UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 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  ý No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
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 oNo ý

As of August 13, 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
 

 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 


PART I.    Financial Information
Item 1.    Financial Statements

CVSL Inc.
Condensed Consolidated Balance Sheets
(in thousands except share and per share data)  
 
 
(Unaudited)
 
 
 
 
June 30,
2015
 
December 31,
2014
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
6,436

 
$
2,606

Marketable securities, at fair value
 
5,967

 
991

Accounts receivable, net
 
3,966

 
450

Inventory, net
 
20,289

 
14,759

Other current assets
 
3,373

 
2,482

Total current assets
 
40,031

 
21,288

Restricted cash
 
3,027

 
—

Sale leaseback security deposit
 
4,414

 
4,414

Property, plant and equipment, net
 
8,429

 
8,191

Leased property, net
 
14,834

 
15,361

Goodwill
 
5,246

 
4,095

Intangibles, net
 
3,458

 
3,558

Other assets
 
353

 
400

Total assets
 
$
79,792

 
$
57,307

 
 
 
 
 
Liabilities and stockholders' equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
12,515

 
$
8,436

Related party payables, net
 
635

 
127

Lines of credit
 
99

 
105

Accrued commissions
 
4,056

 
3,319

Accrued liabilities

8,316


4,612

Deferred revenue
 
2,490

 
2,982

Current portion of long-term debt
 
949

 
974

Accrued taxes payable
 
3,842

 
2,693

Other current liabilities
 
3,027

 
1,404

Total current liabilities
 
35,929

 
24,652

Long-term debt, net of current portion
 
7,015

 
4,316

Lease liability, net of current portion
 
15,765

 
15,774

Other long-term liabilities
 
2,353

 
3,582

Total liabilities
 
61,062

 
48,324

 
 
 
 
 
Commitments & contingencies (Note 9)
 


 


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 June 30, 2015 and December 31, 2014, respectively
 
4

 
3

Additional paid-in capital
 
55,468

 
37,097

Accumulated other comprehensive income
 
174

 
321

Accumulated deficit
 
(38,730
)
 
(32,159
)
Total stockholders' equity attributable to CVSL Inc.
 
16,916

 
5,262

Stockholders' equity attributable to non-controlling interest
 
1,814

 
3,721

Total stockholders' equity
 
18,730

 
8,983

Total liabilities and stockholders' equity
 
$
79,792

 
$
57,307

  
See notes to unaudited condensed consolidated financial statements.

3

CVSL Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)  
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue
 
$
35,742

 
$
24,586

 
$
54,961

 
$
51,257

Program costs and discounts
 
(2,998
)
 
(5,220
)
 
(5,160
)
 
(10,196
)
Net revenue
 
32,744

 
19,366

 
49,801

 
41,061

Costs of sales
 
10,955

 
5,863

 
16,365

 
13,879

Gross profit
 
21,789

 
13,503

 
33,436

 
27,182

Commissions and incentives
 
12,612

 
6,005

 
18,480

 
12,978

Gain on sale of assets
 
(40
)
 
(141
)
 
(83
)
 
(407
)
Selling, general and administrative
 
10,829

 
11,301

 
20,269

 
20,389

Depreciation and amortization
 
678

 
445

 
1,308

 
1,066

Impairment of goodwill
 
192

 
—

 
192

 
—

Operating loss
 
(2,482
)
 
(4,107
)
 
(6,730
)
 
(6,844
)
Loss on marketable securities
 
—

 
58

 
7

 
552

Interest expense, net
 
745

 
213

 
1,341

 
479

Loss from operations before income tax provision
 
(3,227
)
 
(4,378
)
 
(8,078
)
 
(7,875
)
Income tax provision
 
192

 
213

 
386

 
492

Net loss
 
(3,419
)
 
(4,591
)
 
(8,464
)
 
(8,367
)
Net loss attributable to non-controlling interest
 
1,726

 
1,046

 
1,892

 
1,686

Net loss attributable to CVSL Inc.
 
$
(1,693
)
 
$
(3,545
)
 
$
(6,572
)
 
$
(6,681
)
Basic and diluted loss per share:
 
 

 
 

 
 
 
 
Weighted average common shares outstanding
 
34,367,095

 
24,400,893

 
32,017,582

 
24,403,486

Loss per common share attributable to common stockholders, basic and diluted
 
$
(0.05
)
 
$
(0.15
)
 
$
(0.21
)
 
$
(0.27
)
  

See notes to unaudited condensed consolidated financial statements.

4

CVSL Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)  
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(3,419
)
 
$
(4,591
)
 
$
(8,464
)
 
$
(8,367
)
Other comprehensive gain, net of tax:
 
 

 
 

 
 
 
 
Unrealized gain on marketable securities
 
—

 
184

 
7

 
653

Foreign currency translation adjustment gain (loss)
 
(463
)
 
44

 
(153
)
 
34

Other comprehensive gain (loss)
 
(463
)
 
228

 
(146
)
 
687

Comprehensive loss
 
$
(3,882
)
 
$
(4,363
)
 
$
(8,610
)
 
$
(7,680
)
Comprehensive loss attributable to non-controlling interests
 
1,726

 
1,046

 
1,892

 
1,686

Comprehensive loss attributable to CVSL Inc.
 
(2,156
)
 
(3,317
)
 
(6,718
)
 
(5,994
)
   

See notes to unaudited condensed consolidated financial statements.

5

CVSL Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Six Months Ended
June 30,
 
 
2015
 
2014
Operating activities:
 
 

 
 

Net loss
 
$
(8,464
)
 
$
(8,367
)
Adjustments to reconcile net loss to net cash used in operating activities net of effect of acquisitions
 
 

 
 

Depreciation and amortization
 
1,308

 
1,224

(Gain) Loss on marketable securities
 
7

 
552

Interest expense
 
—

 
400

Share-based compensation
 
(1,197
)
 
398

Provision for doubtful accounts
 
220

 
140

Provision for obsolete inventory
 
—

 
41

Gain on sales of assets
 
(83
)
 
(407
)
Deferred income tax
 
73

 
89

Goodwill impairment
 
192

 
—

Changes in certain assets and liabilities:
 
 
 
 

Accounts receivable
 
(748
)
 
(136
)
Inventory
 
754

 
1,182

Other current assets
 
5

 
(161
)
Accounts payable
 
522

 
(168
)
Related party payables, net
 
507

 
(277
)
Accrued commissions
 
737

 
666

Accrued liabilities
 
3,704

 
(100
)
Deferred revenue
 
(491
)
 
1,289

Taxes payable
 
1,077

 
811

Other liabilities
 
(3,798
)
 
(2,187
)
Net cash used in operating activities
 
(5,675
)
 
(5,011
)
Investing activities:
 
 

 
 

Capital expenditures
 
(407
)
 
(645
)
Proceeds from the sale of property, plant and equipment
 
187

 
1,831

Purchase of investments available for sale
 
(18,876
)
 
—

Sale of marketable securities
 
13,900

 
6,238

Proceeds from note receivable
 
1

 
—

Acquisitions, net of cash purchased
 
(3,137
)
 
2

Net cash (used in) provided by investing activities
 
(8,332
)
 
7,426

Financing activities:
 
 

 
 

Borrowings on long-term debt and revolving credit facility
 
3,137

 
42

Payments on debt
 
(477
)
 
(2,662
)
Stock issuances
 
18,357

 
—

Cash held as collateral
 
(3,027
)
 
—

Net cash (used in) provided by financing activities
 
17,990

 
(2,620
)
Effect of exchange rate changes on cash
 
(153
)
 
505

Increase in cash
 
3,830

 
300

Cash and cash equivalents at beginning of period
 
2,606

 
3,877

Cash and cash equivalents at end of period
 
$
6,436

 
$
4,177

Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid during the period for:
 
 

 
 

Interest
 
$
595

 
130

Income taxes
 
—

 
517

See notes to unaudited condensed consolidated financial statements.

6

CVSL Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 

(1) General
 
Interim Financial Information
 
The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. The accompanying unaudited interim condensed consolidated financial statements of CVSL Inc. 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. The Condensed Consolidated Balance Sheet at December 31, 2014 is derived from the December 31, 2014 audited financial statements. 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. ("CVSL" or "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").

All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements. Business combinations accounted for as purchases are included in the condensed consolidated financial statements from their respective dates of acquisition.  

Significant Accounting Policies
 
There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 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 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.

Significant Adjustments

All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01.
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 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. Collectively the 2013 Director Smart Bonus Unit Plan and 2013 Smart Bonus Unit Award Plans are referred herein as The Stock Appreciation Rights Program (“SARs Program”), 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 condensed consolidated balance sheets.


7

In accordance with ASC 718-30-35-3, a public entity shall measure a liability award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date until the date of settlement. Therefore, to reflect the change in the award's fair value, management adjusted the liability of the SARs Program from approximately $1.1 million at March 31, 2015 to $26,684 at June 30, 2015. However, Management identified that approximately $1.1 million of the adjustment should have been recorded in the three months ended March 31, 2015, but was ultimately recorded with the overall fair value adjustment in the three months ended June 30, 2015. Had the adjustment been recorded in the three months ended March 31, 2015 it would have been a reduction in both long term liabilities and net loss, due to an increase in selling, general and administrative expense on the condensed consolidated statement of operations, by approximately $1.1 million.

The table below breaks down the correct balance of the liability at each reporting period (in thousands):

 
 
June 30, 2015
 
December 31, 2014
Share based liability
 
$
25

 
$
1,222


 
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
Change in fair value of liability
 
$
(37
)
 
$
(1,197
)

 
In addition, as a result of our IT system conversion at The Longaberger Company ("TLC") we discovered certain accounting errors impacting the three months ended March 31, 2015. The most significant of these accounting errors was that certain cash payments were not appropriately applied to accounts payable resulting in an overstatement of cash and accounts payable of approximately $1.4 million. Deferred revenues and cash were understated by approximately $1.3 million. Additionally, a commissions application did not appropriately calculate the commission resulting in an understatement of both commissions payable and net loss by approximately $1.1 million.

Management has evaluated these errors for the three months ended March 31,2015 and has concluded these adjustments are immaterial to the March 31, 2015 financial statements, as well as to the results for the period ended June 30, 2015.
 
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 $220,000 and $170,000 at June 30, 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 period-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates for the quarterly 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.

Management has determined the functional currency of each primary operating subsidiary by evaluating indicators such as cash flows, sales prices, sales markets, expenses, financing, and intra-entity transactions and arrangements. We have listed below our primary operating subsidiaries for each of our companies and their functional and reporting currencies.

8

Subsidiary
 
Functional Currency
 
Reporting Currency
The Longaberger Company
 
USD
 
USD
Uppercase Acquisition, Inc.
 
USD
 
USD
CVSL TBT LLC
 
USD
 
USD
My Secret Kitchen, Ltd.
 
GBP
 
USD
Your Inspiration At Home Pty Ltd.
 
AUD
 
USD
Paperly, Inc.
 
USD
 
USD
Happenings Communications Group, Inc.
 
USD
 
USD
Agel Enterprises Inc.
 
USD
 
USD
Kleeneze Ltd.
 
GBP
 
USD

 
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 June 30, 2015 and 2014, our allowance for sales returns totaled $309,000 and $227,000, respectively.

Recent Accounting Pronouncements
 
In January 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-01 (ASU 2015-01), Income Statement - Extraordinary Items and Unusual Items. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2015-01 eliminates the concept of extraordinary items from 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), Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. 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.

In July 2015, the FASB issued Accounting Standards Update 2015-11 (ASU 2015-11) to simplify the subsequent measurement of inventory. The new standard requires that inventory be measured at the lower of cost or net realizable value. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2016. Early application is permitted as of the beginning of an interim or annual reporting period.
 
(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. Kleeneze offers a wide variety of cleaning, health, beauty, home, outdoor and other products to customers across the United Kingdom and Ireland.

9


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 remaining $2.1 million of consideration consisted of cash. Approximately $1.9 million in cash remained with the Company at closing.
  
The following summary represents the preliminary estimate of fair value of Kleeneze as of the acquisition date, March 24, 2015, and is subject to change following management’s final evaluation of the purchase price allocation and fair value assumptions.
 
 
 
(in thousands)
Consideration
 
$
5,100

Amounts recognized for assets acquired and liabilities assumed:
 
 
Current assets
 
12,164

Other long-term assets
 
624

Current liabilities
 
9,030

Net assets acquired
 
$
3,758

 
 
 
Goodwill and intangible assets
 
$
1,342


Pro-forma Consolidated Statement of Operations
 
The following unaudited pro-forma financial information presents the Company's consolidated financial results for the three and six months ended June 30, 2015 and 2014 as if the acquisition had occurred as of January 1, 2014 (in thousands, except per share data):
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Operations
 
 
 
 
 
 
 
 
Revenues
 
$
35,742

 
$
40,092

 
$
67,773

 
$
83,238

Net loss
 
(3,419
)
 
(4,049
)
 
(8,643
)
 
(7,366
)
Net loss attributable to CVSL Inc.
 
(1,693
)
 
(3,003
)
 
(6,751
)
 
(5,680
)
Loss per common share attributable to CVSL Inc., basic and diluted
 
$
(0.05
)
 
$
(0.12
)
 
$
(0.21
)
 
$
(0.23
)
 
Notes to Pro-forma Unaudited Condensed Consolidated Financial Statement
 
These pro-forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that actually would have resulted had the acquisition been effective at the beginning of the respective periods and are not necessarily representative of future results. The pro-forma results include the following adjustments:

•
Losses were incurred as a result of the write down of intercompany receivables in the amount of $33.1 million 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 financials above;
•
The pro-forma results above exclude $113,000 in transaction costs.

The revenues and earnings of Kleeneze since the acquisition date that have been included in our condensed consolidated financial statements for the three and six months ended June 30, 2015 were as follows:


10

 
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
Revenues
 
$
13,116

 
$
13,485

 
 
 
 
 
Net income (loss), net of intercompany items
 
$
22

 
$
(258
)

Kleeneze net income (loss) in the table above is presented net of intercompany expenses of $404,000 for the three and six months ended June 30, 2015.

 
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-to-consumer company that sells 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 at March 31, 2014 of $219,787. The payable was relieved in April 2014 once the stock was issued to the seller. 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. There have been no payments related to this contingency, to date, and no liability is recorded on our balance sheet related to a contingent payment for UAI due to the Company's belief that it is not probable that UAI will achieve positive EBITDA during the period of the contingent payment. Goodwill arising from the transaction totaled $469,065.
  
Dispositions
 
On July 31, 2014, CVSL and 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 Sale 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. 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. 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.

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 exercise price of the warrant is subject to anti-dilutive adjustments (such as stock splits, stock dividends, recapitalizations or other similar events). There are no cash settlement alternatives associated with the warrant agreements that would require the Company to pay a holder of such warrant cash at exercise or at any other event. The fair value of the warrants is approximately $9.0 million as calculated using the Black Scholes model. In accordance with US GAAP, the Company has accounted for the warrants as equity instruments.

The Warrants will be exercisable at any time a registration statement registering the issuance of the shares of Common Stock underlying the Warrants under the Securities Act is effective and available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment in full in immediately available funds for the number of shares of Common Stock purchased upon such exercise. If a registration statement registering the issuance of the shares of Common Stock underlying the warrants under the Securities Act is not effective or available and

11

an exemption from registration under the Securities Act is not available for the issuance of such shares, the holder may, in its sole discretion, elect to exercise the Warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Common Stock determined according to the formula set forth in the Warrant. 

A holder of Warrants will not have the right to exercise any portion of the Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice from the holder to us.

Possible Issuance of Additional Common Stock under Share Exchange Agreement
 
Under a certain Share Exchange Agreement with Rochon Capital, which was amended during the fourth quarter of 2014 (the "Amended Share Exchange Agreement") Rochon Capital has rights to be issued the 25,240,676 shares of our common stock (the "Second Tranche Parent Stock") 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.

(3) Marketable Securities
 
Our marketable securities as of June 30, 2015 include fixed income and equity investments classified as available for sale. At June 30, 2015, the fair value of the equity securities totaled $0 and the fair value of the fixed income securities totaled $6.0 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 cost of marketable securities purchases, net of proceeds from sales, during the six months ended June 30, 2015 totaled $5.0 million. The proceeds from the sales of our marketable securities total $6.2 million for the six months ended June 30, 2014. Unrealized gains on the investments included in consolidated statements of other comprehensive income were $0 and $184,000 for the three months ended June 30, 2015 and 2014, respectively. Unrealized gains on the investments included in consolidated statements of other comprehensive income were $7,000 and $653,000 for the six months ended June 30, 2015 and 2014, respectively. Our realized losses from the sale of our marketable securities totaled $0 and $58,000 for the three months ended June 30, 2015 and 2014, respectively. Our realized losses from the sale of our marketable securities totaled $7,000 and $552,000 for the six months ended June 30, 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.
 
The Company elected fair value option to value the available for sale securities. These securities are Level 1 securities estimated based on quoted prices in active markets. In measuring the securities at an alternative adjusted cost basis, the adjusted cost equals the fair value reported as there were no unrealized gains or losses on the available for sale securities for the three months ended June 30, 2015 and the three months ended June 30, 2014.

As of June 30, 2015 our marketable securities investments had an effective maturity of 1.24 years and an average effective duration of 0.22 years. The majority of our marketable securities are invested in investment-grade corporate bonds.


(4) Inventory
 
Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory consisted of the following (in thousands):
 
 
 
June 30,
2015
 
December 31,
2014
Raw material and supplies
 
$
3,083

 
$
3,052

Work in process
 
479

 
931

Finished goods
 
21,078

 
14,852

 
 
24,640

 
18,835

Inventory reserve
 
(4,351
)
 
(4,076
)
 
 
 
 
 
 Inventory, net
 
$
20,289

 
$
14,759

 


12

(5) Property, plant and equipment
 
Property, plant and equipment consisted of the following (in thousands):
 
 
 
June 30,
2015
 
December 31,
2014
Land and improvements
 
$
499

 
$
699

Buildings and improvements
 
6,423

 
6,351

Equipment
 
3,939

 
2,978

Construction in progress
 
—

 
10

 
 
10,861

 
10,038

Less accumulated depreciation
 
(2,432
)
 
(1,847
)
Property, plant and equipment, net
 
$
8,429

 
$
8,191

 
Depreciation and amortization expense related solely to property plant, and equipment depreciation was approximately $678,000 and $1.3 million for the three and six months ended June 30, 2015, respectively. The depreciation and amortization expense was approximately $554,000 and $1.2 million for the three and six months ended June 30, 2014, which includes approximately $109,000 and $158,000 related to cost of goods sold, respectively. Following the execution of our Sale Leaseback Agreement in July 2014, we no longer record any depreciation expense in cost of good sold and the entire depreciation amount for the three and six months ended June 30, 2015, respectively, was recorded in selling, general and administrative expense.
 
In addition to owned property, the Company also has $14.8 million in leased property due to the Sale Leaseback Agreement, which is net of accumulated depreciation of approximately $1.0 million as of June 30, 2015.

(6) Long-term debt and other financing arrangements
 
The Company's long-term borrowing consisted of the following (in thousands, except for interest rates):
 
Description
 
Interest
rate
 
June 30,
2015
 
December 31, 2014
Senior secured debt – HSBC Bank PLC
 
1.10
%
 
$
3,143

 
$
—

Promissory note—Payable to Former Shareholder of TLC
 
2.63
%
 
3,189

 
3,373

Promissory note—Lega Enterprises, LLC (formerly Agel Enterprises, LLC)
 
5.00
%
 
1,180

 
1,375

Other miscellaneous notes
 
4.00
%
 
417

 
516

Capital lease obligation
 
14.00
%
 
15,800

 
15,800

Total debt
 
 

 
23,729

 
21,064

Less current maturities
 
 

 
(949
)
 
(974
)
Long-term debt and other financing arrangements, net of current maturities
 
 

 
$
22,780

 
$
20,090


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. The loan is denominated in pound sterling (GBP) and secured by approximately $3.0 million in cash shown as "restricted cash" on our unaudited combined consolidated balance sheets and there are no other covenants related to the debt. The cash collateral is held in a GBP denominated account.
 

13

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 our 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 NNN Raiders. The lease was deemed to qualify as a capital lease and the transaction is being accounted for as a sale 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. The interest expense associated with the lease payments was $552,000 and $0 for the three months ended June 30, 2015 and 2014 respectively. Interest expense recognized for the six months ended June 30, 2015 and 2014 was $1,104,000 and $0 respectively. Amortization expense of $263,334 and $0 was recorded in the three months ended June 30, 2015 and 2014 respectively. $526,667 and $0 was recorded as amortization expense for the six months ended June 30, 2015 and 2014, respectively. The gain on sales of real estate amortized over the life of the lease was $42,000 and $84,000 for the three and six months ended June 30, 2015, respectively. On June 30, 2015 the current portion of the lease totaled $35,000.
 
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 or that the Company will maintain conditions necessary for a cash exercise.
 
On May 6, 2014, the Company issued warrants to purchase up to 12,500 and 6,250 shares of its Common Stock in connection with exclusivity agreements. The warrants were 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. The fair value of the warrants on the date of issuance approximated $116,000. The warrants expired in May 2015 and were not exercised.
 

14

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. 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 was subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. On July 30, 2015 we executed an extension on the consulting agreement through July of 2017 in exchange for cancellation of the original warrant for 50,000 shares and the issuance of a new warrant exercisable for 50,000 shares of our common stock at an exercise price of $1.16 per share. The new warrant is also exercisable for a ten day period commencing 720 days after issuance.

 
(7) Accumulated Other Comprehensive Loss
 
Accumulated other comprehensive loss ("AOCI"), net of taxes, is comprised of the following (in thousands):
 
 
 
Foreign
Currency
Translation
 
Unrealized Gain
(Loss) on
Available-for-
Sale Securities
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2014
 
$
128

 
$
192

 
$
320

Other comprehensive income (loss) before reclassifications
 
(153
)
 
7

 
(146
)
Amount reclassified from AOCI
 
—

 
—

 
—

Net other comprehensive income (loss) at June 30, 2015
 
$
(25
)
 
$
199

 
$
174

 
(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 due to the immediate or short-term nature or maturity of these financial instruments. Our available for sale securities (Level 1) was $6.0 million and (Level 2) $0 at June 30, 2015. Our available for sale securities (Level 1) was $129,000 and (Level 2) $862,000 at December 31, 2014.

CVSL does not disclose the fair value of its debt instruments in accordance with the practicability exceptions laid out in ASC 820-10-15-3. Level 1 and 2 inputs are not available for the company’s notes, and Level 3 inputs are not reliable in relation to determining the fair market value of the company’s debt.
(9) Commitments and Contingencies
 
The Company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company is remote. As such, management believes that the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations.
 
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

15

on past claims experience, and has an accrued liability to cover estimated future costs. At June 30, 2015, the accrued liability was approximately $0.7 million compared to $1.0 million at December 31, 2014. There can be no assurance that actual results will not materially differ from the Company’s estimates.

(10) Income Taxes
 
As of June 30, 2015, the Company did not have a history of earnings that would allow it to record any of its net deferred tax assets without a corresponding valuation allowance. Therefore, no net deferred tax asset is reflected as of June 30, 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. A deferred tax liability is recorded within other current liabilities in the amount of $538,446 within our condensed consolidated balance sheets.

The deferred tax expense for the three and six months ended June 30, 2015 was approximately $40,000 and $73,000 respectively. Deferred tax expense for the three and six months ended June 30, 2014 was approximately $44,700 and $89,000, respectively. The Company records no current income tax expense related to its domestic activities due to historical or current net operating losses. Current tax expense for the three and six months ended June 30, 2015 was $152,000 and $313,000, respectively. Current tax expense for the three and six months ended June 30, 2014 was approximately $212,900 and $491,900, respectively. The current tax is 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 SARs Program vests 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 three and six months ended June 30, 2015 was $(1.2) million and $(1.2) million, respectively, compared to $311,000 and $398,000 for the three and six months ended June 30, 2014, respectively. The share-based compensation expense is included in selling, general and administrative expenses on the Company’s consolidated income statements. As of June 30, 2015, total unrecognized compensation cost related to unvested share-based compensation was $25,000, 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 of 6,996,875 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 five operating segments, three of which are reportable segments, as a direct-to-consumer company that sells a wide range of products primarily through independent sales forces across many countries around the world. For the six months ended June 30, 2015 and June 30, 2014, respectively approximately $34.9 million or 63.5% and $21.6 million or 42.1% of our revenues were generated in international markets. For the three months ended June 30, 2015 and June 30, 2014, respectively approximately $25.6 million or 71.6% and $10.8 million or 43.9% of our revenues were generated in international markets. We have grouped our products into the following five operating segments: gourmet foods, nutritional and wellness, home décor, publishing and printing, and other. Substantially all of our long-lived assets are located in the U.S. Of these 5 operating segments, Gourmet Food Products, Home Décor, and Nutritional and Wellness qualify as reportable segments in line with the specifications established in ASC 280-10-50.


16

We have identified three reportable segments as each segment engages in business activities, incurring expenses and producing revenues, the operating results of these segments are regularly reviewed by chief decision makers and there is discrete financial information available for each unit. Also, the reported revenue of each reportable segment, both external and intercompany, is 10% or more of the combined revenue of all of the operating segments. The Company's three reportable segments are: 1) Gourmet Food Products, 2) Home Décor and 3) Nutritionals and Wellness. In prior periods we had identified and presented one reportable segment, with revenue broken down into five categories within our segment discussion. However, with the addition of Kleeneze, the continued growth of Your Inspiration at Home and anticipated future growth, both organically and through acquisitions, we now view the Company as having five operating segments, three of which are reportable segments as discussed above. As revenues have concentrated within these three reportable segments, our chief operating decision makers ("CODM") now view these segments as appropriate for decision making purposes because they each represent a significant part of our business. The following is a brief description of our three reportable segments.

Gourmet Food Products - Segment consists of operations related to the production and sale of hand-crafted spices, oils and other food products from around the world. These operations have a presence in many of our markets both in the U.S. and internationally such as in Australia, New Zealand, Canada, and the United Kingdom. The CVSL subsidiaries involved in this line of business are Your Inspiration at Home and My Secret Kitchen.

Home Décor - Segment consists of operations related to the production and sale of premium hand-crafted baskets and the selling of products for the home, including pottery, cleaning, health, beauty, home, outdoor and customizable vinyl expressions for display. These operations are primarily located within the United States and the United Kingdom. The primary CVSL subsidiaries involved in this line of business are Kleeneze, TLC and Uppercase Living.

Nutritionals and Wellness - Segment consists of operations related to the selling of nutritional supplements and skin care products. These operations have a presence in many foreign markets and over 40 countries such as Italy, Russia, Spain, and Israel. The CVSL subsidiary primarily involved in this type of products is Agel.

We note that these three segments exceed 75% of The Company's consolidated revenue. Therefore, no further aggregation or disclosures are required for the remaining operating segments.

Although they do not qualify as reportable segments, we have included our Publishing and Printing and Other operating segments within the tables below to provide easier reconciliation to our results found on the condensed consolidated statements of operations and further transparency. The Publishing and Printing Segment consists of HCG and Paperly. The Other Segment consists of Tomboy Tools ("TBT").

In the tables below we present revenues and gross profit by operating segment. Our CODM evaluates performance on a segment basis from the standpoint of gross profit because many of our operating expenses are part of our shared services group at the corporate level, providing services to all of our operating segments, which is consistent with our post-acquisition integration strategies. In addition, there are numerous intercompany allocations and expenses that are most appropriately viewed on a consolidated basis for the Company as a whole. We do not have intersegment revenues.

Segment information, which includes all operating segments, for the three and six months ended June 30, 2015 and June 30, 2014 are shown in the tables below (in thousands):

17

 

Three months ended
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Gourmet Food Products
 
Home Décor
 
Nutritionals and Wellness
 
Publishing & Printing
 
Other
 
Consolidated
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
4,990

 
$
22,372

 
$
7,981

 
$
273

 
$
126

 
$
35,742

 
Gross profit
 
2,025

 
13,161

 
6,358

 
179

 
66

 
21,789

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
24,271

 
Loss on marketable securities
 
 
 
 
 
 
 
 
 
 
 
—

 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
745

 
Loss from operations before income tax provision
 
 
 
 
 
 
 
 
 
 
 
$
(3,227
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
1,644

 
$
12,437

 
$
9,954

 
$
319

 
$
232

 
$
24,586

 
Gross profit
 
889

 
3,730

 
8,530

 
206

 
148

 
13,503

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
17,610

 
Loss on marketable securities
 
 
 
 
 
 
 
 
 
 
 
58

 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
213

 
Loss from operations before income tax provision
 
 
 
 
 
 
 
 
 
 
 
$
(4,378
)

Six months ended
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Gourmet Food Products
 
Home Décor
 
Nutritionals and Wellness
 
Publishing & Printing
 
Other
 
Consolidated
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
7,708

 
$
31,713

 
$
14,757

 
$
504

 
$
280

 
$
54,961

 
Gross profit
 
2,727

 
18,608

 
11,603

 
317

 
181

 
33,436

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
40,166

 
Loss on marketable securities
 
 
 
 
 
 
 
 
 
 
 
7

 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
1,341

 
Loss from operations before income tax provision
 
 
 
 
 
 
 
 
 
 
 
$
(8,078
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
2,608

 
$
27,458

 
$
20,156

 
$
613

 
$
422

 
$
51,257

 
Gross profit
 
1,367

 
8,587

 
16,595

 
393

 
239

 
27,182

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
34,026

 
Loss on marketable securities
 
 
 
 
 
 
 
 
 
 
 
552

 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
479

 
Loss from operations before income tax provision
 
 
 
 
 
 
 
 
 
 
 
$
(7,875
)


18

In accordance with ASC 280-10-50, we have disclosed below the total assets for which there has been a material change from the amount disclosed in the last annual report. The total assets related to the reportable segment, Home Décor, increased over $29 million from December 31, 2014 to June 30, 2015 primarily due to the acquisition of Kleeneze in March 2015, which at June 30, 2015, had approximately $21 million in total assets.

The below table shows the total assets for each reportable segment, which have been reconciled to the consolidated total assets (in thousands):
 
 
June 30, 2015
 
December 31, 2014
Gourmet Food Products
 
$
1,103

 
$
1,142

Home Décor
 
57,215

 
28,184

Nutritionals and Wellness
 
10,663

 
11,693

All other segments
 
10,811

 
16,288

Consolidated total assets
 
$
79,792

 
$
57,307




(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-to-consumer 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-to-consumer 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 three months ended June 30, 2015 and 2014, we recorded $552,300 and $480,000, respectively in Reimbursement Fees that were included in selling, general and administrative expense in the consolidated statements of operations. During the six months ended June 30, 2015 and 2014, we recorded $1.1 million and $960,000, respectively.
 
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. The loan does not currently bear interest and has no set maturity date.
 
(15) Goodwill and Other Intangible Assets

Goodwill

CVSL management performs its goodwill and other indefinite-lived intangible impairment tests annually or when changes in circumstances indicate an impairment event may have occurred by estimating the fair value of each reporting segment compared to its carrying value. The Company is aggregated into five operating segments presented herein (Note 13) based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods. Our five operating segments consist of: 1) Gourmet Food Products, 2) Home Décor, 3) Nutritionals and Wellness, 4) Publishing and Printing and 5) Other.

We use a discounted cash flow model and a market approach to calculate the fair value of our operating segments. The models include a number of significant assumptions and estimates regarding future cash flows and these estimates could be materially impacted by adverse changes in market conditions. Goodwill is measured for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded.

A significant decline in TBT revenue, the only subsidiary included in the Other Operating Segment, indicated that the carrying amount of this reporting unit may be impaired. The Company tested goodwill for impairment and determined that TBT's goodwill was impaired at June 30, 2015. Impairment charges totaled $192,000 for the three and six month June 30, 2015. Goodwill at June 30, 2015 was approximately $190,000, net of accumulated impairment, and accumulated impairment of goodwill for TBT since the acquisition in October 2013 is approximately $375,000.

Indefinite-lived assets are measured for impairment by comparing the fair value of the indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible asset is lower than its carrying value, an impairment charge equal to the difference is recorded. We determined that no impairment of indefinite-lived intangible assets should be made in the period.

19



The following table provides the components of and changes in the carrying amount of Goodwill (in thousands):
 
Acquired Goodwill
 
Accumulated Impairment
 
Other
 
Net Carrying Amount
Balance December 31, 2014
$
7,073

 
$
(2,978
)
 
$
—

 
$
4,095

Additions(a)
1,342

 
—

 
3

 
1,345

Impairment(b)
—

 
(192
)
 
—

 
(192
)
Other(c)
—

 
—

 
(2
)
 
(2
)
Balance June 30, 2015
$
8,415

 
$
(3,170
)
 
$
1

 
$
5,246

(a) Related to our acquisition of Kleeneze (see note 2. Acquisitions, Dispositions and Other Transactions)
(b) Related to the impairment of Tomboy Tools
(c) Primarily reflects the impact of foreign exchange.

Identifiable Intangible Assets
The following table provides the components of Identifiable intangible assets (in thousands, except amortization period):
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount as of June 30, 2015
 
Weighted Average Amortization period (in years)
Trade name and trademarks
$
5,579

 
$
(2,430
)
 
$
3,149

 
19
Other intellectual property
363

 
(54
)
 
309

 
9
 
$
5,942

 
$
(2,484
)
 
$
3,458

 
17
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount as of December 31, 2014
 
Weighted Average Amortization period (in years)
Trade name and trademarks
$
5,579

 
$
(2,348
)
 
$
3,231

 
19
Other intellectual property
363

 
(36
)
 
327

 
9
 
$
5,942

 
$
(2,384
)
 
$
3,558

 
17

Amortization
Amortization expense related to acquired intangible assets that contribute to our trade names, trademarks and other intellectual property is included in amortization of intangible assets. Amortization expense related to intangible assets is included in depreciation and amortization in the operating expenses. Total amortization expense for intangible assets was $51,000 for the second quarter of 2015 and $51,000 for the second quarter of 2014, and $103,000 for the first six months of 2015 and $103,000 for the first six months of 2014.

As of June 30, 2015, the estimated future amortization expense associated with our intangible assets for each of the five succeeding fiscal years ending December 31 is as follows (in thousands):
 
Amortization of Intangible Assets
2015 (remaining six months)
$
103,000

2016
$
206,000

2017
$
206,000

2018
$
206,000

2019
$
206,000

Thereafter
$
2,531,000



20


(16) Subsequent Events
 
On July 30, 2015, the Company entered into separate consulting agreements with two individuals pursuant to which each will provide certain business and financial advisory services to the Company. In connection with the consulting agreements, each consultant will be granted options exercisable for 500,000 shares of the Company’s common stock, par value $0.0001 per share under the Company’s 2015 Stock Incentive Plan (for an aggregate of 1,000,000 shares). The options have an exercise price $1.27 and are fully vested on the date of the grant and expire on July 30, 2020. The options and the shares of Common Stock issuable thereunder were issued in a transaction exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.

On July 30, 2015, we executed an extension on the original consulting agreement we executed on July 2, 2014 with an individual who has extensive experience in the direct-to-consumer industry. The agreement now ends in July of 2017. The extension was in exchange for cancellation of the original warrant for 50,000 shares, issued on July 2, 2014, and the issuance of a new warrant exercisable for 50,000 shares of our common stock at an exercise price of $1.16 per share. The warrant is exercisable for a ten day period commencing 720 days after issuance. 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.




21

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2014 , as filed with the Securities and Exchange Commission. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. "Risk Factors."

Business Overview
 
We operate a multi-brand platform in the direct-to-consumer sector 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 global, diverse company that combines the entrepreneurship, innovation and relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a highly scalable public company.
 
We follow a simple strategy: We have one “product,” which is opportunity for the independent sellers in our sales forces. They earn money for their families and have the freedom to decide for themselves how much time and effort to put into their business. Our platform of multiple brands supports that opportunity. We do not consider our strategy to be a “rollup.” Each of our companies keeps its own distinct brand identity, its own sales force, its own compensation plan and its own product line. Behind the scenes, in operational areas such as finance, accounting, technology and supply chain, we find synergies and achieve efficiencies by eliminating duplication of effort and cost.

We have grown at a rapid pace as a result of our acquisitions through June 30, 2015. With each acquisition we have expanded our product base and our base of independent sales representatives and potential customers. 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 that these attributes will be amplified.

This sector has unique characteristics quite unlike the traditional retail sector, and it must be managed accordingly. Our team has a proven skill set in the direct-to-consumer sector. Our team has developed and honed its skills over decades of work within the direct-to-consumer category at multiple companies. We apply our knowledge and experience to the companies in our portfolio.

We remain continually open to pursue good acquisition opportunities that come along at any time. As interesting acquisition opportunities arise, we conduct a thorough evaluation of them. We intend to be opportunistic about acquisitions. We also will consider opportunities to extend our brands into additional markets wherever possible. That being said, our primary focus currently is to be as effective as possible in managing and improving our existing businesses.
 
We believe that our visibility in the direct-to-consumer 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 growing visibility has made us more attractive to potential acquisition targets. At the same time the costs of growth through acquisition, such as legal costs and other due diligence-related costs, the costs associated with our up-listing to the NYSE MKT last December, systems implementation and other transitional operating costs have been significant and have affected our profitability. Conditions affecting each individual company have posed challenges to our company as a whole. However, we anticipate that our operating and net losses will continue to decrease over time as we implement certain operating and administrative efficiencies for the acquired companies as a whole. We are confident that our strategy is working and believe that second quarter results show good progress in executing our strategy.
 
Our results can be 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-to-consumer 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 this 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-to-consumer company and therefore negatively impacting our revenue.

22

 
Current CVSL Portfolio
 
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 direct-to-consumer 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 opportunistically pursue additional acquisitions while improving the fundamental strength of our existing businesses. As of the date of this filing, our platform of direct-to-consumer brands 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 and Home Security
Agel
 
October 22, 2013
 
40
 
Nutritional Supplements and 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-to-consumer companies that offer 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-to-consumer brand selling premium hand-crafted baskets and a line of products for the home), Your Inspiration at Home, Ltd. (“YIAH”) (a direct-to-consumer brand selling hand-crafted spices from around the world), Tomboy Tools, Inc. ("Project Home”) (a direct-to-consumer brand selling a line of tools designed for women as well as home security monitoring services), Agel Enterprises, LLC (“Agel”) (a direct-to-consumer brand selling nutritional supplements and skin care products), My Secret Kitchen Limited (“MSK”) (a direct-to-consumer brand selling a unique line of gourmet food products), Paperly, LLC (“Paperly”) (a direct-to-consumer brand selling custom stationery and paper products), and Uppercase Living, LLC (“Uppercase”) (a direct-to-consumer brand selling customizable vinyl expressions for display on walls).
 
During the first quarter of 2015, we completed the acquisition of our eighth direct-to-consumer company, Kleeneze Limited (“Kleeneze”), which is 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. Lastly, since Kleeneze currently only operates in the United Kingdom and Ireland, opportunities to leverage our platform to enter into other markets exist.
 
Overview of Companies
(in alphabetical order)

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-to-consumer 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.

Nutrition and wellness is a significant part of the direct-to-consumer sector.  Agel brings to CVSL’s portfolio a unique and appealing line of nutritional products in gel form, which are more easily absorbed by the body than nutritionals in pill form. 

23

Agel also includes a skin care line under the brand name Ageless, and its presence in that market gives CVSL opportunity to market additional skin care products in the future, which we intend to do.  Finally, Agel provides CVSL with a global footprint in more than 40 countries around the world.  We believe that this global presence can help other CVSL companies and brands over time and can reduce the costs of entry into international markets in which Agel already has a presence.    

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-to-consumer 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 serves as an "in-house" resource for providing certain marketing and creative services.

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 remaining $2.1 million of consideration consisted of cash. Approximately $1.9 million in cash remained with the Company at closing.

Kleeneze is the largest of our current companies in terms of revenue. We acquired it because we valued the established, 90-year-old brand, the loyal seller network, and the opportunity for expansion into other European markets. Kleeneze’s biggest challenge when we acquired it was the fact that its previous owner was not experienced in the direct-to-consumer sector and, thus, did not appreciate the uniqueness and the nuances of managing a direct-to-consumer company. In addition, Kleeneze had a sister company, under its previous ownership group, which directly competed with Kleeneze’s sales network at lower prices with similar products. This had a damaging effect on the morale of the sales field.

We have re-affirmed for Kleeneze’s sales network and employees our respect for their brand and given confidence that their company is in the hands of ownership which understands their channel.  Such confidence, in our view, will help Kleeneze realize its potential over the coming years as we seek operational efficiencies and growth opportunities.   
 
The Longaberger Company
 
In March 2013, we acquired a 51.7% controlling interest in TLC. TLC is a direct-to-consumer business based in Newark, Ohio which sells premium hand-crafted baskets and a line of products for the home, including pottery and other home décor products, through a nationwide network of independent sales representatives. TLC also has a retail destination in Frazeysburg, OH, called The Longaberger Homestead. 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. TLC had a variety of fixed assets and real estate that were being underutilized in TLC's operations. We have sold assets such as land and buildings that were not core to TLC's business and we intend to continue to make use of the remaining 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 may be sold to further reduce our liabilities and generate free cash flow.

24


In the turnaround of TLC, we have faced a number of challenges that had to be overcome in order to put the company on sound footing for long-term success. One challenge was excessive discounting, which is counterproductive when dealing with a hand-crafted, premium product. We have corrected that problem by returning to a more predictable and appropriate pricing model, which not only helps our profitability, but benefits the Longaberger sales force by generating healthier commissions for them.

A second challenge was self-inflicted competition. Longaberger had opened a number of “factory stores” that competed with their own sales force. We recently announced and put an end to that unwise practice and the sales force has responded very positively.

A third challenge involved leadership and the need for effective leadership for Longaberger. In late May 2015, John Rochon Jr., our vice chairman and chief financial officer, stepped in to provide much-needed hands-on leadership as chairman, president and CEO of Longaberger. Mr. Rochon Jr. grew up in the direct-to-consumer sector and, therefore, understands the importance of effective and engaged leadership to the sales force. The response from the sales force to his leadership has been overwhelmingly positive. In July 2015, Mr. Rochon led the annual Longaberger sales convention, which was held for the first time in 30 years in the Ohio community of Dresden where The Longaberger Company was born. This well-received action reinforced our respect for Longaberger's heritage and the impact it can have on the business.

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-to-consumer company which sells a unique line of food products. We acquired substantially all of 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.

Paperly
 
In December 2013, we formed Paperly, Inc., a Delaware corporation, which acquired substantially all of the assets of Paperly, a direct-to-consumer company 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.

Tomboy Tools (Project Home)
 
In October 2013, we formed CVSL TBT, LLC, a Texas limited liability company, which acquired substantially all of the assets of Tomboy Tools, Inc., a direct-to-consumer company which sells 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. For a period of time TBT used the name "Project Home," but we are returning to the use of the name "Tomboy Tools," as we believe it is a stronger brand name.

Uppercase Living
 
In March 2014, we formed Uppercase Acquisition, Inc., a Delaware corporation which acquired substantially all the assets of Uppercase Living, a direct-to-consumer company which sells 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.

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-to-consumer company which sells hand-crafted spices from around the world. YIAH originated in Australia and has expanded its operations to the United States, Canada and New Zealand. 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.

25


Since CVSL acquired YIAH, it has grown significantly and is the primary driver of growth in our gourmet food segment. YIAH primarily needed operational support and financial management, which we provided. YIAH also utilizes existing CVSL resources, such as distribution space in Ohio, to launch and support its expansion into North America. We expect that YIAH will continue to look to open new geographies in the future, particularly in areas where other CVSL companies have existing infrastructure, resources, assets and registrations that could be leveraged.
 

Our Results of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (in thousands):
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue
 
$
35,742

 
$
24,586

 
$
54,961

 
$
51,257

Program costs and discounts
 
(2,998
)
 
(5,220
)
 
(5,160
)
 
(10,196
)
Net revenue
 
32,744

 
19,366

 
49,801

 
41,061

Costs of sales
 
10,955

 
5,863

 
16,365

 
13,879

Gross profit
 
21,789

 
13,503

 
33,436

 
27,182

Commissions and incentives
 
12,612

 
6,005

 
18,480

 
12,978

Gain on sale of assets
 
(40
)
 
(141
)
 
(83
)
 
(407
)
Selling, general and administrative
 
10,829

 
11,301

 
20,269

 
20,389

Depreciation and amortization
 
678

 
445

 
1,308

 
1,066

Impairment of goodwill
 
192

 
—

 
192

 
—

Operating loss
 
$
(2,482
)
 
$
(4,107
)
 
$
(6,730
)
 
$
(6,844
)
 
Revenue
 
Total revenue for the three months ended June 30, 2015 increased $11.2 million, or approximately 45.4% compared to the same period in 2014, primarily due to the impact of a full quarter of our recent acquisition of Kleeneze at the end of March of 2015. Revenue for the six months ended June 30, 2015 increased $3.7 million, or approximately 7.2% compared to the same period in 2014. Results for the six months ended June 30, 2015 were impacted by turnaround actions taken at TLC such as narrowing product lines, focusing on quality products, closing the company’s discount outlet stores and reducing the emphasis on overall program discounts at the company. We anticipated a short-term negative revenue impact from these steps but believe that it will lead to growth and strength in the fundamental business over the long-term. The increase in revenues due to the inclusion of Kleeneze in our results, since our acquisition in March of 2015, was offset partially by the decline in revenue at TLC. For the three months ended June 30, 2015, the net impact of the decrease in TLC revenues against the increase in revenues from Kleeneze was an increase in revenue of $10.2 million. For the six months ended June 30, 2015, the net impact of the decrease in TLC revenues against the increase in revenues from Kleeneze was an increase in revenue of $4.5 million.
 
CVSL operates five operating segments, three of which are reportable segments, as a direct-to-consumer company that sells a wide range of products primarily through independent sales forces across many countries around the world. For the six months ended June 30, 2015 and June 30, 2014, respectively approximately $34.9 million or 63.5% and $21.6 million or 42.1% of our revenues were generated in international markets. For the three months ended June 30, 2015 and June 30, 2014, respectively approximately $25.6 million or 71.6% and $10.8 million or 43.9% of our revenues were generated in international markets. We have grouped our products into the following five operating segments: gourmet foods, nutritional and wellness, home décor, publishing and printing, and other. Substantially all of our long-lived assets are located in the U.S. Of these 5 operating segments, Gourmet Food Products, Home Décor, and Nutritional and Wellness qualify as reportable segments in line with the specifications established in ASC 280-10-50.



26

For the three months ended June 30, 2015 and June 30, 2014, approximately $7.7 million or 14.0% and $2.6 million or 5.1% of our revenues, respectively, were derived from the sales of gourmet food products; $14.8 million or 26.9% and $20.2 million or 39.4% of our revenues, respectively, were derived from the sale of nutritional and wellness products; $31.7 million or 57.7% and $27.5 million or 53.7% of our revenues, respectively, were derived from the sale of home décor products; $0.5 million or 0.9% and $0.6 million or 1.2% or our revenues, respectively, were derived from the sale of our publishing and printing services and products; and for the three months ended June 30, 2015 and June 30, 2014, $0.3 million or 0.5% and $0.4 million or 0.8% of our revenues, respectively, were derived from the sale of our other products.

For the six months ended June 30, 2015 and June 30, 2014, approximately $7.7 million or 14.0% and $2.6 million or 5.1% of our revenues, respectively, were derived from the sales of gourmet food products; $14.8 million or 26.8% and $20.2 million or 39.3% of our revenues, respectively, were derived from the sale of nutritional and wellness products; $31.7 million or 57.7% and $27 million or 53.6% of our revenues, respectively, were derived from the sale of home décor products; $0.5 million or 0.9% and $0.6 million or 1.2% or our revenues, respectively, were derived from the sale of our publishing and printing services and products; and for the six months ended June 30, 2015 and June 30, 2014 $0.3 million or 0.5% and $0.4 million or 0.8% of our revenues, respectively, were derived from the sale of our other products.
 
Gross Profit

Gross profit increased by $8.3 million in the three months ended June 30, 2015 compared to the same period in 2014. For the six months ended June 30, 2015 gross profit increased by $6.3 million compared with the same period in 2014. Gross profit margins increased to 61.0% from 54.9% for the three months ended June 30, 2015 compared to the same period in 2014. For the six months ended June 30, 2015, gross profit margins increased to 60.8% from 53.0% for the six months ended June 30, 2014. The expansion in gross profit margins was primarily a result of less discounting at TLC and the lack of discounting at Kleeneze that reduced program costs and discounts as a percentage of revenue and increased gross margins. The increase in gross margins as a result of less discounting was offset partially by an increase in cost of good sold as a percentage of revenue to 29.8% from 27.1% for the six months ended June 30, 2015 and 2014, respectively. This increase was primarily attributable to a cost of goods sold increase at Kleeneze due to higher distribution and warehousing costs related to the service agreement entered into with Express Gifts Limited (a subsidiary of Findel Plc) at the acquisition of Kleeneze in March 2015.

Operating Losses
 
Operating losses decreased by $1.6 million in the three months ended June 30, 2015 compared to the same period in 2014. For the six months ended June 30, 2015 operating losses remained flat compared with the same period in 2014. These results are in line with our expectations at this stage in the execution of our strategy and represent a positive trend toward positive operating margins as we continue to improve the portfolio businesses and gain additional cost efficiencies from eliminating redundant overhead. 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 believe we are 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 as a percentage of revenue increased to 35.3% from 24.4% for the three months ended June 30, 2015 compared to the same period in 2014. For the six months ended June 30, 2015 total commissions and incentives as a percentage of revenue increased to 33.6% from 25.3% for the same period in 2014. Included in the commission and incentives expense for the three months ended June 30, 2015 and six months ended June 30, 2015 was an adjustment recorded in the three months ended June 30, 2015 that increased commissions and incentives by $1.1 million to correct an error from the three months ended March, 2015 (see "Significant Adjustments" section of Note 1). Without this adjustment, commissions and incentives expense as a percentage of revenues for the three months ended June 30, 2015 would be 32.3%. However, program costs and discounts decreased to 9.4% from 19.9% for the six months ended June 30, 2015 and 2014, respectively, and decreased to 9.4% from 19.9% for the three months ended June 30, 2015 and 2014, respectively, primarily as a result of less discounting at TLC and the fact that Kleeneze has almost no discounting, but a higher commission and incentive expense as a percentage of revenue. We believe it is useful to compare both commissions and incentives along with program costs and discounts together as a percentage of revenue, as well. Together, these two items represented 43.0% and 45.2% of revenue for the six months ended June 30, 2015 and 2014, respectively, and 43.7% and 45.6% for the three months ended June 30, 2015 and 2014, respectively.
 

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Selling, General and Administrative
 
Selling, general and administrative expenses ("SG&A") incurred during the three months ended June 30, 2015 decreased to $10.8 million compared to $11.3 million for the same period in 2014. However, selling, general and administrative expenses as a percentage of revenue decreased from 46.0% to 30.3% as a result of cost reductions at CVSL's subsidiaries, primarily TLC, as well as fewer legal and advisory fees associated with acquisitions due to increasing internal efficiencies in our deal process. For the six months ended June 30, 2015 and 2014, respectively, SG&A decreased to 36.9% from 39.8%. We expect that these costs will decrease as a percentage of revenue as we continue to find and implement cost efficiencies and as we continue to grow, as many of our SG&A expenses will not increase as we continue to scale up our business through organic and acquisition-based growth. Included in the SG&A expense for the three months ended June 30, 2015 and six months ended June 30, 2015 was an adjustment related to our SARs Program recorded in the three months ended June 30, 2015 that decreased SG&A by $1.1 million to correct an error from the three months ended March, 2015 (see "Significant Adjustments" section of Note 1). Without this adjustment,SG&A as a percentage of revenues for the three months ended June 30, 2015 would be 33.4%.
 
Gain/Loss on Marketable Securities
 
Our marketable securities as of June 30, 2015 include fixed income and equity investments classified as available for sale. At June 30, 2015, the fair value of the equity securities totaled $0 and the fair value of the fixed income securities totaled $6.0 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 six months ended June 30, 2015 totaled $5.0 million. The net proceeds from the sales of our marketable securities total $6.2 million for the six months ended June 30, 2014.

Unrealized gains on the investments included in consolidated statements of other comprehensive income were $0 and $184,000 for the three months ended June 30, 2015 and 2014, respectively. Unrealized gains on the investments included in consolidated statements of other comprehensive income were $7,000 and $653,000 for the six months ended June 30, 2015 and 2014, respectively.

Our realized losses from the sale of our marketable securities totaled $0 and $58,000 for the three months ended June 30, 2015 and 2014, respectively. Our realized losses from the sale of our marketable securities totaled $7,000 and $552,000 for the six months ended June 30, 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. These securities are Level 1 securities estimated based on quoted prices in active markets.
 
Non-Controlling Interest
 
Non-controlling interest losses were approximately $1.89 million and $1.69 million for the six months ended June 30, 2015 and 2014, respectively. Non-controlling interest had losses of approximately $1.73 million and $1.05 million for the three months ended June 30, 2015 and 2014, respectively. The increase in the current period was primarily due to the re-classification of sale-leaseback expenses from CVSL corporate to TLC to more accurately represent TLC's primary use of the leased facilities for its operations.

Additional Performance Indicators - EBITDA Metrics
 
We believe that having a reliable measure of our company's financial health is invaluable both to us and to potential business partners. We believe that Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA, and Adjusted Operating EBITDA can be useful performance indicators over time.
 
We have included Adjusted EBITDA and Adjusted Operating EBITDA in this Quarterly Report on Form 10-Q because they are key metrics used by our management and board of directors to measure operating performance and trends in our business. In particular, the exclusion of certain specific expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis. Adjusted Operating EBITDA excludes expenses related to our M&A and capital markets infrastructure and activities. We believe this metric is particularly useful for determining the performance of our subsidiary business and ongoing corporate expenses absent costs associated with the ongoing acquisition component of our strategy.
 
These measures are not defined by GAAP and the discussion of EBITDA, Adjusted EBITDA and Adjusted Operating 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

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making strategic and operating decisions. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Neither Adjusted EBITDA nor Adjusted Operating 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 and Adjusted Operating EBITDA are not defined by GAAP.
 
The following table presents a reconciliation of Net Loss to EBITDA, Adjusted EBITDA and Adjusted Operating EBITDA for each of the periods presented:

Net Loss to Adjusted Operating EBITDA Reconciliation (in thousands) 

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(3,419
)
 
$
(4,591
)
 
$
(8,464
)
 
$
(8,367
)
Interest, net
 
745

 
213

 
1,341

 
479

Income tax expense
 
192

 
213

 
386

 
492

Depreciation and amortization
 
678

 
445

 
1,308

 
1,066

EBITDA
 
$
(1,804
)
 
$
(3,720
)
 
$
(5,429
)
 
$
(6,330
)
Specific capital market event expense
 
168

 
109

 
542

 
109

Specific M&A deal/diligence expense
 
97

 
252

 
212

 
284

Adjusted EBITDA
 
$
(1,539
)
 
$
(3,359
)
 
$
(4,675
)
 
$
(5,937
)
M&A infrastructure expense
 
791

 
581

 
$
1,320

 
$
1,764

Adjusted Operating EBITDA
 
$
(748
)
 
$
(2,778
)
 
$
(3,355
)
 
$
(4,173
)
 
Specific Capital Market Event Expense
 
Specific Capital Market Event Expense includes expenses related to certain activities such as listing or other exchange fees, road show and other expenses related to equity offerings, and fees associated with filings like our S-3 that were expensed in the period.
 
Specific M&A Deal/Diligence Expense
 
These are specific expenses related to certain legal and due diligence costs for potential acquisition targets.

M&A Infrastructure Expense
 
These are expenses related to our M&A infrastructure, such as our M&A team and costs associated with supporting their efforts, as well as expenses related to our Reimbursement of Services Agreement with Richmont Holdings. We expect these costs to continue as we look for opportunistic acquisition targets and participate in other deal-related activities.
 
Our use of Adjusted EBITDA and Adjusted Operating 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 and Adjusted Operating EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•
Adjusted EBITDA and Adjusted Operating EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA and Adjusted Operating EBITDA do 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 and Adjusted Operating EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
Adjusted EBITDA and Adjusted Operating EBITDA do not reflect acquisition-related costs; and
•
Other companies, including companies in our own industry, may calculate Adjusted EBITDA and Adjusted Operating

29

EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA and Adjusted Operating EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
 
Liquidity and Capital Resources
 
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. We also have access to the capital markets through public offerings, such as the one we completed in March 2015. Cash and cash equivalents and marketable securities consist primarily of cash on deposit with banks, investments in short-duration fixed income mutual funds, which may include investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. Cash and cash equivalents and marketable securities were $12.4 million as of June 30, 2015, an increase of $8.8 million from December 31, 2014, primarily due to our March 2015 public offering and cash acquired in our acquisition of Kleeneze, offset by cash used for the acquisition of Kleeneze, paying down accounts payable balances at TLC and other uses of cash for operations.

Currently we do not have a revolving credit facility or other working capital facility at CVSL. Although we believe we have sufficient cash and cash equivalents, as well as marketable securities, to fund our business currently, we recognize that there may be additional needs for working capital as we invest in our current businesses and as we look for accretive future acquisitions. We are constantly evaluating the most efficient capital for us to use for these purposes.
 
Cash Flows
 
Cash used in operating activities for the six months ended June 30, 2015 was $(5.7) million, as compared to net cash used in operating activities of $(5.0) million for the six months ended June 30, 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 six months ended June 30, 2015 was $(8.3) million, as compared to a net cash provided by investing activities of $7.4 million for the six months ended June 30, 2014. The Company used $(18.9) million to buy marketable securities and had proceeds of $13.9 million from the sale of marketable securities, and $(0.4) million was used for capital expenditure, primarily to upgrade IT infrastructure, for the six months ended June 30, 2015.
 
Net cash provided by financing activities was $18.0 million for the six months ended June 30, 2015 compared to net cash used of $(2.6) million for the six months ended June 30, 2014. Through the issuance of common stock and warrants in a public offering consummated in March 2015, we raised net proceeds of $18.4 million. The cash inflows were offset by $3 million held in collateral as restricted cash on our combined consolidated balance sheet.
 
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 approximately $25.0 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 in connection with exclusivity agreements. The warrants were exercisable commencing 75 days after their date of issuance, in whole or in part, until May 6, 2015 at an exercise price of $11.00 per share, representing the average closing price of our common stock for the ten days preceding

30

the issuance. The fair value of the warrants on the date of issuance approximated $116,000. The warrants for 12,500 and 6,250 shares, respectively, expired in May 2015 and were not exercised.
 
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 who has extensive experience in the direct-to-consumer industry. The warrant was exercisable for a ten day period commencing 720 days after issuance. 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 was subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. On July 22, 2015 we executed an extension on the consulting agreement through July of 2017 in exchange for cancellation of the original warrant for 50,000 shares and the issuance of a new warrant exercisable for 50,000 shares of our common stock at an exercise price of $1.16 per share. The new warrant is also exercisable for a ten day period commencing 720 days after issuance.
 
Contractual Obligations
 
See Footnote (6) “Long-term debt and other financing arrangements” of our accompanying condensed consolidated financial statements for a full description of the Company’s contractual debt obligations. The following table displays our future payments on contractual obligations:

 
2015
2016
2017
2018
2019
Thereafter
Total
Principal Payments on Debt
$
453

$
931

$
3,858

$
715

$
412

$
1,417

$
7,786

Interest Payments on Debt
93

159

96

61

43

63

515

Capital Lease Obligations
1,137

2,307

2,377

2,448

2,521

28,282

39,072

Operating Lease Obligations
763

611

493

361

349

2,238

4,815

 
 
 
 
 
 
 
$
52,188

 

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 six months ended June 30, 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 condensed 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.

31

 
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.

Commitments and Contingencies
 
The Company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company is remote. As such, management believes that the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations.

 
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.
 
Foreign Currency Exchange Risk

Revenue from customers outside of the United States represented approximately 63.5% and 42.1% of our total net revenues for the six months ended June 30, 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 0.6%, and on June 30, 2015, the weighted average interest rate of the Credit Facility, including borrowings under the Term Loan, was 1.1%. The Credit Facility matures on March 24, 2017, 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 $34,000.
 
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 June 30, 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.
 

32

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 financial executives and 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 are developing and putting in place plans to critically evaluate our existing accounting processes and control environment to implement controls to enhance our overall control environment.
•
We developed and executed a new IT project management methodology which includes documented change management and ultimate user acceptance testing.
•
We have migrated TLC to our new enterprise resource planning ("ERP") system which includes sophisticated accounting systems and we are 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.

In February of 2015 we completed our conversion to a new ERP system at TLC. We believe that the system will have a positive impact on both our internal controls over financial reporting and, over a longer period once additional subsidiaries are migrated to this system, will allow for simplified consolidation procedures and increased efficiencies for our accounting team. We encountered certain challenges in the conversion, including the need for additional training for our staff on the new system, as well as some initial errors in how information was flowing between our front-end sales system and our ERP system (see "Significant Adjustments" section in Footnote 1). We believe we have discovered and corrected these errors since the implementation of the system and are confident that the new ERP system represents a significant upgrade to our prior system at TLC. Additionally, we discovered other accounting errors in the first quarter ended March 31, 2015 that were corrected in the second quarter ended June 30, 2015. We have also revised and added additional disclosures in our current quarterly report on Form 10-Q through our review process.

Other than the changes described above, we believe the remediation steps outlined above, which is some cases have been implemented, will improve the effectiveness of our internal control over financial reporting. However, we have not completed all of the corrective processes identified above.
  
As our management continues to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting, we will likely determine to take additional measures to address these deficiencies or determine to modify certain of the remediation measures described above. Our management does not expect to conclude that our disclosure controls and procedures are effective until our efforts to remediate the material weaknesses in our internal control over financial reporting described above have been in effect for a period of time sufficient to provide reasonable assurance to our management of achieving the desired control objective.

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 three months ended June 30, 2015 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
 

33

 

34

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 $(38.7) million as of June 30, 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.a
 
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-to-consumer 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-to-consumer 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 $3.2 million and $1.2 million, respectively as of June 30, 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 $3.1 million as of June 30, 2015 and is fully secured by cash shown on our consolidated balance sheet under the restricted cash line as part of non-current assets. 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

35

to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, incurring additional debt, issuing equity or convertible securities, reducing discretionary expenditures and selling certain assets (or combinations thereof). Our ability to execute such alternative financing plans will depend on the capital markets and our financial condition at such time. In addition, our ability to execute such alternative financing plans may be subject to certain restrictions under our existing indebtedness. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants compared to those associated with any debt that is being refinanced, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or our inability to refinance our debt obligations on commercially reasonable terms or at all, would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.

Our investments in marketable securities are subject to market risks, which may result in losses.
 
As of June 30, 2015 and December 31, 2014, we had approximately $6.0 million and $1.0 million in marketable securities, respectively, invested primarily in a diversified portfolio of liquid bonds. At neither June 30, 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 six months ended June 30, 2015, we realized a loss on marketable securities of $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:
  
•
assimilating Kleeneze’s business operations, products and personnel with our existing operations, products and personnel;
•
estimating the capital, personnel and equipment required for Kleeneze’s business based on the historical experience of management;
•
minimizing potential adverse effects on existing business relationships with other suppliers and customers;
•
successfully developing and marketing Kleeneze’s products and services;
•
entering a market in which we have limited prior experience; and
•
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.
 

36

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-to-consumer companies, such as the recent Kleeneze acquisition and potentially companies engaged in other direct-to-consumer 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-to-consumer 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 completed in March 2015 (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:
  
•
interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and
•
any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current holders of our common stock.

We may be unable to successfully integrate the businesses we have recently acquired and may acquire in the future with our current management and structure.
 
Our failure to successfully complete the integration of the businesses we acquire could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. The larger the business we acquire, the larger we believe our integration challenge will be. Integration challenges may include the following: 

•
assimilating the acquired business’ operations products and personnel with our existing operations, products and personnel;
•
estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience of management with the businesses they are familiar with;
•
minimizing potential adverse effects on existing business relationships with other suppliers and customers;
•
successfully developing and marketing the new products and services;
•
entering markets in which we have limited or no prior experience; and
•
coordinating our efforts throughout various distant localities and time zones, such as Italy, the United Kingdom and Australia, currently.


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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-to-consumer 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” in the Company's Form 10-K/A. 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-to-consumer companies. We

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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. For instance, YIAH is particularly dependent upon its Colleen Walters, its Chief Executive Officer and founder, who represent the YIAH brand to her sales force. The loss of this individual 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-to-consumer 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-to-consumer 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-to-consumer model. We cannot ensure that our strategies for soliciting and retaining the representatives of our subsidiaries or any direct-to-consumer company we acquire in the future will be successful, and if they are not, our prospects, business activities, cash flow, financial condition, results of operations and stock price could be harmed.
 
Several factors affect our ability to attract and retain independent sales representatives, including:
 
•
on-going motivation of our independent sales representatives;
•
general economic conditions;
•
significant changes in the amount of commissions paid;
•
public perception and acceptance of the industry, our business and our products;
•
our ability to provide proprietary quality-driven products that the market demands; and
•
competition in recruiting and retaining 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:
 
•
address changing market dynamics;
•
provide incentives to independent sales representatives that are intended to help grow our business;
•
conform to local regulations; and
•
address other business needs.

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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-to-consumer channel. Products and services of direct-to-consumer 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-to-consumer company’s products, or reducing purchases from representatives or buying products in channels other than direct-to-consumer, 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-to-consumer companies are subject to numerous laws.
 
The direct-to-consumer 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-to-consumer activities in foreign markets. Laws specifically applicable to direct-to-consumer 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-to-consumer 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-to-consumer 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-to-consumer industry. Adverse decisions in these cases could impact our business if direct-to-consumer 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-to-consumer company, its products or its direct-to-consumer 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.
 

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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-to-consumer industry and regulatory authorities have generally relied on the implementation of a company’s rules and policies governing its direct-to-consumer sales field, designed to promote retail sales, protect consumers, prevent inappropriate activities and distinguish between legitimate direct-to-consumer 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

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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:
 
•
the safety and quality of our products, components and ingredients, as applicable;
•
the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies’ representatives;
•
our marketing program; and
•
the business of direct-to-consumer companies 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, evaluate, 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

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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.

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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:
 
•
the possibility that a foreign government might ban or severely restrict our business method of direct selling, or that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
•
the lack of well-established or reliable legal systems in certain areas where we operate;
•
the presence of high inflation in the economies of international markets in which we operate;
•
the possibility that a government authority might impose legal, tax or other financial burdens on us or our sales force, due, for example, to the structure of our operations in various markets;
•
the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
•
the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.

Currency exchange rate fluctuations could reduce our overall profits.
 
During the six months ended June 30, 2015, 63.5% of our revenues were derived from markets outside of the United States. In 2014, 42.1% 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

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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-to-consumer system could harm our business.
 
Direct-to-consumer 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-to-consumer 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-to-consumer 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

45

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.

46

•
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 three months ended June 30, 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. For the three months ended June 30, 2015 we recognized an impairment charge of $192,000. 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.
 

47

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:
 
•
the issuance of new equity securities, including issuances of preferred stock;
•
the introduction of new products or services by us or our competitors;
•
the acquisition of new direct selling businesses;
•
changes in interest rates;
•
significant dilution caused by the anti-dilutive clauses in our financial agreements;
•
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
•
variations in quarterly operating results;
•
change in financial estimates by securities analysts;
•
a limited amount of news and analyst coverage for our company;
•
the depth and liquidity of the market for our shares of common stock;
•
sales of large blocks of our common stock, including sales by Rochon Capital, any executive officers or directors appointed in the future, or by other significant shareholders;
•
investor perceptions of our company and the direct selling segment generally; and
•
general economic and other national and international conditions.

Market price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.
 
Sales of our common stock under Rule 144 could impact the price of our common stock.
 

48

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 2,000 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.
 

49

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 or certain current 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 and result in our inability to remain S-3 eligible. 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” in the Company's Form 10-K/A.
 
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

50

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
 
On July 22, 2015 we issued a warrant exercisable for 50,000 shares of common stock in exchange for a previously-issued warrant exercisable for 50,000 shares of common stock. The new warrant has an extended exercise period. The new warrant was issued in reliance upon Section 3(a)(9) of the Securities Act of 1933, as amended, as the exchange was with an existing security holder exclusively and no commissioner remuneration was paid or given in the exchange.
 
Item 3.    Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.    Mine Safety Disclosures
 
Not applicable
 
Item 5.    Other Information
 
Not applicable.
 

51

Item 6. Exhibits
 
Exhibits required by Item 601 of Regulation S-K:
 

Exhibit No.
 
Description
 

 
 
4.1

 
Warrant Issued to Consultant**
 

 
 
4.2

 
Exchange Agreement for Warrant Issued to Consultant**
 

 
 
31.1

 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 

 
 
31.2

 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 

 
 
32.1

 
Certification pursuant to 18 U.S.C. Section 1350.**
 

 
 
32.2

 
Certification pursuant to 18 U.S.C. Section 1350.**
 

 
 
101.INS

 
Instance Document.**
 

 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document.**
 

 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.**
 

 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.**
 

 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.**
 

 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document.**

** Filed herewith

52

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: August 13, 2015
 
 
 
By:
/s/ John Rochon, Jr.
 
 
 
 
 
John Rochon , Jr .
 
 
Chief Financial Officer (Principal Financial and Principal Accounting Officer)
 
Date: August 13, 2015

53

INDEX TO EXHIBITS
 

Exhibit No.
 
Description
 

 
 
4.1

 
Warrant Issued to Consultant**
 

 
 
4.2

 
Exchange Agreement for Warrant Issued to Consultant**
 
 
 
31.1

 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 

 
 
31.2

 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 

 
 
32.1

 
Certification pursuant to 18 U.S.C. Section 1350.**
 

 
 
32.2

 
Certification pursuant to 18 U.S.C. Section 1350.**
 

 
 
101.INS

 
Instance Document.**
 

 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document.**
 

 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.**
 

 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.**
 

 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.**
 

 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document.**

** Filed herewith

54



THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. ALL SUCH SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED (A “TRANSFER”) WITHOUT REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED BECAUSE THE TRANSFER IS EXEMPT FROM REGISTRATION OR THE TRANSFER MAY BE MADE PURSUANT TO RULE 144 OR RULE 144A UNDER THE ACT. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
Warrant Certificate No. 4    

COMMON STOCK WARRANT

For the Purchase of Shares of Common Stock
of
CVSL INC.

July 22, 2015

THIS CERTIFIES THAT, Randy Schroeder, for value received, and successors and assigns (collectively, “Warrantholder”), is entitled to subscribe for and purchase, subject to the terms hereof, from CVSL Inc., a Florida corporation (the “Company”), Fifty Thousand (50,000) fully-paid and non-assessable shares (the “Shares”) of the Company’s Common Stock, par value $0.0001 per share (“Common Stock”), at a price per share equal to One Dollar and Sixteen Cents ($1.16) (the “Warrant Exercise Price”), such price (i) representing the average closing price of a share of the Common Stock for the 10 trading days prior to the grant of this Warrant and (ii) being subject to adjustment upon the occurrence of the contingencies set forth in this Warrant.
This Warrant is granted in connection with the Exclusivity Agreement, of even date herewith, by and between the Company and Warrantholder (the “Exclusivity Agreement”).
1.Term. Except as otherwise provided for herein, the Fifty Thousand (50,000) Shares represented by this Warrant shall be exercisable, in whole or in part, at any time and from time to time, upon the expiration of 720 days of the date of the original issuance of this Warrant and ending at 5:00 p.m., Dallas, Texas time, on the first anniversary of the original issuance date of this Warrant (the “Expiration Date”); provided, however, unless on the Expiration Date stated above either (i) the Shares are subject to an effective registration statement of the Company under the Securities Act of 1933, as amended, or (ii) the Common Stock is listed or included for quotation on at least one of the Nasdaq National Market, the New York Stock Exchange or the New York Stock Exchange



EXECUTION COPY 07022014

Amex (and such listed trading has not been suspended or otherwise restricted pursuant to an effective order of such exchange), then the Expiration Date shall be extended through, and the term “Expiration Date” shall be deemed to mean, the next following anniversary of the original issuance date of this Warrant upon which one of the foregoing conditions has been met.
2.    Number of Shares; Vesting of Shares. Subject to the terms and conditions set forth herein, including the Expiration Date, the Warrantholder is entitled, upon surrender of this Warrant, to purchase from the Company the Shares represented by this Warrant as follows: Fifty Thousand (50,000) Shares represented by this Warrant shall be exercisable, in whole or in part, at any time and from time to time, 720 days after the original issuance date of this Warrant, unless the Warrantholder is in breach of, or has breached, the Consultancy Agreement between the parties hereto of the same date on or before the time of such exercise. In the event of such breach determinable in the sole discretion of the CVSL Board of Directors, this Warrant shall be null and void and of no force or effect.
3.    Method of Exercise; Net Issue Exercise.
(a)    Method of Exercise; Payment; Issuance of New Warrant. The purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by the surrender of this Warrant (together with the notice of exercise form attached hereto as Exhibit A, duly executed) at the principal office of the Company and by the payment to the Company, by check or bank draft, of an amount equal to the then applicable Warrant Exercise Price per share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing the Shares shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the Shares represented thereby (and such Shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the Shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within 45 days of receipt of such notice and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such 45-day period.

(b)    Share Issuance/Restrictive Legends/Representations. Notwithstanding the foregoing, (i) the Company shall not be obligated to deliver any shares of Common Stock during any period when the Company determines that the exercisability of the Warrant or the delivery of shares hereunder would violate any federal, state or other applicable laws and/or may issue shares subject to any restrictive legends that, as determined by the Company’s counsel, is necessary to comply with securities or other regulatory requirements, and (ii) the date on which shares are issued may include a delay in order to provide the Company such time as it determines appropriate to address administrative matters. Warrantholder is an accredited investor within the meaning of Rule 501 of Regulation D promulgated under the Act, is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed


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and knowledgeable decision to acquire the Common Stock, and Warrantholder is acquiring the Shares for his own account for the purpose of investment and not with a view to distribute the same, or for resale in connection with any distribution thereof, within the meaning of the Act.
(c)    Piggyback Registration. If, during the Term of this Agreement, the Company proposes to register any shares of its Common Stock in connection with a shelf registration statement under Rule 415 of Regulation C of the Act (“Shelf Registration”), the Company shall promptly, and in any event at least ten days prior to the filing of the registration statement, give written notice to the Warrantholder of its intention to effect such registration. Upon the written request of the Warrantholder given within ten days after the mailing of such notice by the Company, the Company shall, subject to the provisions of this Section 3, cause to be registered under the Act all of the Common Stock that such Investor has requested to be registered. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3 prior to the effectiveness of such registration whether or not the Warrantholder has elected to include any Common Stock in such registration and shall promptly notify the Warrantholder of such termination or withdrawal. The piggyback registration rights set forth herein relate solely to those that may be available under a Shelf Registration by the Company, if any, and expressly exclude (i) the registration of any securities of the Company in connection with an underwritten public offering; (ii) a registration relating solely to an employee benefit plan, (ii) a registration relating solely to a transaction under Rule 145 of the Securities Act, or (iv) a registration in which the only securities being registered is common stock issuable upon conversion of debt securities which are also being registered.

4.    Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant shall, upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by the Warrant may be exercised, the Company shall at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.
5.    Adjustment of Warrant Exercise Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant and the Warrant Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:
(a)    Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall execute a new Warrant (in form and substance satisfactory to the Warrantholder) providing


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that the holder of this Warrant shall have the right to exercise such new Warrant and upon such exercise to receive, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of one share of Common Stock. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5, and appropriate adjustments shall be made to the purchase price per share payable hereunder, provided the aggregate purchase price shall remain the same. The provisions of this subsection (a) shall similarly apply to successive reclassification, changes, mergers and transfers.
(b)    Subdivisions or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise hereof shall be proportionately adjusted such that the aggregate exercise price of this Warrant shall at all times remains equal. Any adjustments under this subsection (b) shall become effective at the close of business on the date the subdivision or combination becomes effective.
(c)    Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Common Stock (except any distribution specifically provided for in the foregoing subsections (a) and (b)), then the Warrant Exercise Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Exercise Price in effect immediately prior to such date of determination by a fraction, (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution and the number of shares of Common Stock subject to this Warrant shall be proportionately adjusted. Any adjustment under this subsection (c) shall become effective as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
(d)    No Impairment. The Company will not, by amendment of its Articles of Incorporation (as amended, restated, supplemented or otherwise modified from time) or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment.
6.    Notice of Adjustments. Whenever the Warrant Exercise Price shall be adjusted pursuant to the provisions hereof, the Company shall within 20 days of such adjustment deliver a certificate signed by its chief executive officer of chief financial officer to the registered holder(s) hereof setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Warrant Exercise Price after giving effect to such adjustment.


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7.    Fractional Shares. No fractional shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares, the Company shall make a cash payment therefor upon the basis of the Warrant Exercise Price then in effect.
8.    Transfers and Exchanges. This Warrant may be transferred upon the prior written consent of the Company, which consent shall not be unreasonably withheld, provided that no such consent shall be required for the transfer of this Warrant by operation of law.
9.    Rights as Shareholders. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the shares of Common Stock purchasable upon the exercise hereof shall have become deliverable, as provided herein. However, nothing in this Section 9 shall limit the right of the Warrantholder to be provided the notices required under this Warrant.
10.    Modification and Waiver. Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the holders of a majority of shares of Common Stock issued or issuable upon exercise of this Warrant. Any waiver or amendment effected in accordance with this Section shall be binding upon each holder of any Shares issuable upon exercise of this Warrant.
11.    Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at his, her or its address as shown on the books of the Company or to the Company at the address indicated on the signature page of this Warrant.
12.    Assumption of Warrant. If at any time, while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) an acquisition of the Company by another entity by means of a merger, consolidation or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company’s capital stock such that shareholders of the Company prior to such transaction own, directly or indirectly, less than 50% of the voting power of the surviving entity or (ii) a sale or transfer of all or substantially all of the Company’s assets to any other person, then, as a part of such acquisition, sale or transfer, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Warrant Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such acquisition, sale or transfer which a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such acquisition, sale or transfer if this Warrant had been exercised immediately before such acquisition, sale or transfer, all subject to further adjustment as provided in this Section 12; and in any such case, appropriate adjustment (as determined in good faith by the Company’s Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Warrantholder to the end that the


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provisions set forth herein (including provisions with respect to changes in and other adjustments of the number of Shares of the Warrantholder is entitled to purchase) shall thereafter by applicable, as nearly as possible, in relation to any shares of Common Stock or other securities or other property thereafter deliverable upon the exercise of this Warrant.
13.    Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the Warrantholder. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the Warrantholder but at the Company’s expense, acknowledge in writing its continuing obligation to the Warrantholder in respect of any rights to which the Warrantholder shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the Warrantholder to make any such request shall not affect the continuing obligation of the Company to the Warrantholder in respect of such rights.
14.    Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
15.    Descriptive Headings. The descriptive headings of the several sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant.
16.    Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Texas if not otherwise in conflict with the laws governing matters of corporate concern in the State of the Company’s incorporation.
17.    Counterparts. This Common Stock Warrant may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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IN WITNESS WHEREOF, this Common Stock Warrant is executed effective as of the date first above written.

CVSL INC.



By:    /s/ John P. Rochon    


Name: John P. Rochon


Title: Chief Executive Officer
                                                    

Address:    
2400 Dallas Parkway, Suite 230
Plano, Texas 75093

Accepted and Agreed:


/s/ Randy Schroeder                        
Randy Schroeder

Address:
6821 Calle Portone
Rancho Santa Fe, California 92091







SIGNATURE PAGE

EXECUTION COPY 07022014

EXHIBIT A

NOTICE OF EXERCISE


To:    CVSL Inc.
2400 Dallas Parkway, Suite 230
Dallas, Texas 75093

Attn:    Ryan C. Mack, Deputy CFO


The undersigned hereby elects to purchase ___________ shares of Common Stock of CVSL Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.
Such payment is hereby made in the amount of ___________ by wire transfer or by certified or bank check.
Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below
Name:     

Address:        

            

            

    
_______________________        
(Date)    (Signature)

COMMON STOCK WARRANT – NOTICE OF EXERCISE





EXCHANGE AGREEMENT

THIS EXCHANGE AGREEMENT (the “Agreement”) is dated as of July 22, 2015, by and between CVSL Inc., a Florida corporation, (the “Company”) and Randy Schroeder (the “Securityholder”).
WHEREAS:
A.    The Securityholder owns a warrant exercisable for Fifty Thousand (50,000) shares of Common Stock of the Company (the “Existing Warrant”) that was issued to it on July 2, 2014 and desires to exchange the Existing Warrant for a warrant in the form attached hereto as Exhibit A (the “New Warrant”) initially exercisable for Fifty Thousand (50,000) shares of Common Stock (the “Underlying Shares”), which warrant shall be substantially similar to the Existing Warrant; however, the new warrant terms will provide for the Warrant Exercise Price (as defined in the New Warrant document, Warrant Certificate No. 4) to be One Dollar and Sixteen Cents ($1.16).
C.     The exchange of the Existing Warrant for the New Warrant (the “Exchange”) will be made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”).
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants hereinafter contained, the parties hereto agree as follows:
1.    EXCHANGE.
1.1     Exchange. Subject to the satisfaction or waiver of the conditions with respect to the Closing set forth in Sections 5 and 6 below, at the Closing the Securityholder and the Company shall, pursuant to Section 3(a)(9) of the Securities Act, exchange the Existing Warrant for the New Warrant.
1.2     Closing. The closing of the exchange contemplated herein (the “Closing”) shall occur at the offices of Gracin & Marlow, LLP. The date and time of the Closing shall be 10:00 a.m., New York time, on the first Business Day on which the conditions to the Closing set forth in Sections 5 and 6 below are satisfied or waived (or such later date as is mutually agreed to by the Company and the Securityholder).
1.3     Consideration. The New Warrant shall be issued in exchange for the Existing Warrant without the payment of any additional consideration.
1.4     Delivery. In exchange for the Existing Warrant, within five (5) business days of receipt by the Company from the Securityholder (or its designee) of the Existing Warrant (or, in the event of the loss, theft or destruction of the Existing Warrant, an affidavit with respect thereto in form reasonably acceptable to the Company), which shall be delivered at the Closing, the Company shall deliver or cause to be delivered to the Securityholder the New Warrant being issued in exchange for the Existing Warrant. As of the Closing Date, the Existing Warrant exchanged for the New Warrant shall be null and void and any and all rights arising thereunder shall be extinguished, including all dividend rights.
2.     COMPANY REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to the Securityholder that:

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2.1    Reporting Company Status. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary other than those jurisdictions in which the failure to so qualify would not have a material and adverse effect on the business, operations, properties, prospects or condition (financial or otherwise) of the Company. The Company has registered its Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
2.2    Authorized Warrant. The Company has authorized the issuance of the New Warrant and reserved for issuance, free from preemptive rights, shares of Common Stock equal to the number of shares for which the New Warrant is exercisable. The Underlying Shares have been duly authorized and, when issued upon exercise of the New Warrant will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder.
2.3    Exchange Agreement. This Agreement and the transactions contemplated hereby have been duly and validly authorized by the Company, this Agreement has been duly executed and delivered by the Company and this Agreement, when executed and delivered by the Company, will be, a valid and binding agreement of the Company enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors’ rights generally.
2.4    Non-contravention. The execution and delivery of this Agreement by the Company, the issuance of the New Warrant, and the consummation by the Company of the other transactions contemplated by this Agreement do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under: (i) the certificate of incorporation or by-laws of the Company; (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound; (iii) any existing applicable law, rule, or regulation or any applicable decree, judgment; or (iv) any order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, except such conflict, breach or default which would not have a material adverse effect on the transactions contemplated herein. The Company is not in material violation of any laws, governmental orders, rules, regulations or ordinances to which its property, real, personal, mixed, tangible or intangible, or its businesses related to such properties, are subject.
2.5    Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market is required to be obtained by the Company for the issuance and exchange of the New Warrant to the Securityholder as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained.
2.6    SEC Documents, Financial Statements. The Company has filed on a timely basis all reports, schedules, forms, statements and other documents required to be filed by it with the Securities and Exchange Commission (“SEC”) pursuant to the reporting requirements of the Exchange Act, including

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material filed pursuant to Section 13(a) or 15(d) (the “SEC Documents”). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act as the case may be and the rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year‑end audit adjustments).

3.     SECURITYHOLDER REPRESENTATIONS AND WARRANTIES.
As a material inducement to the Company to enter into this Agreement and consummate the Exchange, the Securityholder represents, warrants and covenants with and to the Company as follows:
3.1    Authorization and Binding Obligation. The Securityholder has the requisite legal capacity, power and authority to enter into, and perform under, this Agreement and to acquire the New Warrant being issued to such Securityholder hereunder and thereunder. The execution, delivery and performance of this Agreement by such Securityholder and the consummation by such Securityholder of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate, partnership or similar action on the part of such Securityholder and no further consent or authorization is required. This Agreement has been duly authorized, executed and delivered. This Agreement constitutes the legal, valid and binding obligations of the Securityholder, enforceable against the Securityholder in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies and except as rights to indemnification and to contribution may be limited by federal or state securities laws.
3.2     Beneficial Owner. With respect to the Existing Warrant: (i) the Securityholder owns, good and marketable title to the Existing Warrant, free and clear of any liens or encumbrances and the Existing Warrant has not been pledged to any third party; (ii) the Existing Warrant is not subject to any transfer restriction, other than the restriction that they have not been registered under the Securities Act or applicable state securities laws and, therefore, cannot be resold unless registered under the Securities Act or applicable state securities laws or in a transaction exempt from or not subject to the registration requirements of the Securities Act or applicable state securities laws; (iii) the Securityholder has not entered into any agreement or understanding with any person or entity to dispose of the Existing Warrant; and (iv) at the Closing, the Securityholder will convey to the Company good and marketable title to the Existing Warrant, free and clear of any security interests, liens, adverse claims, encumbrances, taxes or encumbrances.

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3.3    Liens. There are no outstanding liens, claims, offset rights, or other encumbrances relating to the Existing Warrant. To the knowledge of the Securityholder, the exchange by the Securityholder and the consummation of the transactions herein, does not by itself or with the passage of time violate or infringe upon the rights of any third parties or result or could reasonably result in any claims against the Securityholder or the Company.
3.4    Sale or Transfer. The Securityholder has not sold, assigned, conveyed, transferred, mortgaged, hypothecated, pledged or encumbered or otherwise permitted any lien to be incurred with respect to the Existing Warrant.
3.5    Proceedings. No proceedings relating to the Existing Warrant are pending or, to the knowledge of the Securityholder, threatened before any court, arbitrator or administrative or governmental body that would adversely affect the Securityholder’s right and ability to surrender and exchange the Existing Warrant.
3.6    Conveyance. The Securityholder has full legal and equitable title to the Existing Warrant, free and clear of all liens, pledges or encumbrances of any kind, nature or description, with full and unrestricted legal power, authority and right to enter into this Agreement and to transfer and deliver such Existing Warrant to the Company pursuant hereto, and upon delivery of the Existing Warrant to the Company, the Company will be the owner of each of the Existing Warrant, free and clear of all liens, claims, pledges or encumbrances of any kind, nature or description.
3.7    Action. The Securityholder has taken no action that would impair its ability to transfer the Existing Warrant.
3.8    Interest. No person other than the Securityholder has any right or interest in the Existing Warrant.
3.9    Tax Consequences. The Securityholder acknowledges that the exchange of the Existing Warrant may involve tax consequences to the Securityholder and that this Agreement does not contain tax advice. The Securityholder acknowledges that it has not relied and will not rely upon the Company with respect to any tax consequences related to the exchange of the Existing Warrant. The Securityholder assumes full responsibility for all such consequences and for the preparation and filing of any tax returns and elections which may or must be filed in connection with the Existing Warrant.
3.10     Reliance on Exemptions. The Securityholder understands that the New Warrant being issued in the exchange is being issued in reliance on specific exemptions from the registration requirements of United States federal and state securities laws provided by Section 3(a)(9) and that the Company is relying in part upon the truth and accuracy of, and the Securityholder’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Securityholder set forth herein in order to determine the availability of such exemptions and the eligibility of the Securityholder to acquire the New Warrant.
3.11     No Governmental Review. The Securityholder understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the New Warrant or the fairness or suitability of the exchange with the New Warrant nor have such authorities passed upon or endorsed the merits of the exchange of the New Warrant.

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3.12     No Conflicts. The execution, delivery and performance by the Securityholder of this Agreement and the consummation by the Securityholder of the transactions contemplated hereby will not (i) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Securityholder is a party or (ii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Securityholder, except in the case of clause (i) or (ii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Securityholder to perform its obligations hereunder.
3.13     No Public Sale or Distribution. The Securityholder: (i) is acquiring the New Warrant and (ii) upon exercise of the New Warrant will acquire the Underlying Shares, in each case, for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof in violation of applicable securities laws, except pursuant to sales registered or exempted under the Securities Act. The Securityholder does not presently have any agreement or understanding, directly or indirectly, with any person to distribute any of the New Warrant or the Underlying Shares, for its own account and with a view towards, or for resale in connection with, the public sale of securities in violation of applicable securities laws.
3.14    Information. The Securityholder and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the New Warrant which have been requested by the Securityholder. The Securityholder and its advisors, if any, have been afforded the opportunity to ask questions of the Company. The Securityholder understands that its exchange of the New Warrant and Existing Warrant involves a high degree of risk. The Securityholder has sought such accounting, legal and tax advice as it has considered necessary to make an informed decision with respect to its acquisition of the New Warrant. Without limiting the generality of the foregoing, the Securityholder has also had the opportunity to obtain and to review: (i) the Company’s Private Placement Memorandum dated as of December 1, 2014, with respect to the offering of up to $7,875,000 Units, each Unit comprised of four shares of Common Stock and a warrant exercisable for one share of common stock at an exercise price of $1.75, (ii) the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, and (iii) the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
3.15     Transfer or Resale. The Securityholder understands that: (i) neither the New Warrant nor the Underlying Shares has been and is being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder; (B) the Securityholder shall have delivered to the Company (if requested by the Company) an opinion of counsel to the Securityholder, in a form reasonably acceptable to the Company, to the effect that the New Warrant or the Underlying Shares, as the case may be to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration; or (C) the Securityholder provides the Company with reasonable assurance that the New Warrant or the Underlying Shares can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act (or a successor rule thereto) (collectively, “Rule 144”) and (ii) any sale of the New Warrant or Underlying Shares made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144.
 
4.
COVENANTS.
4.1     Reasonable Best Efforts. The Company shall use its reasonable best efforts to timely satisfy each of the conditions to be satisfied by it as provided in Section 6 of this Agreement. The

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Securityholder shall use its reasonable best efforts to timely satisfy each of the conditions to be satisfied by it as provided in Section 5 of this Agreement.
4.2     Reservation of Shares. The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than the maximum number of Underlying Shares.
5.     CONDITIONS TO COMPANY’S OBLIGATIONS HEREUNDER.
The obligations of the Company to the Securityholder hereunder are subject to the satisfaction of each of the following conditions (except to the extent such condition is expressly conditional to a specific closing, in which case such condition shall only apply to such specific closing), provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing the Securityholder with prior written notice thereof:
5.1     The Securityholder shall have duly executed this Agreement and delivered the same to the Company and shall have delivered the certificates evidencing the Existing Warrant (or, in the event of the loss, theft or destruction of the Existing Warrant, an affidavit with respect thereto in form reasonably acceptable to the Company).
5.2     The representations and warranties of the Securityholder shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date), and the Securityholder shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Securityholder at or prior to the Closing Date.
5.3    No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by this Agreement.
5.4    The Private Placement shall have been consummated.
6.     CONDITIONS TO THE SECURITYHOLDER’S OBLIGATIONS HEREUNDER.
The obligations of the Securityholder hereunder are subject to the satisfaction of each of the following conditions (except to the extent such condition is expressly conditional to a specific closing, in which case such condition shall only apply to such specific closing), provided that these conditions are for the Securityholder’s sole benefit and may be waived by the Securityholder at any time in its sole discretion by providing the Company with prior written notice thereof:
6.1    The Company shall have duly executed and delivered this Agreement to the Securityholder.
6.2    Each and every representation and warranty of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though originally made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required to be performed, satisfied or complied with by the Company at or prior to the Closing Date.

6


6.3     The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the transactions contemplated by this Agreement.
6.4     No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by this Agreement.
6.5     The Private Placement Closing Date shall have occurred.


7.     MISCELLANEOUS.
7.1     Legends. The Securityholder acknowledges that the certificate(s) representing the New Warrant and Underlying Shares shall each conspicuously set forth on the face or back thereof a legend in substantially the following form:
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR UNDER THE SECURITIES LAWS, RULES OR REGULATIONS OF ANY STATE; AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, RULES OR REGULATIONS OR AN EXEMPTION THEREFROM DEEMED ACCEPTABLE BY COUNSEL TO THE COMPANY.”
7.2     Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.
7.3    Arbitration. Both parties shall resolve all disputes, controversies and differences which may arise between the parties, out of or in relation to or in connection with this Agreement, after discussion in good faith attempting to reach an amicable solution. Provided that such disputes, controversies and differences remain unsettled after discussion between the parties, both parties agree that those unsettled matter(s) shall be finally settled by arbitration in New York, New York in accordance with the latest Rules of the American Arbitration Association. Such arbitration shall be conducted by three arbitrators appointed as follows: each party will appoint one arbitrator and the appointed arbitrators shall appoint a third arbitrator. If within 30 days after confirmation of the last appointed arbitrator, such arbitrators have failed to agree upon a chairman, then the chairman will be appointed by the American Arbitration Association. The decision of the tribunal shall be final and may not be appealed. The arbitral tribunal may, in its discretion award fees and costs as part of its award. Judgment on the arbitral award may be entered by any court of competent jurisdiction, including any court that has jurisdiction over either party or any of their assets. At the request of any party, the arbitration proceeding shall be conducted in the utmost secrecy subject to a requirement of law to disclose. In such case, all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy, available for inspection only by any party and by their attorneys and experts who shall agree, in advance and in writing, to receive all such information in secrecy.

7


7.4     Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. This Agreement, to the extent delivered by means of a facsimile machine or electronic mail (any such delivery, an “Electronic Delivery”), shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto, each other party hereto shall re‑execute original forms hereof and deliver them in person to all other parties. No party hereto shall raise the use of Electronic Delivery to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of Electronic Delivery as a defense to the formation of a contract, and each such party forever waives any such defense, except to the extent such defense related to lack of authenticity.
7.5     Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.
7.6    Severability. If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
7.7     Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Securityholder, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement, contains the entire understanding of the parties with respect to the matters covered herein and, except as specifically set forth herein, neither the Company nor the Securityholder makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Securityholder, and any amendment to this Agreement made in conformity with the provisions of this Section shall be binding upon the Securityholder. No provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought.
7.8    Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:
If to the Company:
with a copy (for informational purposes only) to:

8



Gracin & Marlow, LLP
The Chrysler Building
405 Lexington Avenue, 26th Floor
New York, New York 10174
Telephone: (212) 907-6457
Facsimile: (212) 208-4657
Attention: Leslie Marlow, Esq.

If to the Securityholder:






with a copy (for informational purposes only) to:




to its address and facsimile number set forth above, or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication; (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission; or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above, respectively.


7.9     Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Series B Preferred. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Securityholder. The Securityholder may assign some or all of its rights hereunder without the consent of the Company.
7.10    Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. No specific representation or warranty shall limit the generality or applicability of a more general representation or warranty.

9


IN WITNESS WHEREOF, the Securityholder and the Company have caused their respective signature pages to this Agreement to be duly executed as of the date first written above.
 
COMPANY:
 
CVSL INC.

 
By:
/s/ John P. Rochon
 

Name: John P. Rochon
 

Title: Chief Executive Officer


 
SECURITYHOLDER:

 
 
 
 
By: /s/ Randy Schroeder
Name: Randy Schroeder
            
Address:
6821 Calle Portone
Rancho Santa Fe, California 92091



10



EXHIBIT A

11





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: August 13, 2015
By:  
/s/ JOHN ROCHON, JR.
 
 
Name: John Rochon, Jr.
 
 
Title: Chief Financial Officer
 
 
(Principal Financial 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: August 13, 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 June 30, 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: August 13, 2015
By:  
/s/ JOHN ROCHON, JR.
 
 
Name: John Rochon, Jr.
 
 
Title: Chief Financial Officer
 
 
(Principal Financial 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 June 30, 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: August 13, 2015
By:  
/s/ JOHN ROCHON, JR.
 
 
Name: John Rochon, Jr.
 
 
Title: Chief Financial Officer
 
 
(Principal Financial Officer)
 



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