full description of the Company’s contractual obligations.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements
in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to
the rules and regulations promulgated by the Securities and Exchange Commission (“SEC”), we make assumptions, judgments
and estimates that can have a significant impact on our net income/(loss) and affect the reported amounts of certain assets, liabilities,
revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various
other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates
under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and 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.
There have been no significant changes to our critical accounting
policies and estimates during the three months ended March 31, 2015, 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, 2014, which was filed with the SEC on March 23, 2015.
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.
Item 3. Quantitative and Qualitative
Disclosures about Market Risks
Market Risk Sensitive Instruments
The market risk inherent in our market-risk-sensitive instruments
and positions is the potential loss arising from adverse changes in investment market prices, foreign currency exchange-rates and
interest rates.
Investment Market Price Risk
We had short-term investments of $1,799 at March 31, 2015. Those
short-term investments consisted of time deposits. Time deposits are short-term in nature and are accordingly valued at cost plus
accrued interest, which approximates fair value.
Foreign Currency Exchange Risk
Revenue from customers outside of the United
States represented approximately 49.3% and 40.4% of our total net revenues for the three months ended March 31, 2015
and 2014, respectively. We expect that revenue from foreign customers will continue to represent a large percentage
of our revenue.
Interest rate risk
Due to our financing, investing and cash-management activities,
we are subject to market risk from exposure to changes in interest rates.
We
entered into a Credit Facility with HSBC Bank as of March 24, 2015 for the approximated amount of $3.0 million. The
Credit Facility bears a variable interest rate based on the Bank of England base rate plus 0.5%, and on March 31, 2015, the weighted
average interest rate of the Credit Facility, including borrowings under the Term Loan, was 2.91%. The Credit Facility matures on
August 15, 2019, unless earlier repurchased. Since our Credit Facility is based on variable interest rates, and as we have not entered into any new interest swap arrangements,
if interest rates were to increase or decrease by 1% for the year, and our borrowing amounts stayed constant on our Credit Facility,
our annual interest expense would increase or decrease by approximately $8.8 million.
Item 4. Controls and Procedures
The term “disclosure controls and procedures” is
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and procedures of a company that
are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act
is recorded, processed, summarized and reported within required time periods, including controls and disclosures designed to ensure
that this information is accumulated an communicated to the Company’s management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and
our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015, the
end of the period covered by this Form 10-Q, and they have concluded that as of that date, our disclosure controls and procedures
were not effective because of material weaknesses in our internal controls over financial reporting.
Changes in Internal Controls over Financial Reporting
As stated in our Form 10K/A for the year ended December 31,
2014, management identified the following material weaknesses: we determined that we needed to employ a greater number of staff
in our finance and accounting department to perform the increased tasks being handled at the headquarters and maintain an optimal
segregation of duties and provide optimal levels of oversight. In addition, the accounting system at one of our largest subsidiaries
was outdated which impacted our responsiveness.
Management’s Remediation Initiatives
We have taken the following actions to address the ineffectiveness
of our disclosure controls and procedures.
| · | A Disclosure Committee was formed and a Committee Charter was adopted
with Disclosure Controls and Procedures that were implemented this quarter. |
| · | Representatives from all business areas are represented on the committee
and the SEC reporting manager presides over the meetings and minutes are kept to evidence the Committee’s effectiveness. |
We have taken the following actions to address the ineffectiveness
of our internal controls over financial reporting:
| · | We continue to take strides to identify, attract and retain quality
staff members to provide improved segregation of duties and to assist in the identification and implementation of mitigating controls
when optimal segregation is not be feasible for our newly formed entity. |
| · | We have centralized accounting at our headquarters for five of our
companies. |
| · | We developed and executed a new IT project management methodology
which includes documented change management and ultimate user acceptance testing. |
| · | We have migrated our largest subsidiary (prior to Kleeneze) to our
new enterprise resource planning system which includes sophisticated accounting systems and we are aggressively migrating our other
companies. |
| · | We have aggressively streamlined our financial close process and the
related financial reporting process in order to provide management with more timely accurate information and to comply with the
filing deadlines for accelerated filers. |
There have been no other changes in our internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended
March 31, 2015 that materially affected, or is reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. Other Information
Item 1. Legal Proceedings
There have been no significant changes to our legal proceedings
from those included in Part I Item 3. Legal Proceedings in our Annual Report on Form 10-K/A for the year ended December 31, 2014,
which was filed with the SEC on March 23, 2015.
Item 1A. Risk Factors
You should carefully consider the following
risks in evaluating our Company and our business. The risks described below are the risks that we currently believe are material
to our business. However, additional risks not presently known to us, or risks that we currently believe are not material, may
also impair our business operations. You should also refer to the other information set forth in this report, including the information
set forth in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” as well as our consolidated financial statements and the related notes. Our business prospects, financial condition
or results of operations could be adversely affected by any of the following risks. If we are adversely affected by such risks,
then the market price of our common stock could decline.
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 ($37.0 million) as of March
31, 2015 and ($32.2 million) as of December 31, 2014 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. Between March of 2013 and the end of the first quarter of 2015, we completed eight 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 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 continue to raise capital
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 such as the Offering, 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.
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 that have principal balances of $3.28
million and $1.26 million, respectively as of March 31, 2015. We also are required to make monthly interest payments on senior
secured debt owed to HSBC Bank PLC as part of our acquisition of Kleeneze. The debt owed to HSBC had a balance of $2.98 million
as of March 31, 2015 and is fully secured by cash shown on our consolidated balance sheet under the restricted cash line as part
of non-current assets. In addition, we are obligated to repay the aggregate principal amount of $1.0 million owed under three notes
together with accrued interest in July 2015 and miscellaneous debt of $0.5 million due in 2016. 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 March 31, 2015 and December 31, 2014, we had approximately
$9.7 million and $1.0 million in marketable securities, respectively, invested primarily in a diversified portfolio of liquid bonds.
At neither March 31, 2015 nor December 31, 2014 did we 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 months ended March 31, 2015, we realized a loss on marketable
securities of approximately $7,000. These investments are subject to general credit, liquidity, market and interest rate risks
that could have a negative impact on our results of operations.
We may be unsuccessful in integrating the business operations
of our recently acquired subsidiary Kleeneze with ours, which, if it were to occur, would negatively impact our growth strategy.
There can be no assurance that we will be able to successfully
complete the integration of Kleeneze’s business operations following our recent acquisition acquisition, the failure of which
could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock
price. 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. The integration of the Kleeneze
transaction may include the following challenges:
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assimilating Kleeneze’s business operations, products and personnel with our existing operations, products and personnel; |
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estimating the capital, personnel and equipment required for Kleeneze’s business based on the historical experience of management; |
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minimizing potential adverse effects on existing business relationships with other suppliers and customers; |
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successfully developing and marketing Kleeneze’s products and services; |
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entering a market in which we have limited prior experience; and |
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coordinating our efforts throughout various distant localities and time zones, such as the United Kingdom where Kleeneze is based. |
Our growth strategy, as well as the business of Kleeneze, will
be 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, 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.
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, such as the recent Kleeneze acquisition and potentially companies
engaged in other direct selling related businesses. As such, it may be difficult for investors to analyze our results of operations,
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. The issuance of our common stock in the Offering resulted
in dilution to existing shareholders and the issuance of additional shares of common stock and/or Warrants pursuant to the Underwriter’s
over-allotment option as well as the exercise of any Warrants issued in the Offering will result in additional dilution to current
shareholders. In addition, an acquisition or other strategic transaction could adversely impact our cash flows and/or operating
results, and dilute shareholder interests, for a number of reasons, including:
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interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and |
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any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current holders of our common stock. |
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. The larger the business we acquire, the larger we believe our integration challenge will be. Integration
challenges may include the following:
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assimilating the acquired business’ operations products and personnel with our existing operations, products and personnel; |
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estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience of management with the businesses they are familiar with; |
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minimizing potential adverse effects on existing business relationships with other suppliers and customers; |
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successfully developing and marketing the new products and services; |
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entering markets in which we have limited or no prior experience; and |
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coordinating our efforts throughout various distant localities and time zones, such as Italy, the United Kingdom 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 acquisitions,
including our recently acquired subsidiary Kleeneze, 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. There can be no assurance that conflicts of interest will not arise with respect to John P. Rochon’s and
John Rochon, Jr.’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. On December 1, 2014, the Amended Share Exchange Agreement became effective, which limits Rochon
Capital’s right to be issued the Second Tranche Stock solely upon the occurrence of certain stock acquisitions by third parties
or the announcement of certain tender or exchange offers of our common stock. See “Certain Relationships and Related Transactions,
and Director Independence.” Upon the issuance of the shares sold in the Offering completed on March 4, 2015, John P.
Rochon, together with John Rochon, Jr., control approximately 58.2% of the voting power of our outstanding securities. In
the event that the Second Tranche Stock is issued, John P. Rochon, together with John Rochon, Jr., will control approximately
75.9% of the voting power of our outstanding securities.
Furthermore, the issuance of the Second Tranche Stock
in accordance with the terms of the Amended Share Exchange Agreement would have a further dilutive effect.
Assuming the issuance of the Second Tranche Stock occurs, the
number of outstanding shares of our common stock would increase to in excess of 60,000,000, with approximately 190,000,000 shares
of our common stock available for issuance and John P. Rochon, together with John Rochon, Jr., would beneficially own approximately
75.9% of our outstanding shares of common stock. In the event the Second Tranche Stock becomes issuable, 25,240,676 additional
shares of common stock will be issued. The perception that such further 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.
We utilize the services of Richmont Holdings, Inc. (“Richmont
Holdings”), a private investment and business management company owned 100% by John P. Rochon, under a reimbursement of services
agreement pursuant to which Richmont Holdings provides transactions and administrative services to us. CVSL has entered into an
agreement with Richmont Holdings to reimburse Richmont Holdings for certain 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. We continue to rely 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 expertise and infrastructure on our own without the assistance of these affiliated entities.
Certain of our subsidiaries are dependent on their key
personnel.
The loss of the key executive officers of certain 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, certain subsidiaries are primarily dependent upon their founder and/or Chief Executive Officer for their leadership
roles with the respective sales forces. 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 certain 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 December 31, 2014, we had over 47,000 active
independent sales representatives, of which more than 600 were at the highest level under our various compensation plans.
These independent sales leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level
independent sales representative or a group of leading representatives could negatively impact our growth and our
revenue.
In the direct selling industry, sales are made to the ultimate
consumer principally through independent sales representatives. Generally, there can be a high rate of turnover among a direct
selling company’s independent sales representatives. Our independent sales representatives may terminate their service at
any time.
Our ability to remain competitive and maintain and expand our
business depends, in significant part, on the success of our subsidiaries in recruiting, retaining, and incentivizing their independent
sales representatives through an appropriate compensation plan, the maintenance of an attractive product portfolio and other incentives,
and innovating the direct selling model. We cannot ensure that our strategies for soliciting and retaining the representatives
of our subsidiaries or any direct selling company we acquire in the future will be successful, and if they are not, our prospects,
business activities, cash flow, financial condition, results of operations and stock price could be harmed.
Several factors affect our ability to attract and retain independent
sales representatives, including:
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on-going motivation of our independent sales representatives; |
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general economic conditions; |
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significant changes in the amount of commissions paid; |
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public perception and acceptance of the industry, our business and our products; |
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our ability to provide proprietary quality-driven products that the market demands; and |
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competition in recruiting and retaining independent sales representatives. |
Changes to our compensation arrangements could be viewed
negatively by some independent sales representatives and could cause failure to achieve desired long-term results and increases
in commissions paid could have a negative impact on profitability.
The payment of commissions and incentives, including bonuses
and prizes, is one of our most significant expenses. We closely monitor the amount of the commissions and incentives we pay as
a percentage of net revenues, and may periodically adjust our compensation plan to better manage these costs.
We modify components of our compensation plans from time to
time in an attempt to remain competitive and attractive to existing and potential independent sales representatives including modifications
to:
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address changing market dynamics; |
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provide incentives to independent sales representatives that are intended to help grow our business; |
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conform to local regulations; and |
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address other business needs. |
Because of the size of our sales force and the complexity of
our compensation plans, it is difficult to predict how independent sales representatives will view such changes and whether such
changes will achieve their desired results. Furthermore, any downward adjustments to commissions and incentives may make it difficult
to attract and retain our independent sales representatives or cause us to lose some of our existing independent sales representatives.
There can be no assurance that changes to our compensation plans will be successful in achieving target levels of commissions and
incentives as a percentage of net revenues 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 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, labor strikes 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 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 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.
Our operations could be harmed if we are found not to
be in compliance with Good Manufacturing Practices.
In the United States, FDA regulations on Good Manufacturing
Practices and Adverse Event Reporting requirements for the nutritional supplement industry require us and our vendors to maintain
good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and
record keeping. The ingredient identification requirement, which requires us to confirm the levels, identity and potency of ingredients
listed on our product labels within a narrow range, is particularly burdensome and difficult for us with respect to our cosmetic
products which contains many different ingredients. We are also required to report serious adverse events associated with consumer
use of our products. Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are
not in compliance with these regulations or public reporting of adverse events harms our reputation for quality and safety. A finding
of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling certain
products. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain
of our products as we work with our vendors to assure they are qualified and in compliance.
Adverse publicity associated with our products, ingredients
or network marketing program, or those of similar companies could harm our prospects, business activities, cash flow, financial
condition and results of operations.
Our number of representatives and the results of our operations
may be affected significantly by the public’s perception of our subsidiaries and of similar companies. This perception is
dependent upon opinions concerning:
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the safety and quality of our products, components and ingredients, as applicable; |
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the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies’ representatives; |
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our marketing program; and |
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the business of direct selling generally. |
Adverse publicity concerning any actual or purported failure
of our subsidiaries or of their representatives to comply with applicable laws and regulations regarding product claims and advertising,
good manufacturing practices, the regulation of our marketing program, the licensing of our products for sale in our target markets
or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an
adverse effect on our goodwill and could negatively affect the ability to attract, motivate and retain representatives, which would
negatively impact our ability to generate revenue.
If we are unable to develop and introduce new products
that gain acceptance from our customers and representatives, our business could be harmed.
Our continued success depends on our ability to anticipate,
gauge, and react in a timely and effective manner to changes in consumer spending patterns and preferences. We must continually
work to discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products,
and refine our approach as to how and where we market and sell our products. A critical component of our business is our ability
to develop new products that create enthusiasm among our independent sales representatives and ultimate customers. If we are unable
to introduce new products, our independent sales representatives’ productivity could be harmed. In addition, if any new products
fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, this would harm our results
of operations. Factors that could affect our ability to continue to introduce new products include, among others, government regulations,
the inability to attract and retain qualified research and development staff, the termination of third-party research and collaborative
arrangements, proprietary protections of competitors that may limit our ability to offer comparable products, and the difficulties
in anticipating changes in consumer tastes and buying preferences.
A general economic downturn, a recession globally or in
one or more of our geographic regions or other challenges may adversely affect our business and our access to liquidity and capital.
A downturn in the economies in which we sell our products, including
any recession in one or more of our geographic regions, or the current global macro-economic pressures, could adversely affect
our business and our access to liquidity and capital. We could experience a decline in revenues, profitability and cash flow due
to reduced orders, payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any
or all of these factors could potentially have a material adverse effect on our liquidity and capital resources, including our
ability to raise additional capital and maintain credit lines and offshore cash balances.
Consumer spending is also generally affected by a
number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and
consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty
and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of
our products. We could face continued economic challenges in the current fiscal year 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 a substantial portion 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 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 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” emails remain a serious problem that may
damage our brands, discourage use of our websites, and increase our costs.
Our ability to conduct business in international markets
may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets
and to maintain the current level of operations in our existing international markets is exposed to risks associated with our international
operations, including:
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the possibility that a foreign government might ban or severely restrict our business method of direct selling, or that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market; |
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the lack of well-established or reliable legal systems in certain areas where we operate; |
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the presence of high inflation in the economies of international markets in which we operate; |
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the possibility that a government authority might impose legal, tax or other financial burdens on us or our sales force, due, for example, to the structure of our operations in various markets; |
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the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and |
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the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash. |
Currency exchange rate fluctuations could reduce our overall
profits.
During the quarter ended March 31, 2015, 49.3% of our
revenues were derived from markets outside of the United States. In 2014, 41.8% of our revenues were derived from markets
outside of the United States. In preparing our consolidated financial statements, certain financial information is required
to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average
exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported
sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange
rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we
have not entered into any hedging contracts or participated in any hedging or derivative activities.
Taxation and transfer pricing affect our operations and
we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.
As a multinational corporation, in many countries, including
the United States, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions
are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are
reported as earned by the local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor
our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge
our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our effective
tax rate may increase.
A change in applicable tax laws or regulations or their interpretation
could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results.
In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial
condition.
Non-compliance with anti-corruption laws could harm our
business.
Our international operations are subject to anti-corruption
laws, including the Foreign Corrupt Practices Act (the “FCPA”). Any allegations that we are not in compliance with
anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result
in a government investigation. Any determination that our operations or activities are not in compliance with existing anti-corruption
laws or regulations could result in the imposition of substantial fines, and other penalties. Although we have implemented anti-corruption
policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will
be effective. We are aware that one of our competitors is under investigation in the United States for allegations that its employees
violated the FCPA in China and other markets. If this investigation causes adverse publicity or increased scrutiny of our industry,
our business could be harmed.
We may own, obtain or license intellectual property material
to our business, and our ability to compete may be adversely affected by the loss of rights to use that intellectual property.
The market for our products may depend significantly upon the
value associated with product innovations and our brand equity. Many direct sellers own, obtain or license material patents and
trademarks used in connection with the marketing and distribution of their products. Those companies must expend time and resources
in developing their intellectual property and pursuing any infringers of that intellectual property. The laws of certain foreign
countries may not protect a company’s intellectual property rights to the same extent as the laws of the United States. The
costs required to protect a company’s patents and trademarks may be substantial.
Challenges by private parties to the direct selling system
could harm our business.
Direct selling companies have historically been subject to legal
challenges regarding their method of operation or other elements of their business by private parties, including their own representatives,
in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward
recruiting over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of
our current subsidiaries or any other direct selling company we may acquire in the future.
As a direct selling company, we may face product liability
claims and could incur damages and expenses, which could affect our prospects, business activities, cash flow, financial condition
and results of operations.
As a direct selling company we may face financial liability
from product liability claims if the use of our products results in significant loss or injury. A substantial product liability
claim could exceed the amount of our insurance coverage or could be excluded under the terms of our existing insurance policy,
which could adversely affect our prospects, business activities, cash flow, financial condition and results of operations.
Selling products for human consumption such as nutritional supplements
and spices as well as the sale of skin care products involve a number of risks. We may need to recall some of our products if they
become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage
to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our business
results and the value of our brands. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the
negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image.
If we fail to protect our trademarks and tradenames, then
our ability to compete could be negatively affected, which would harm our financial condition and operating results.
The market for our products depends upon the goodwill associated
with our trademarks 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 majority of 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 Securities Exchange Act of
1934, as amended (the “Exchange Act”). Our stated growth strategy is to acquire companies, some of which may not have
invested in adequate systems or staffing to meet public company financial reporting standards. We review the financial reporting
and other systems that each company has. However, in many cases, especially in the case of private companies we acquire, the financial
systems that are in place may not be as robust as needed. We have identified material weaknesses in our internal controls with
respect to our financial statement closing process of our financial statements for the year ended December 31, 2014. Our
management discovered certain conditions that we deemed to be material weaknesses in our internal controls, including those at
TLC. The accounting system at TLC was outdated which impacted our responsiveness. In addition, we needed to employ a greater number
of staff in our finance and accounting department to maintain optimal segregation of duties and to provide optimal levels of oversight.
This need for additional personnel existed during our 2014 audit.
We have taken the following actions to address the ineffectiveness
of our disclosure controls and procedures.
| · | A Disclosure Committee was formed and a Committee Charter was adopted
with Disclosure Controls and Procedures that were implemented this quarter. |
| · | Representatives from all business areas are represented on the committee
and the SEC reporting manager presides over the meetings and minutes are kept to evidence the Committee’s effectiveness. |
We have taken the following actions to address the ineffectiveness
of our internal controls over financial reporting:
| · | We continue to take strides to identify, attract and retain quality
staff members to provide improved segregation of duties and to assist in the identification and implementation of mitigating controls
when optimal segregation is not be feasible for our newly formed entity. |
| · | We have centralized accounting at our headquarters for five of our
companies. |
| · | We developed and executed a new IT project management methodology
which includes documented change management and ultimate user acceptance testing. |
| · | We have migrated our largest subsidiary (prior to Kleeneze) to our
new enterprise resource planning system which includes sophisticated accounting systems and we are aggressively migrating our other
companies. |
| · | We have aggressively streamlined our financial close process and the
related financial reporting process in order to provide management with more timely accurate information and to comply with the
filing deadlines for accelerated filers. |
There have been no other changes in our internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended
March 31, 2015 that materially affected, or is reasonably likely to materially affect, our internal controls over financial
reporting.
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.
Several of our directors and officers have other business
interests.
Several of our directors have other business interests, including
Mr. Rochon, who controls Richmont Holdings. Those other interests may come into conflict with our interests and the interests
of our shareholders. Mr. Rochon and several of our other directors serve on the boards of directors of several other companies
and, as a result of their business experience, may be asked to serve on the boards of other companies. We may compete with these
other business interests for such directors’ time and efforts.
CVSL officers may also work for Richmont Holdings or its affiliated
entities. These employees have discretion to decide what time they devote to our activities, which may result in a lack of availability
when needed due to their other responsibilities.
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. For the year ended December 31, 2014, we have included
an impairment charge of $0.5 million as a result of this testing. Although we believe these charges are non-cash in nature and
do not affect our operations or cash flow, these charges reduce shareholders’ equity and reported results of operations in
the period charged.
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 NYSE MKT. We cannot predict how liquid the market for our common stock may become. We believe the listing of our common
stock on the NYSE MKT is beneficial to us and our shareholders. However, while we believe that the NYSE MKT listing has improved
the liquidity of our common stock, reduced trading volume and increased volatility may affect our share price. 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.
Our common stock may not always be considered a “covered
security”.
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 our common stock is listed on the NYSE MKT, our common stock is a covered security.
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.
Our failure to meet the continued listing requirements
of the NYSE MKT could result in a de-listing of our common stock.
Our shares of common stock are currently listed on the NYSE
MKT. If 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.
The limited trading volume of our common stock may cause
volatility in our share price.
Our stock has in the past been thinly traded due to the limited
number of shares available for trading on the NYSE MKT thus causing potential large swings in price. As such, investors and potential
investors may find it difficult to resell their securities at or near the original purchase price or at any price. Our recent Offering,
which closed on March 4, 2015, may increase the number of shares available for trading but our stock price may nevertheless be
volatile. If our stock experiences volatility, investors may not be able to sell their common stock at or above the price they
paid per share. 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.
Market prices for our common stock will be
influenced by a number of factors, including:
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the issuance of new equity securities, including issuances of preferred stock; |
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the introduction of new products or services by us or our competitors; |
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the acquisition of new direct selling businesses; |
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changes in interest rates; |
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significant dilution caused by the anti-dilutive clauses in our financial agreements; |
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competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
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variations in quarterly operating results; |
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change in financial estimates by securities analysts; |
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a limited amount of news and analyst coverage for our company; |
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the depth and liquidity of the market for our shares of common stock; |
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sales of large blocks of our common stock, including sales by Rochon Capital, any executive officers or directors appointed in the future, or by other significant shareholders; |
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investor perceptions of our company and the direct selling segment generally; and |
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general economic and other national and international conditions. |
Market price fluctuations may negatively affect the ability
of investors to sell our shares at consistent prices.
Sales of our common stock under Rule 144
could impact the price of our common stock.
In general, under Rule 144 (“Rule 144”),
as promulgated under the Securities Act, persons holding restricted securities in an SEC reporting company, including affiliates,
must hold their shares for a period of at least six months, may not sell more than 1% of the total issued and outstanding shares
in any 90-day period and must resell the shares in an unsolicited brokerage transaction at the market price. Whenever a substantial
number of shares of our common stock become available for resale under Rule 144, the market price for our common stock will
likely be impacted.
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, including those affiliated with
our underwriters, 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. While we expect securities
research analyst coverage, 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 may 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. The issuance of our common stock in the Offering resulted
in dilution to existing shareholders and the issuance of additional shares of common stock and/or Warrants pursuant to the Underwriters’
over-allotment option as well as the exercise of any Warrants issued in the Offering will result in additional dilution to current
shareholders. 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. In addition, the issuance
of shares of our common stock pursuant to the terms of the At-the-Market Issuance Sales Agreement, may result in dilution to our
shareholders. Our articles of incorporation currently authorize us to issue 250,000,000 shares of common stock. Assuming the
issuance of the Second Tranche Stock (which shares may only be issued under certain limited circumstances, as described above),
the number of outstanding shares of our common stock would increase to in excess of 60,000,000 with approximately 190,000,000 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 listed on the NYSE MKT, such as our company, must
be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the
Exchange Act, in order to maintain the listing on NYSE MKT. 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 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. In addition, our failure
to timely file periodic reports with the SEC could result in our failure to meet the conditions that would require a cash exercise
of the Warrants issued in the Offering. 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 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.
In addition, the Amended Share Exchange Agreement provides for
the issuance of the Second Tranche Stock to Rochon Capital solely upon the occurrence of certain stock acquisitions by third parties
or the announcement of certain tender or exchange offers of our common stock. The Second Tranche Stock, which possess no rights
other than voting rights, may serve as a further deterrent to third parties looking to acquire us. See the section entitled “Certain
Relationships and Related Transactions, and Director Independence.”
Resales of our common stock in the public market by our
stockholders may cause the market price of our common stock to fall.
This issuance of shares of common stock in any offering, including
the Offering, could result in resales of our common stock by our current stockholders concerned about the potential dilution of
their holdings. In turn, these resales could have the effect of depressing the market price for our common stock.
There is no public market for the Warrants to purchase
shares of our common stock that were sold in the Offering.
There is no established public trading market for the Warrants,
and we do not expect a market to develop. In addition, we do not intend to apply to list the Warrants on any national securities
exchange or other nationally recognized trading system, including the NYSE MKT. Without an active market, the liquidity of the
Warrants will be limited.
Due to the speculative nature of warrants, there is no
guarantee that it will ever be profitable for holders of the Warrants to exercise the Warrants.
The Warrants that were issued in the Offering do not confer
any rights of share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent
the right to acquire our common stock at a fixed price for a limited period of time. Holders of Warrants may exercise their right
to acquire the common stock underlying the Warrants at any time after the date of issuance by paying an exercise price of $3.75
per share, prior to their expiration on the date that is five years from the date of issuance, after which date any unexercised
warrants will expire and have no further value. There can be no assurance that the market price of our common stock will ever equal
or exceed the exercise price of the Warrants, and, consequently, whether it will ever be profitable for investors to exercise their
Warrants.
Item 2. Unregistered Sales of Unregistered
Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior
Securities
Not applicable.
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 |
|
|
|
4.1 |
|
Form of Warrant Issued to Investors (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015) |
|
|
|
4.2 |
|
Form of Representative’s Warrant Agreement (incorporated
by reference to Exhibit 4.2 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015)
|
10.1 |
|
Share Purchase Agreement, dated February
6, 2015, between Trillium Pond AG and Findel plc. 2014 (incorporated by reference to Exhibit 10.1 of our Current Report on
Form 8-K (File No. 001-36755) filed with the Commission on February 6, 2015) |
|
|
|
10.2 |
|
Service Level Agreement to be executed at
closing between Kleeneze and Express Gifts, Ltd. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K
(File No. 001-36755) filed with the Commission on February 6, 2015) |
|
|
|
10.3 |
|
Transition Services Agreement to be executed at closing between Kleeneze and Findel plc. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on February 6, 2015) |
|
|
|
21 |
|
List of Subsidiaries (incorporated by reference to Exhibit 21 of our Annual Report on Form 10-K/A (File No. 001-36755) filed with the Commission on March 17, 2015) |
|
|
|
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.** |
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.
|
CVSL Inc. |
|
|
|
By: |
/s/ John P. Rochon |
|
|
|
|
|
John P. Rochon |
|
|
Chief Executive Officer, President and Chairman |
|
|
(Principal Executive Officer) |
|
Date: May 11,
2015 |
|
|
|
By: |
/s/ John Rochon, Jr. |
|
|
|
|
|
John Rochon , Jr . |
|
|
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
|
Date: May 11,
2015 |
INDEX TO EXHIBITS
Exhibit No. |
|
Description |
|
|
|
4.1 |
|
Form of Warrant Issued to Investors (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015) |
|
|
|
4.2 |
|
Form of Representative’s Warrant Agreement (incorporated
by reference to Exhibit 4.2 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015)
|
10.1 |
|
Share Purchase Agreement, dated February
6, 2015, between Trillium Pond AG and Findel plc. 2014 (incorporated by reference to Exhibit 10.1 of our Current Report on
Form 8-K (File No. 001-36755) filed with the Commission on February 6, 2015) |
|
|
|
10.2 |
|
Service Level Agreement to be executed at
closing between Kleeneze and Express Gifts, Ltd. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K
(File No. 001-36755) filed with the Commission on February 6, 2015) |
|
|
|
10.3 |
|
Transition Services Agreement to be executed at closing between Kleeneze and Findel plc. (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on February 6, 2015) |
|
|
|
21 |
|
List of Subsidiaries (incorporated by reference to Exhibit 21 of our Annual Report on Form 10-K/A (File No. 001-36755) filed with the Commission on March 17, 2015) |
|
|
|
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.** |
Exhibit 31.1
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, John P Rochon, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of CVSL Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: May 11, 2015 |
By: |
/s/ JOHN P ROCHON |
|
|
Name: John P Rochon |
|
|
Title: Chief Executive Officer
and Chairman |
|
|
(Principal Executive Officer) |
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, John Rochon, Jr. certify that:
1.
I have reviewed this quarterly report on Form 10-Q of CVSL Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: May 11, 2015 |
By: |
/s/ JOHN ROCHON, JR. |
|
|
Name: John Rochon, Jr. |
|
|
Title: Chief Financial Officer |
|
|
(Principal Financial Officer) |
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 of the Registrant for the period ended March 31, 2015 (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: May 11, 2015 |
|
|
|
|
|
|
|
|
|
By: |
/s/ JOHN P. ROCHON |
|
|
Name: John P. Rochon |
|
|
Title: Chief Executive Officer
and Chairman |
|
|
(Principal Executive Officer) |
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 of the Registrant for the year ended March 31, 2015 (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: May 11, 2015 |
|
|
|
|
By: |
/s/ JOHN ROCHON, JR. |
|
|
Name: John Rochon, Jr. |
|
|
Title: Chief Financial Officer |
|
|
(Principal Financial Officer) |
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