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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
Table of Contents
As filed with the Securities and Exchange Commission on October 14, 2014
Registration No. 333-196155
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 5
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CVSL Inc.
(Exact name of Registrant as specified in its charter)
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Florida (State or other jurisdiction of
incorporation or organization) |
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5961 (Primary Standard Industrial
Classification Code Number) |
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98-0534701 (I.R.S. Employer
Identification Number) |
2400 North Dallas Parkway, Suite 230
Plano, Texas 75093
(972) 398-7120
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
John P. Rochon
CVSL Inc.
2400 North Dallas Parkway, Suite 230
Plano, Texas 75093
(972) 398-7120
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Copies to: |
Hank Gracin, Esq.
Leslie Marlow, Esq.
Gracin & Marlow, LLP
The Chrysler Building
405 Lexington Avenue, 26th Floor
New York, New York 10174
Phone: (212) 907-6457
Fax: (212) 208-4657 |
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Daniel I. Goldberg, Esq.
Reed Smith LLP
599 Lexington Avenue
New York, New York 10022
Phone: (212) 521-5400
Fax: (212) 521-5450 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. 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 the definitions of
"large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a
smaller reporting company) |
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Smaller reporting company ý |
CALCULATION OF REGISTRATION FEE
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Title of each class of securities
to be registered
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Proposed maximum
aggregate offering
price(1)
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Amount of
registration fee
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Common Stock, $0.0001 par value(2)(3) |
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$69,000,000 |
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$8,887.20(4) |
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- (1)
- Estimated
solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
- (2)
- Pursuant
to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issued after the
date hereof as a result of stock splits, stock dividends or similar transactions.
- (3)
- Includes
shares of common stock the underwriters have the option to purchase to cover over-allotments, if any.
- (4)
- Previously
paid.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
Table of Contents
The information in this preliminary prospectus is not complete and may be changed. These securities may not
be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, nor does it seek an offer
to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 14, 2014
PRELIMINARY PROSPECTUS
Shares
Common Stock
We are offering shares of our common stock. Our common stock is traded on the OTCQX Marketplace, operated by the OTC Markets Group, under
the symbol "CVSL." Our common stock has been approved for listing on the NYSE MKT under the symbol "CVSL," subject to meeting all of the NYSE listing standards on the date of this offering and
official notice of issuance. The last reported sale price of our common stock on the OTCQX Marketplace on ,
2014 was $ per share.
We
anticipate that the offering price of our common stock will be between $ and $ per share. For factors
considered in determining the public offering price of the shares
of common stock offered hereby, see "Determination of Offering Price Range." We expect to effect
a -for- reverse stock split of our outstanding common stock just prior to
the date of this prospectus.
Investing in our common stock involves risk. See "Risk Factors" beginning on page 14 of this prospectus for a discussion
of information that should be considered in connection with an investment in our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Per Share
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Total
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Public offering price |
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$ |
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$ |
Underwriting discounts and commissions(1) |
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$ |
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$ |
Proceeds to us, before expenses |
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$ |
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$ |
- (1)
- See
"Underwriting" for a description of the compensation payable to the underwriters.
We
have granted a 30-day option to the underwriters to purchase up to additional shares of common stock solely to cover over-allotments, if any.
The
underwriters expect to deliver our shares to purchasers in the offering on or about , 2014.
Cantor Fitzgerald & Co.
, 2014
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Table of Contents
TABLE OF CONTENTS
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You should rely only on the information contained in this prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to
you. We have not, and the underwriters have not, authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize
to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only
be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus
or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriters are not, making an
offer of these securities in any jurisdiction where the offer is not permitted.
For
investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction
where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of shares of common stock and the distribution of this prospectus outside of the United States.
This
prospectus includes trademarks, service marks and trade names owned by CVSL and its subsidiaries. All trademarks, service marks and trade names included in this prospectus are the property of
their respective owners.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you
should consider before investing in our common stock. You should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in
our common stock, including the information discussed under "Risk Factors" in this prospectus and our consolidated financial statements and notes thereto appearing at the end of this prospectus.
Except where the context requires otherwise, in this prospectus the terms "CVSL," "our
company," "we," "us" and "our" refer to CVSL Inc., a Florida corporation, and, where appropriate, its subsidiaries. Unless otherwise indicated, all share amounts and per share amounts in this
prospectus have been presented on a pro forma basis as if a reverse stock split of our outstanding shares of common stock at a ratio
of -for- that we expect to effect
just prior to the date of this prospectus has occurred.
Overview
We operate a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce
strategies to drive a high-growth global business. We are engaged in a long-term strategy to develop a large, global, diverse company that combines the entrepreneurship, innovation and
relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a large scale company. We are building an online "community" consisting of a growing number of
entrepreneurs and their customers, who can share various economic benefits of membership. Our growth is supported by a highly disciplined acquisition strategy focused on quality targets that can
benefit from our significant operational expertise, turnaround strategies, financial resources, access to innovative technologies, and core infrastructure. We completed our first seven acquisitions of
direct selling companies during 2013 and in the first quarter of 2014 and currently have a presence in seven major product categories: home décor, gourmet foods and spices, nutritional
supplements, skin care, home improvement, stationery and home security. During 2013, we had $84.9 million in revenues. The following table sets forth our quarterly revenues for the fiscal year
ended 2013, revenues for the first and second quarter of 2014 and aggregate revenues for our four most recent reported quarters:
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Fiscal Year 2013 |
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Fiscal Year 2014 |
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Trailing Four
Quarters |
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Q1 |
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Q2 |
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Q3 |
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Q4 |
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Q1 |
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Q2 |
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Revenues |
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4,268,010 |
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20,116,868 |
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$ |
23,750,749 |
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$ |
36,810,551 |
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26,670,921 |
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$ |
24,586,118 |
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111,818,339 |
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Acquisitions
Our disciplined acquisition strategy is derived from the industry knowledge and operating expertise of our management team, which we believe allows
us to identify, evaluate and integrate premium micro-enterprise companies that can benefit from our company's resources, while contributing to our overall growth strategy. We have grown at a rapid
pace as a result of our recent acquisitions and intend to
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continue
to aggressively pursue additional acquisitions in the micro-enterprise space. As of the date of this prospectus, our micro-enterprise portfolio is comprised of the following seven businesses:
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Business*
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Date of
Acquisition |
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Number of
Countries with
Sales Presence |
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Products |
The Longaberger Company |
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March 18, 2013 |
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2 |
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Premium hand-crafted baskets and products for the home |
Your Inspiration at Home |
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August 22, 2013 |
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3 |
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Hand-crafted spices from around the world |
Project Home (formerly Tomboy Tools) |
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October 1, 2013 |
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1 |
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Tools designed for women, as well as home security systems |
Agel |
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October 22, 2013 |
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40 |
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Nutritional supplements and skin care products |
My Secret Kitchen |
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December 20, 2013 |
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1 |
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Unique line of gourmet food products |
Paperly |
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December 31, 2013 |
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1 |
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Custom stationery and paper products |
Uppercase Living |
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March 13, 2014 |
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2 |
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Customizable vinyl expressions for display on walls |
- *
- We
have signed a definitive acquisition agreement to acquire Golden Girls LLC ("Golden Girls"), an entity that exchanges gold, silver and platinum jewelry for
cash; however, the transaction has not yet closed.
Each
company we acquire maintains its own unique identity, sales force, leadership, brand and culture. CVSL provides each company it acquires with a common shared corporate infrastructure that
provides operating efficiencies in areas such as sourcing, manufacturing, IT, distribution and administration. CVSL also provides operational expertise and cross-pollination of business ideas and best
practices
across companies. With each acquisition we expand our product and service base, our customer base and our geographic base, as well as our independent sales force. CVSL currently has sales in more than
40 countries on six continents around the world and has established a strong foundation for further international expansion for all of its companies. We believe we have an opportunity to
leverage the resources, infrastructure and local market expertise we have in each of the countries where we have operations and sales.
In addition to the direct selling companies identified above, on September 25, 2012, we consummated a share exchange agreement (the "Share Exchange Agreement") with HCG and Rochon Capital
Partners, Ltd. ("Rochon Capital"), an entity controlled by John Rochon, our Chief Executive Officer and Chairman of the Board, whereby Rochon Capital transferred 100% of the outstanding shares of
Happenings Communications Group, Inc. ("HCG") to us in exchange for approximately 95% of the common stock (on a fully-diluted basis upon issuance) of CVSL, (the "Initial Exchange"), to be issued in
two tranches, the first of which (consisting of 438,086,034 shares of our common stock) was issued on September 25, 2012, and the second of which (consisting of 504,813,514 shares of our common
stock), which may be issued in the future, as hereinafter described. The Initial Exchange resulted in HCG becoming our wholly-owned subsidiary.
On October 10, 2014, we entered into an amendment to the Share Exchange Agreement with Rochon Capital (as amended, the "Amended Share Exchange Agreement,") which will become effective upon the
consummation of this offering, and which limits Rochon Capital's right to be issued the remaining 504,813,514 shares solely upon the occurrence of certain stock acquisitions by third parties or the
announcement of certain tender or exchange offers of our common stock. Upon issuance, these shares will possess no rights other than voting rights and will be subject to strict transfer restrictions.
See the section of this prospectus entitled "Certain Relationships and Related Party Transactions."
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From
September 2012 until our first acquisition in March 2013, our primary focus was on the publishing business conducted by HCG, which until March 2013 was our sole revenue producing business. For
the year ended December 31, 2012, we derived $0.9 million in revenue from the operations of HCG. Prior to our acquisition of HCG in September 2012, our primary business was the
development of products for medical use. The medical products line of business was terminated in
December 2012. HCG publishes a monthly magazine, Happenings Magazine, which references events and attractions, entertainment and recreation, and people and community in Northeast Pennsylvania. HCG
also provides marketing and creative services to various companies, including direct selling companies. Such services may include creating brochures, sales materials, websites and other communications
for independent sales representatives and ultimate customers. As a result, HCG is available to serve as an "in-house" resource for our current direct selling companies and the direct selling companies
we hope to acquire in the future.
Recent Developments
On July 31, 2014, TLC and CFI NNN Raiders, LLC ("CFI"), entered into an Agreement of Purchase and Sale (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 and the aggregate purchase price was $15,800,000 ($4,400,000 of which is held with CFI as a security deposit and will be released to TLC over time as certain targets are
met).
Concurrently
with entering into the Sale Leaseback Agreement, we entered into a Master Lease Agreement with CFI (the "Master Lease Agreement"). The Master Lease Agreement provides for a 15-year lease
term and specifies the base quarterly rental for the real estate leased. The base quarterly rent in the first year is $551,772 and increases 3% annually each year thereafter. During the lease term,
all of the costs, expenses and liabilities associated with the real estate are to be borne by us, and we are entitled to the unlimited use of the real estate. The Master Lease Agreement includes
customary events of default, including non-payment by us of the quarterly rental or other charges due under any The Master Lease Agreement. We used the proceeds from the sale of the real estate to pay
off outstanding bank debt and intend to use the remaining proceeds for working capital purposes.
Strengths and Competitive Advantages
We believe that the following sets us apart from our competitors:
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- Our experienced management team and board of
directors. Our management team and board of directors (the "Board") are comprised of highly experienced industry leaders, including
John P. Rochon, our Chairman of the Board and Chief Executive Officer. Mr. Rochon has 35 years of experience in capital markets, finance, operations, mergers and acquisitions,
business planning, technology, sales and brand building, including an ownership position and prior senior management experience as the Chairman and Chief Executive Officer of Mary Kay Inc., a
company he led through global expansion to 37 countries, a major investment in technology and a successful management-led leveraged buyout. Other members of the senior management team and the
Board have also had significant experience in the direct selling industry and other industries, including Russell Mack (Mary Kay, American and United Airlines, the White House), Kelly Kittrell
(Bank of America, Ernst & Young, KPMG Peat Marwick), William Randall (Mary Kay, BeautiControl), and Julie Rasmussen (Mary Kay, Hertz Russia, with clients including RJR Nabisco,
Johnson and Johnson). In addition, our team includes other employees and consultants with significant experience in the direct selling industry, including Thomas Reynolds, Ph.D. (Wirthlin Reynolds,
clients including Coca Cola, Federal Express, Procter and Gamble) and Richard Holt (Amway, NuSkin).
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- Our diverse product offerings and large distributor and customer
base. Each company that we acquire adds to our diverse product offerings portfolio as well as to our large representative and customer
base. Currently, we have over 40,000 active independent sales force members and numerous customers in our CVSL family. We currently offer products and services in the following categories: home
décor, gourmet foods and spices, nutritional supplements, personalized stationery, skin care, home improvement and home security. We intend to grow our business into additional product
and service categories.
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- A differentiated shopping experience integrating social media and other
state of the art technologies. We provide a differentiated shopping experience for our customers through our energized sales force and
our innovative use of social media and other technologies for the sale of our products and services, which provides a multi-channel presence. For example, each of our independent sales representatives
has his or her own personalized webpage which allows them to offer a convenient shopping experience and to establish a loyal customer base. We have invested in a state of the art IT system for use by
our independent sales force members, as well as a new Enterprise Resource Planning ("ERP") system for operational use. Starting in April, 2014, CVSL began converting to its new, more modern and
sophisticated IT platform for these functions, internally and externally. These systems are being implemented first at TLC. We plan to eventually use these systems at all of our other companies. This
new IT system makes the shopping experience easier and more efficient for customers. Our technology upgrade at TLC has two distinct but related aspects, both of which are aimed at improving the
company's efficiency as a business and making it more attractive to sellers and customers. The internal side of the upgrade, the ERP system, gives the company improved ability to manage all aspects of
its operations and finance, including financial planning, regular reporting of daily financial metrics to management, ordering of components for manufacturing and vendor-sourced products, accounting,
and similar aspects of monitoring the business in order to make better-informed business decisions. The external side of the upgrade is the IT platform on which TLC's sales force monitors their own
businesses. It provides them with the information they need to track sales, their progress toward achievement and reward levels, and their downline recruits. The IT platform also includes a
customer-facing side, which includes the individual web sites from which customers can shop and place orders. Independent sales representatives now have a centralized site for product information and
placing orders, and customers can now more easily maneuver through the site from the home page to the order pages with less clicks. Separately, we have been developing, and have launched, a new
website for our benefits program called "CVSL Connections," which seeks to bring all of our independent sales representatives, along with their
respective customers, into our virtual community, where they can explore the offerings of all of our CVSL companies, view social media postings from all of our CVSL companies, and receive a range of
discounts and other benefits from third-party partners.
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- Our ability to benefit from the brand recognition and loyal customers
of each company we acquire. We strive to acquire target companies with well established brands and loyal customers. We believe this
approach allows us to maximize sales opportunities by increasing the chances that our customers will buy multiple products and services from our CVSL family of companies. We intend that each company
that we bring into the CVSL community will maintain its own brand identity, independent sales representatives, key product lines and key leaders.
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- Our scalable business
model. CVSL provides each company it acquires with a common shared corporate infrastructure that provides operating efficiencies in
sourcing, manufacturing, IT, distribution and administration. As noted above, a new IT system is being introduced at TLC for sales support and a new ERP system for operational use, and once fully
implemented it is expected that the systems will be made available to all other CVSL companies. In addition, Your Inspiration at Home ("YIAH") has now begun operations in North America while
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continuing
operations in Australia, operating out of our Newark, Ohio office building and Project Home, formerly conducting business under the name Tomboy Tools ("Project Home"), has shifted inventory
and distribution from its facilities in Denver, Colorado to our Ohio facilities. YIAH's manufacturing facility in Australia has commenced production of certain products to be sold by My Secret Kitchen
in the United Kingdom, allowing for both companies to benefit from economies of scale and best practices in manufacturing. We anticipate further integration over time of back-office functions
by all our companies, resulting in what we expect to be additional cost synergies. "Shared services" are also being developed in areas such as marketing support, travel, distribution, customer care
and legal support. CVSL also provides operational expertise and cross-pollination of business ideas across companies. Our role in managing our companies varies according to the needs and circumstances
of each company. Our intention is that all of our companies will be able to operate in a relatively self-sufficient manner on a day-to-day basis, drawing upon our management as needed to set strategy,
improve operations or solve problems, such as identifying suitable strategic business opportunities or other partnerships. However, companies may require varying levels of involvement from the CVSL
management team from time to time. For example, TLC has required rather significant, hands-on management by members of the CVSL team in order to help it bring its costs under control and to ensure
that it operates with best practices. Agel, on the other hand, sells products in approximately 40 countries and, because each international market tends to be comparatively self-contained from
a management perspective, it has required less hands-on management from CVSL than TLC.
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- Our unique incentives
program. Through our CVSL Connections program, we are building an array of attractive
benefits and other incentives for our independent sales representatives and their customers, including a range of useful discounts in areas such as travel, amenities, office supplies, entertainment,
services and other benefits. The Hertz Corporation is the first partner, subsequently joined by Vivint, Inc. Home Automation, Bond Street Office Supplies, Square Inc. Payment Solution,
Dynamics co-branded Visa credit cards, Protect America, Inc. Home Security and XOOM Energy, LLC. We are in various stages of discussion with a number of other partners. We have launched
a web-based portal for members of the CVSL Connections program and will continue to build out features and offers available over time, which will allow
members to access these exclusive benefits. As the CVSL Connections program grows over time, we believe it will have a powerful impact on customer and
sales field loyalty.
Our Strategy
Our goal is to combine the power of micro-enterprise with the power of personal networks, linking millions of interpersonal relationships in a
virtual "community." We are engaged in a long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. A core component is our ongoing acquisition strategy,
which we expect will result in additional revenue being added as more companies are acquired. We intend to "build out" the CVSL family of companies across multiple dimensions by expanding in each of
the following areas:
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- Product and Service
Categories. We seek to acquire micro-enterprise companies with diverse product and service offerings, which will allow us to gain a
foothold in a fundamental category of products or services that has significant potential to grow over time. The size of a target company is not as important to us as gaining entry into a desirable
new product or service category. We also believe that we will be able to grow each of our portfolio companies organically by our leveraging of operational infrastructure, as well as shared best
practices in operations, sales and sales field recruiting. As described under "Strengths and Competitive Advantages-Our Scalable Business Model," we are already leveraging our operational
infrastructure to support our current companies. For example, YIAH and Project Home use
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office
and distribution space at our facilities in Ohio and the shared services events and marketing teams at our offices have helped multiple companies that previously used outside third parties with
new catalogues and event planning. In addition to the shared operational resources currently being leveraged by the various companies, we have plans to continue to integrate the back-office. For
example, the implementation of our new ERP system at TLC is expected to be rolled out to the other companies over time, which will be beneficial from a simplicity (single system to manage and operate)
and cost (single system to host and maintain) standpoint.
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- Geography. We seek to acquire companies in new geographic markets. Our major markets
outside the United States currently are Australia, Italy, Russia and other Eastern European countries. Each time we acquire a company in a new geographic market, we gain a foothold in that country
which represents additional growth potential. Each new geographic market we are able to penetrate becomes an established platform in which our other portfolio companies may conduct commerce, saving
the investment of time and expense that would be otherwise necessary for each company to open new markets individually. Although we do not have any immediate plans to expand our sales or operations to
any new countries and believe that there is ample room to expand our sales and operations within the countries in which we currently have a presence, should a business opportunity in a new country
present itself, we would consider entering such geographic markets.
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- The "Consumer
Cloud." Every micro-enterprise company we acquire brings with it names and contacts that represent personal relationships with current
sellers, former sellers, current customers and former customers. We intend to use social media as one method to reach and connect all of these people. There are numerous connections already within the
CVSL family of companies and we intend to continue to add many more connections through organic growth and acquisitions. The "consumer cloud" refers to a database with a list of connections, including
information regarding current and former sellers in our independent sales force, current and former customers, in some cases current and former hosts or hostesses (for party plan companies), and
employees. The number of such connections varies according to the size of the company. From this database we are able to derive information regarding these individuals including names, addresses,
email addresses, phone numbers and past selling or purchasing history. These persons can be reached via email, and in some cases by phone or in writing. They can also be reached when they visit the
websites of any CVSL company, or the website for the CVSL Connections program, or the personalized website of any of our CVSL independent sales
representatives.
In
the consumer cloud, CVSL can inform these contacts about opportunities or product or service offerings at all of our CVSL companies, it can engage them in dialog through social media (e.g.,
Facebook), and can provide them with benefits and privileges such as discounts on products or services offered by third-party partnersfor example, rental cars, office supplies, a credit
card offering, etc. Each time a CVSL company adds another seller or customer to its database, it obtains additional connections from that person (organic growth), and each time CVSL acquires another
company, it adds to its database the total number of connections which that acquired company has already accumulated. These connections represent numerous personal relationships between family
members, friends, neighbors, co-workers, etc. When a consumer recommends a product to a friend, family member or neighbor, that recommendation carries more credibility than even the most effective
advertising. Our strategy is to build a virtual "community" which offers its members an attractive and growing array of benefits and privileges.
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- Gender
Demographics. Our collective sales forces of our companies, and their customers, represent both gender demographics, although the gender
breakdown varies from company to company. We seek to acquire companies that will appeal to both gender demographics. For
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example,
the sales force of TLC and its customer base is predominantly female, while the sales force and customer base of Agel, is comprised of more men than women. In general, the
micro-enterprise/direct selling sector globally tends to be more female than male. According to a 2011 study by the Direct Selling Association, 78% of direct selling entrepreneurs were female.
However, both genders are represented in varying proportions, depending on the nature of the product or service.
The Direct Selling Industry
Direct selling is a well-established sales channel where products are marketed directly to customers, eliminating the need for middlemen,
wholesalers, advertisers and retailers. The global direct selling market is a growing $166 billion industry. The U.S. portion of the direct selling industry alone exceeds $31 billion in
annual sales. Worldwide, more than 90 million people are estimated to participate in direct selling. According to the World Federation of Direct Selling Associations, the four largest direct
selling markets are the United States, Japan, China and Brazil, but the direct selling industry has a strong presence in every region of the world. Our management team believes that there are numerous
companies in the micro-enterprise sector with annual revenues of $50 to $300 million.
Risks Related to Our Business
Our business and our ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to
invest in our common stock. In particular, you should carefully consider the following risks, which are discussed more fully in "Risk Factors" beginning on page 14 of this
prospectus.
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- We have suffered operating losses since inception and we may not be able to achieve
profitability;
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- We may be unable to service, or upon maturity, refinance or repay, our current outstanding debt obligations or any future
debt obligations, which require a significant amount of cash;
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- We may be unable to successfully implement our acquisitions strategy;
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- We may be unable to successfully integrate acquired companies;
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- We may have difficulty managing or supporting future growth;
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- A significant percentage of our voting securities are under the control of John Rochon;
-
- We are dependent upon certain members of management and certain affiliated entities;
-
- Each of our subsidiaries is dependent on its key personnel, the loss of which could have a significant adverse effect on
the operations of the affected subsidiary;
-
- We may be unable to attract and retain key employees and independent sales representatives;
-
- We may be unable to compete in the market for the retention of independent sales representatives, acquisition candidates
or product sales;
-
- We may not satisfy U.S. and international regulatory requirements;
-
- Our business depends upon our ability to gain market acceptance of our products;
-
- Our business depends upon our information technology systems;
-
- We are subject to certain risks of conducting business internationally;
-
- We need to protect our intellectual property;
7
Table of Contents
-
- We need to protect against product liability claims or intellectual property claims;
and
-
- Our management will have broad discretion over our use of proceeds from this offering.
Our Business Philosophy: A Letter from the Chairman
We believe commerce has the power to serve high ideals, including prosperity and dignity for all humankind. We strive to employ micro-enterprise to
generate opportunity that nurtures the human spirit. We believe that the desire for a life of self worth, freedom, a sense of belonging and financial security is an elemental force of human nature. If
commerce taps into this force, we believe it can release energy that has the power to warm even the coldest community and satisfy the need for meaningful lives everywhere in the world.
All
people crave a feeling of self worth. They want the freedom to use their talents productively. They desire a sense of belonging and financial security for their families. We believe that bringing
these benefits to as many people as possible is a worthy goal that goes beyond just acquiring companies and growing successful businesses. As we see it, CVSL's true currency is human connection and
fulfillment. Strong financial returns are a byproduct.
Commerce
and communication technology should create new ways to connect people. Enlightened commerce is built upon meaningful connections. CVSL is acquiring, building and enlarging networks of
connections that are rooted in family and friendships and served by social media and e-commerce. We see the micro-enterprise sector as the perfect convergence of these connections.
CVSL's
goal is to use the power of micro-enterprise, harnessed to social media, to help bring self worth, freedom, a sense of belonging and economic security to millions of people around the world.
In
pursuing this goal, CVSL is doing something profoundly important in addition to seeking to generate healthy results for our investors.
Sincerely,
John
Rochon
Chairman, CVSL Inc.
Our Corporate Information
We were incorporated under the laws of Delaware in April 2007 under the name Cardio Vascular Medical Device Corporation. In June 2011, we converted
to a Florida corporation and changed our name to Computer Vision Systems Laboratories, Corp. On May 27, 2013, we changed our name to CVSL Inc. Our principal offices are located at 2400
North Dallas Parkway, Suite 230, Plano, Texas 75093, and our telephone number at that office is (972) 398-7120. We maintain an Internet website at www.cvsl.us.com. The information on this
website is not included or incorporated in and is not a part of this prospectus.
Because
John Rochon, our Chief Executive Officer and Chairman of the Board, through his control of Rochon Capital, will continue to control more than 50% of the outstanding voting power of our common
stock following the offering, we will be classified as a "controlled company" within the meaning of applicable NYSE MKT rules. In the event our common stock is listed on the NYSE MKT, we
will qualify as a "controlled company" because Mr. Rochon, through his control of Rochon Capital, will continue to hold in excess of 50% of our voting securities. As a controlled company, we
will qualify for certain exemptions to the NYSE MKT listing requirements, including the requirement that a majority of our directors be independent, and the requirements to have a compensation
committee and a nominating and corporate governance committee, each composed of entirely independent directors.
8
Table of Contents
The Offering
|
|
|
Common stock offered by us |
|
shares |
Over-allotment option |
|
We have granted the underwriters a 30-day option to purchase up
to additional shares of our common stock from us at the public offering price less underwriting discounts and commissions. The option may be exercised only to cover any
over-allotments. |
Common stock outstanding after the offering |
|
shares
(or shares if the underwriters exercise their over-allotment option in full) |
Use of Proceeds |
|
We intend to use the proceeds from this offering for acquisitions of other synergistic direct selling companies and general
working capital purposes. See "Use of Proceeds." |
Risk Factors |
|
See the section entitled "Risk Factors" beginning on page 14 of this prospectus for a discussion of factors you should
carefully consider before deciding to invest in our common stock. |
OTCQX trading symbol |
|
CVSL |
Proposed NYSE MKT symbol |
|
Our common stock has been approved for listing on the NYSE MKT under the symbol "CVSL," subject to meeting all of the NYSE
listing standards on the date of this offering and official notice of issuance. |
Except as otherwise indicated herein, all information in this prospectus, including the number of shares that will be outstanding after this offering, without taking into account the shares offered in
this offering, will be based on 551,975,986 shares outstanding as of October 14, 2014, which includes the 64,000,000 shares of common stock to be issued to Richmont Capital
Partners V LP ("RCP V") upon conversion of the convertible promissory note in the principal amount of $20.0 million held by RCP V (the "RCP V Note"), upon the
closing of this offering, which number of shares will be subject to adjustment in connection with the anticipated -for- reverse stock split of our issued and outstanding
shares of common stock and:
-
- excludes 1,375,000 shares of common stock issuable upon exercise of outstanding warrants, 375,000 of which have
been issued to a potential supplier and have an exercise price of $0.55 per share and 1,000,000 of which have been issued to a consultant and have an exercise price of $0.64, which number of shares
will be subject to adjustment in connection with the anticipated -for- reverse stock split of our issued and
outstanding shares of common stock;
-
- excludes 504,813,514 shares of our common stock, which may be issued to Rochon Capital under certain limited
circumstances (the "Second Tranche Stock"). On October 10, 2014, we entered into the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering, 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. Upon issuance, such shares will possess no rights other than voting rights and will be subject to strict transfer restrictions. See the section of this prospectus entitled
"Certain Relationships and Related Party Transactions." The Amended Share Exchange Agreement provides that the shares to be issued
9
Table of Contents
We
anticipate effecting a -for- reverse stock split of our issued and outstanding shares of common stock just
prior to the date of this prospectus. Unless we indicate
otherwise, all references to share numbers in this prospectus reflect this reverse stock split.
10
Table of Contents
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our consolidated financial data as of December 31, 2013 and for the years ended December 31, 2013 and
2012, derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus and our summary statement of operations data for the six months ended
June 30, 2013 and 2014, and the balance sheet data as of June 30, 2014 from our unaudited consolidated financial statements and related notes
included elsewhere in this prospectus. In our opinion, such unaudited consolidated financial statements include all adjustments consisting of only normal recurring adjustments that we consider
necessary for a fair presentation of the financial information set forth in those statements. Our consolidated financial statements are prepared and presented in accordance with generally accepted
accounting principles in the United States. Our historical results of operations and financial condition are not necessarily indicative of the results or financial condition that may be expected in
the future. You should read the following summary financial data together with our financial statements and the related notes and "Management's Discussion and Analysis
11
Table of Contents
of
Financial Condition and Results of Operations" included in this prospectus together with the sections entitled "Capitalization," and "Risk Factors" included in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six months Ended June 30, |
|
Statement of Operations Data
|
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
Revenues |
|
$ |
84,850,502 |
|
$ |
930,073 |
|
$ |
51,257,039 |
|
$ |
24,843,804 |
|
Program costs and discounts |
|
|
(20,139,341 |
) |
|
|
|
|
(10,196,353 |
) |
|
(6,358,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
64,711,161 |
|
|
930,073 |
|
|
41,060,686 |
|
|
18,484,822 |
|
Costs of sales |
|
|
29,027,643 |
|
|
324,923 |
|
|
13,878,643 |
|
|
9,153,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35,683,518 |
|
|
605,150 |
|
|
27,182,043 |
|
|
9,331,673 |
|
Gain on sale of assets |
|
|
|
|
|
|
|
|
(406,912 |
) |
|
|
|
Impairment of goodwill |
|
|
|
|
|
2,488,708 |
|
|
|
|
|
|
|
Commissions and incentives |
|
|
16,432,061 |
|
|
|
|
|
12,978,029 |
|
|
3,203,947 |
|
Selling, general and administrative |
|
|
27,918,877 |
|
|
2,291,991 |
|
|
21,455,360 |
|
|
10,454,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(8,667,420 |
) |
|
(4,175,549 |
) |
|
(6,844,434 |
) |
|
(4,327,080 |
) |
(Gain) loss on marketable securities |
|
|
(499,949 |
) |
|
|
|
|
552,085 |
|
|
|
|
Interest expense, net |
|
|
1,609,313 |
|
|
42,673 |
|
|
479,378 |
|
|
604,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision |
|
|
(9,776,784 |
) |
|
(4,218,222 |
) |
|
(7,875,897 |
) |
|
(4,931,128 |
) |
Income taxes |
|
|
273,000 |
|
|
|
|
|
491,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(10,049,784 |
) |
|
(4,218,222 |
) |
|
(8,367,818 |
) |
|
(4,931,128 |
) |
Loss from discontinued operations, net of income taxes of $0 |
|
|
|
|
|
(184,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(10,049,784 |
) |
|
(4,402,947 |
) |
|
(8,367,818 |
) |
|
(4,931,128 |
) |
Net income (loss) attributable to non-controlling interest |
|
|
(1,518,719 |
) |
|
|
|
|
(1,686,020 |
) |
|
(784,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders' |
|
$ |
(8,531,065 |
) |
$ |
(4,402,947 |
) |
$ |
(6,681,798 |
) |
$ |
(4,146,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
994,102,491 |
* |
|
451,274,391 |
|
|
992,882,941 |
* |
|
992,525,840 |
* |
Loss from continuing operations |
|
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.00 |
) |
|
(0.00 |
) |
Loss from discontinued operations |
|
|
(0.00 |
) |
|
(0.00 |
) |
|
(0.00 |
) |
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders' |
|
$ |
(0.01 |
) |
$ |
(0.01 |
) |
$ |
(0.01 |
) |
$ |
(0.00 |
) |
- *
- On
October 10, 2014, we entered into the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering, and
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. Upon issuance, such shares will possess no rights other than voting rights and will be subject to strict transfer restrictions. See the section of this prospectus entitled
"Certain Relationships and Related Party Transactions." Upon the consummation of this offering, the 504,813,514 shares of our common stock, which may be issued to Rochon Capital in the future,
pursuant to the terms and conditions of the Amended Share Exchange Agreement, will no longer be included in the earnings per share calculation.
12
Table of Contents
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014 |
|
|
|
Actual
(Unaudited) |
|
Pro Forma
As Adjusted(1) |
|
Balance sheet data: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,176,351 |
|
|
|
|
Marketable securities |
|
|
5,223,472 |
|
|
|
|
Total current assets |
|
|
30,769,384 |
|
|
|
|
Total assets |
|
|
61,148,470 |
|
|
|
|
Total current liabilities |
|
|
32,683,979 |
|
|
|
|
Long-term liabilities |
|
|
26,583,396 |
|
|
|
|
Total stockholders' equity |
|
$ |
1,881,095 |
|
|
|
|
- (1)
- The
pro forma as adjusted balance sheet data reflects the sale of shares of our common stock in this offering at an assumed price of
per share (the midpoint of the price range indicated on the cover page of this prospectus), and the
application of the net proceeds therefrom after deducting underwriting discounts and
commissions and other estimated offering expenses by us and also includes the conversion of the RCP V Note into 64,000,000 shares of our common stock upon the closing of this offering.
13
Table of Contents
RISK FACTORS
Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your
investment. Investors should carefully consider the risks described below in addition to the other information contained in this prospectus, including our financial statements and related notes
included elsewhere in this prospectus before deciding whether to invest in our securities. If any of the following risks actually occurs, our business, consolidated financial condition or results of
operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Our actual results could differ materially
from those anticipated in the forward-looking statements made throughout this prospectus as a result of different factors, including the risks we face described below.
Risks Relating To Our Business
We have suffered operating losses since inception and we may not be able to achieve profitability.
We had an accumulated deficit of $(19,767,575) as of June 30, 2014 and $(13,085,777) as of December 31, 2013 and we expect to continue
to incur increasing expenses in the foreseeable future related to our long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. As a result, we are
sustaining operating and net losses, and it is possible that we will never be able to achieve or sustain the revenue levels necessary to attain profitability.
Because we have recently acquired a large number of businesses, it is difficult to predict if we will continue to generate our current level of revenue.
Prior to March 2013, our primary business was publishing a monthly magazine, Happenings Magazine, and prior to September 2012, we were engaged in the
development and commercialization of medical devices. During 2013 and in the first quarter of 2014, we completed seven business acquisitions, changing our business focus away from that of the
publishing business and medical devices business towards the direct selling business. It is too early to predict whether consumers will accept, and continue to use, on a regular basis, the products
generated by the companies we acquired in these recent acquisitions or the direct selling companies we hope to acquire in the future. We have had a very limited operating history as a combined entity
and the impact of our recent acquisitions is difficult to assess. Therefore, our ability to sustain our current revenue is uncertain and there can be no assurance that we will continue to be able to
generate significant revenue or be profitable.
We rely upon our existing cash balances and cash flow from operations to fund our business and if our cash flow from operations is inadequate, we will need to raise money
through a debt or equity financing, if available, or curtail operations.
The adequacy of our cash resources to continue to meet our future operational needs depends, in large part, on our ability to increase product sales
and/or reduce operating costs. If we are unsuccessful in generating positive cash flow from operations, we could exhaust our available cash resources and be required to secure additional funding
through a debt or equity financing, significantly scale back our operations, and/or discontinue many of our activities which could negatively affect our business and prospects. Additional funding may
not be available or may only be available on unfavorable terms.
To service our debt obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Any failure to meet
our debt service obligations, or to refinance or repay our outstanding indebtedness as it matures, could materially adversely impact our business, prospects, financial condition, liquidity, results of
operations and cash flows.
Our ability to satisfy our debt obligations and repay or refinance our maturing indebtedness will depend principally upon our future operating
performance. We are required to make monthly payments
14
Table of Contents
under
our promissory notes that mature on February 14, 2023 and October 22, 2018 in the principal amounts of $4.0 million and $1.7 million, respectively. In addition, we
are obligated to repay the aggregate principal amount of $1,000,000 owed under three notes together with accrued interest in July 2015. As a result, prevailing economic conditions and
financial, business, legislative, regulatory and other factors, many of which are beyond our control, will affect our ability to make payments on and to refinance our debt. If we do not generate
sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, incurring additional
debt, issuing equity or convertible securities, reducing discretionary expenditures and selling certain assets (or combinations thereof). Our ability to execute such alternative financing plans will
depend on the capital markets and our financial condition at such time. In addition, our ability to execute such alternative financing plans may be subject to certain restrictions under our existing
indebtedness. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants compared to those associated with any debt that is being
refinanced, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or our inability to refinance our debt
obligations on commercially reasonable terms or at all, would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our investments in marketable securities are subject to market risks, which may result in losses.
As of June 30, 2014, we had $5,223,472 in marketable securities, invested primarily in a diversified portfolio of corporate and government
bonds. At June 30, 2014 we did not have any investments in equity securities. However, we have from time to time and may in the future invest in equity securities. During the three and six
months ended June 30, 2014, our loss on marketable securities was $58,289 and $0.6 million, respectively. At December 31, 2013, the fair market value of equity securities totaled
$1,390,355 and the fair market value of the fixed income securities totaled $10,439,897. These investments are subject to general credit, liquidity, market and interest rate risks that could have a
negative impact on our results of operations.
Our business is difficult to evaluate because we have recently expanded, and intend to continue to expand, our product offerings and customer base.
Although our business has grown rapidly, we are still in the early stages of the implementation of our primary growth strategy, which is to increase
our acquisitions of, and our number of strategic transactions with, other direct selling companies, and potentially companies engaged in other direct selling related businesses. As such, it may be
difficult for investors to analyze our results of operation, to identify historical trends or even to make quarter-to-quarter comparisons because we have operated many of these newly-acquired
businesses for a relatively limited time and intend to continue to expand our product offerings. Our growth strategy, as well as each business we acquire, is subject to many of the risks common to new
enterprises, including the ability to implement a business plan, market acceptance of proposed products and services, under-capitalization, cash shortages, limitations with respect to personnel,
financing and other resources, competition from better funded and experienced companies, and the ability to generate profits. In light of the stage of our development, no assurance can be given that
we will be able to consummate our business strategy and plans, as described herein, that our activities will be successful or that financial, technological, market, or other limitations will not force
us to modify, alter, significantly delay, or significantly impede the implementation of our plans.
We may be unsuccessful in identifying suitable acquisition candidates which may negatively impact our growth strategy.
There can be no assurance that we will be able to identify additional suitable acquisition candidates or consummate future acquisitions or strategic
transactions on acceptable terms. Our failure to successfully
15
Table of Contents
identify
suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms could have an adverse effect on our prospects, business activities, cash flow,
financial condition, results of operations and stock price as our primary growth strategy is based on increasing our acquisitions of, or entering into strategic transactions with direct selling
companies, and potentially companies engaged in other direct selling related businesses. We are continually evaluating acquisition opportunities available to us that we believe will fit our
acquisition strategy, namely companies that can increase the size and geographic scope of our operations or otherwise offer us growth and operating efficiency opportunities.
We may seek to finance acquisitions or develop strategic relationships which may dilute the interests of our shareholders.
The financing for future acquisitions could dilute the interests of our shareholders, result in an increase in our indebtedness, or both. In
addition, an acquisition or other strategic transaction could adversely impact our cash flows and/or operating results, and dilute shareholder interests, for a number of reasons,
including:
-
- interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business
venture; and
-
- any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current
holders of our common stock.
We may be unable to successfully integrate the businesses we have recently acquired and may acquire in the future with our current management and structure.
Our failure to successfully complete the integration of the businesses we acquire could have an adverse effect on our prospects, business activities,
cash flow, financial condition, results of operations and stock price. Integration challenges may include the following:
-
- assimilating the acquired business' operations products and personnel with our existing operations, products and
personnel;
-
- estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience of
management with the businesses they are familiar with;
-
- minimizing potential adverse effects on existing business relationships with other suppliers and customers;
-
- successfully developing and marketing the new products and services;
-
- entering markets in which we have limited or no prior experience; and
-
- coordinating our efforts throughout various distant localities and time zones, such as Italy and Australia currently.
The diversion of management's attention and costs associated with acquisitions may have a negative impact on our business.
If management's attention is diverted from the management of our existing businesses as a result of its efforts in evaluating and negotiating new
acquisitions and strategic transactions, the prospects, business activities, cash flow, financial condition and results of operations of our existing businesses may suffer. We also may incur
unanticipated costs in connection with pursuing acquisitions and strategic transactions.
16
Table of Contents
Acquisitions may subject us to additional unknown risks which may affect our customer retention and cause a reduction in our revenues.
In completing prior acquisitions and any future acquisition, we have and will rely upon the representations and warranties and indemnities made by
the sellers with respect to each such acquisition as well as our own due diligence investigation. We cannot assure you that such
representations and warranties will be true and correct or that our due diligence will uncover all materially adverse facts relating to the operations and financial condition of the acquired companies
or their customers. To the extent that we are required to pay the debt obligations of an acquired company, or if material misrepresentations exist, we may not realize the expected benefit from such
acquisition and we will have overpaid in cash and/or stock for the value received in that acquisition.
We may have difficulty managing future growth.
Since we commenced operations in the direct selling business, our business has grown significantly. This growth has placed substantial strain on our
management, operational, financial and other resources. If we are able to continue to expand our operations, we may experience periods of rapid growth, including increased resource requirements. Any
such growth could place increased strain on our management, operational, financial and other resources, and we may need to train, motivate, and manage additional employees, as well as attract new
management, sales, finance and accounting, international, technical, and other professionals in order to oversee our expanded operations. Any failure to expand our workforce and implement appropriate
procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.
The beneficial ownership of a significant percentage of our common stock gives John Rochon effective control of us, and limits the influence of other shareholders on
important policy and management issues.
John P. Rochon, as our Chief Executive Officer and Chairman of our Board, and through his control of Rochon Capital, controls our company and
important matters relating to us. As a result of his positions with our company and his voting control of our company, John P. Rochon controls the outcome of all matters submitted to our
shareholders for approval, including the election of our directors, our business strategy, our day-to-day operations and any proposed merger, consolidation or sale of all or substantially all of our
assets. John P. Rochon's control of our company could discourage the acquisition of our common stock by potential investors and could have an anti-takeover effect, preventing a change in
control of our company that might be otherwise beneficial to our shareholders, and possibly depressing the trading price of our common stock. There can be no assurance that conflicts of interest will
not arise with respect to John P. Rochon's ownership and control of our company or that any conflicts will be resolved in a manner favorable to the other shareholders of our company. On October
10, 2014, we entered into the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering and 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 the section of this prospectus
entitled "Certain Relationships and Related Party Transactions." In addition, RCP V, an entity controlled by John Rochon, Jr., was issued a convertible note which will convert into
64,000,000 shares of our common stock automatically upon the closing of this offering. Upon the issuance of the additional 64,000,000 shares, John P. Rochon, together with John
Rochon, Jr., will control approximately 73.5% 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 86.2% of the voting power of our outstanding securities.
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The conversion of any of the RCPV Note into common shares will have a dilutive effect that could cause the share price of our common stock to decline. 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.
Following the conversion of the RCPV Note described above, and assuming the issuance of the Second Tranche Stock, the number of outstanding shares of
our common stock would increase to in excess of 1,000,000,000, with approximately 4,000,000,000 shares of our common stock available for issuance and John P. Rochon, together with John
Rochon, Jr., would beneficially own approximately 86.2% of our outstanding shares of common stock. When the RCP V Note is converted into 64,000,000 shares of our common stock automatically upon the
closing of this offering, our existing shareholders will experience immediate dilution of voting rights and our common stock price may decline. In addition, in the event the Second Tranche Stock
becomes issuable, 504,813,514 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.
During the fourth quarter of 2013, we renewed a reimbursement of services agreement for a minimum of one year with Richmont Holdings, Inc. ("Richmont
Holdings"), a private investment and business management company owned 100% by John Rochon, pursuant to which Richmont Holdings provides administrative services to us. CVSL has entered into an
agreement with Richmont Holdings to reimburse Richmont Holdings for a portion of its expenses incurred by us in connection with our use of its office space, access to its office equipment, access to
certain of its personnel, financial analysis personnel, strategy assistance, marketing advice and assorted other services related to our day-to-day operations and our efforts to acquire direct-selling
companies. Although we have begun to establish an infrastructure of personnel and resources necessary to identify, analyze, negotiate and conduct due diligence on direct selling acquisition
candidates, we have generally relied upon Richmont Holdings for advice and assistance in areas related to identification, analysis, financing, due diligence, negotiations and other strategic planning,
accounting, tax and legal matters associated with potential acquisitions. Richmont Holdings and its affiliates have experience in the above areas. There can be no assurance that we can successfully
develop the necessary infrastructure on our own without the assistance of these affiliated entities.
Each of our subsidiaries is dependent on its key personnel.
The loss of the key executive officers of any of our subsidiaries would have a significant adverse effect on the operations of the affected
subsidiary and its prospects, business activities, cash flow, financial condition and results of operations. Although major decision making policies are handled by CVSL's senior
management, each subsidiary is primarily dependent upon its founder and/or Chief Executive Officer for their leadership roles with the respective sales forces. For example, TLC is particularly
dependent upon Tami Longaberger as the face of the Longaberger brand and her close interaction with the sales field. Agel is particularly dependent upon its Co-Chief Executive Officers, Jeff Higginson
and Jeremiah Bradley, who represent the Agel brand to their sales force and likewise YIAH is dependent upon Colleen Walters, its Chief Executive Officer and founder. The loss of any of these
individuals could have a negative impact on sales field recruiting and sales, which ultimately would impact our revenue. We believe it is critical to retain key leaders of each of the businesses we
acquire, however there can be no assurance that any business or company acquired by us will be successful in attracting and retaining its key personnel.
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We experience a high level of competition for qualified representatives in the direct selling industry and the loss of key high-level independent sales representatives could
negatively impact our growth and our revenue.
As of June 30, 2014, we had over 40,000 active independent sales representatives, of which more than 600 were at the highest level under our
various compensation plans. These independent sales leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level independent sales representative or a group of
leading representatives could negatively impact our growth and our revenue.
In
the direct selling industry, sales are made to the ultimate consumer principally through independent sales representatives. Generally, there can be a high rate of turnover among a direct selling
company's independent sales representatives. Our independent sales representatives may terminate their service at any time.
Our
ability to remain competitive and maintain and expand our business depends, in significant part, on the success of our subsidiaries in recruiting, retaining, and incentivizing their independent
sales representatives through an appropriate compensation plan, the maintenance of an attractive product portfolio and other incentives, and innovating the direct selling model. We cannot ensure that
our strategies for soliciting and retaining the representatives of our subsidiaries or any direct selling company we acquire in the future will be successful, and if they are not, our prospects,
business activities, cash flow, financial condition, results of operations and stock price could be harmed.
Several
factors affect our ability to attract and retain independent sales representatives, including:
-
- on-going motivation of our independent sales representatives;
-
- general economic conditions;
-
- significant changes in the amount of commissions paid;
-
- public perception and acceptance of the industry, our business and our products;
-
- our ability to provide proprietary quality-driven products that the market demands;
and
-
- competition in recruiting and retaining an independent sales representatives.
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 selling channel. Products and services of direct selling companies are sold
to retail consumers. Spending by retail consumers is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer
confidence, all of which are beyond our control. Our subsidiaries may face economic challenges because customers may continue to have less money for discretionary purchases as a result of job losses,
foreclosures, bankruptcies, reduced access to credit and falling home prices, among other things.
Changes
in consumer purchasing habits, including reducing purchases of a direct selling company's products, or reducing purchases from representatives or buying products in channels other than direct
selling, such as retail, could reduce our sales, impact our ability to execute our business strategy or have a material adverse effect on our prospects, business activities, cash flow, financial
condition, and results of operations.
Direct selling companies are subject to numerous laws.
The direct selling industry is subject to a number of federal and state regulations administered by the Federal Trade Commission (the "FTC") and
various state agencies in the United States, as well as regulations regarding direct selling activities in foreign markets. Laws specifically applicable to direct selling companies generally are
directed at preventing deceptive or misleading marketing and sales practices, and include laws often referred to as "pyramid" or "chain sales" scheme laws. These "anti-pyramid" laws are focused on
ensuring that product sales ultimately are made to end consumers and that advancement within a sales organization is based on sales of products and services rather than investments in the
organization, recruiting other participants, or other non-retail sales-related criteria. The regulatory requirements concerning direct selling programs involve a high level of subjectivity and are
subject to judicial interpretation. We and our subsidiaries are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental
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agencies
or courts can change. Any direct selling company that we own or we acquire in the future, could be found not to be in compliance with current or newly adopted laws or regulations in one or
more markets, which could prevent us from conducting our business in these markets and harm our prospects, business activities, cash flow, financial condition, results of operations and stock price.
We are aware of pending judicial actions and investigations against other companies in the direct selling
industry. Adverse decisions in these cases could impact our business if direct selling laws or anti-pyramid laws are interpreted more narrowly or in a manner that results in additional burdens or
restrictions on direct selling. The implementation of such regulations may be influenced by public attention directed toward a direct selling company, its products or its direct selling program, such
that extensive adverse publicity could result in increased regulatory scrutiny. If any government were to ban or restrict our business model, our prospects, business activities, cash flows, financial
condition and results of operations may be materially adversely affected.
We are subject to numerous government regulations.
Our products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and
authorities, including the Food and Drug Administration (the "FDA"), the FTC, the Consumer Product Safety Commission, the Department of Agriculture, State Attorney Generals and other state regulatory
agencies in the United States, and similar government agencies in each market in which we operate. Government authorities regulate advertising and product claims regarding the efficacy and benefits of
our products. These regulatory authorities typically require adequate and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation
can vary widely from market to market and there is no assurance that the research and development efforts that we undertake to support our claims will be deemed adequate for any particular product or
claim. If we are unable to show adequate and reliable scientific substantiation for our product claims, or our marketing materials or the marketing materials of our sales force make claims that exceed
the scope of allowed claims for spices, dietary supplements or skin care products that we offer, the FDA or other regulatory authorities could take enforcement action requiring us to revise our
marketing materials, amend our claims or stop selling certain products, which could harm our business.
For
example, the FDA recently issued warning letters to several cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims
regarding gene activity, cellular rejuvenation, and rebuilding collagen. There is a degree of subjectivity in determining whether a claim is an improper structure/function claim. Given this
subjectivity and our research and development focus on skin care products and dietary supplements, there is a risk that we could receive a warning letter, be required to modify our product claims or
take other actions to satisfy the FDA if the FDA determines any of our marketing materials include improper structure/function claims for our cosmetic products. In addition, plaintiffs' lawyers have
filed class action lawsuits against some of our competitors after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to governmental actions or
class action lawsuits, which could harm our business.
There
are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing
business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies.
As
a U.S. entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between us and
our subsidiaries and for product purchases, management services and contractual obligations, such as the payment of sales commissions.
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The failure of the representatives of our subsidiaries to comply with laws, regulations and court decisions creates potential exposure for regulatory action or lawsuits
against us.
Because the representatives that market and sell our products and services are independent contractors, and not employees, we and our subsidiaries
have limited control over their actions. In the United States, the direct selling industry and regulatory authorities have generally relied on the implementation of a company's rules and policies
governing its direct sellers, designed to promote retail sales, protect consumers, prevent inappropriate activities and distinguish between legitimate direct selling plans and unlawful pyramid
schemes, to compel compliance with applicable laws. We maintain formal compliance measures to identify specific complaints against our representatives and to remedy any violations through appropriate
sanctions, including warnings, suspensions and, when necessary, terminations. Because of the significant number of representatives our subsidiaries have, it is not feasible for our subsidiaries to
monitor the representatives' day-to-day business activities. We and our subsidiaries must maintain the "independent contractor" status of our representatives and, therefore, have limited control over
their business activities. As a result, we cannot insure that our representatives will comply with all applicable rules and regulations, domestically or globally. Violations by our representatives of
applicable laws or of our policies and procedures in dealing with customers could reflect negatively on our prospects, business activities, cash flow, financial condition and results of operations,
including our business reputation, and could subject us to fines and penalties. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability
because of the actions of our representatives.
Although
the physical labeling of our products is not within the control of our representatives, our representatives must nevertheless advertise our products in compliance with the extensive
regulations that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.
Our
foods, nutritional supplements and skin care products are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made about our products. The
treatment or cure of disease, for example, is not a permitted claim for these products. While we train our independent sales representatives and attempt to monitor our sales representatives' marketing
materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our independent sales representatives fail to comply with these
restrictions,
then we and our independent sales representatives could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial condition and
operating results. Although we expect that our responsibility for the actions of our independent sales representatives in such an instance would be dependent on a determination that we either
controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our independent sales representatives.
Our operations could be harmed if we are found not to be in compliance with Good Manufacturing Practices.
In the United States, FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements for the nutritional supplement
industry require us and our vendors to maintain good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping. The
ingredient identification requirement, which requires us to confirm the levels, identity and potency of ingredients listed on our product labels within a narrow range, is particularly burdensome and
difficult for us with respect to our cosmetic products which contains many different ingredients. We are also required to report serious adverse events associated with consumer use of our products.
Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are not in compliance with these regulations or public reporting of adverse events harms our
reputation for quality and safety. A finding of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling
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certain
products. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are
qualified and in compliance.
Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies could harm our prospects, business activities, cash
flow, financial condition and results of operations.
Our number of representatives and the results of our operations may be affected significantly by the public's perception of our subsidiaries and of
similar companies. This perception is dependent upon opinions concerning:
-
- the safety and quality of our products, components and ingredients, as
applicable;
-
- the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies'
representatives;
-
- our marketing program; and
-
- the business of direct selling generally.
Adverse
publicity concerning any actual or purported failure of our subsidiaries or of their representatives to comply with applicable laws and regulations regarding product claims and advertising,
good manufacturing practices, the regulation of our marketing program, the licensing of our products for sale in our target markets or other aspects of our business, whether or not resulting in
enforcement actions or the imposition of penalties, could have an adverse effect on our goodwill and could negatively affect the ability to attract, motivate and retain representatives, which would
negatively impact our ability to generate revenue.
If we are unable to develop and introduce new products that gain acceptance from our customers and representatives, our business could be harmed.
Our continued success depends on our ability to anticipate, gauge, and react in a timely and effective manner to changes in consumer spending
patterns and preferences. We must continually work to discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach
as to how and where we market and sell our products. A critical component of our business is our ability to develop new products that create enthusiasm among our independent sales representatives and
ultimate customers. If we are unable to introduce new products, our independent sales representatives' productivity could be harmed. In addition, if any new products fail to gain market acceptance,
are restricted by regulatory requirements or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce new products include,
among others, government regulations, the inability to attract and retain qualified research and development staff, the termination of
third-party research and collaborative arrangements, proprietary protections of competitors that may limit our ability to offer comparable products, and the difficulties in anticipating changes in
consumer tastes and buying preferences.
A general economic downturn, a recession globally or in one or more of our geographic regions or other challenges may adversely affect our business and our access to
liquidity and capital.
A downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions, or the current global
macro-economic pressures, could adversely affect our business and our access to liquidity and capital. We could experience a decline in revenues, profitability and cash flow due to reduced orders,
payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity
and capital resources, including our ability to raise additional capital and maintain credit lines and offshore cash balances.
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Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and
consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when
disposable income is lower, and may impact sales of our products. We could face continued economic challenges in fiscal 2014 if customers continue to have less money for discretionary purchases as a
result of job losses, foreclosures, bankruptcies, reduced access to credit or sharply falling home prices, among other things.
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
Some of the nutritional supplements we offer are made from vitamins, minerals, herbs, and other substances for which there is a long history of human
consumption. Other nutritional supplements we offer contain innovative ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience
with human consumption of certain of these ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have not
performed or sponsored any clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products
distributed by other companies, we could be adversely affected in the event that these products prove or are asserted to be
ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar
products of our competitors.
We frequently rely on outside suppliers and manufacturers, and if those suppliers and manufactures fail to supply products in sufficient quantities and in a timely fashion,
our business could suffer.
We depend on outside suppliers for raw materials and finished goods. We also may use outside manufacturers to make all or part of our products. Our
profit margins and timely product delivery may be dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our contract
manufacturers acquire all of the raw materials for manufacturing our products from third-party suppliers. We do not believe we are materially dependent on any single supplier for raw materials or
finished goods, with the exception of Innovative FlexPak, LLC, which produces substantially all of Agel's finished goods. We believe that there are other suppliers who could produce these products for
Agel, if necessary; however, transitioning to other suppliers could result in delays or additional expense. In order to mitigate this risk, Agel has developed relationships with two additional
suppliers and has begun diversifying the source of its finished goods. In the event we were to lose any significant suppliers and experience delays in identifying or transitioning to alternative
suppliers, we could experience product shortages or product back orders, which could harm our business. There can be no assurance that suppliers will be able to provide our contract manufacturers the
raw materials or finished goods in the quantities and at the appropriate level of quality that we request or at a price that we 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
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our
facilities would not have a material adverse effect on our business, financial condition, or results of operations.
Disruptions to transportation channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those
markets.
We may experience disruptions to the transportation channels used to distribute our products, including increased airport and shipping port
congestion, a lack of transportation capacity, increased fuel expenses, and a shortage of manpower. Disruptions in our container shipments may result in increased costs, including the additional use
of airfreight to meet demand. Although we have not recently experienced significant shipping disruptions, we continue to watch for signs of upcoming congestion. Congestion to ports can affect
previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our profitability.
A failure of our information technology systems would harm our business.
Our IT systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters, telecommunication
failures, and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although we have adopted and implemented a business continuity and disaster recovery plan, which
includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting our
business and the results of our operations.
Our business is subject to online security risks, including security breaches.
Our businesses involve the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or
misuse of this information, litigation, and potential liability. An increasing number of websites, including those of several large companies, have recently disclosed breaches of their security, some
of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems,
change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to
circumvent our security measures could misappropriate our or our customers' proprietary information, cause interruption in our operations, damage our computers or those of our customers, or otherwise
damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation,
and a loss of confidence in our security measures, which could harm our business.
Our
servers are also vulnerable to computer viruses, physical or electronic break-ins, "denial-of-service" type attacks and similar disruptions that could, in certain instances, make all or portions
of our websites unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the
unauthorized release of our users' personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits,
which may not be adequate to reimburse us for losses caused by security breaches.
Our
web customers, as well as those of other prominent companies, may be targeted by parties using fraudulent "spoof" and "phishing" emails to misappropriate passwords, credit card numbers, or other
personal information or to introduce viruses or other malware through "trojan horse" programs to our customers' computers. These emails appear to be legitimate emails sent by us, but they may direct
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recipients
to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to
mitigate "spoof" and "phishing" emails through product improvements and user education, "spoof" and "phishing" remain a serious problem that may damage our brands, discourage use of our websites, and
increase our costs.
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international
markets is exposed to risks associated with our international operations, including:
-
- the possibility that a foreign government might ban or severely restrict our business method of direct selling, or that
local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
-
- the lack of well-established or reliable legal systems in certain areas where we operate;
-
- the presence of high inflation in the economies of international markets in which we operate;
-
- the possibility that a government authority might impose legal, tax or other financial burdens on us or our sales force,
due, for example, to the structure of our operations in various markets;
-
- the possibility that a government authority might challenge the status of our sales force as independent contractors or
impose employment or social taxes on our sales force; and
-
- the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.
Currency exchange rate fluctuations could reduce our overall profits.
In 2013, we recognized 16% of net revenues in markets outside of the United States. This percentage will likely increase in 2014 when we include a
full year of results from our international acquisitions. For the six months ended June 30, 2014, we recognized 32% of net revenues in markets outside of the United States. In preparing our
consolidated financial statements, certain financial information is required to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average
exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are
not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging
contracts or participated in any hedging or derivative activities.
Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our
business.
As a multinational corporation, in many countries, including the United States, we are subject to transfer pricing and other tax regulations designed
to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the
local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund
transfers. If regulators challenge our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.
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A
change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial
results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
Non-compliance with anti-corruption laws could harm our business.
Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA"). Any allegations that we
are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any
determination that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties.
Although we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are
aware that one of our competitors is under investigation in the United States for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse
publicity or increased scrutiny of our industry, our business could be harmed.
We may own, obtain or license intellectual property material to our business, and our ability to compete may be adversely affected by the loss of rights to use that
intellectual property.
The market for our products may depend significantly upon the value associated with product innovations and our brand equity. Many direct sellers
own, obtain or license material patents and trademarks used in connection with the marketing and distribution of their products. Those companies must expend time and resources in developing their
intellectual property and pursuing any infringers of that intellectual property. The laws of certain foreign countries may not protect a company's intellectual property rights to the same extent as
the laws of the United States. The costs required to protect a company's patents and trademarks may be substantial.
Challenges by private parties to the direct selling system could harm our business.
Direct selling companies have historically been subject to legal challenges regarding their method of operation or other elements of their business
by private parties, including their own representatives, in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting
over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire in the
future.
As a direct selling company, we may face product liability claims and could incur damages and expenses, which could affect our prospects, business activities, cash flow,
financial condition and results of operations.
As a direct selling company we may face financial liability from product liability claims if the use of our products results in significant loss or
injury. A substantial product liability claim could exceed the amount of our insurance coverage or could be excluded under the terms of our existing insurance policy, which could adversely affect our
prospects, business activities, cash flow, financial condition and results of operations.
Selling
products for human consumption such as nutritional supplements and spices as well as the sale of skin care products involve a number of risks. We may need to recall some of our products if
they become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our
products, which could have a material adverse effect on our business results and the value of our brands. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the
negative publicity
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surrounding
such assertions regarding our products could adversely affect our reputation and brand image.
If we fail to protect our trademarks and tradenames, then our ability to compete could be negatively affected, which would harm our financial condition and operating
results.
The market for our products depends upon the goodwill associated with our trademark and tradenames. We own, or have licenses to use, the material
trademark and trade name rights used in connection with the packaging, marketing and distribution of our products in the markets where those products are sold. Therefore, trademark and trade name
protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting
trademark or trade name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The loss or
infringement of our trademarks or tradenames could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
We
permit the limited use of our trademarks by our representatives to assist them in the marketing of our products. It is possible that doing so may increase the risk of unauthorized use or misuse of
our trademarks in markets where their registration status differs from that asserted by our independent sales representatives, or they may be used in association with claims or products in a manner
not permitted under applicable laws and regulations. Were this to occur, it is possible that this could diminish the value of these marks or otherwise impair our further use of these marks.
Our business is subject to intellectual property risks.
Many of our products are not protected by patents. Restrictive regulations governing the precise labeling of ingredients and percentages for
nutritional supplements, the large number of manufacturers that produce products with many active ingredients in common and the rapid change and frequent reformulation of products make patent
protection impractical. As a result, we enter into confidentiality agreements with certain of our employees in our research and development activities, our independent sales representatives,
suppliers, directors, officers and consultants to help protect our intellectual property, investment in research and development activities and trade secrets. There can be no assurance that our
efforts to protect our intellectual property and trademarks will be successful, nor can there be any assurance that third parties will not assert claims against us for
infringement of intellectual property rights, which could result in our business being required to obtain licenses for such rights, to pay royalties or to terminate our manufacturing of infringing
products, all of which could have a material negative impact on our financial position, results of operations or cash flows.
We have identified material weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional
material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report
our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in
our stock price.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act. Our stated growth strategy is to acquire companies, some of which may not have invested in adequate systems or staffing to meet public company financial
reporting standards. We review the financial reporting and other systems that each 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
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financial
statements for the year ended December 31, 2013. Our management discovered certain conditions that we deemed to be material weaknesses and significant deficiencies in the internal
controls of TLC, which was acquired during 2013 and which failed to employ a sufficient number of staff in its finance and accounting department to maintain optimal segregation of duties and to
provide optimal levels of oversight. This lack of personnel was acute during our 2013 audit which resulted in certain audit adjustments.
We
have taken actions that we believe will substantially remediate the material weaknesses identified above. In response to the identification of these material weaknesses, we: (1) have
appointed a controller for all CVSL subsidiaries as well as the parent company; (2) hired additional staff at TLC; (3) arranged for key managers and accounting personnel to work closely
with our independent audit firm in evaluating our progress in remediating our material weaknesses with oversight by the audit committee; (4) evaluated control procedures and where possible
modified those control procedures to improve oversight; and (5) purchased and begun implementation of a new global ERP system which will provide accounting for all of our current and future
subsidiaries. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future. We will be required
to expend time and resources to further improve our internal controls over financial reporting, including by expanding our finance and accounting staff.
We may be held responsible for certain taxes or assessments relating to the activities of our independent sales representatives, which could harm our financial condition and
operating results.
Our independent sales representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us
to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar
taxes with respect to our representatives. In the event that local laws and regulations require us to treat our independent sales representatives as employees, or if our representatives are deemed by
local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related
assessments and penalties, which could harm our financial condition and operating results.
A majority of our directors will not be required to be "independent" and several of our directors and officers have other business interests.
We are not currently listed on a national securities exchange or an inter-dealer quotation system that requires a majority of our directors to be
independent. In the event our common stock is listed on the NYSE MKT, we will qualify as a "controlled company" because Mr. Rochon, through his control of Rochon Capital, will continue
to hold in excess of 50% of our voting securities. As a controlled company, we will qualify for certain exemptions to the NYSE MKT listing requirements, including the requirement that a majority of
our directors be independent, and the requirements to have a compensation committee and a nominating/corporate governance committee, each composed of entirely independent directors. Although a
majority of our directors are currently "independent" under the NYSE MKT independence standards and our compensation committee and nominating and corporate governance committee are currently composed
of only independent directors, this may not always be the case. If at any point in the future, a majority of our directors are not independent, this lack of "independence" may interfere with our
directors' judgment in carrying out their responsibilities as directors.
Several
of our directors have other business interests, including Mr. Rochon, who controls Richmont Holdings. Those other interests may come into conflict with our interests and the interests
of our shareholders. Mr. Rochon and several of our other directors serve on the boards of directors of several other companies and, as a result of their business experience, may be asked to
serve on the boards of
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other
companies. We may compete with these other business interests for such directors' time and efforts.
CVSL
officers are currently working for us on a part-time basis and also work for Richmont Holdings or its affiliated entities. These part-time employees also work at other jobs and have discretion to
decide what time they devote to our activities, which may result in a lack of availability when needed due to their responsibilities at other jobs.
Impairment of goodwill and intangible assets is possible, depending upon future operating results and the value of our common stock.
We will test our goodwill and intangible assets for impairment during the fourth quarter of the current fiscal year and in future fiscal years, and
on an interim basis, if indicators of impairment exist. Factors which influence the evaluation of impairment of our goodwill and intangible assets include the price of our common stock and expected
future operating results. If the carrying value of a reporting unit or an intangible asset is no longer deemed to be recoverable, we potentially could incur material impairment charges. Although we
believe these charges would be non-cash in nature and would not affect our operations or cash flow, these charges would adversely affect shareholders' equity and reported results of operations in the
period charged.
Risks Related to our Securities and This Offering
There currently is a limited liquid trading market for our common stock and we cannot assure investors that a robust trading market will ever develop or be sustained.
To date there has been a limited trading market for our common stock on the OTC Markets OTCQX. We cannot predict how liquid the market for our common
stock may become. Our common stock has been approved for listing on the NYSE MKT under the symbol "CVSL," subject to meeting all of the NYSE listing standards on the date of this offering and official
notice of issuance. We believe the listing of our common stock on the NYSE MKT will be beneficial to
us and our shareholders. However, while we believe that the NYSE MKT listing will improve the liquidity of our common stock, it may not improve trading volume, reduce volatility or stabilize
our share price. We currently do not satisfy the initial listing standards of any exchange, and we cannot assure investors that we will be able to satisfy the listing standards of the NYSE MKT.
Should we fail to satisfy the initial listing requirements of the NYSE MKT, or if our common stock is otherwise rejected for listing and remains listed on the OTC Markets OTCQX, the trading
price of our common stock could be subject to increased volatility and the trading market for our common stock may be less liquid. A lack of an active market may impair investors' ability to sell
their shares at the time they wish to sell them or at a price they consider reasonable. The lack of an active trading market may impair our ability to raise capital by selling shares of capital stock
and may impair our ability to acquire other companies by using our common stock as consideration.
For
companies whose securities are traded in the OTC Markets OTCQX, it is generally more difficult to obtain accurate quotations, to obtain coverage for significant news events (because major wire
services generally do not publish press releases about such companies) and to obtain needed capital.
The NYSE MKT may not list our securities for quotation on its exchange which could limit investors' ability to make transactions in our securities and subject us to
additional trading restrictions.
We anticipate that our securities will be listed on the NYSE MKT, a national securities exchange, upon consummation of this offering.
Although, after giving effect to this offering, we expect to meet, on a pro forma basis, the NYSE MKT's minimum initial listing standards, which generally mandate that we meet certain
requirements relating to shareholders' equity, market capitalization, aggregate market value of publicly held shares and distribution requirements and minimum share price, we cannot assure
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you
that we will be able to meet those initial listing requirements. If the NYSE MKT does not list our securities for trading on its exchange, we could face significant material adverse
consequences, including:
-
- a limited availability of market quotations for our securities;
-
- reduced liquidity with respect to our securities;
-
- a determination that our shares of common stock are "penny stock" which will require brokers trading in our shares of
common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
-
- a limited amount of news and analyst coverage for our company; and
-
- a decreased ability to issue additional securities or obtain additional financing in the future.
The
National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as "covered
securities."
Because
we expect that our common stock will be listed on the NYSE MKT, our common stock will be covered securities. Although the states are preempted from regulating the sale of covered
securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar
the sale of covered securities in a particular case. Further, if we are not listed on the NYSE MKT or another national securities exchange, then our common stock would not be considered covered
securities and we would be subject to regulation in each state in which we offer our securities.
Our failure to meet the continued listing requirements of the NYSE MKT could result in a de-listing of our common stock.
If after listing we fail to satisfy the continued listing requirements of the NYSE MKT, such as the corporate governance requirements or the
minimum stockholder's equity requirement, the NYSE MKT may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and
would impair our shareholders' ability to sell or purchase our common stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the
NYSE MKT's listing requirements, but we can provide no
assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our common stock.
There is no assurance of an established public trading market and our limited trading market may cause volatility in our share price.
The OTCQX, where our common stock is currently quoted, is an inter-dealer, over-the-counter market that provides significantly less liquidity than
the NYSE MKT. Our stock is thinly traded due to the limited number of shares available for trading on the OTCQX market thus causing large swings in price. As such, investors and potential
investors may find it difficult to obtain accurate stock price quotations, and holders of our common stock may be unable to resell their securities at or near their original offering price or at any
price. Our public offering price per share may vary from the market price of our common stock after the offering. If an active market for our stock develops and continues, 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 public offering price 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
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period
of time. As a result, our shareholders could suffer losses or be unable to liquidate their holdings. Although our common stock has been approved for listing on the NYSE MKT under the symbol
"CVSL," subject to meeting all of the NYSE MKT listing standards on the date of this offering and official notice of issuance, no assurance can be given that the price of our common stock will become
less volatile when listed.
Market
prices for our common stock will be influenced by a number of factors, including:
-
- the issuance of new equity securities pursuant to a future offering, including issuances of preferred
stock;
-
- the introduction of new products or services by us or our competitors;
-
- the acquisition of new direct selling businesses;
-
- changes in interest rates;
-
- significant dilution caused by the anti-dilutive clauses in our financial agreements;
-
- competitive developments, including announcements by competitors of new products or services or significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
-
- variations in quarterly operating results;
-
- change in financial estimates by securities analysts;
-
- a limited amount of news and analyst coverage for our company;
-
- the depth and liquidity of the market for our shares of common stock;
-
- sales of large blocks of our common stock, including sales by Rochon Capital, any executive officers or directors
appointed in the future, or by other significant shareholders;
-
- investor perceptions of our company and the direct selling segment generally;
and
-
- general economic and other national and international conditions.
Market
price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price
and trading volume.
Securities research analysts, 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
following this offering, 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
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are
particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. Our common stock has experienced substantial price volatility in the past. This may be a result
of, among other things, variations in our results of operations and announcements by us and our competitors, as well as general economic conditions. Our stock price may continue to experience
substantial volatility. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and could divert the attention and
resources of our management.
We are obligated to issue additional securities in the future, which will reduce investors' ownership percentage in our outstanding securities and will dilute our share
value.
If future operations or acquisitions are financed through issuing equity securities, shareholders could experience significant dilution. In addition,
securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. The issuance of
shares of our common stock upon the exercise of options, which we may grant in the future, may result in dilution to our shareholders. Our articles of incorporation currently authorize us to issue
5,000,000,000 shares of common stock. Following the issuance of the 64,000,000 shares of our common stock upon conversion of the RCP V Note, and assuming the issuance of the
Second Tranche Stock (which shares may only be issued under certain limited circumstances, as described in more detail in the section of this prospectus entitled "Certain Relationships and Related
Party Transactions"), the number of outstanding shares of our common stock would increase to in excess of 1,000,000,000, with approximately 4,000,000,000 shares of our common stock available
for issuance (subject to adjustment in connection with our anticipated - for - reverse stock split). 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.
Shareholders purchasing shares in this offering will experience immediate and substantial dilution, causing their investment to immediately be worth less than their purchase
price.
If you purchase common stock in this offering, you will experience immediate and substantial dilution in the projected book value of the common stock
you purchase from the price you pay in this offering.
After
consummation of this offering at the assumed offering price per share of common stock of $ (the midpoint of the range indicated on the cover page of this prospectus), exclusive of
the over-allotment
option, you will incur immediate dilution of $ per common share, resulting from an immediate increase in net tangible book value per share of $ to
$ .
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.
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Complying with federal securities laws as a publicly traded company is expensive. Any deficiencies in our financial reporting or internal controls could adversely affect our
financial condition, ability to issue our shares in acquisitions and the trading price of our common stock.
Companies trading on the OTCQX, such as our company, must be reporting issuers under Section 12 of the Exchange Act, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation privileges. We file quarterly and annual reports containing our financial statements with the SEC. We may
experience difficulty in meeting the SEC's reporting requirements. Any failure by us to timely file our periodic reports with the SEC could harm our reputation, reduce the trading price of our common
stock, result in removal from the over-the-counter markets and cause sanctions or other actions to be taken by the SEC against us. A failure to timely file our periodic reports with the SEC could
cause additional harm, such as a default under an indenture or loan covenant that we may enter into from time to time. We will incur significant legal, accounting and other expenses related to
compliance with applicable securities laws.
Our management will have broad discretion over the use of the proceeds we receive in this offering, and may not apply the proceeds in ways that increase the value of your
investment.
If the underwriters exercise their option to purchase additional shares in this offering in full, we estimate that net proceeds of the sale of the
common stock that we are offering will be approximately $ million. Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on
the judgment of our management regarding the application of these proceeds. Although we intend to use a portion of the net proceeds from this offering for acquisitions of other businesses in the
direct selling line of business, because of the number and variability of factors that will determine our use of the net proceeds from this offering, we cannot specify with certainty the particular
use of the net proceeds that we will receive from this offering, and we cannot assure you that we will use the proceeds in a manner that will increase the value of your investment or of which you
would approve. Moreover, you will not have the opportunity to influence our decision on how to use the proceeds from this offering. We may use the proceeds for corporate purposes that do not
immediately enhance our prospects for the future or increase the value of your investment. See the section of this prospectus entitled "Use of Proceeds."
Our articles of incorporation, bylaws and Florida law have anti-takeover provisions that could discourage, delay or prevent a change in control, which may cause our stock
price to decline.
Our articles of incorporation, bylaws and Florida law contain provisions which could make it more difficult for a third party to acquire us, even if
closing such a transaction would be beneficial to our shareholders. We are authorized to issue up to 10,000,000 shares of preferred stock. This preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by our Board without further action by shareholders. The terms of any series of preferred stock may include preferential voting
rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. The issuance of any
preferred stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.
Provisions
of our articles of incorporation, bylaws and Florida law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a
change in control, including changes a shareholder might consider favorable. Such provisions may also prevent or frustrate attempts by our shareholders to replace or remove our management. In
particular, the articles of incorporation, bylaws and Florida law, as applicable, among other things, provide the
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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, which will become effective upon the consummation of this offering, 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 will possess no rights
other than voting rights, may serve as a further deterrent to third parties looking to acquire us. See the section of this prospectus entitled "Certain Relationships and Related Party Transactions."
Risks Related to our Reverse Stock Split
We anticipate effecting a -for- reverse stock split of our outstanding common stock prior to this offering. However, the reverse
stock split may
not increase our stock price sufficiently and we may not be able to list our common stock on the NYSE MKT in which case this offering may not be completed.
We expect that the reverse stock split of our outstanding common stock will increase the market price of our common stock so that we will be able to
meet the minimum market price requirement of the listing rules of the NYSE MKT. However, the effect of a reverse stock split upon the market price of our common stock cannot be predicted with
certainty, and the results of reverse stock splits by companies in similar circumstances have been varied. It is possible that the market price of our common stock following the reverse stock split
will not increase sufficiently for us to be in compliance with the minimum market price requirement of the NYSE MKT, or if it does, that such price will be sustained. If we are unable to meet
the minimum market price requirement, we may be unable to list our shares on the NYSE MKT, in which case this offering may not be completed.
Even if the reverse stock split achieves the requisite increase the market price of our common stock, there can be no assurance that we will be able to comply with other
continued listing standards of the NYSE MKT.
Even if the market price of our common stock increases sufficiently so that we comply with the minimum market price requirement, we cannot assure you
that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on the NYSE MKT. Our failure to meet these requirements
may result in our common stock being delisted from the NYSE MKT.
The reverse stock split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be
outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split may
increase the number of shareholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such shareholders to experience an increase in the cost of selling
their shares and greater difficulty effecting such sales.
Following the reverse stock split, the resulting market price of our common stock may not attract new investors, including institutional investors, and may not satisfy the
investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve.
Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, there can be no assurance
that the reverse stock split will result in a share price that will attract new investors, including institutional investors.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains statements that are, or may be deemed "forward-looking statements," including statements regarding our expected future
revenues, operations and expenditures, future acquisitions and projected cash needs. The forward-looking statements are contained principally in the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds," and "Business." These statements relate to future events of our financial
performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those
expressed or implied by these forward-looking statements.
Forward-looking
statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would,"
"expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or the negative of those terms, and similar expressions and comparable terminology intended to identify
forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you
should not place undue reliance on these forward-looking statements. These forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements,
whether as a result of new information, future events or otherwise after the date of this prospectus. You should read this prospectus and the documents referenced in this prospectus and filed as
exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
Some
of the factors that we believe could cause actual results to differ from those anticipated or predicted in any forward-looking statement
include:
-
- Our dependence upon certain members of management;
-
- Our ability to raise additional financing to fund our acquisitions and meet our liquidity requirements;
-
- Our ability to attract acquisition candidates;
-
- Our ability to successfully integrate acquired companies;
-
- Our ability to adequately support our growth;
-
- Our ability to compete in the market;
-
- Our ability to attract and retain key employees and sales representatives;
-
- Our ability to satisfy U.S. and international regulatory requirements;
-
- Our ability to protect our intellectual property;
-
- Our ability to protect against product liability claims or intellectual property claims;
-
- Our ability to gain market acceptance of our products;
-
- Our dependence upon suppliers and manufacturers;
-
- Our dependence upon our information technology systems; and
-
- Our ability to apply the proceeds of this offering as contemplated by this prospectus.
You
should also read carefully the factors described in the "Risk Factors" section of this prospectus to better understand the risks and uncertainties inherent in our business and underlying any
forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a
representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $ million from the sale of shares of common stock offered in
this offering, or approximately $ million if the underwriters exercise their over-allotment option in full, based on an assumed initial public offering price of
$
per share of common stock, based on an assumed offering price of $ per share, the midpoint of the range indicated on the cover page of this prospectus and after deducting the
estimated
underwriting discounts and commissions and estimated offering expenses payable by us. For purposes of estimating net proceeds, we are assuming that the public offering price will be
$
per share, which is the midpoint of the range indicated on the cover page of the prospectus.
Each
$ increase (decrease) in the assumed offering price of $ per share would increase (decrease) the net
proceeds to us from this offering, after deducting the estimated
underwriting fees and estimated offering expenses payable by us, by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of
this
prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 100,000 shares in the number of shares we are offering would increase
(decrease) the net proceeds to us from this offering, after deducting the estimated underwriting fees and estimated offering expenses payable by us, by approximately $ million,
assuming
the offering price stays the same. An increase of 100,000 shares in the number of shares we are offering, together with a $ increase in the assumed offering price per share, would
increase the net proceeds to us from this offering, after deducting the estimated placement agent fees and estimated offering expenses payable by us, by approximately $ million. A
decrease of 100,000 shares in the number of shares we are offering, together with a $ decrease in the assumed offering price per shares, would decrease the net proceeds to us from
this
offering, after deducting the estimated underwriting fees and estimated offering expenses payable by us, by approximately $ million. We do not expect that a change in the offering
price
or the number of shares by these amount would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need
to seek additional capital.
We
intend to use a substantial portion of the net proceeds from this offering to acquire other businesses that we believe will be synergistic with our current businesses. As of the date of this
offering, we have no current definitive agreements or commitments with respect to any acquisition other than the Golden Girls acquisition for which we have signed a definitive agreement; however, the
conditions to closing have not yet been satisfied as of the date of this prospectus. The remaining net proceeds will be used for general corporate purposes, including ongoing operations, expansion of
the business, further research and development, and potential acquisitions.
The
expected use of the net proceeds from this offering represents our current intentions based on our present plans and business conditions. As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the net proceeds to be received from this offering. The amounts and timing of our actual expenditures will depend on numerous factors including costs of any
companies we acquire. Accordingly, our management will have broad discretion over the application of the net proceeds from this offering, and investors will be relying on the judgment of management
regarding the application of the net proceeds from the offering. We may find it necessary or advisable to reallocate the net proceeds of this offering; however any such reallocation would be
substantially limited to the categories set forth above as we do not intend to use the net proceeds for other purposes. Pending use of the proceeds from this offering, we plan to invest the net
proceeds in government securities and other short-term investment grade, marketable securities.
37
Table of Contents
DETERMINATION OF OFFERING PRICE RANGE
The offering price range set forth on the cover of this prospectus has been determined by negotiation between us and the underwriters. Among the
factors considered in determining the offering price range for our shares of common stock to be offered in this offering were:
-
- the price and trading history of our common stock on the OTCQX Marketplace;
-
- our history and our prospects;
-
- the industry in which we operate;
-
- the status and development prospects of our services and proposed services;
-
- the previous experience of our executive officers; and
-
- the general condition of the securities markets at the time of this offering.
The
offering price range stated on the cover page of this prospectus should not be considered as an indication of the actual value of our shares. The price of our shares is subject to change as a
result of market conditions and other factors, and we cannot assure you that shares purchased in this offering can be resold at or above their public offering prices.
PRICE RANGE OF OUR COMMON STOCK AND OTHER RELATED INFORMATION
Since February 2014 our common stock has been traded on the OTC Markets OTCQX under the symbol "CVSL." From February 2008 until February 2014, our
common stock had been traded on the OTC Bulletin Board and the OTC Markets OTCQB under the symbol "CVSL." The last reported sale price of our common stock on the OTCQX on was
$ . Our common stock has been approved for listing on the NYSE MKT under the symbol "CVSL," subject to meeting all of the NYSE listing standards on the date of this offering and
official
notice of issuance.
The
following table sets forth, for the periods indicated, the high and low closing bid price quotations for our common stock. The quotes represent inter-dealer prices, without adjustment for retail
mark-up, markdown or commission and may not represent actual transactions.
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
Quarterly Periods for the Year 2014 |
|
|
|
|
|
|
|
Ended March 31 |
|
$ |
.55 |
|
$ |
.35 |
|
Ended June 30 |
|
$ |
.70 |
|
$ |
.35 |
|
Ended September 30 |
|
$ |
1.15 |
|
$ |
.72 |
|
Quarterly Periods for the Year 2013 |
|
|
|
|
|
|
|
Ended March 31 |
|
$ |
.63 |
|
$ |
.06 |
|
Ended June 30 |
|
$ |
.35 |
|
$ |
.20 |
|
Ended September 30 |
|
$ |
.38 |
|
$ |
.22 |
|
Ended December 31 |
|
$ |
.73 |
|
$ |
.36 |
|
Quarterly Periods for the Year 2012 |
|
|
|
|
|
|
|
Ended March 31 |
|
$ |
.40 |
|
$ |
.10 |
|
Ended June 30 |
|
$ |
.25 |
|
$ |
.05 |
|
Ended September 30 |
|
$ |
.13 |
|
$ |
.04 |
|
Ended December 31 |
|
$ |
24 |
|
$ |
.02 |
|
38
Table of Contents
Holders
As of October 14, 2014, we had 487,975,986 shares of common stock outstanding held by approximately 67 holders of record. This
amount excludes 504,813,514 shares issuable to Rochon Capital under certain limited circumstances, as described in the Amended Share Exchange Agreement, and 64,000,000 shares issuable upon
conversion of the RCP V Note.
Transfer Agent
We have retained Fidelity Transfer Company as our transfer agent. They are located at 8915 South 700 East, Suite 102, Sandy, Utah 84070. Their
telephone number is (801) 562-1300.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our common stock
in the foreseeable future. We expect to retain all available funds and future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends, if any,
on our common stock will be at the discretion of our Board and will depend on, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.
39
Table of Contents
CAPITALIZATION
You should read this table in conjunction with the sections of this prospectus entitled "Summary Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements, and in each case, the related notes included elsewhere in this prospectus. The
information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public price.
The
following table sets forth our capitalization as of June 30, 2014:
-
- on an actual basis;
-
- on a pro forma basis as of June 30, 2014 to reflect the conversion of the RCP V Note into 64,000,000 shares
of our common stock upon the closing of this offering; and
-
- on a pro forma adjusted basis to give further effect to the issuance and sale of shares of our
common stock in this offering at an assumed offering price of $ per share (the midpoint of the price range indicated on the cover page of this prospectus), after deducting
underwriting
discounts and commissions and estimated offering expenses payable by us, and the receipt by us of the proceeds of such sale and the conversion of the RCP V Note into 64,000,000 shares of our
common stock upon the closing of this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Pro Forma |
|
Pro Forma
As Adjusted(1) |
|
Long-term debt, including current portion |
|
$ |
26,405,630 |
|
|
5,124,533 |
|
|
|
|
Common stock, $0.0001 par value: 5,000,000,000 shares authorized, 487,712,326 shares issued and outstanding, actual; 5,000,000,000 shares
authorized, 551,712,326 shares issued and outstanding, pro forma 5,000,000,000 shares authorized, , shares issued and outstanding pro forma as adjusted |
|
|
48,771 |
|
|
55,171 |
|
|
|
|
Additional paid in capital |
|
|
15,052,359 |
|
|
36,327,056 |
|
|
|
|
Accumulated deficit |
|
|
(19,767,575 |
) |
|
(19,767,575 |
) |
|
|
|
Accumulated other comprehensive loss |
|
|
(80,481 |
) |
|
(80,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity attributable to CVSL |
|
|
(4,746,927 |
) |
|
16,534,171 |
|
|
|
|
Stockholders' equity attributable to non-controlling interest |
|
|
6,628,022 |
|
|
6,628,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
1,881,095 |
|
|
23,162,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
28,286,726 |
|
|
28,286,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- A
$1.00 increase (decrease) in the assumed public offering price of $ per share of our common stock (the midpoint of the range indicated on
the cover page of this prospectus), would increase (decrease) each of cash, total shareholders' deficit and total capitalization by $ assuming the number of shares offered by us,
as set
forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
40
Table of Contents
We
may also increase or decrease the number of shares we are offering. Each increase (decrease) of 100,000 shares in the number of shares offered by us would increase (decrease) the as adjusted
amount of cash, total shareholders' equity and total capitalization by approximately $ million, assuming that the assumed public offering price remains the same, and after
deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The
number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of October 14, 2014 and includes 64,000,000 shares of our common stock
to be issued to RCP V upon the conversion of the RCP V Note at the closing of this offering and does not include:
-
- 1,375,000 shares of common stock issuable upon exercise of outstanding warrants, 375,000 of which have been issued
to a potential supplier and have an exercise price of $0.55 per share and 1,000,000 of which have been issued to a consultant and have an exercise price of
$0.64;
-
- 504,813,514 shares of common stock issuable to Rochon Capital, which may be issued to Rochon Capital under certain
limited circumstances, as described in the Amended Share Exchange Agreement. The Amended Share Exchange Agreement, which will become effective upon the consummation of this offering, limits Rochon
Capital's right to be issued the Second Tranche Stock solely upon the occurrence of certain stock acquisitions by third parties or the announcement of certain tender or exchange offers of our common
stock. Upon issuance, such shares will possess no rights other than voting rights and will be subject to strict transfer restrictions. See the section of this prospectus entitled "Certain
Relationships and Related Party Transactions"; and
-
- the exercise by the underwriters of their option to purchase up to additional shares of common stock from
us in the offering.
41
Table of Contents
DILUTION
If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the
offering price per share of our common stock and the pro forma adjusted net tangible book value per share of our common stock after the offering.
Our
historical net tangible book value as of June 30, 2014 was ($ million), or ($ ) per share of our
common stock. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding.
Prior to considering the effects of the proceeds of this offering, but after giving effect to the automatic conversion of the RCP V Note into 64,000,000 shares of our common stock upon the
closing of this offering, our pro forma net tangible book value as of June 30, 2014 was approximately $ million or approximately
$ per share.
After giving effect to our issuance and sale of shares of our common stock in this offering at an assumed offering price of
$ per share (which is the midpoint of
the price range indicated on the cover page of this prospectus), less underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book
value as of June 30, 2014 would have been $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value per share of
$ to our existing shareholders and immediate dilution of $ per share to new investors purchasing common
stock in this offering. The following table illustrates this
dilution on a per share basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Offering Price Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of June 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in pro forma net tangible book value attributable to new investors participating in this offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share as of June 30, 2014, after giving effect to this offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new investors participating in this offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their option to purchase additional shares of our common stock at an assumed offering price of $ per share (which is the midpoint of the price range
indicated on the cover page of this prospectus), the pro forma as adjusted net tangible book value after this offering would be $ per share, representing an increase in pro forma
as
adjusted net tangible book value of $ per share to existing shareholders and immediate dilution in net tangible book value of
$ per share to purchasers in this offering
at the assumed offering price.
The following table summarizes, on a pro forma as adjusted basis as of June 30, 2014, the total number of shares purchased from us, the total consideration paid, or to be paid, and the average
price per share paid or to be paid, by existing shareholders and by new investors participating in this offering at the assumed public offering price of $ per share (which is the
midpoint of the price range indicated on the cover page of this prospectus), before deducting underwriting discounts and commissions and estimate offering expenses payable by us. As the table shows,
new investors
42
Table of Contents
purchasing
shares in this offering will pay an average price per share substantially higher than our existing shareholders paid.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares purchased |
|
Total consideration |
|
|
|
|
|
Average
Price
Per Share |
|
|
|
Number |
|
Percentage |
|
Amount |
|
Percentage |
|
Existing shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above includes 64,000,000 shares of our common stock to be issued to RCP V upon the conversion of the RCP V Note at the closing of this offering and excludes:
The
table above excludes:
-
- 1,375,000 shares of our common stock issuable upon exercise of outstanding warrants, 375,000 of which have been
issued to a potential supplier at an exercise price of $0.55 per share and 1,000,000 of which have been issued to a consultant at an exercise price of
$0.64;
-
- 504,813,514 shares of common stock, which may be issued to Rochon Capital under certain limited circumstances as
described in the Amended Share Exchange Agreement. The Amended Share Exchange Agreement, which will become effective upon the consummummation of this offering, 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. Upon issuance,
such shares will possess no rights other than voting rights and will be subject to strict transfer restrictions. See the section of this prospectus entitled "Certain Relationships and Related Party
Transactions"; and
-
- the exercise by the underwriters of their option to purchase up to additional shares of common stock from
us in the offering.
43
Table of Contents
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
On March 18, 2013, we acquired a controlling interest in TLC. The transaction resulted in us acquiring 64.6% of the voting stock and 51.7% of
all the stock in TLC in consideration of our issuance of a $6,500,000 convertible note and a $4,000,000 promissory note. We incurred acquisition-related costs of approximately $338 thousand
recorded during the fourth quarter of 2012 and $138 thousand during the first quarter of 2013. The costs were recorded in selling, general and administrative expenses in the consolidated income
statements.
The
following unaudited pro forma condensed consolidated statement of operations is presented to show the effect of the TLC acquisition on our historical condensed consolidated statement of
operations. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2013 assumes the transaction was consummated on January 1, 2013.
An unaudited pro forma condensed consolidated balance sheet has not been presented, as the acquisition has already been fully reflected in our consolidated balance sheet in our Quarterly Report
on Form 10-Q for the period ended March 31, 2013 and in all subsequent financial statements we have filed with the Securities and Exchange Commission. Additionally, the pro forma
condensed consolidated statement of operations for the three months ended March 31, 2013 was included in our Quarterly Report on
Form 10-Q for the period ended March 31, 2013. The unaudited pro forma condensed consolidated statement of operations is presented for illustration purposes only and is not
necessarily indicative of the results of operations that would have occurred had the transaction been consummated at the beginning of the period, nor are they necessarily indicative of our future
operating results.
44
Table of Contents
CVSL Inc.
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVSL Inc.
As Reported
for 2013 |
|
TLC
for the period
January 1 -
March 18, 2013 |
|
Pro Forma
Adjustments |
|
Pro Forma
2013 for
CVSL Inc.
including TLC
as of
January 1 |
|
Revenues |
|
$ |
84,850,502 |
|
$ |
16,480,192 |
|
|
|
|
$ |
101,330,694 |
|
Program costs and discounts |
|
|
(20,139,341 |
) |
|
(3,765,365 |
) |
|
|
|
|
(23,904,706 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
64,711,161 |
|
|
12,714,827 |
|
|
|
|
|
77,425,988 |
|
Costs of Sales |
|
|
29,027,643 |
|
|
6,237,000 |
|
|
(335,197 |
)* |
|
34,929,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
35,683,518 |
|
|
6,477,827 |
|
|
335,197 |
|
|
42,496,542 |
|
Commissions and incentives |
|
|
16,432,061 |
|
|
3,242,091 |
|
|
|
|
|
19,674,152 |
|
Selling, general, and administrative |
|
|
27,918,877 |
|
|
5,834,927 |
|
|
(273,689 |
)* |
|
33,480,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(8,667,420 |
) |
|
(2,599,191 |
) |
|
608,886 |
|
|
(10,657,725 |
) |
Gain on marketable securities |
|
|
(499,949 |
) |
|
|
|
|
|
|
|
(499,949 |
) |
Interest expense, net |
|
|
1,609,313 |
|
|
249,534 |
|
|
77,042 |
* |
|
1,935,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision |
|
|
(9,776,784 |
) |
|
(2,848,725 |
) |
|
531,844 |
|
|
(12,093,665 |
) |
Income tax provision |
|
|
273,000 |
|
|
|
|
|
|
|
|
273,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(10,049,784 |
) |
|
(2,848,725 |
) |
|
531,844 |
|
|
(12,366,665 |
) |
Loss from discontinued operations, net of income
taxes of $0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(10,049,784 |
) |
|
(2,848,725 |
) |
|
531,844 |
|
|
(12,366,665 |
) |
Net loss attributable to non-controlling interest |
|
|
(1,518,719 |
) |
|
(1,375,934 |
) |
|
227,438 |
|
|
(2,667,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders' |
|
$ |
(8,531,065 |
) |
$ |
(1,472,791 |
) |
$ |
304,406 |
|
$ |
(9,699,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
994,102,491 |
*** |
|
|
|
|
|
|
|
994,102,491 |
*** |
Loss from continuing operations** |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
(0.01 |
) |
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
|
|
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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- *
- Pro
forma adjustments include reduced depreciation and amortization expense assuming the purchase price adjustments occurred on January 1, 2013,
elimination of acquisition costs included in the first quarter of 2014 results and increased interest expense associated with the $6.5 million convertible note and $4.0 million
promissory note for the time period January 1, 2013 to March 18, 2013.
- **
- Excludes
loss attributable to non-controlling interest.
- ***
- On
October 10, 2014, we entered into the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering, which
provides for the issuance of 504,813,514 shares of our common 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. See the section of this prospectus entitled "Certain Relationships and Related Party Transactions." Upon the consummation of this offering, the
504,813,514 shares of our common stock issuable to Rochon Capital will no longer be included in the earnings per share calculation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the
related notes that appear elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and
the timing of certain events may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled "Risk
Factors," "Special Note Regarding Forward-Looking Statements" and elsewhere in this prospectus.
Overview
We operate a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce
strategies to drive a high-growth global business. We are engaged in a long-term strategy to develop a large, global diverse
company that combines the entrepreneurship, innovation and relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a large scale company.
We
seek to acquire companies primarily in the direct selling (micro-enterprise) business and companies potentially engaging in businesses related to micro-enterprise and to build within this sector an
interconnected "network of networks," in which social connections aided by the power of social media will be combined with relationship-based commerce (that is, commerce conducted between friends,
neighbors, relatives and colleagues). Our goal is to form a virtual, online economy with the sellers and customers from the businesses we acquire, which will offer its members a myriad of benefits and
advantages. Our acquisitions form the platform for this growing online economy.
Through
a series of seven recent acquisitions of direct selling companies offering a diverse product mix, we have expanded our product offerings as well as our base of sales representatives and
customers. In addition to our acquisition of TLC, we completed the acquisition of the assets or stock of the following companies in 2013 and during the first quarter of 2014: Your Inspiration at
Home, Ltd., an Australian company ("YIAH") (a direct seller of hand-crafted spices from around the world), Tomboy Tools, Inc., a Colorado company ("TBT") (a direct seller of a line of
tools designed for women as well as home security monitoring services), Agel Enterprises, LLC ("Agel") (a direct seller of nutritional supplements and skin care products), My Secret Kitchen
Limited ("MSK"), (a direct seller of a unique line of gourmet food products), Paperly, LLC ("Paperly"), (a direct seller of custom stationery and paper products), and Uppercase
Living, LLC ("Upper Case") (a direct seller of customizable vinyl expressions for display on walls). During the first quarter of 2014, we entered into a definitive agreement to acquire Golden
Girls LLC ("Golden Girls") (a direct seller and purchaser of jewelry for cash), but have not yet closed this transaction. Each company we acquire maintains its own unique product line,
independent sales representatives and culture. Our objective with each acquisition is to maintain these unique elements, while reducing the cost of operations and goods for each acquired company
through economies of scale, operating efficiencies.
We
have grown at a rapid pace as a result of our recent acquisitions. With each acquisition we have expanded our product base and our base of independent sales representatives and potential customers.
In this respect, we believe we have something valuable that social media companies wish they had. Social media companies help people stay connected, but have been unable to fully translate these
connections directly into commerce. In contrast, our companies' virtual communities of sellers and customers are already conducting commerce, much of it using our online business tools, such as
personalized web sites. This convergence of personal relationships, social media and relationship-based commerce is what gives us our unique blend of attributes for growth. As we scale up through
additional acquisitions and organic growth, we expect these attributes will be magnified.
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Our
combined revenues have increased significantly as a result of the acquisitions we have made in the past 18 months. Our revenues increased by $84.0 million for the year ended
December 31, 2013 as compared to our revenues for the year ended December 31, 2012 and our operating losses for the year ended December 31, 2013 increased by $4.5 million
as compared to our operating losses for the year ended December 31, 2012. Our revenues were $24.6 million and $51.3 million for the three and six months ended
June 30, 2014, respectively, as compared to our revenue of $20.6 million and $24.8 million for the three and six months ended June 30, 2013, respectively. Our operating
losses for the three and six months ended June 30, 2014 increased by $0.8 million and $2.5 million, respectively, as compared to our operating losses for the three and six months
ended June 30, 2013. Collectively, TLC, Agel and YIAH represented over 90% of our reported revenues in 2013. We do not view any product groups as segments but have grouped similar products into
the following five categories for disclosure purposes only: gourmet foods, nutritional and wellness, home décor, publishing and printing and other. For the year ended
December 31, 2013, approximately $1.5 million or 1.7% of our revenues were derived from the sale of gourmet food products, $9.3 million or 11.0% of our revenues were derived from
the sale of nutritional and wellness products, $72.7 million or 85.6% of our revenues were derived from the sale of home décor products, $1.0 million or 1.1% of our
revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.5% of our revenues were derived from the sale of our other products. During the
year ended December 31, 2012, all of our revenues were derived from the sale of our publishing and printing services and products. For the six months ended June 30, 2014, approximately
$2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of our revenues were derived from the sale of nutritional and wellness
products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products, $0.6 million or 1.2% of our revenues were derived from the sale of our
publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale of our other products. For the six months ended June 30, 2013,
$24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and $0.5 million or 2.0% of our revenues were derived from the sale of our
publishing and printing services and products.
We
expect that our revenue will continue to increase as we continue to acquire companies and we continue to integrate the companies we have acquired with newly-acquired companies. We believe that our
visibility in the direct selling industry increased during 2013, as news about us circulated through the industry and increasing numbers of people in the industry became more familiar with CVSL's
strategy and progress. We also believe that this visibility has made us more attractive to potential acquisition targets. At the same time, however, the costs of growth through acquisition, such as
legal costs and other due diligence-related costs, have been significant and have affected CVSL's profitability. In addition, conditions affecting each individual company have posed challenges to our
company as a whole. We anticipate that our operating losses and net loss will decrease over time as we are able to implement certain operating and administrative efficiencies for the acquired
companies as a whole.
Our
results are impacted by economic, political, demographic and business trends and conditions in the United States as well as globally. A rise or fall in economic conditions, including such factors
as inflation, economic confidence, recession and disposable income can affect the direct selling industry, as the independent sales representatives who comprise the sales forces of our various
companies make decisions based, at times, on those economic factors. A weak economy historically has been favorable to micro-enterprise/direct selling companies, because in times of economic distress,
increasing numbers of individuals look for ways to supplement or replace their income and becoming an independent sales representative can provide supplemental income. Similarly, when jobs are lost,
many are forced to seek independent means of earning a living or supplementing family income. However, economic distress can reduce customers' disposable income, making it more difficult to convince a
customer to buy a non-essential product or service from a direct seller and therefore negatively impacting our revenue.
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Political
changes in a stable country like the United States do not generally have much impact on a direct selling business, unless there are significant regulatory changes that make it more difficult
for our companies to do business. Outside the United States, political instability can have a potential effect on our business in any particular country, if that country is a significant market for
one of our companies. For example, Ukraine and Russia are markets for one of our companies, Agel. To date, the instability in those countries has not had a major impact on Agel's ability to do
business; however, there can be no assurance that it will not have a negative impact in the future. As we grow, our presence in various international markets could be affected by instability in any of
those markets. Even amid instability, consumers still tend to buy and sell products.
The largest demographic factor affecting our business is the aging of the population. As a sales force and customer base ages, in some cases their selling or buying power could decrease. Offsetting
this is the fact that aging also allows more free time to carry on a part-time business, and aging consumers often make purchases for children and grandchildren. As a sales force ages, it is necessary
to try to replace retiring members with younger recruits. We are attempting to do this by marketing more effectively to younger demographics, such as through the use of technology. The male/female
demographics' effect on our business depends upon the company: some CVSL companies are predominantly male, others female.
Various
business trends can affect our companies. For example, tightening of credit availability can affect our ability to raise capital for growth. In addition, tighter credit availability can impact
customer disposable income, thus negatively impacting spending. The trend toward greater reliance on Internet technology requires us to continually keep our internal and external Internet-based tools
in good order (financial management/web sites for sales forces, etc.). The trend toward greater speed and personalization in business (through social media) requires us to put more emphasis on
communicating within our businesses through those methods.
The
micro-enterprise sector also has the benefit of diversity, in the sense that it includes many different categories of products and services, spread across different demographics and across global
markets. When one segment of our direct selling company weakens, it is likely that another will strengthen or remain unaffected as independent sales representatives move around and follow
opportunities. We believe this diversification is a particular strength of ours, as we already have sales from seven different product categories and in multiple global markets. We expect that this
diversification should enable us to take advantage of changing trends in the industry. Further acquisitions are expected to increase this diversification.
In
considering appropriate acquisition targets, we anticipate that we will evaluate companies of varying sizes in our targeted space. We do not plan to limit our acquisition opportunities to companies
of any particular size, and we will periodically evaluate smaller companies in our targeted space, particularly companies that management believes are accretive or would otherwise add value to one or
more of our businesses. We will consider companies that are currently profitable and that are looking to enhance their growth by leveraging the global foundation for growth we have built, as well as
companies that can, in our opinion, be strengthened by improved strategic and tactical guidance. Companies that have experienced financial and operational difficulties are the best candidates to
benefit almost immediately from cost reductions that our shared resources can provide. All of the acquisitions, large or small, profitable or otherwise, will add additional coordinates of sellers and
customers, thereby adding size and continually increasing the scope of our network of networks.
Overview of Recently Acquired Companies and Companies to be Acquired
Happenings Communications Group
On September 25, 2012, we acquired 100% of HCG as part of the Share Exchange Agreement. HCG publishes a monthly magazine, Happenings Magazine
that highlights events and attractions,
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entertainment
and recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, and can provide such services to direct
selling businesses. Services HCG provides may include creating brochures, sales materials, websites and other communications for independent sales representatives and ultimate customers. As a result,
HCG is available to serve as an "in-house" resource for providing marketing and creative services to the direct selling companies that we have acquired and hope to acquire in the future.
The Longaberger Company
In March 2013, we acquired a 51.7% controlling interest in TLC. TLC is a direct selling business based in Newark, Ohio which sells premium
hand-crafted baskets and a line of products for the home, including pottery, cookware, wrought iron and other home décor products, through a nationwide network of independent sales
representatives. TLC also has showrooms in various states, which offer merchandise and serve as support centers for independent sales representatives. We acquired, in two separate transactions, a
total of 1,616 shares of TLC's Class A common stock ("TLC Class A Common Stock"), representing 64.6% of the issued and outstanding TLC Class A Common Stock, which class has sole
voting rights at TLC, and acquired 968 shares of TLC's Class B common stock, which are non-voting shares ("TLC Class B Common Stock" and, together with the TLC Class A Common
Stock, the "TLC Stock"). Together, the two transactions resulted in CVSL acquiring 51.7% of all issued and outstanding TLC Stock. As consideration, we issued to a trust of which Tamala Longaberger is
the trustee (the "Trust"), a Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6.5 million (the "Convertible Note"), and, to
TLC, we issued a ten year, $4.0 million unsecured promissory note, dated March 14, 2013, payable in monthly installments. On June 14, 2013, the Convertible Note was converted into
32,500,000 shares of our common stock. At the time of the acquisition, TLC had $22.9 million in liabilities, which after the transaction were reflected in our financial statements in addition
to the additional debt incurred as a result of the issuance of the notes to the Trust and TLC.
Along
with its well-respected brand, its hand-crafted products and its loyal sales force, one of the many aspects of TLC's operation that was attractive to us was its abundance of assets. TLC had
$15.6 million in inventory as of December 31, 2013, compared to $19.3 million at December 31, 2012, with further reductions planned in future quarters. We have worked with
TLC to begin reducing its inventory through selling more items online, through TLC's showrooms (which provide commissioned sales to members of its independent sales force) and by expanding into new
territories. Another challenge we have faced with TLC is bringing its costs and selling, general and administrative expenses under control. We believe the sale of excess inventory will help us to
generate cash, which will help us to reduce our liabilities and fund our operations.
Another
characteristic of TLC which we found attractive was the variety of fixed assets and real estate that were being underutilized in TLC's operations. We intend to make use of these assets at our
other CVSL companies (including those we own now and those we will acquire in the future). For example, YIAH has begun operations in North America, operating out of TLC's Newark, Ohio office building
and Project Home has shifted inventory and distribution to TLC's Ohio facilities. While we intend to find new uses for certain under-utilized assets, other assets owned by TLC are non-core assets
which can be sold to further reduce our liabilities and generate positive cash.
Your Inspiration At Home
In August 2013, we formed Your Inspiration At Home, Pty. Ltd., an Australian corporation, which acquired substantially all of the assets of
YIAH. YIAH is an innovative and award-winning direct seller of hand-crafted spices from around the world. YIAH originated in Australia and has expanded its operations to North America during the third
quarter of 2013. We acquired substantially all the assets
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of
YIAH in exchange for total consideration of 4,512,975 shares of our common stock and the assumption of liabilities of $140,647 in connection with the acquisition.
Project Home
In October 2013, we formed CVSL TBT, LLC, a Texas limited liability company, which acquired substantially all of the assets of Tomboy Tools,
Inc., a direct seller of a line of tools designed for women as well as home security systems. We acquired substantially all the assets of Tomboy Tools, Inc. in exchange for total consideration of
1,766,979 shares of our common stock and the assumption of liabilities of $471,477 in connection with the acquisition.
Agel Enterprises
In October 2013, we formed Agel Enterprises, Inc., a Delaware corporation which acquired substantially all of the assets of Agel Enterprises,
LLC. Agel is a direct selling business based in Utah that sells nutritional supplements and skin care products through a worldwide network of independent sales representatives. Agel's products are
sold in over 40 countries. Agel acquired substantially all the assets of Agel Enterprises, LLC in exchange for total consideration of 7,446,600 shares of our common stock (of which 572,549
shares were issued in January 2014), the delivery of a purchase money note, dated the closing date, in the original principal amount of $1.7 million and the assumption of $9.1 million in
liabilities, which after the transaction were reflected in our financial statements in addition to the additional $1.7 million purchase money note.
Paperly
In December 2013, we formed Paperly, Inc., a Delaware corporation, which acquired substantially all of the assets of Paperly, a direct seller
that allows its independent sales representatives to work with customers to design and create custom stationery through home parties, events and individual appointments. We acquired substantially all
the assets of Paperly in exchange for total consideration of 155,926 shares of our common stock and payment of an earn out of 10% of earnings before interest, taxes, depreciation and amortization
("EBITDA") from 2014 to 2016. The shares of our common stock for this acquisition were issued in 2014. We assumed liabilities of $110,022 in connection with the acquisition.
My Secret Kitchen
In December 2013, we formed CVSL A.G., a Switzerland company, which acquired a 90% controlling interest of MSK, an award-winning United Kingdom-based
direct seller of a unique line of food products. We acquired substantially all the stock of MSK in exchange for total consideration of 317,804 shares of our common stock and payment of an earn-out of
5% of MSK's EBITDA from 2014 to 2016. The shares of our common stock for this acquisition were issued in January 2014. At the time of the acquisition, MSK had $168,515 in liabilities, which after the
transaction were reflected in our financial statements.
Uppercase Living
In March 2014, we formed Uppercase Acquisition, Inc. a Delaware corporation which acquired substantially all the assets of Uppercase Living, a
direct seller of customizable vinyl expressions for display on walls. Consideration consisted of 578,387 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.
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Golden Girls
During the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls, a direct seller and purchaser of jewelry for cash.
Upon the closing of the acquisition, we will acquire substantially all the assets of Golden Girls in exchange for shares of our common stock. As of the date of this filing, this transaction has not
yet closed and there can be no assurance that it will close. We do not expect to assume any liabilities in connection with this acquisition.
Recent Developments
On July 31, 2014, TLC and CFI entered into the Sale Leaseback Agreement pursuant to which TLC agreed to sell to CFI certain real estate owned
by TLC and used by TLC in its manufacturing, distribution and showroom activities. The real estate described in the Sale Leaseback Agreement was purchased by CFI and the aggregate purchase price was
$15,800,000 ($4,400,000 of which is held with CFI as a security deposit and will be released to TLC over time as certain targets are met).
Concurrently
with entering into the Sale Leaseback Agreement, we entered into the Master Lease Agreement with CFI. The Master Lease Agreement provides for a 15-year lease term and specifies the base
quarterly rental for the real estate leased. The base quarterly rent in the first year is $551,772 and increases 3% annually each year thereafter. During the lease term, all of the costs, expenses and
liabilities associated with the real estate are to be borne by us, and we are entitled to the unlimited use of the real estate. The Master Lease Agreement includes customary events of default,
including non-payment by us of the quarterly rental or other charges due under the Master Lease Agreement. We used the proceeds from the sale of the real estate to pay off outstanding bank debt and
intend to use the remaining proceeds for working capital purposes.
Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013
Revenues
Our substantial growth during 2013 results in significant challenges in the comparison of year-over-year results. As described above, we acquired TLC
during the first quarter of 2013, YIAH during the third quarter of 2013, Project Home, AEI, MSK and Paperly during the fourth quarter of 2013 and Uppercase Living in the first quarter of 2014. As
such, we caution that a comparative discussion of our results of operations for the three and six months ended June 30, 2014 and 2013 may not be meaningful on a quantitative or qualitative
basis.
In
addition, our consolidated financial statements for the six months ended June 30, 2013 reflect only partial-quarter revenue for TLC and no revenue for any other companies we acquired in
2013, as these companies were all acquired after June 30, 2013.
During
the three and six months ended June 30, 2014, our revenues were $24.6 million and $51.3 million, respectively, as compared to $20.6 million and $24.8 million
for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2014, TLC, Agel and YIAH collectively represented over 90% of the reported
revenues. For the six months ended June 30, 2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of
our revenues were derived from the sale of nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products,
$0.6 million or 1.2% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale
of our other products. For the six months ended June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and $0.5 or 2.0%
of our revenues were derived from the sale of
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our
publishing and printing services and products. Revenues by product groups are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months ended
June 30, |
|
|
|
2014 |
|
2013 |
|
Gourmet Food Products |
|
$ |
2,608 |
|
|
|
|
Home Décor |
|
$ |
27,458 |
|
$ |
24,349 |
|
Nutritionals and Wellness |
|
$ |
20,156 |
|
|
|
|
Publishing & Printing |
|
$ |
613 |
|
$ |
495 |
|
Other |
|
$ |
422 |
|
|
|
|
Operating Losses
Our operating losses were $4.1 million and $6.8 million for the three and six months ended June 30, 2014, respectively, as
compared to $3.3 million and $4.3 for the three and six months ended June 30, 2013, respectively. The increase in operating losses was the result of the six acquisitions completed in
2013.
Operating Expenses
Commissions and Incentives
Commissions and incentives represent costs to compensate and incentivize members of our independent sales force. These expenses may include costs for
certain corporate sponsored events that contain qualification requirements in order for individuals to attend. During the three and six months ended June 30, 2014, we incurred approximately
$6.0 million and $13.0 million in commissions and incentives costs, respectively, as compared to $2.7 million and $3.2 million for the three and six months ended
June 30, 2013, respectively. The increase is primarily due to increased commissions paid as a result of the numerous companies that we acquired.
Selling, General and Administrative
Our selling, general and administrative costs were $11.7 million and $21.5 million for the three and six months ended
June 30, 2014, respectively, as compared to $8.1 million and $10.5 million for the three and six months ended June 30, 2013, respectively. The increase is primarily the
result of the addition of various administrative departments at each of the acquired companies, including human resources, legal, information technology, finance and executive, as well as costs
associated with leased buildings. Additionally, we incurred professional and legal fees associated with the acquisitions and the pursuit of potential acquisitions. Included in selling, general and
administrative expenses are fees paid to Richmont Holdings pursuant to a Reimbursement of Services Agreement for services provided by Richmont Holdings incurred in identifying, analyzing, performing
due diligence, structuring and negotiating potential transactions. For the three and six months ended June 30, 2014, we recorded $0.5 million and $1.0 million in reimbursement
expenses, respectively, as compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2013, respectively.
Loss on Marketable Securities
Our loss on marketable securities for the three and six months ended June 30, 2014 totaled $58 thousand and $0.6 million,
respectively. We did not have any investments for the three and six months ended June 30, 2013.
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Non-controlling Interest
Non-controlling interest was a net loss of $1.0 million and $1.7 million for three and six months ended June 30, 2014,
respectively, as compared to $0.8 million and $0.8 million for the three and six months ended June 30, 2013, respectively. The increase is primarily the result of losses generated
at TLC. Additionally, the six months ended June 30, 2013 only included TLC results for the period beginning March 19, 2013 through June 30, 2013, which was the acquisition date of
TLC.
Results of Operations and Financial Condition for the Years Ended December 31, 2013 and 2012
As noted elsewhere in this prospectus, we acquired six direct selling companies in 2013, which had a dramatic impact on our results of operations. As
such, we caution that a comparative discussion of our results of operations for the years ended December 31, 2013 and 2012, may not be meaningful on a quantitative or qualitative basis.
In
addition, our consolidated financial statements for the year ended December 31, 2013 reflect only partial-year revenue for those companies we acquired in 2013, following their acquisition by
us, and these results do not reflect the operations of Uppercase Living, which we did not acquire until March 2014.
Revenues
For the year ended December 31, 2013, our gross sales increased $84.0 million to $84.9 million, compared to $0.9 million
for the year ended December 31, 2012. For the year ended December 31, 2013, approximately $1.5 million or 1.7% of our revenues were derived from the sale of gourmet food products,
$9.3 million or 11.0% of our revenues were derived from the sale of nutritional and wellness products, $72.7 million or 85.6% of our revenues were derived from the sale of home
décor products, $1.0 million or 1.1% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.5% of our
revenues were derived from the sale of our other products. During the year ended December 31, 2012, all of our revenues were derived from the sale of our publishing and printing services and
products.
Revenues
by product groups for the years ended December 31 are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Gourmet Food Products |
|
$ |
1,483 |
|
$ |
|
|
Home Décor |
|
$ |
72,666 |
|
$ |
|
|
Nutritionals and Wellness |
|
$ |
9,312 |
|
$ |
|
|
Publishing & Printing |
|
$ |
951 |
|
$ |
930 |
|
Other |
|
$ |
439 |
|
$ |
|
|
Operating Losses
Our operating losses were $8.7 million compared to $4.2 million for the years ended December 31, 2013 and 2012, respectively.
The increase in operating losses was the result of the six acquisitions completed in 2013.
Operating Expenses
Commissions and Incentives
We incurred $16.4 million in commissions and incentives costs for the year ended December 31, 2013. The costs represent commissions and
incentive trips earned by the independent sales representatives. Inasmuch as we did not acquire any companies in the direct selling business prior to 2013, we did not
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have
any commission payments in 2012. Commissions and incentives represented 37% of our operating expenses for the year ended December 31, 2013.
Selling, General and Administrative Expenses
Our selling, general and administrative costs increased by $25.6 million to $27.9 million for the year ended December 31, 2013,
as compared to $2.3 for the year ended December 31, 2012. The year-over-year increase was primarily the result of the costs associated with various administrative departments at each of the
companies we have acquired, including human resources, legal, information technology, finance and executive, as well as costs associated with leased buildings. We also incurred professional consulting
fees associated with our consideration and pursuit of potential acquisition targets. Selling, general and administrative expenses represented 63% of our operating expenses for the year ended
December 31, 2013 as compared to 246% for the year ended December 31, 2012. Included in selling, general and administrative expenses for the years ended December 31, 2013 and 2012
are $1.9 million and $450,000, respectively, of fees paid to Richmont Holdings pursuant to a reimbursement of services agreement for due diligence, financial analysis, legal, travel and other
expenses incurred by Richmont Holdings in connection with identifying, analyzing, performing due diligence, structuring and negotiating potential transactions and management of certain of our
operations for us. For the year ended December 31, 2012, HCG's largest expenses were its printing costs of $0.3 million and its compensation costs of $0.4 million.
Interest expense
We incurred interest expense of $1.6 million for the year ended December 31, 2013 compared to $43,000 for the year ended
December 31, 2012. Our increase in interest expense was primarily associated with the $20.0 million convertible note issued to RCP V and debt assumed in the TLC acquisition. The
$20.0 million convertible note and accrued interest will likely be converted to common stock during the second quarter of 2015.
Liquidity and Capital Resources
The table below reflects our highly liquid assets as of June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Cash |
|
$ |
4,176,351 |
|
$ |
3,876,708 |
|
Marketable Securities |
|
|
5,223,472 |
|
|
11,830,252 |
|
Accounts Receivable, net |
|
|
777,871 |
|
|
780,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,177,694 |
|
$ |
16,487,197 |
|
At
June 30, 2014 we had cash and marketable securities of $9.4 million. In December 2012, we received $20.0 million in proceeds from the sale of a convertible note to RCP V which
provided working capital for our current operations and smaller acquisitions. Our investments in marketable securities enable us to also provide needed liquidity for acquisitions, debt service and
operating expenses.
Our
principal uses of cash have included legal and professional fees associated with our acquisitions, legal, due diligence and other fees related to other potential acquisitions and the cost of
buying inventory. We plan to continue acquiring additional businesses engaged in direct selling and intend to fund such acquisitions primarily by issuing shares of our common stock as consideration.
To the extent that we need to pay cash as a portion of the acquisition consideration, we expect to use our cash on hand and, to the extent necessary, to raise any additional cash through debt and/or
equity financing. We expect to fund any large acquisitions from a combination of the proceeds of this offering and
54
Table of Contents
potentially
through other public or private equity or debt offerings. We believe that additional debt or equity financing will be available to us based on the assets and financials of any potential
acquisition candidate we would consider and based on management's experience with debt and equity financings. We expect to be able to raise capital from lenders and equity investors who will
understand our direct selling acquisition strategy, but there is no assurance that we will be able to raise the capital.
Cash Flows
Cash used in operating activities for the six months ended June 30, 2014 was $5.0 million, as compared to net cash used in operating
activities of $0.4 million for the six months ended June 30, 2013. Our principal uses of cash have included legal and professional fees associated with our acquisitions, legal, due
diligence and other fees related to other potential acquisitions, the cost of buying inventory, labor and benefits costs and commissions and incentives.
Net
cash provided by investing activities for the six months ended June 30, 2014 was $7.4 million, as compared to $84 thousand for the six months ended June 30, 2013. Net
cash provided by investing activities was the result of $6.2 million in sales of marketable securities in addition to $1.8 million associated with TLC's sale of a building in the ECO
Business Park in Frazeysburg, Ohio and three properties in Dresden, Ohio. The cash inflows were offset by $0.6 million in capital expenditures primarily associated with our information
technology implementation.
Net
cash used in financing activities was $2.6 million for the six months ended June 20, 2014 as we paid down $1.9 million on our lines of credit and paid $0.8 million in
debt primarily related to the payoff of the term loan with Key Bank. During the six months ended June 30, 2013, we used $0.2 million, primarily related to long-term debt payments.
The
Company's long-term borrowing consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
June 30,
2014 |
|
December 31,
2013 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
21,281,097 |
|
$ |
20,881,096 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,555,293 |
|
|
3,734,695 |
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,496,996 |
|
|
1,649,880 |
|
Promissory Notepayable to Tamala L. Longaberger |
|
|
10.00 |
% |
|
42,000 |
|
|
|
|
Term loanKeyBank |
|
|
|
|
|
|
|
|
427,481 |
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,405,630 |
|
|
26,723,396 |
|
Less current maturities |
|
|
|
|
|
711,398 |
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,694,232 |
|
$ |
25,594,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
to June 30, 2014, Agel issued two promissory notes in the aggregate principal amount of $958,000 to Tamala L. Longaberger. The two notes issued by Agel to Tamala L. Longaberger and
the note issued by TLC to Tamala L. Longaberger bear interest at 10% per annum. The note in the principal amount of $42,000 matures on June 27, 2015 and the other notes in the principal amounts
of $158,000 and $800,000 mature on July 1, 2015 and July 11, 2015, respectively. The notes may be prepaid in whole or in part at any time without premium or penalty. The notes also
provide for a cure period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the
note holder may accelerate the time of payment of the notes.
55
Table of Contents
On
July 31, 2014, we entered into the Master Lease Agreement in connection with the Sale Leaseback Agreement. TLC used approximately $6.2 million from the proceeds of the sale of certain
real estate owned by TLC to repay the outstanding balance owed under the Key Bank Line of Credit.
At
December 31, 2013, we had cash and cash equivalents of approximately $3.9 million, marketable securities of $11.8 million, total current assets of $38.2 million and
working capital of approximately $3.3 million, as compared to cash and cash equivalents of $19.0 million, no marketable securities, total current assets of $19.2 million and
working capital of approximately $18.2 million as of December 31, 2012. The 2012 cash and cash equivalents reflect the $20.0 million proceeds we received in the sale of a
convertible note to RCP V in December 2012 referenced above.
Net
cash used by operating activities for the year ended December 31, 2013 was $4.6 million, as compared to net cash used in operating activities of $1.0 million for the year
ended December 31, 2012.
Our
principal uses of cash have included legal and professional fees associated with the acquisitions, legal, due diligence and other fees related to our consideration of other potential acquisitions
as well as the cost of buying inventory, all of which increased for the year ended December 31, 2013. We plan to acquire additional businesses in 2014 and beyond that are engaged in direct
selling and intend to fund such acquisitions through a variety of means, including by issuing shares of our common stock as consideration, using our cash on hand and if necessary raising cash through
debt and/or equity financing. We believe that additional debt or equity financing will be available to us to be used for future acquisitions, the amount of such financing to be based on the assets and
financials of the acquisition candidate and based on management's experience with respect to debt and equity financing.
As
of December 31, 2013, we had $11.8 million invested in marketable securities. The investments are readily available to provide liquidity for acquisitions, debt service and operating
expenses.
Net
cash used in investing activities for the year ended December 31, 2013 was approximately $5.7 million, as compared to $0 for the year ended December 31, 2012. Net cash used in
investing activities consisted primarily of investments in marketable securities of $16.5 million offset primarily by proceeds from the sale of a golf course owned by TLC and the sale of
marketable securities. We also sold certain marketable securities and obtained cash through our acquisitions.
Net
cash used in financing activities was $4.8 million for the year ended December 31, 2013, as we paid down the term loan with the sale of the TLC golf course, as compared to net cash
provided by financing activities of $20.0 million for the year ended December 31, 2012. During 2012, we received $20.0 million from RCP V through the sale of Convertible Notes.
At
December 31, 2013, we had the following total long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
December 31,
2013 |
|
December 31,
2012 |
|
Convertible Subordinated Unsecured Promissory NoteRCP V (including accrued interest) |
|
|
4.00 |
% |
$ |
20,881,096 |
|
$ |
20,041,644 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,734,695 |
|
|
|
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,649,880 |
|
|
|
|
Term loanKeyBank |
|
|
7.70 |
% |
|
427,481 |
|
|
|
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,723,396 |
|
|
20,041,644 |
|
Less current maturities |
|
|
|
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,594,722 |
|
$ |
20,041,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Table of Contents
The
schedule of maturities of our long-term debt is as follows:
|
|
|
|
|
2014 |
|
$ |
1,128,674 |
|
2015 |
|
|
696,406 |
|
2016 |
|
|
722,928 |
|
2017 |
|
|
750,565 |
|
2018 |
|
|
714,939 |
|
Thereafter |
|
|
1,828,788 |
|
|
|
|
|
|
|
|
|
|
Total excluding convertible note |
|
|
5,842,300 |
|
Convertible note |
|
|
20,881,096 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt including current maturities |
|
$ |
26,723,396 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V LP
On December 12, 2012 (the "Issuance Date"), we received cash proceeds of $20.0 million and issued to RCP V, a Convertible Subordinated
Unsecured Promissory Note, in the original principal amount of $20.0 million. The note is an unsecured obligation and subordinated to any bank, financial institution, or other lender providing
funded debt to us (or any direct or indirect subsidiary of ours), including any debt financing provided by the sellers of any entity(ies) that we may acquire in the future. Principal payments of
$1,333,333 are due and payable on each anniversary of the Issuance Date beginning on the third anniversary of the Issuance Date. A final principal payment, equal to the then unpaid principal balance
of the note, is due and payable on the tenth anniversary of the Issuance Date. The note bears interest at an annual rate of 4%, which interest is payable on each anniversary of the Issuance Date;
provided, however, that interest payable through the third anniversary of the Issuance Date may, at our option, be paid in kind ("PIK Interest"), and any such PIK Interest will be added to the
outstanding principal amount of the note. Beginning 380 days from the Issuance Date, the note may be prepaid, in whole or in part, at any time, without premium or penalty.
On June 17, 2013, the note was amended to extend the date of mandatory conversion of the note from a date that was 380 days from the Issuance Date to provide that the note be mandatorily
convertible into shares of our common stock (subject to a maximum of 64,000,000 shares being issued) within ten days of June 17, 2014. On June 12, 2014, the note was amended to extend
the mandatory conversion date to within ten days of June 12, 2015 or such earlier date as may be mutually agreed by us and RCP V. The full amount of the note (including any and all
accrued interest thereon, whether previously converted to principal or otherwise) will be converted into no more than 64,000,000 shares of common stock at a price of $0.33 per share of our common
stock. On October 10, 2014, RCP V and we mutually agreed to provide for the automatic conversion of the note into 64,000,000 shares of our common stock automatically upon the closing of
this offering.
John
Rochon, Jr., our Vice Chairman and one of our directors and the son of our Chief Executive Officer, is the 100% owner and is in control of Richmont Street LLC ("Richmont Street"), the sole
general partner of RCP V. Michael Bishop, one of our directors, is a limited partner of RCP V.
Promissory NoteLega Enterprises, LLC
On October 22, 2013, we issued a $1.7 million Promissory Note to Lega Enterprises, LLC pursuant to the terms of the Asset
Purchase Agreement between AEI and Agel Enterprises, LLC. The Promissory Note bears interest at 5% per annum, matures on October 22, 2018 and is payable in equal monthly installments of
outstanding principal and interest.
57
Table of Contents
Promissory Notepayable to former shareholder of TLC
On March 14, 2013, we issued a $4.0 million Promissory Note pursuant to the terms of the Purchase Agreement with TLC. The Promissory
Note bears interest at 2.63% per annum, has a ten-year maturity, and is payable in equal monthly installments of outstanding principal and interest.
Promissory Notepayable to Tamala L. Longaberger
On June 27, 2014, Tamala L. Longaberger lent TLC $42,000 and in connection therewith TLC issued a promissory note in the principal
amount of $42,000 to her. The note bears interest at the rate of 10% per annum and matures on June 27, 2015. The company's failure to attain certain milestones, including specified operational
cost-savings, are considered a default under the note as is a default under other loan, security or similar agreements of TLC if the default materially affects any of TLC's property, or ability to
repay the note or perform its obligations under the note or any related document. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure
period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may
accelerate the time of payment of the note.
Line of Credit PayableKey Bank
In July 2014, we used the proceeds that we received under the Sale Leaseback Agreement to repay all amounts owed under the TLC line of credit with
Key Bank. TLC had a line of credit agreement through October 23, 2015. Under the agreement with Key Bank, TLC had available borrowings of up to $12.0 million, calculated in accordance
with a formula primarily based on accounts receivable and inventory. The interest rate for the line of credit was based on Key Bank's prime rate plus 1.75%, or LIBOR plus 3.50%. Interest at
June 30, 2014 and December 31, 2013 was 3.94%. The line of credit balance was $6,633,250, $8,067,573 at June 30, 2014, and December 31, 2013, respectively. The line of
credit was collateralized by substantially all of the assets of TLC. Under the agreement, TLC was subject to certain financial covenants, including a fixed charge coverage ratio and limitations on
capital expenditures, additional indebtedness, and incurrence of liens. TLC was not in compliance with the fixed charge covenant for the period ended June 30, 2014. TLC obtained a waiver for
the fixed charge coverage calculation, as the term loan had been paid in full, and was in compliance with all other the financial covenants at June 30, 2014. The loan is included in the lines
of credit on our consolidated balance sheets.
Term loanKey Bank
In conjunction with the Key Bank line of credit described above, on October 23, 2012, TLC obtained a $6.5 million term loan from Key
Bank. The interest rate on the term loan was either Key Bank's prime rate plus 5.75%, or LIBOR plus 7.50%. The term loan was repayable in monthly installments beginning April 1, 2013 and was
repayable in full on October 23, 2015. As of March 1, 2014, TLC had paid in full the outstanding balance of the term loan through monthly amortization payments and proceeds from our sale
of non-core assets, primarily real estate.
UBS Margin Loan
We have a margin loan agreement with UBS that allows us to purchase investments. The maximum loan amount is based on a percentage of marketable
securities held by us. The interest rate at June 30, 2014 and December 31, 2013 was 1.65% and 1.67%, respectively. The outstanding balance was $1,174,174 and $1,663,534 on
June 30, 2014 and December 31, 2013, respectively. The loan is included in the line of credit on our consolidated balance sheets.
58
Table of Contents
Outstanding Warrants
On May 6, 2014, CVSL issued warrants to purchase up to 250,000 and 125,000 shares of its common stock, respectively, in connection with
exclusivity agreements. The warrants will be exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a
cashless exercise basis at an exercise price of $0.55 per share, representing the average closing price of our common stock for the ten days preceding the issuance. In addition, the warrants provide
for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock
dividend or our recapitalization, reorganization, merger or consolidation. The fair value of the warrants on the date of issuance totaled $116,000.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimations and
assumptions, including those related to the valuation allowances for receivables, inventory and sales returns and allowances, the carrying value of non-current assets and income taxes, on an ongoing
basis. Estimates and assumptions are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results in future periods could differ materially from these
estimates. Significant judgments and estimates used in the preparation of the consolidated financial statements apply to the following critical accounting policies:
Revenue Recognition and Deferred Revenue
We receive payment, primarily via credit card, for the sale of products at the time customers place orders. Sales and related fees such as shipping
and handling, net of applicable sales discounts, are recorded as revenue when the product is shipped and when title and the risk of ownership pass to the customer. Payments received for undelivered
products are recorded as deferred revenue and are included in other current liabilities. Certain incentives offered on the sale of our products, including sales discounts, are classified as a
reduction of revenue. A provision for product returns and allowances is recorded and is founded on historical experience.
Income Taxes
We and our U.S. subsidiaries (excluding TLC) file a consolidated Federal income tax return. Deferred income taxes are provided for temporary
differences between accrual basis and tax bases of asset and liabilities. The principal differences are described in footnote (11) to income taxes to the notes to the annual consolidated
financial statements included in this prospectus. 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.
Impairment of Long-Lived Assets
We review long-lived assets, including property, plant and equipment and other intangibles with definite lives for impairment or whenever events or
changes in circumstances indicated that the carrying amount of such an asset might not be recoverable. When indicators are present, management determines
59
Table of Contents
whether
there has been an impairment of long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or
asset group to the carrying value of the asset. The amount of any resulting impairment is calculated by
comparing the carrying value to the fair value. Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value. Assets or asset groups
are determined at the lowest level possible for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets whose aggregate undiscounted cash
flows are less than its carrying value, the assets are considered potentially impaired and actual impairments, if any, would be determined to the extent the assets carrying value exceeds its aggregate
fair value.
Goodwill and Other Intangibles
We perform our goodwill and other indefinite-lived intangible impairment test annually or when changes in circumstances indicate an impairment event
may have occurred by estimating the fair value of each reporting unit compared to its carrying value. Our reporting units represent an operating segment or a reporting level below an operating
segment.
Additionally,
the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods.
We use a discounted cash flow model and a market approach to calculate the fair value of its reporting units. The model includes a number of significant assumptions and estimates regarding future cash
flows and these estimates could be materially impacted by adverse changes in market conditions.
Other Accounting Policies and Recent Accounting Pronouncements
See footnote (2), Summary of Significant Accounting Policies, to our consolidated annual financial statements included in this prospectus.
60
Table of Contents
BUSINESS
Overview
We operate a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce
strategies to drive a high-growth global business. We are engaged in a long-term strategy to develop a large, global, diverse, company that combines the entrepreneurship, innovation and
relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a large scale company. We are building an online "community" consisting of a growing number of
entrepreneurs and their customers, who can share various economic benefits of membership. Our growth is supported by a highly disciplined acquisition strategy focused on quality targets that can
benefit from our significant operational expertise, turnaround strategies, financial resources, access to innovative technologies, and core infrastructure. We completed our first seven acquisitions of
direct selling companies during 2013
and in the first quarter of 2014 and currently have a presence in seven major product categories: home décor, gourmet foods and spices, nutritional supplements, skin care, home
improvement, stationery and home security. During 2013, we had $84.9 million in revenues. The following table sets forth our quarterly revenues for the fiscal year ended 2013, gross sales for
first quarter of 2014 and aggregate gross sales for our four most recent reported quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2013 |
|
Fiscal Year 2014 |
|
Trailing Four |
|
|
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
Q2 |
|
Quarters |
|
Revenues |
|
$ |
4,268,010 |
|
$ |
20,116,868 |
|
$ |
23,750,749 |
|
$ |
36,810,551 |
|
$ |
26,670,921 |
|
$ |
24,586,118 |
|
$ |
111,818,339 |
|
Acquisitions
Our disciplined acquisition strategy is derived from the industry knowledge and operating expertise of our management team, which we believe allows
us to identify, evaluate and integrate premium micro-enterprise companies that can benefit from our company's
resources, while contributing to our overall growth strategy. We have grown at a rapid pace as a result of our recent acquisitions and intend to continue to aggressively pursue additional acquisitions
in the micro-enterprise space. As of the date of this prospectus, our micro-enterprise portfolio is comprised of the following seven businesses:
|
|
|
|
|
|
|
|
Business*
|
|
Date of
Acquisition |
|
Number of
Countries with
Sales Presence |
|
Products |
The Longaberger Company |
|
March 18, 2013 |
|
|
2 |
|
Premium hand-crafted baskets and products for the home |
Your Inspiration at Home |
|
August 22, 2013 |
|
|
3 |
|
Hand-crafted spices from around the world |
Project Home |
|
October 1, 2013 |
|
|
1 |
|
Tools designed for women, as well as home security systems |
Agel |
|
October 22, 2013 |
|
|
40 |
|
Nutritional supplements and skin care products |
My Secret Kitchen |
|
December 20, 2013 |
|
|
1 |
|
Unique line of gourmet food products |
Paperly |
|
December 31, 2013 |
|
|
1 |
|
Custom stationery and paper products |
Uppercase Living |
|
March 13, 2014 |
|
|
2 |
|
Customizable vinyl expressions for display on walls |
- *
- We
have signed a definitive acquisition agreement to acquire Golden Girls, an entity that exchanges gold, silver and platinum jewelry for cash; however, the
transaction has not yet closed.
61
Table of Contents
Each
company we acquire maintains its own unique identity, sales force, leadership, brand and culture. CVSL provides each company it acquires with a common shared corporate infrastructure that
provides operating efficiencies in areas such as sourcing, manufacturing, IT, distribution and administration. CVSL also provides operational expertise and cross-pollination of business ideas and best
practices across companies. With each acquisition we expand our product and service base, our customer base and our geographic base, as well as our independent sales force. CVSL currently has sales in
more than 40 countries on six continents around the world and has established a strong foundation for further international expansion for all of its companies. We believe we have an opportunity
to leverage the resources, infrastructure and local market expertise we have in each of the countries where we have operations and sales.
In addition to the direct selling companies identified above, on September 25, 2012, we consummated a Share Exchange Agreement with HCG and Rochon Capital, an entity controlled by John Rochon,
our Chief Executive Officer and Chairman of the Board, whereby Rochon Capital transferred 100% of the outstanding shares of HCG to us in exchange for approximately 95% of the common stock (on a
fully-diluted basis upon issuance) of CVSL to be issued in two tranches, the first of which was issued on September 25, 2012, and the second of which (consisting of 504,813,514 shares of our
common stock) may be issued in the future. On October 10, 2014, we entered into the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering, 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 the section of this prospectus entitled "Certain Relationships and Related Party Transactions." The Initial Exchange resulted in HCG becoming our wholly-owned subsidiary.
From
September 2012 until our first acquisition in March 2013, our primary focus was on the publishing business conducted by HCG, which until March 2013 was our sole revenue producing business. For
the year ended December 31, 2012, we derived $0.9 million in revenue from the operations of HCG. Prior to our acquisition of HCG in September 2012, our primary business was the
development of products for medical use. The medical products line of business was terminated in December 2012. HCG publishes a monthly magazine, Happenings Magazine, which references events and
attractions, entertainment and recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, including direct selling
companies. Such services may include creating brochures, sales materials, websites and other communications for independent sales representatives and ultimate customers. As a result, HCG is available
to serve as an "in-house" resource for our current direct selling companies and the direct selling companies we hope to acquire in the future.
Strengths and Competitive Advantages
We believe that the following sets us apart from our competitors:
-
- Our experienced management team and board of
directors. Our management team and the Board are comprised of highly experienced industry leaders, including John P. Rochon, our
Chairman of the Board and Chief Executive Officer. Mr. Rochon has 35 years of experience in capital markets, finance, operations, mergers and acquisitions, business planning, technology,
sales and brand building, including an ownership position and prior senior management experience as the Chairman and Chief Executive Officer of Mary Kay Inc., a company he led through global
expansion to 37 countries, a major investment in technology and a successful management-led leveraged buyout. Other members of the senior management team and the Board have also had significant
experience in the direct selling industry and other industries, including Russell Mack (Mary Kay, American and United Airlines, the White House), Kelly Kittrell (Bank of America, Ernst & Young,
KPMG Peat Marwick), William Randall (Mary Kay, BeautiControl) and Julie Rasmussen (Mary Kay, Hertz Russia, with clients including RJR Nabisco, Johnson and Johnson). In addition, our management team
also includes other employees and consultants with
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significant
experience in the direct selling industry, including Thomas Reynolds, Ph.D. (Wirthlin Reynolds, clients including Coca Cola, Federal Express, Procter and Gamble) and Richard Holt (Amway,
NuSkin).
-
- Our diverse product offerings and large distributor and customer
base. Each company that we acquire adds to our diverse product offerings portfolio as well as to our large representative and customer
base. Currently, we have over 40,000 active independent sales force members and numerous customers in our CVSL family. We currently offer products in the following categories: home
décor, gourmet foods and spices, nutritional supplements, personalized stationery, skin care, home improvement and home security. We intend to grow our business into additional product
and service categories.
-
- A differentiated shopping experience integrating social media and other
state of the art technologies. We provide a differentiated shopping experience for our customers through our energized sales force and
our innovative use of social media and other technologies for the sale of products, which provides a multi-channel presence. For example, each of our independent sales representatives has his or her
own personalized webpage which allows them to offer a convenient shopping experience and to establish a loyal customer base. We have invested in a state of the art IT system for use by our independent
sales force members, as well as a new ERP system for operational use. Starting in April, 2014, CVSL began converting to its new, more modern and sophisticated IT platform for these functions,
internally and externally. These systems are being implemented first at TLC. We plan to use these systems for all of our other companies. This new IT system makes the shopping experience easier and
more efficient for customers. Our technology upgrade at TLC has two distinct but related aspects, both of which are aimed at improving the company's efficiency as a business and making it more
attractive to sellers and customers. The internal side of the upgrade, the ERP system, gives the company improved ability to manage all aspects of its operations and finance, including financial
planning, regular reporting of daily financial metrics to management, ordering of components for manufacturing and vendor-sourced products, accounting, and similar aspects of monitoring the business
in order to make better-informed business decisions. The external side of the upgrade is the IT platform on which TLC's sales force monitors their own businesses. It provides them with the information
they need to track sales, their progress toward achievement and reward levels and their downline recruits. The IT platform also includes a customer-facing side of their IT platform, which includes the
individual web sites on which customers can shop and place orders. Independent sales representatives now have a centralized site for product information and placing orders, and customers can now more
easily maneuver through the site from the home page to the order pages with less clicks. Separately, we have been developing, and have launched, a new web site for our benefits program called
"CVSL Connections," which seeks to bring all of our independent sales representatives, along with their respective customers, into our virtual
community, where they can explore the offerings of all of our CVSL companies, view social media postings from all of our CVSL companies, and receive a range of discounts and other benefits from their
third-party partners.
-
- Our ability to benefit from the brand recognition and loyal customers
of each company we acquire. We strive to acquire target companies with well established brands and loyal customers. We believe this
approach allows us to maximizes sales opportunities and by increasing the chances that our customers will buy multiple products and services from our CVSL family of companies. We intend that each
company that we bring into the CVSL community will maintain its own brand identity, independent sales representatives, key product lines and key leaders.
-
- Our scalable business
model. CVSL provides each company it acquires with a common shared corporate infrastructure that provides operating efficiencies in
sourcing, manufacturing, IT, distribution and administration. As noted above, a new IT system is being introduced at TLC for
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sales
support and a new ERP system for operational use, and once fully implemented it is expected that the systems will be made available to all other CVSL companies. In addition, YIAH has now begun
operations in North America based in our Ohio facilities while continuing operations in Australia, operating out of our Newark, Ohio office building and Project Home has shifted inventory and
distribution from its facilities in Denver, Colorado to our Ohio facilities. YIAH's manufacturing facility in Australia has commenced production of certain products to be sold by My Secret Kitchen in
the United Kingdom, allowing for both companies to benefit from economies of scale and best practices in manufacturing. We anticipate further integration over time of back-office functions by
all our companies, resulting in what we expect to be additional cost synergies. "Shared services" are also being developed in areas such as marketing support, travel, distribution, customer care and
legal support. CVSL also provides operational expertise and cross-pollination of business ideas across companies. Our role in managing our companies varies according to the needs and circumstances of
each company. Our intention is that all of our companies will be able to operate in a relatively self-sufficient manner on a day-to-day basis, drawing upon our management as needed to set strategy,
improve operations or solve problems, such as identifying suitable strategic business opportunities or other partnerships. However, companies may require varying levels of involvement from the CVSL
management team from time to time. For example, TLC has required rather significant, hands-on management by members of the CVSL team in order to help it bring its costs under control and to ensure
that it operates with best practices. Agel, on the other hand, sells products in approximately 40 countries and, because each international market tends to be comparatively self-contained from
a management perspective, it has required less hands-on management from CVSL than TLC.
-
- Our unique incentives
program. Through our CVSL Connections program, we are building an array of attractive
benefits and other incentives for our independent sales representatives and their customers, including a range of useful discounts in areas such as travel, amenities, office supplies, entertainment,
services and other benefits. The Hertz Corporation is the first partner, subsequently joined by Vivint, Inc. Home Automation, Bond Street Office Supplies, Square Inc. Payment Solution,
Dynamics co-branded Visa credit cards, Protect America, Inc. Home Security and XOOM Energy, LLC. We are in various stages of discussion with a number of other partners. We have launched
a web-based portal for members of the CVSL Connections program and will continue to build out features and offers available over time, which will allow
members to access these exclusive benefits. As the CVSL Connections program grows, we believe it will have a powerful impact on customer and sales field
loyalty.
Our Strategy
Our goal is to combine the power of micro-enterprise with the power of personal networks, linking millions of interpersonal relationships in a
virtual "community." We are engaged in a long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. A core component is our ongoing acquisition strategy,
which we expect will result in additional revenue being added as more companies are acquired. We intend to "build out" the CVSL family of companies across multiple dimensions by expanding in each of
the following areas:
-
- Product and Service
Categories. We seek to acquire micro-enterprise companies with diverse product and service offerings, which will allow us to gain a
foothold in a fundamental category of products or services that has significant potential to grow over time. The size of a target company is not as important to us as gaining entry into a desirable
new product or service category. We also believe that we will be able to grow each of our portfolio companies organically by our leveraging of operational infrastructure, as well as shared best
practices in operations, sales and sales field recruiting. As described under "Strengths and Competitive Advantages-Our Scalable Business Model," we are already leveraging our operational
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infrastructure
to support our current companies. For example, YIAH and Project Home use office and distribution space at our facilities in Ohio and the shared services events and marketing teams have
helped multiple companies that previously used outside third parties with new catalogues and event planning. In addition to the shared operational resources currently being leveraged by the various
companies, we have plans to continue to integrate the back-office and leverage our operational resources. For example, the implementation of our new ERP system at TLC is expected to be rolled out to
the other companies over time, which will be beneficial from a simplicity (single system to manage and operate) and cost (single system to host and maintain) standpoint.
-
- Geography. We seek to acquire companies in new geographic markets. Our major markets
outside the United States currently are Australia, Italy, Russia and other Eastern European countries. Each time we acquire a company in a new geographic market, we gain a foothold in that country
which represents additional growth potential. Each new geographic market we are able to penetrate becomes an established platform in which our other portfolio companies may conduct commerce, saving
the investment of time and expense that would otherwise be necessary for each company to open new markets individually. Although we do not have any immediate plans to expand our sales or operations to
any new countries and believe that there is ample room to expand our sales and operations within the countries in which we currently have a presence, should a business opportunity in a new country
present itself, we would consider entering such geographic markets.
-
- The "Consumer
Cloud." Every micro-enterprise company we acquire brings with it names and contacts that represent personal relationships with current
sellers, former sellers, current customers and former customers. We intend to use social media as one method to reach and connect all of these people. There are numerous connections already within the
CVSL family of companies and we intend to continue to add many more connections through organic growth and acquisitions. The "consumer cloud" refers to a data base with a list of connections,
including names of current and former sellers in our independent sales force, current and former customers, in some cases current and former hosts or hostesses (for party plan companies), and
employees. The number of such connections varies according to the size of the company. The connections include such information as names, addresses, email addresses, phone numbers and past selling or
purchasing history. These persons can be reached via email, and in some cases by phone or in writing. They can also be reached when they visit the web sites of any CVSL company, or the website for the CVSL
Connections program, or the personalized web sites of independent sales representatives of any CVSL company.
In
the consumer cloud, CVSL can inform these contacts about opportunities or product or service offerings by all CVSL companies, it can engage them in dialog through social media (e.g., Facebook), and
can provide these contacts with benefits and privileges such as discounts on products or services offered by third-party partnersfor example, rental cars, office supplies, a credit card
offering, etc. Every time any CVSL company adds another seller or customer, it obtains an additional connection from that person (organic growth), and each time CVSL acquires another company, it adds
to its data base the total number of connections which that acquired company has already accumulated. These connections represent personal relationshipsbetween family members, friends,
neighbors, co-workers, etc. When a consumer recommends a product to a friend, family member or neighbor, that recommendation carries more credibility than even the most effective advertising. Our
strategy is to build a virtual "community" which offers its members an attractive and growing array of benefits and privileges.
-
- Gender
Demographics. The sales forces of our companies, as well as their customers, represent both gender demographics, although the gender
breakdown varies from one company to another. We seek to acquire companies that will appeal to both gender demographics. For example,
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TLC's
sales force and customer base is predominantly female, while the sales force and customer base of Agel, is comprised of more men than women. In general, the micro-enterprise/direct selling
sector globally tends to be more female than male. According to a 2011 study by the Direct Selling Association, 78% of direct selling entrepreneurs were female. However, both genders are represented
in varying proportions, depending on the nature of the product or service.
The Direct Selling Industry
Direct selling is a well-established sales channel where products are marketed directly to customers, eliminating the need for middlemen,
wholesalers, advertisers and retailers. The global direct selling market is a growing $166 billion industry. The U.S. portion of the industry alone exceeds $31 billion in annual sales.
Worldwide, more than 90 million people are estimated to participate in direct selling. According to the World Federation of Direct Selling Associations, the four largest direct selling markets
are the United States, Japan, China and Brazil, but the direct selling industry has a strong presence in every region of the world. Our management team believes that there are numerous companies in
the micro-enterprise sector with annual revenues of $50 to $300 million.
Our History and Overview of Recently Acquired Companies and Companies to Be Acquired
Our History
We were incorporated under the laws of Delaware in April 2007 under the name Cardio Vascular Medical Device Corporation. In June 2011, we converted
to a Florida
corporation and changed our name to Computer Vision Systems Laboratories, Corp. On May 27, 2013, we changed our name to CVSL Inc. On September 25, 2012, we completed an initial share
exchange whereby we acquired 100% of the issued and outstanding capital stock of HCG, a magazine publisher, in exchange for 438,086,034 shares of our common stock representing approximately 90% of our
issued and outstanding capital stock at such time. In December 2012, we decided to terminate our medical device line of business.
Because
John Rochon, our Chief Executive Officer and Chairman of the Board, through his control of Rochon Capital, will continue to control more than 50% of the outstanding voting power of our common
stock following the offering, we will be classified as a "controlled company" within the meaning of applicable NYSE MKT rules. In the event our common stock is listed on the NYSE MKT, we
will qualify as a "controlled company" because Mr. Rochon, through his control of Rochon Capital, will continue to hold in excess of 50% of our voting securities. As a controlled company, we
will qualify for certain exemptions to the NYSE MKT listing requirements, including the requirement that a majority of our directors be independent, and the requirements to have a compensation
committee and a nominating corporate governance committee each composed of entirely independent directors.
Happenings Communications Group
Through a share exchange that occurred in August 2012, we acquired HCG. HCG publishes a monthly magazine, Happenings Magazine, that references events
and attractions, entertainment and recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, and can provide such services
to direct selling businesses. Services may include creating brochures, sales materials, websites and other communications for independent sales representatives and ultimate customers. As a result, HCG
is available to serve as an "in-house" resource for providing marketing and creative services to the direct selling companies that we expect to acquire.
The Longaberger Company
In March 2013, we acquired a 51.7% controlling interest in TLC. TLC is a direct selling business based in Newark, Ohio that sells premium
hand-crafted baskets and a line of products for the home,
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including
pottery, cookware, wrought iron and other home décor products, through a nationwide network of independent sales representatives. TLC also has showrooms in various states,
which offer merchandise and serve as support centers for sales representatives. We acquired, in two separate transactions, a total of 1,616 shares of TLC's Class A common stock ("TLC
Class A Common Stock"), representing 64.6% of the issued and outstanding TLC Class A Common Stock, which class has sole voting rights at TLC, and acquired 968 shares of TLC's
Class B common stock, which are non-voting ("TLC Class B Common Stock" and, together with the TLC Class A Common Stock, the "TLC Stock"). Together, the two transactions resulted
in CVSL acquiring 51.7% of all issued and outstanding TLC Stock. As consideration, we issued to a trust of which Tamala Longaberger is the trustee (the "Trust"), a Convertible Subordinated Unsecured
Promissory Note, dated March 15, 2013, in the original principal amount of $6.5 million (the "Convertible Note"), and, to TLC, we issued a ten year, $4.0 million unsecured
promissory note, dated March 14, 2013, payable in monthly installments. On June 14, 2013, the Convertible Note was converted into 32,500,000 shares of our common stock.
Your Inspiration At Home
In August 2013, we formed Your Inspiration At Home, Ltd., a Nevada corporation, which acquired substantially all of the assets of YIAH. YIAH
is an innovative and award-winning direct seller of hand-crafted spices from around the world. YIAH originated in Australia and has expanded its operations to North America during the third quarter of
2013. We acquired substantially all the assets of YIAH in exchange for total consideration of 4,512,975 shares of our common stock and the assumption of certain liabilities of YIAH.
Project Home
In October 2013, we formed CVSL TBT, LLC, a Nevada limited liability company, which acquired substantially all of the assets of Tomboy
Tools, Inc., a direct seller of a line of tools designed for women as well as home security monitoring services. We acquired substantially all the assets of Tomboy Tools, Inc. in exchange for
total consideration of 1,766,979 shares of our common stock and the assumption of certain liabilities of Tomboy Tools, Inc.
Agel Enterprises
In October 2013, we formed AEI which acquired substantially all of the assets of Agel. AEI is a direct selling business based in Utah that sells
nutritional supplements and skin care products through a worldwide network of independent sales representatives. AEI's products are sold in over 40 countries. We are in the process of developing a new
proprietary skin care product to be launched by Agel and are in negotiations for the exclusive use of a unique ingredient for such product. To date, research and development costs for such product
have been minimal. AEI acquired substantially all the assets of Agel in exchange for total consideration of 7,446,600 shares of our common stock (of which 572,549 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 certain liabilities of Agel.
Paperly
In December 2013, we formed Paperly, Inc., a Delaware corporation, which acquired substantially all of the assets of Paperly, a direct seller
that allows its independent sales representatives to work with customers to design and create custom stationery through home parties, events and individual appointments. We acquired substantially all
the assets of Paperly in exchange for total consideration of 155,926 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.
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My Secret Kitchen
In December 2013, we formed CVSL A.G., a Switzerland company, which acquired a 90% controlling interest of MSK, an award-winning United Kingdom-based
direct seller of a unique line of food products. We acquired substantially all the stock of MSK in exchange for total consideration of 317,804 shares of our common stock and payment of an earn-out of
5% of EBITDA from 2014 to 2016. The shares of our common stock for this acquisition were issued in January 2014.
Uppercase Living
In March 2014, we formed Uppercase Acquisition, Inc., a Delaware corporation which acquired substantially all the assets of Uppercase Living,
a direct seller of customizable vinyl expressions for display on walls. Consideration consisted of 578,387 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 2014.
Golden Girls
During the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls, a direct seller and purchaser of jewelry for cash.
Upon the closing of the acquisition, a newly formed subsidiary of ours will acquire substantially all the assets of Golden Girls. The newly formed subsidiary will be obligated to pay a purchase price
equal to five percent (5%) of its EBITDA for each of the fiscal years ended December 31, 2014, 2015 and 2016, which is payable in cash or shares of our common stock. In addition, if the
subsidiary achieves its budget during each of 2014, 2015 and 2016, for any year that the budget is achieved it will issue 33,333 share of our common stock to Golden Girls. As of the date of this
filing, this transaction has not yet closed and there can be no assurance that it will close.
Marketing, Manufacturing and Distribution
We presently have sales operations in over 40 countries and serve our customers through independent sales representatives. For the year ended
December 31, 2013, approximately 16% of our revenue was derived from sales outside the United States and for the six months ended June 30, 2014, approximately 32% of our revenue was
derived from sales outside the United States. The independent sales representatives utilize brochures and websites to advertise products offered by our companies. Nearly all independent sales
representatives have their own personalized website for customers to use for ordering products, which allows the sales representatives to run their business more efficiently and improves our
order-processing accuracy. Representatives earn commissions by selling products to their customers, the ultimate consumer. We generally have no arrangements with end-users of our products beyond the
representatives. No single representative accounts for more than 1% of our revenues.
Orders
are placed using the Internet, mail, telephone, fax and directly with our representatives at events that they host, and payments are processed, often via credit card, when orders are taken.
Once the order is processed, products are gathered at a distribution center and delivered to the customer through a combination of local and national delivery companies. We do not believe we are
materially dependent on any single supplier for raw materials or finished goods, with the exception of Innovative FlexPak, LLC, which produces substantially all of Agel's finished goods. We believe
that there are other suppliers who could produce these products for Agel, if necessary; however, transitioning to other suppliers could result in delays or additional expense. In order to further
mitigate this risk, Agel has developed relationships with two additional suppliers and has begun diversifying the source of its
finished goods. We purchase raw materials from numerous domestic and international suppliers. Sufficient raw materials were available during the year ended December 31, 2013, and we believe
they
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will
continue to be. We believe alternative suppliers of raw materials are readily available if our current suppliers were to become unavailable. In some markets, we utilize retail locations to serve
representatives and customers. We utilize third party manufacturers for some of our products and manufacture certain products ourselves, such as food products sold in Australia and baskets sold by
TLC. We utilize the production capabilities of a 600,000 square foot manufacturing facility in Sherman, Texas, which is owned by Michael Bishop, a member of our Board of Directors, to produce products
for YIAH that are being sold in the United States, as well as for their distribution. In addition, we began initial production runs of certain Agel products in this facility in 2014 and expect to
continue to utilize this facility to meet some of Agel's production needs in the future. To achieve certain economies of scale, best pricing and uniform quality, we rely primarily on a few principal
delivery companies for the delivery of our goods. We believe that there are several alternative delivery companies that could replace the current delivery companies, and there are several alternative
manufacturers that could replace our current manufacturers.
The
independent sales representatives are independent contractors compensated based on sales of products achieved by them, the representatives they recruit, known as their down-line representatives,
and their customers. Representatives do not receive a fee for recruiting down-line representatives. The recruiting of new representatives and the training are responsibilities of the existing
representatives, who are supported by in-house marketing staff. Because representatives are compensated not only on their own sales but on sales made by other representatives who they recruit, each
representative has an incentive to recruit additional representatives in order to increase their total sales and potential sales commissions. The primary method of adding to our independent sales
representatives and customer base has been the acquisitions of other companies with such bases and personal contacts.
Intellectual Property
We have acquired numerous registered trademarks in our business relating to the acquisitions that we have consummated and intend to maintain the
trademarks of companies we acquire. We own trademarks that are registered with the U.S. Patent and Trademark Office and in foreign jurisdictions. Registration of a trademark enables the registered
owner of the mark to bar the unauthorized use of the registered trademark in connection with a similar product in the same channels of trade by any third-party in the respective country of
registration, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs.
We
also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of protection
that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks,
whether registered or claimed under common law, constitute valuable assets, adding to recognition of our brands and the effective marketing of our products. We intend to maintain and keep current all
of our trademark registrations and to pay all applicable renewal fees as they become due. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including
their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. We therefore believe that these proprietary rights have been and
will continue to be important in enabling us to compete, and if for any reason we were unable to maintain our trademarks, our sales of the related products bearing such trademarks could be materially
and negatively affected. See "Risk Factors."
We
own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. Most of our products are not
protected by patents, and therefore, such agreements are often our only form of protection. Even where these agreements exist, there can be no assurance that these agreements will not be breached,
that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to
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or
independently developed by competitors. Our proprietary product formulations are generally considered trade secrets, but are not otherwise protected under intellectual property laws.
We
intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
Governmental Regulation
The direct selling industry is subject to a number of federal and state regulations administered by the FTC and various state agencies in the United
States, as well as regulations regarding direct selling activities in foreign markets. Laws specifically applicable to direct selling companies generally are directed at preventing deceptive or
misleading marketing and sales practices, and include laws often referred to as "pyramid" or "chain sales" scheme laws. These
"anti-pyramid" laws are focused on ensuring that product sales ultimately are made to end consumers and that advancement within a sales organization is based on sales of products and services rather
than investments in the organization, recruiting other participants, or other non-retail sales-related criteria. The regulatory requirements concerning direct selling programs involve a high level of
subjectivity and are subject to judicial interpretation. We and our subsidiaries are subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and
regulations by governmental agencies or courts can change. Any direct selling company that we own or that we acquire in the future, could be found not to be in compliance with current or newly adopted
laws or regulations in one or more markets, which could prevent us from conducting our business in these markets and harm our prospects, business activities, cash flow, financial condition, results of
operations and stock price. We are aware of pending judicial actions and investigations against other companies in the direct selling industry. Adverse decisions in these cases could impact our
business if direct selling laws or anti-pyramid laws are interpreted more narrowly or in a manner that results in additional burdens or restrictions on direct selling. The implementation of such
regulations may be influenced by public attention directed toward a direct selling company, its products or its direct selling program, such that extensive adverse publicity could result in increased
regulatory scrutiny. If any government were to ban or restrict our business mode, our prospects business activities, cash flows, financial condition and results of operations may be materially
adversely affected.
Our
products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and authorities, including the FDA, FTC, the Consumer
Product Safety Commission, the Department of Agriculture, State Attorneys General and other state regulatory agencies in the United States, and the Ministry of Health, Labor and Welfare in Japan and
similar government agencies in each market in which we operate. 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
nutritional supplements, spices 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
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in
determining whether a claim is an improper structure/function claim. Given this subjectivity, 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.
As
previously stated, our spices, nutritional supplements and skin cares 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
representative's marketing materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our independent sales representatives fail
to comply with these restrictions, then we and our independent sales representatives could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which
could harm our financial condition and operating results. Although we expect that our responsibility for the actions of our independent sales representatives in such an instance would be dependent on
a determination that we either controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our independent
sales representatives.
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. 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.
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.
As
is the case with most companies that operate in our product categories, from time to time we receive inquiries from government regulatory authorities regarding the nature of our business and other
issues, such as compliance with local direct selling, transfer pricing, customs, taxation, foreign exchange control, securities and other laws.
Industry Overview/Competition
The business of direct selling is competitive. Not only do we compete for customers but also for independent sales representatives. We face
competition from products sold to customers by other direct selling companies and through the internet, and products sold through the mass market and traditional retail channels.
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Many
direct selling segment competitors such as Avon Products Inc., Tupperware Brands Corp. and others have longer operating histories, greater financial, technical, product development,
marketing and sales resources, greater name recognition, larger customer bases and better-developed distribution channels.
Seasonality
Although we are not significantly affected by seasonality, we do experience slight increases in sales activity in the fourth quarter around
Christmas.
Employees
As of June 30, 2014, we had worldwide approximately 360 employees (including employees of our subsidiaries) as measured by full-time
equivalency. As of December 31, 2013 and 2012, we had worldwide approximately 393 and five employees (including employees of our subsidiaries), respectively, as measured by full-time
equivalency. These numbers do not include our independent sales representatives, who are independent contractors and are not considered employees. Our employees are not represented by a union or other
collective bargaining group. We believe that we have a good relationship with our employees.
Independent Sales Representatives
As of June 30, 2014, we had more than 40,000 active independent sales representatives across our direct selling companies. Our independent
sales representatives are not salaried and earn commissions by selling products to their customers, the ultimate consumer. They also earn revenue from the sales of products by representatives that
they recruit. Our largest general and administrative expense is commissions paid to our independent sales representatives. For the year ended December 31, 2013, we paid $16.4 million in
commissions to our independent sales representatives. For the six months ended June 30, 2014, we paid $13.0 million in commissions to our independent sales representatives.
Facilities
The following table sets forth the location and approximate square footage of our major manufacturing, distribution and office facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Entity
|
|
Location |
|
Approximate
square footage
of facilities |
|
Land in acres |
|
Description of property |
|
Own/
Lease |
CVSL |
|
Plano, Texas |
|
|
14,139 |
|
|
|
|
CVSL Corporate Headquarters |
|
Lease |
CVSL |
|
Luzern, Switzerland |
|
|
350 |
|
|
|
|
European Headquarters |
|
Lease |
TLC |
|
Newark, Ohio |
|
|
180,000 |
|
|
22 |
|
TLC Corporate Headquarters |
|
Own |
TLC |
|
Frazeysburg, Ohio |
|
|
1,170,113 |
|
|
293 |
|
Manufacturing and Distribution Facilities |
|
Lease |
TLC |
|
Frazeysburg, Ohio |
|
|
121,300 |
|
|
32 |
|
Longaberger Homestead (retail, restaurants and historic structures) |
|
Lease |
TLC |
|
Hagerstown, Maryland |
|
|
3,051 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Aurora, Ohio |
|
|
2,587 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Williamsburg, Virginia |
|
|
2,512 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Jeffersonville, Ohio |
|
|
2,475 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Edinburgh, Indiana |
|
|
2,400 |
|
|
|
|
Retail Showroom |
|
Lease |
TLC |
|
Rehoboth Beach, Delaware |
|
|
1,865 |
|
|
|
|
Retail Showroom |
|
Lease |
Agel |
|
Pleasant Grove, UT |
|
|
10,656 |
|
|
|
|
Agel Corporate Headquarters |
|
Lease |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Entity
|
|
Location |
|
Approximate
square footage
of facilities |
|
Land in acres |
|
Description of property |
|
Own/
Lease |
Agel |
|
Spanish Fork, Utah |
|
|
10,350 |
|
|
|
|
Distribution Center |
|
Lease |
Agel |
|
Moscow, Russia |
|
|
4,166 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Kiev, Ukraine |
|
|
3,610 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Kuala Lumpur, Malaysia |
|
|
2,900 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Milan, Italy |
|
|
1,399 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
Agel |
|
Astana, Kazakhstan |
|
|
1,086 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
YIAH |
|
Gold Coast, Australia |
|
|
6,997 |
|
|
|
|
Warehousing, Distribution & Associated Offices |
|
Lease |
HCG |
|
Clark's Summit, Pennsylvania |
|
|
2,080 |
|
|
|
|
HCG Corporate Headquarters |
|
Lease |
Uppercase Living |
|
Sandy, UT |
|
|
41,920 |
|
|
|
|
Uppercase Living Headquarters, manufacturing and distribution |
|
Lease |
Our corporate headquarters are located in Plano, Texas where we rent 14,139 square feet of office space for annual rent of $351,492. TLC owns a 180,000 square foot facility that serve as its corporate
headquarters, and leases a 1,170,113 square foot manufacturing and distribution facility and a 121,300 square foot facility that houses retail stores and restaurants, all located in Ohio for aggregate
annual payments of $2,207,088. TLC leases retail outlets in Maryland, Virginia, Ohio, Indiana and Delaware for aggregate annual lease payments of $296,904 in the aggregate. Agel's corporate
headquarters is located in Pleasant Grove, Utah where Agel rents 10,656 square feet of space for annual rent of
$154,512. Agel also rents 10,350 sq. ft. of distribution space in Spanish Fork, Utah for annual rent of $55,890 per year. In addition, Agel rents warehousing, distribution and office space in Russia,
Ukraine, Malaysia, Italy and Kazakhstan for annual rent of $346,176 in the aggregate. YIAH rents warehousing, distribution and office space in Australia for annual rent of $90,540 and the HCG
corporate headquarters in Pennsylvania are leased for an annual rent of $20,560. CVSL leases 350 square feet for monthly rent of $3,380 in Luzern, Switzerland which serves as our European
Headquarters. Uppercase Living rents 41,920 square feet for monthly rent of $14,249 in Sandy, UT which serves as the company's headquarters. Uppercase Living also subleases some of the space to the
third party manufacturer and distributor of its products.
Legal Proceedings
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, we are disputing a tax and penalty
assessment by the Spanish Taxing Authorities relating to Agel. Prior to AEI's acquisition of the assets of Agel Enterprises LLC ("Agel"), Agel was assessed withholding taxes and income taxes
along with penalties by the Spanish Tax Authorities, which asserted that Agel had maintained permanent establishment in Spain for the years 2008 to 2010. As part of the acquisition, AEI agreed to
assume this liability. Agel, and now AEI, has vigorously disputed these claims on the basis that Agel believes they did not have permanent establishment, and therefore, any compensation paid to
independent representatives should not have been subject to withholding taxes.
AEI
has recently filed an appeal in Tribunal Económico-Administrativo Regional de Cataluña. The ultimate resolution of the dispute cannot be determined at this time. Agel
paid the income tax due and AEI has paid approximately $260,000 in good faith towards the disputed withholding tax liability to
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preserve
the appeal process. As of June 30, 2014, AEI maintained a liability of $0.6 million in accrued liabilities for this disputed amount, which is reflected in CVSL's
2013 consolidated financial statements.
On
April 29, 2014, AEI paid $420,000 to the Spanish Taxing Authorities toward its outstanding tax assessment. Although we have appealed this assessment by the Spanish Taxing Authorities and are
rigorously defending our position, this payment was made to prevent the Spanish Taxing Authorities from beginning certain legal proceedings that would have negatively affected AEI's European
operations. If the appeal is successful, the payments made to date will be refunded to us.
Other
than the above, we are not aware of any material, active, pending or threatened proceeding against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.
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MANAGEMENT AND BOARD OF DIRECTORS
Our business and affairs are organized under the direction of our Board, which currently consists of twelve members. The primary responsibilities of
our board are to provide oversight, strategic guidance, counseling and direction to our management. Our Board meets on a regular basis and additionally as necessary.
The
following table sets forth the name, age and position of each of our directors and executive officers:
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age |
|
Current Title & Position |
|
Served as an
Officer or
Director Since |
|
John P. Rochon |
|
|
63 |
|
Chief Executive Officer, President and Chairman of the Board |
|
|
2012 |
|
John Rochon, Jr. |
|
|
37 |
|
Vice Chairman and Director |
|
|
2012 |
|
Kelly L. Kittrell |
|
|
56 |
|
Chief Financial Officer, Treasurer and Director |
|
|
2012 |
|
Russell Mack |
|
|
63 |
|
Vice President and Director |
|
|
2012 |
|
Michael Bishop(1)(2)(3) |
|
|
66 |
|
Director |
|
|
2012 |
|
Tamala L. Longaberger |
|
|
52 |
|
Director |
|
|
2012 |
|
William H. Randall(1)(2)(3) |
|
|
68 |
|
Director |
|
|
2012 |
|
Julie Rasmussen(2) |
|
|
49 |
|
Director |
|
|
2013 |
|
Kay Bailey Hutchison(3) |
|
|
71 |
|
Director |
|
|
2014 |
|
Bernard Ivaldi |
|
|
65 |
|
Director |
|
|
2014 |
|
Roy Damary |
|
|
71 |
|
Director |
|
|
2014 |
|
John W. Bickel |
|
|
66 |
|
Director |
|
|
2014 |
|
- (1)
- Audit
Committee
- (2)
- Compensation
Committee
- (3)
- Nominating
Committee
Our
directors and officers serve until their successor is elected and qualified, or until their earlier resignation or removal.
The
business experience for the past five years (and in some instances for prior years) of each of our executive officers and directors is as follows:
John P. Rochon, Chief Executive Officer, President and Chairman of the Board
John P. Rochon has had four decades of wide-ranging success in finance, operations, business planning, sales, brand-building and marketing. He is an
accomplished investor and business strategist. By the time he was 40 years old, Mr. Rochon was chairman and CEO of a Fortune 500 global consumer goods company, serving in that role for
nearly a decade. Mr. Rochon is founder and chairman of Richmont Holdings, a private investment and business holding company based in Dallas, Texas. His career has included hundreds of business
transactions across multiple industries. His team has achieved an impressive investment track record in its category over three decades. Richmont uses its own patented diagnostic system to build the
top line of a company. Mr. Rochon was the leader in bringing the power of the Internet to consumer sales. With Mr. Rochon as its General Partner, Richmont Capital Partners led an
investment group that became the largest shareholder in, and appointed two members to the Board of Directors of, Avon Products Inc., which subsequently experienced tremendous growth. From 1989-1992,
Mr. Rochon and his team created a detailed strategy for Avon to grow, including recommendations (many of which were adopted by Avon) relating to revitalizing the corporate entrepreneurial
culture through a re-focus on the needs of the sales force; enhancing career opportunities for the sales force; improved training for the sales force; more effective internal
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communication;
improving product delivery and product rationalization; strengthening price/quality equity; enhanced long range planning to increase repeat purchases and reduce sales force turnover;
and tying management compensation more closely to shareholder returns. During the 1987-1997 period, Avon's revenue increased by 100% from $2.5 billion to $5 billion, earnings per share
increased by 43% and market cap increased from approximately $1.5 billion at the beginning of 1987 to approximately $8.0 billion at the end of 1997. Neither John Rochon nor Richmont
Capital Partners I or II currently has an equity interest in Avon Products, Inc.
As
chairman and CEO of Mary Kay Inc., he led that company to global growth and pioneered the use of Internet technology in the micro-enterprise/direct selling sector. He also managed the growth
of a portfolio of Richmont companies, in financial services, marketing, international trading, food services and other sectors. Major investments included Armor Holdings, Royal Appliance/Dirt Devil,
The Dial Corp., Harvey's Casinos, Black and Decker, RealPage Inc. and Maybelline. In addition to CVSL, Mr. Rochon's companies today include a nationwide network of supplies and
services to businesses and a line of gourmet products. He has founded several investment funds, including a hedge fund, a fund of
funds and a debt investment fund. Mr. Rochon holds a Bachelor of Science and a Master of Business Administration from the University of Toronto and began his career as a chemist before moving
on to management positions in manufacturing, operations, marketing and finance. We selected Mr. Rochon to serve on our Board due to his substantial experience in finance, operations, business
planning, and his years of leadership in the direct selling industry.
John Rochon, Jr., Vice Chairman and Director
John Rochon, Jr. became a director on December 3, 2012 and our Vice Chairman on May 1, 2014. Since 2006, he has served as the Vice
Chairman and CEO of Richmont Holdings. He has expertise in capital markets and is experienced in financial analysis, mergers and acquisitions, technology and the review, structuring and management of
new business opportunities. After receiving his degree in Business Administration from Southern Methodist University, he worked at JP Morgan Chase in New York before returning to Dallas, where for
more than a decade he has run the Rochon's family office. He now oversees Richmont Holdings' financial analysis of potential business transactions and plays a leading role in guiding strategic
planning for Richmont Holdings. We selected Mr. Rochon to serve on our Board due to his experience in financial analysis, mergers and acquisitions, technology and structuring and management of
new business opportunities. Mr. Rochon is the son of John P. Rochon, our Chairman and CEO.
Kelly L. Kittrell, Chief Financial Officer, Treasurer and Director
Kelly L. Kittrell was appointed as our Chief Financial Officer and Treasurer on November 20, 2012, and as a director effective
December 3, 2012. Mr. Kittrell has served as the Chief Investment Officer of Richmont Holdings since January 2005. Mr. Kittrell has more than 25 years of experience in
corporate finance, investments, and mergers and acquisitions. Prior to his position at Richmont Holdings, he provided financial advisory services to clients while at Bank of America as a Managing
Director in the Private Company Advisory Services practice and as a Director in the Mergers & Acquisitions practice at Ernst & Young Capital Advisors LLC. Mr. Kittrell is a
member of the CFA Institute and obtained the Chartered Financial Analyst designation in 1996. Mr. Kittrell obtained a Master of Business Administration degree from the University of Texas at
Austin and a Bachelor of Science degree from the University of Alabama. We selected Mr. Kittrell to serve on our Board due to his experience in corporate finance and mergers and acquisitions.
Russell Mack, Vice President and Director
Russell R. Mack was appointed as our Vice President on November 20, 2012, and as a director effective December 3, 2012. Mr. Mack
has been the Executive Vice President and Chief Marketing Officer at Richmont Holdings for more than 15 years. Mr. Mack is a former member of President
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Ronald
Reagan's White House staff and possesses 40 years of experience in the field of communications and marketing. He has served as a senior executive in companies such as Mary
Kay Inc., American Airlines, and United Airlines and as a legislative assistant and press secretary in the U.S. Senate and the U.S. House of Representatives. His career also included positions
in the U.S. Department of Health and Human Services, the U.S. Department of Education and Temerlin McClain Advertising. He received a Juris Doctor degree from George Washington University Law School
and a Bachelor of Arts from American University. We selected Mr. Mack to serve on our Board due to his experience in the field of communications and marketing.
Michael Bishop, Director
Michael Bishop became a director on December 3, 2012 and is the Chairman of our Audit Committee. Since 2011, he has served as the President of
Actiprime, a personal care and healthy lifestyle product development and marketing company and president of ActiTech, a full service third party manufacturer of items such as creams, hair products,
OTC drugs, certified NOP Organic food and personal care products, energizing and relaxing drinks and owner of a decontamination process for herbs and other products. The company owns a
state-of-the-art, 600,000 square foot manufacturing and warehouse facility, serving customers such as Unilever, TIGI and Estee Lauder. He co-founded Actifirm, a marketer of anti-aging skin care sold
in physicians' offices and medi-spas. He founded Active Organics, a leading natural ingredient supplier to the personal care industry, serving as president from 1981 to 2011 before the company was
sold to Berkshire Hathaway's Lubrizol Corporation. A chemist holding nine patents, he held development roles with Max Factor, Redken Laboratories, Life Laboratories and Rachel Perry cosmetics. He
received his Bachelor of Science and Bachelor of Arts degrees from the University of California at Irvine. We selected Mr. Bishop to serve on our Board due to his manufacturing and product
development experience.
Tamala L. Longaberger, Director
Tamala L. Longaberger became a director on December 3, 2012. From 1999 to the present, Ms. Longaberger has served as the Chief
Executive Officer and Chairman of the Board of The Longaberger Company, a 40 year old direct selling company that offers hand-crafted baskets and other home furnishings. In 2006, President
George W. Bush, appointed her chair of the National Women's Business Council, a bipartisan advisory council that recommends policy to the President, Congress and the U.S. Small Business Administration
on economic issues important to women business owners. She served as a member of the U.S. delegation to the United Nations Commission on Human Rights and last year was part of a delegation of
distinguished Americans who served as observers during free elections in Tunisia. She served on the board of the Woodrow Wilson Center for International Scholars, chaired the U.S. Executive Committee
for the 2002 Helsinki Women Leaders Summit, was a board member of the John Glenn Public Policy Institute and has chaired the Direct Selling Association. She is a member of Ohio Business Roundtable and
serves on the Board of the International Republican Institute. She holds a Bachelor of Science degree in business administration from The Ohio State University ("Ohio University") and is a past chair
of Ohio University's board of trustees and recipient of Ohio University's Distinguished Service Award. We selected Ms. Longaberger to serve on our Board due to her prior experience at The
Longaberger Company and her direct selling accomplishments.
William H. Randall, Director
William Randall became a director on December 3, 2012 and is the Chairman of our Compensation Committee. He is a 35-year veteran of the direct
selling industry who has served in sales, marketing and other senior executive positions in companies such as Mary Kay Inc., BeautiControl Cosmetics and start-up enterprises funded by Sur la
Table and Ross Simons. He is a past board member of the Direct Selling Association and is founder and chairman of Hatch Holdings LLC which, since 1990, has provided strategic planning and
tactical support to senior management of direct selling companies. He
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received
his Master of Business Administration from Harvard Business School. We selected Mr. Randall to serve on our Board due to his prior direct selling experience.
Julie Rasmussen, Director
Julie Rasmussen became a director on February 8, 2013. During the past five years, she has been the majority owner of Hertz Russia and CEO of
Dagmar Associates, a consulting and real estate holding company. From 1992 to 2002, she worked at Mary Kay Cosmetics, serving as the President of Mary Kay Europe and prior thereto as the President of
Mary Kay Russia. She has advised companies on doing business in Russia, including RJR Nabisco, Kodak, Johnson & Johnson and Chevron, and has served on the board of the American Chamber of
Commerce in Russia as well as president of the Russian Federation of Direct Selling Companies. She has received numerous awards and honors for her international business achievements. She received her
Bachelor of Arts from the University of Virginia and her Master of International Affairs from Columbia University, where she was editor of the Journal of International Affairs. We selected
Ms. Rasmussen to serve on our Board due to her prior experience with direct selling companies.
The Honorable Kay Bailey Hutchison, Director
The Honorable Kay Bailey Hutchison became a director on February 18, 2014. Senator Hutchison served for two decades as a U.S. Senator from
Texas, from 1993 to 2013. She is the only woman ever elected to represent the state in the U.S. Senate. She served on the Appropriations Committee and was ranking Republican on the Commerce, Science
and Transportation Committee. Before being elected to the Senate, she served in the Texas House of Representatives from 1972 to 1976 and served on the National Transportation Safety Board from 1976 to
1978. After holding positions as a bank executive and general counsel, and as a small business owner, she served as Texas State Treasurer from 1990 to 1993 and was temporary co-chair of the Republican
National Convention in 1992. She holds a degree from the University of Texas at Austin and a law degree from the School of Law at the University of Texas. We selected Ms. Hutchison to serve on
our Board due to her strong understanding of corporate governance.
Bernard Ivaldi, Director
Bernard Ivaldi became a director on July 9, 2014. He currently serves as a member of the board of directors of two subsidiaries of CVSL. For
the past twenty years, he has been consulting extensively with multinational companies and educational institutions in Europe, USA, South America and Australia. Since 2002, he has been the Managing
Director of BI Conseil & Associates, a consulting company that he owns based in Vaud, Switzerland. From 1997 to 2002, he served as the CEO of Neuromedia SA of Liege, Belgium.
Prior thereto, he served as an administrator at Lalive & Partners, Attorneys at Law, Geneva, a Director of Webster University, Geneva, Switzerland and a Director General of The International
School of Geneva. Bernard Ivaldi has obtained diplomas from
American and French Universities including a Ph.D. (doctorate 1983) from Columbia Pacific University, Ph.D. (ABD) New York University. He was a Doctoral Fellow in Bilingual Education at New-York
University N.Y. (1977). He was awarded a Maîtrise de Linguistique Générale (Honors), University of Nice, France. (1971) He has been a Member of
la Conférence de l'Instruction Publique du Département de l'Instruction Publique, Genève. Bernard Ivaldi is former Chairman of
the International Schools Association and currently a board member. ISA is an international NGO with consultative status to UNESCO and ECOSOC. He is currently Vice-Président
du Conseil de Fondation de l'Institut Supérieur des Affaires et du Management (INSAM), Geneva. We selected Mr. Ivaldi to serve on our Board due to his
knowledge of Swiss and French corporate laws and his experience in the field of administration, management of finances and of personnel, and in-service training.
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Roy G.C. Damary, Director
Roy G.C. Damary became a director on July 9, 2014. Mr. Damary currently serves as a member of the board of directors of two
subsidiaries of CVSL. He is the President of the INSAM Foundation in Geneva, Head of Business Studies at Robert Kennedy College (RKC), Switzerland, where he has taught for the last 13 years, and
Honorary Professor at the Ural State Forest Engineering University, Ekaterinburg (Russia). He owns, and since 1994 has provided consulting services through, Technomic Consultants SA, which
provided industrial marketing consultancy services for nearly 25 years before its reorientation to management services for foreign-owned Swiss companies. From 1998 through 2013,
Mr. Damary also individually provided services to Bridport and Co., a financial services company in Switzerland, as an outside consultant. He began his professional career in 1966 as a research
engineer and later as a techno-economic specialist at the Battelle Institue in Geneva, Switzerland. He holds an M.A. in Engineering Science with First Class Honours from Oxford University (1966), an
M.B.A. with High Distinction (Baker Scholar) from Harvard Business School (1974) and a Ph.D. from Lausanne University (2000). We selected Mr. Damary to serve on our Board due to his international
management prior experience as well as his knowledge of Swiss corporate law and practice and his international experience as a marketing consultant.
John W. Bickel Director
Mr. Bickel became a director on September 16, 2014. Mr. Bickel co-founded the Dallas and New York-based national law firm
Bickel & Brewer, where he served as an equity partner for over 30 years, withdrawing only recently from the firm to pursue other interests. He currently heads the firm of Bickel PLLC.
Mr. Bickel received his Bachelor of Science degree from the United States
Military Academy at West Point, New York in 1970, received infantry and parachute training, and served three years as an officer in an infantry battalion and aide-de-camp to a general officer of the
United States Army. Mr. Bickel received his law degree from Southern Methodist University Dedman School of Law in 1976. Following law school, Mr. Bickel completed his West Point
obligation as a trial attorney in the Judge Advocate General's Corps, in three years trying to verdict over 80 jury cases while serving on separate occasions as Chief Trial Counsel and Chief Defense
Counsel at Ft. Lewis, Washington. As a business litigator, Mr. Bickel was selected by his peers as a Top 100 Lawyer in the State of Texas. Mr. Bickel has been a member of the Executive
Committee of the Southern Methodist University Dedman School of Law and has served terms as a trustee of the West Point Association of Graduates. Mr. Bickel is a Fellow of both the American Bar
Foundation and the Texas Bar Foundation, a Sustaining Life Fellow in the Dallas Bar Foundation, a member of the Citizens for a Qualified Judiciary, an alumni member of the former Markey-Wigmore
Chapter of the Inns of Court, and is licensed to practice in both Texas and New York. We selected Mr. Bickel to serve on our Board because of his decades of accomplishment, experience, and good
judgment as a preeminent commercial litigation attorney; his broad and deep experience in corporate law, governance, and dispute resolution; and his analytical skills and leadership abilities.
Leadership Structure
Our Chief Executive Officer also serves as our Chairman of the Board. Our Board does not have a lead independent director. Our Board has determined
its leadership structure was appropriate and effective for us given our stage of development.
Director Independence
Although our common stock is not listed on any national securities exchange, for purposes of independence our Board has adopted NYSE MKT guidelines
regarding director independence and has determined that Michael Bishop, William Randall, Julie Rasmussen, Kay Bailey Hutchison, Bernard Ivaldi, Roy Damary and John W. Bickel are "independent"
directors under the definition set forth in the listing standards of the NYSE. In the event our shares of common stock are listed NYSE MKT, we
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will
qualify as a "controlled company" because Mr. Rochon, through his control of Rochon Capital, will continue to hold in excess of 50% of our voting securities. As a controlled company, we
will qualify for
certain exemptions to the NYSE MKT listing requirements, including the requirement that a majority of our directors be independent, and the requirements to have a compensation committee and a
nominating/corporate governance committee, each composed of entirely independent directors.
Audit Committee
The Audit Committee of our Board is currently composed of two directors, all of whom satisfy the independence and other standards for Audit Committee
members under the rules of the NYSE MKT (although our securities are not listed on the NYSE MKT, but are quoted on the OTCQX). The Audit Committee is composed of Mr. Bishop and
Mr. Randall and we have determined that Mr. Bishop is a "Financial Expert," as that term is defined under Section 407 of Regulation S-K.
The
Audit Committee operates under a written Audit Committee Charter, which is available to shareholders on our website at http://www.cvsl.us.com/investors/corporate-governance/.
Compensation Committee
The Compensation Committee of our Board currently consists of Mr. Bishop and Mr. Randall and Ms. Rasmussen.
The
Compensation Committee operates under a written Compensation Committee Charter, which is available to shareholders on our website at http://www.cvsl.us.com/investors/corporate-governance/.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee of our Board currently consists of Senator Hutchison, Mr. Bishop and Mr. Randall.
The
Nominating and Corporate Governance Committee operates under a written Nominating and Corporate Governance Committee Charter, which is available to shareholders on our website at http://www.cvsl.us.com/investors/corporate-governance/.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation awarded to or earned by our principal executive officer, principal financial officer and our two most
highly compensated executive officers who were serving as executive officers as of December 31, 2013 other than our principal executive officer and principal financial officer, whose total
compensation did not exceed $100,000 for the respective fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Year |
|
Salary
($) |
|
Bonus
($) |
|
Stock
Awards
($) |
|
Option
Awards
($) |
|
Incentive
Plan
Compensation
($) |
|
Deferred
Compensation
Earnings
($) |
|
All Other
Compensation
($) |
|
Total
($) |
|
John P. Rochon(1) |
|
|
2013 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Chief Executive Officer, President and Chairman of our Board of Directors |
|
|
2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Kelly L. Kittrell(2) |
|
|
2013 |
|
$ |
95,542 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
95,542 |
|
Chief Financial Officer, Treasurer and Director |
|
|
2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Russell Mack(3) |
|
|
2013 |
|
$ |
97,919 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
40,000 |
|
$ |
137,919 |
|
Vice President and Director |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Tamala L. Longaberger(4) |
|
|
2013 |
|
$ |
670,685 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
670,685 |
|
Chief Executive Officer of The Longaberger Company and Director |
|
|
2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
- (1)
- Mr. Rochon
was appointed as our Chief Executive Officer and President immediately after the consummation of the Initial Share Exchange on
September 25, 2012. Mr. Rochon currently is not receiving, and has not received, compensation for his service as our Chief Executive Officer. Mr. Rochon has received compensation
from Richmont Holdings for services performed for Richmont Holdings.
- (2)
- Mr. Kittrell
was appointed as our Chief Financial Officer on November 20, 2012. Mr. Kittrell began receiving compensation for his
services as Chief Financial Officer in 2013, and has received additional compensation from Richmont Holdings for services performed for Richmont Holdings.
- (3)
- Mr. Mack
was appointed as our Vice President on November 20, 2012. Mr. Mack began receiving compensation for his services as Vice
President in 2013, and has received additional compensation from Richmont Holdings for services performed for Richmont Holdings. Included in other compensation is a one-time fee that was paid to
Mr. Mack in the amount of $40,000 for communications and marketing consulting services he performed for TLC.
- (4)
- Ms. Longaberger
is compensated pursuant to her employment agreement, as further described below.
81
Table of Contents
We
do not have any current intentions to change our compensation policy or to compensate our executive officers differently after the Offering.
Options Grants During the Last Fiscal Year/Stock Option Plans
No individual grants of stock options, whether or not granted in tandem with stock appreciation rights (known as SARs or freestanding SARs,
respectively), or other stock awards were made to any executive officer or director during the fiscal years ended December 31, 2013 or 2012 or during the current fiscal year, as of the date of
this prospectus.
Aggregated Options Exercises in Last Fiscal Year
No stock options were exercised by any of our officers or directors and no stock awards vested during the fiscal years ended December 31, 2013
and 2012 or during the current fiscal year, as of the date of this prospectus.
Long-Term Incentive Plans and Awards
None of our executive officers is a participant in any long-term incentive plan.
Employment Agreements
On March 18, 2013, we entered into an employment agreement with Tamala L. Longaberger (the "Longaberger Agreement"), pursuant to which
Ms. Longaberger will continue to serve as Chief Executive Officer of TLC, our majority-owned subsidiary. The Longaberger Agreement contains a ten-year term and provides Ms. Longaberger
with eight weeks of paid vacation each year, which, if not taken, does not carry over to subsequent years. Upon termination of her employment for any reason, any unused vacation days are forfeited.
Ms. Longaberger is entitled to a vehicle allowance and reimbursement for her business expenses in accordance with TLC's standard policies. Ms. Longaberger's initial base salary is
$850,000, subject to adjustment by the Board, and she is entitled to an incentive bonus based on, among other things, TLC's operating results for and Ms. Longaberger's performance during each
fiscal year. The incentive bonus is a percentage of Ms. Longaberger's base salary, and her target bonus is 50% of her base salary, subject to adjustment by the Board.
DIRECTOR COMPENSATION TABLE FISCAL YEAR 2013
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned or
Paid in Cash(1) |
|
All Other
Compensation |
|
Total |
|
William Randall |
|
$ |
41,666 |
|
|
|
|
$ |
41,666 |
|
Julie Rasmussen |
|
$ |
41,666 |
|
$ |
37,193 |
|
$ |
78,859 |
|
- (1)
- In
March 2013, we began making cash payments of $4,166 per month ($50,000 annually) to two of our non-employee directors for their service as directors.
We
do not compensate any of our employee directors. Directors who are not employees will receive an annual cash fee of $50,000, payable monthly. Commencing July 2014, upon election to the
Board, each non-employee director receives a grant of restricted stock having a value of $50,000 on such date, vesting on the first anniversary of the grant date.
Long-Term Incentive Plans and Awards
The 2013 Director Smart Bonus Unit Plan (the "Plan") provides for the issuance of a cash bonus tied to stock price appreciation for non-employee
directors. The Compensation Committee of the Board approves all awards that are granted under the Plan. During 2013, we awarded a total of 500,000 equivalent shares of SARs among all eligible
directors that are remeasured each reporting period and are recognized ratably over the contractual term. We recognized $42,000 in compensation expense in 2013 related to the Plan.
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Table of Contents
SECURITY OWNERSHIP OF MANAGEMENT AND OTHER BENEFICIAL OWNERS
The table below sets forth information as of October 14, 2014 regarding the beneficial ownership of our common stock. Beneficial ownership
generally includes voting or investment power with respect to securities. The table reflects ownership by:
-
- each person or entity who owns beneficially 5% or greater of the shares of our outstanding common stock;
-
- each of our executive officers and directors; and
-
- our executive officers and directors as a group.
The percentages below are calculated based on 551,975,986 shares of our common stock being issued and outstanding as of October 14, 2014, which includes the 64,000,000 shares of
common stock to be issued to RCP V upon conversion of the RCP V Note, upon the closing of this offering. We have determined beneficial ownership in accordance with the rules of the SEC.
These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules
include shares of common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable on or before December 14, 2014, which is
60 days after October 14, 2014. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the
percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The table below does not include the Second
Tranche Stock, which may be issued at some time in the future, subject to the terms and conditions of the Amended Share Exchange Agreement. Unless otherwise indicated, the persons or entities
identified in this table have sole voting and investment
83
Table of Contents
power
with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
|
|
|
|
|
|
|
|
|
|
Name of Beneficial Owner
|
|
Positions |
|
Number of Shares
of Common Stock
Beneficially
Owned or Right
to Direct Vote |
|
Percent of
Common Stock
Beneficially
Owned or Right
to Direct Vote |
|
Directors and Named Executive Officers |
|
|
|
|
|
|
|
|
|
John P. Rochon(1) |
|
Chief Executive Officer/President and Chairman of the Board |
|
|
292,057,363 |
|
|
52.9 |
% |
John Rochon, Jr.(2) |
|
Vice Chairman and Director |
|
|
113,750,000 |
|
|
20.6 |
% |
Kelly Kittrell(3) |
|
Chief Financial Officer, Treasurer and Director |
|
|
292,057,363 |
|
|
52.9 |
% |
Russell Mack(4) |
|
Vice President and Director |
|
|
292,057,363 |
|
|
52.9 |
% |
Michael Bishop |
|
Director |
|
|
|
|
|
* |
|
Tamala Longaberger(5) |
|
Director |
|
|
|
|
|
* |
|
William Randall |
|
Director |
|
|
65,000 |
|
|
* |
|
Julie Rasmussen |
|
Director |
|
|
|
|
|
* |
|
Kay Bailey Hutchison(6) |
|
Director |
|
|
106,315 |
|
|
* |
|
Bernard Ivaldi(7) |
|
Director |
|
|
52,631 |
|
|
* |
|
Roy Damary(8) |
|
Director |
|
|
52,631 |
|
|
* |
|
John W. Bickel(9) |
|
Director |
|
|
52,083 |
|
|
* |
|
All directors and executive officers as a group(12) |
|
|
|
|
406,136,023 |
|
|
73.6 |
% |
5% Shareholders |
|
|
|
|
|
|
|
|
|
Rochon Capital Partners, Ltd.(10) |
|
|
|
|
292,057,363 |
|
|
52.9 |
% |
John Rochon Management, Inc.(11) |
|
|
|
|
292,057,363 |
|
|
52.9 |
% |
Richmont Street, LLC(12) |
|
|
|
|
64,000,000 |
|
|
11.6 |
% |
Richmont Capital Partners V LP |
|
|
|
|
64,000,000 |
|
|
11.6 |
% |
- *
- Less
than 1%
- (1)
- Includes
750,000 shares of common stock issued directly to John Rochon Management, Inc. ("JRMI") and 252,807,363 shares issued to Rochon
Capital. The limited partnership interests of Rochon Capital are owned 79% by Mr. Rochon, 20% by his wife and 1% by the general partner, JRMI. JRMI has control over the voting and disposition
of the shares held by Rochon Capital, and as the owner of all of the equity of JRMI, Mr. Rochon has control over the decision making of JRMI. As such, Mr. Rochon may be considered to
have control over the voting and disposition of the shares registered in the name of Rochon Capital, and therefore, such shares are also included in the shares listed as held by Mr. Rochon.
Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI may be deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement,
the beneficial ownership number for John Rochon also includes an additional 3,000,000 shares issued directly to each of Mr. Kittrell and Mr. Mack. Also includes an additional
32,500,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into between the trust and Rochon
Capital. Excludes an additional 504,813,514 shares of common stock which may be issued in the future upon the occurrence of certain stock acquisitions by third parties or the announcement of
certain tender or exchange offers of our common stock, pursuant to the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering. In the event the Second
Tranche Stock is
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Table of Contents
issued
to Rochon Capital, Mr. Rochon's beneficial ownership percentage would increase to 75.4%. See the section of this prospectus entitled "Certain Relationships and Related Party
Transactions."
- (2)
- Includes
25,000,000 shares held directly by John Rochon, Jr. and 24,750,000 shares of common stock held by The William John Philip Rochon 2010
Dynasty Trust, of which John Rochon, Jr. is the sole trustee. Includes 64,000,000 shares of common stock to be issued upon conversion of the RCP V Note.
- (3)
- Includes
3,000,000 shares owned by Mr. Kittrell. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI
may be deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement, the beneficial ownership number for Mr. Kittrell includes an additional
3,000,000 shares issued directly to Mr. Mack, 750,000 shares of common stock issued directly to JRMI and 252,807,363 shares issued to Rochon Capital. JRMI is the general
partner of Rochon Capital and John Rochon has decision making power with respect to JRMI. Mr. Kittrell disclaims ownership of all shares other than the 3,000,000 shares directly owned by
him. Also includes an additional 32,500,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into
between the trust and Rochon Capital. Excludes an additional 504,813,514 shares of common stock which may be issued in the future upon the occurrence of certain stock acquisitions by third
parties or the announcement of certain tender or exchange offers of our common stock pursuant to the Amended Share Exchange Agreement, which will become effective upon the consummation of this
offering. In the event the Second Tranche Stock is issued to Rochon Capital, Mr. Kittrell's beneficial ownership percentage would increase to 75.4%. See the section of this prospectus entitled
"Certain Relationships and Related Party Transactions."
- (4)
- Includes
3,000,000 shares owned by Mr. Mack. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI may
be deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement, the beneficial ownership number for Mr. Mack includes an additional
3,000,000 shares issued directly to Mr. Kittrell, 750,000 shares of common stock issued directly to JRMI and 252,807,363 shares issued to Rochon Capital. JRMI is the
general partner of Rochon Capital and John Rochon has decision making power with respect to JRMI. Mr. Mack disclaims ownership of all shares other than the 3,000,000 shares directly
owned by him. Includes an additional 32,500,000 shares of common stock issued to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered
into between the trust and Rochon Capital. Excludes an additional 504,813,514 shares of common stock which may be issued in the future upon the occurrence of certain stock acquisitions by third
parties or the announcement of certain tender or exchange offers of our common stock pursuant to the Amended Share Exchange Agreement, which will become effective upon the consummation of this
offering. In the event the Second Tranche Stock is issued to Rochon Capital, Mr. Mack's beneficial ownership percentage would increase to 75.4%. See the section of this prospectus entitled
"Certain Relationships and Related Party Transactions."
- (5)
- Does
not include 32,500,000 shares of common stock that were issued to a trust of which Ms. Longaberger is the trustee upon conversion of a
convertible subordinated unsecured note in the principal amount of $6,500,000 bearing interest at the rate of 4% per annum issued to a trust of which Ms. Longaberger is the trustee. The note
converted into 32,500,000 shares of common stock at a conversion price of $0.20 per share. These shares are subject to a voting agreement entered into between the trust and Mr. Rochon
that grants to Mr. Rochon the right to vote the shares for a period of five years commencing March 18, 2013. The agreement also provides that the trust also agreed not to transfer,
pledge, hypothecate, encumber or assign or otherwise dispose of the shares during the term of the agreement.
- (6)
- Includes
106,315 shares of common stock that were issued to Kay Bailey Hutchinson for director compensation.
- (7)
- Includes
52,631 shares of restricted common stock issued to Mr. Ivaldi for director compensation, for which restrictions lapse on
July 8, 2015.
- (8)
- Includes
52,631 shares of restricted common stock issued to Mr. Damary for director compensation, for which restrictions lapse on
July 5, 2015.
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Table of Contents
- (9)
- Includes
52,083 shares of restricted common stock issued to Mr. Bickel for director compensation, for which restrictions lapse on
September 16, 2015.
- (10)
- Includes
252,807,363 shares of common stock issued directly to Rochon Capital. The limited partnership interests of Rochon Capital are owned 79% by
Mr. Rochon, 20% by his wife and 1% by the general partner, JRMI. JRMI has control over the voting and disposition of the shares held by Rochon Capital and as the owner of all of the equity of
the JRMI. Mr. Rochon has control over the decision making of JRMI. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon Capital and JRMI may be deemed a group due to
certain actions taken by them in connection with the Share Exchange Agreement the beneficial ownership number for Rochon Capital also includes an additional 750,000 shares issued directly to
JRMI, and an additional 3,000,000 shares issued directly to each of Mr. Kelly Kittrell and Mr. Russell Mack. Includes an additional 32,500,000 shares of common stock issued
to a trust of which Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into between the trust and Rochon Capital. Excludes an additional
504,813,514 shares of common stock which may be issued in the future upon the occurrence of certain stock acquisitions by third parties or the announcement of certain tender or exchange offers
of our common stock pursuant to the Amended Share Exchange Agreement, which will become effective upon the consummation of this offering. In the event the Second Tranche Stock is issued to Rochon
Capital, Rochon Capital's beneficial ownership percentage would increase to 75.4%. See the section of this prospectus entitled "Certain Relationships and Related Party Transactions."
- (11)
- Includes
750,000 shares of common stock issued directly to JRMI and 252,807,363 shares issued to Rochon Capital. The limited partnership
interests of Rochon Capital are owned 79% by Mr. Rochon, 20% by his wife and 1% by the general partner, JRMI. JRMI has control over the voting and disposition of the shares held by Rochon
Capital and as the owner of all of the equity of JRMI, Mr. Rochon has control over the decision-making of JRMI. Inasmuch as Mr. Rochon, Mr. Kittrell, Mr. Mack, Rochon
Capital and JRMI may be deemed a group due to certain actions taken by them in connection with the Share Exchange Agreement, the beneficial ownership number for JRMI also includes an additional
3,000,000 shares issued directly to each of Mr. Kittrell and Mr. Mack. Include an additional 32,500,000 shares of common stock issued to a trust of which
Ms. Longaberger is the trustee, which shares are subject to a voting agreement entered into between the trust and Rochon Capital. Excludes an additional 504,813,514 shares of common
stock which may be issued in the future upon the occurrence of certain stock acquisitions by third parties or the announcement of certain tender or exchange offers of our common stock pursuant to the
Amended Share Exchange Agreement, which will become effective upon the consummation of this offering. In the event the Second Tranche Stock is issued to Rochon Capital, JRMI's beneficial ownership
percentage would increase to 75.4%. See the section of this prospectus entitled "Certain Relationships and Related Party Transactions."
- (12)
- Includes
64,000,000 shares of common stock to be issued to RCP V upon conversion of the RCP V Note upon the closing of this offering.
Richmont Street is the sole general partner of RCP V and John Rochon Jr. has decision making power with respect to Richmont Street.
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Table of Contents
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Related-Party Transaction Policy
Other than compensation arrangements for named executive officers and directors, which are described in the section entitled "Executive Compensation"
we describe below each transaction and series of similar transactions, during our last three fiscal years, to which we were a party or will be a party, in
which:
-
- the amounts involved exceeded or will exceed $120,000; and
-
- any of our directors, executive officers or holders of more than 5% of our common stock, or any member of the immediate
family of the foregoing persons, had or will have a direct or indirect material interest.
On
March 7, 2012, we issued 1,000,000 shares of our restricted common stock to our then director, Douglas Miscoll, for future service as our director. All shares issued to Mr. Miscoll
for future service subsequently were deemed fully earned. Mr. Miscoll has no further obligation to provide services to us.
On
May 15, 2012, we issued 2,666,666 restricted shares of common stock to an investor in satisfaction of $250,000 in principal and $16,666 in interest due to him pursuant to a convertible note.
In connection with the conversion of this note, we granted the investor a warrant to acquire 1,277,537 shares of our common stock exercisable for two years at a price of $0.50 per share. These
warrants are no longer outstanding.
On
May 16, 2012, we issued 2,380,000 shares of restricted common stock to an investor in satisfaction of $225,000 in principal and $13,000 in interest due to him pursuant to a convertible note.
In connection with the conversion of this note, we granted the investor a warrant to acquire 1,010,137 shares of our common stock exercisable for two years at a price of $0.50 per share. These
warrants are no longer outstanding.
On
August 24, 2012, we entered into a Share Exchange Agreement with HCG and Rochon Capital. Under the Share Exchange Agreement, in exchange for all of the capital stock of HCG, we issued
438,086,034 shares of our restricted common stock to Rochon Capital (the "Initial Share Exchange"). The shares of our common stock received by Rochon Capital totaled approximately 90% of our issued
and outstanding stock at the time of issuance. Under the Share Exchange Agreement, Rochon Capital also purchased and has the right to be issued an additional 504,813,514 shares of common stock upon
its request, the timing of which is in its sole discretion.
On
September 27, 2012, Rochon Capital transferred, in a private transaction, 3,000,000 shares of restricted common stock received by Rochon Capital as part of the Initial Share Exchange to each
of Kelly Kittrell and Russell Mack. Rochon Capital transferred these shares to Messrs. Kittrell and Mack in exchange for services performed by them to Richmont Holdings in connection with the
Share Exchange Agreement, and, with respect to Mr. Kittrell, for financial management services, and with respect to Mr. Mack, for marketing strategy services, to be performed on our
behalf in connection with any direct selling business conducted by us. Each of Messrs. Kittrell and Mack is an employee and director of CVSL as well as an employee of an affiliate of Richmont
Holdings.
In
October 2012, we entered into a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings, which was renewed for an additional year in October 2013. We are still building
an infrastructure of personnel and resources necessary to identify, analyze, negotiate and conduct due diligence on direct selling acquisition candidates; however, we have a continuing need for such
acquisition opportunities and 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. We have agreed to pay Richmont Holdings a
87
Table of Contents
reimbursement
fee (the "Reimbursement Fee") each month equal to $150,000, which increased by $10,000 after six months, and we reimbursed or paid 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, which costs were expensed in the 2012
fourth quarter income statements under legal and professional fees and other administrative costs.
On December 12, 2012 (the "Issuance Date\"), we issued a convertible subordinated unsecured promissory note in the amount of $20.0 million to RCP V in consideration of our receipt of
$20.0 million. The note is an unsecured obligation of ours and subordinated to any bank, financial institution, or other lender providing funded debt to us or any direct or indirect subsidiary
of ours, including any seller debt financing provided by the owners of any entity(ies) that may be acquired by us. Principal payments of $1,333,333 are due and payable on each anniversary of the
issuance date beginning on the third anniversary of the issuance date. A final principal payment, equal to the then unpaid principal balance of the note, is due and payable on the tenth anniversary of
the Issuance Date. The note bears interest at an annual rate of 4%, which interest is payable on each anniversary of the issuance date; provided, however, that interest payable through the third
anniversary of the issuance date may, at our option, be paid in kind and any such PIK Interest will be added to the outstanding principal amount of the note. Beginning 380 days from the
issuance date, the note may be prepaid, in whole or in part, at any time without premium or penalty. The full amount of the note (including any and all accrued interest thereon, whether previously
converted to principal or otherwise) will be converted, on a mandatory basis (the "Conversion"), into no more than 64,000,000 shares of our common stock on a date that is within 380 calendar days of
the issuance date (the date of the Conversion being referred to as the "Conversion Date"), at a price of $0.33 per share of common stock. We have agreed, within 365 days of the issuance date,
to: (1) amend our articles of incorporation to increase the number of unissued authorized shares of common stock; (2) reincorporate in Delaware and, as part of such reincorporation,
increase the number of unissued authorized shares of common stock; and/or (3) cause the surrender by Rochon Capital, of issued and outstanding shares of common stock, in each instance necessary
to allow us to be able to effect the Conversion. John Rochon, Jr., our Vice Chairman and one of our directors and the son of John P. Rochon, our Chairman and Chief Executive Officer, is the 100%
owner, and is in control, of Richmont Street, the sole general partner of RCP V. Michael Bishop, one of our directors, is a limited partner of RCP V. On June 17, 2013, the note was amended to
extend the date of Conversion of the RCP V Note from a date that was 380 days from the Issuance Date to provide that the note be mandatorily convertible into shares of our common stock
(subject to a maximum of 64,000,000 shares being issued) within ten days of June 17, 2014. On June 12, 2014, the note was amended to extend the mandatory conversion date to within ten
days of June 12,
2015 or such earlier date as may be mutually agreed by us and RCP V. The full amount of the note (including any and all accrued interest thereon, whether previously converted to principal or
otherwise) will be converted into no more than 64,000,000 shares of common stock at a price of $0.33 per share of our common stock. On October 10, 2014, RCP V and we mutually agreed to
provide for the automatic conversion of the RCP V Note into 64,000,000 shares of our common stock upon the closing of this offering.
At
December 31, 2013, HCG had a related party shareholder payable of $25,241 related to a loan made by HCG's former shareholder, Rochon Capital, to HCG for working capital. Two of the employees
of HCG are siblings of Mr. Rochon, our Chief Executive Officer, Chairman of our Board, and the controlling person of Rochon Capital, our principal shareholder. Each of Paula Mackarey and John
P. Rochon is a guarantor to HCG's line of credit with Pennstar Bank.
On
March 18, 2013, we completed our acquisition of a controlling stake in the voting stock of TLC. The President and CEO of TLC is Tamala Longaberger, a member of our Board. In consideration of
our acquisition of a majority of the shares of TLC stock, we issued to a trust of which Tamala Longaberger is the trustee a $6,500,000 Convertible Subordinated Unsecured Promissory Note, which
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Table of Contents
was
subsequently converted into 32,500,000 shares of our common stock and we issued to TLC a $4,000,000 Unsecured Promissory Note, dated March 14, 2013, payable in monthly installments.
On June 18, 2013, we entered into an Equity Contribution Agreement with Rochon Capital pursuant to which Rochon Capital contributed to us for no cash consideration 32,500,000 shares of our
common stock to offset the shares issued in connection with the acquisition of TLC. During the fourth quarter of 2013, we entered into an Equity Contribution Agreement with Rochon Capital pursuant to
which Rochon Capital contributed to us and we cancelled a total of 13,726,554 shares of our common stock, which consisted of 4,512,975 shares related to the YIAH acquisition, 1,766,979 shares related
to the Project Home acquisition and 7,446,600 shares related to the Agel acquisition to offset the shares issued in connection with the acquisitions. In addition, on December 3, 2013, Rochon
Capital contributed to a consultant on our behalf and for no cash consideration 10,000,000 shares to satisfy an obligation we had to the consultant. On May 1, 2014, we entered into an Equity
Contribution Agreement with Rochon Capital pursuant to which Rochon Capital contributed to us and we cancelled 1,052,117 shares of our common stock to offset the shares issued in connection with the
acquisitions of My Secret Kitchen, Paperly and Uppercase Living. The cancelled shares are not being held as treasury shares.
During the year ended December 31, 2013, we paid a total of $159,378 to Actitech, L.P., an entity owned by Michael Bishop, for the use of the entity's production capabilities for the production
of
products for YIAH that are being sold in the United States. In addition, in 2014 we began initial production runs of certain Agel products in this facility in 2014 and expect to continue to utilize
this facility to meet some of Agel's production needs in the future. As of September 30, 2014, we have paid Actitech, L.P. a total of $206,799 for use of its manufacturing facility in 2014.
On
June 27, 2014, Tamala L. Longaberger loaned TLC $42,000 and in connection therewith TLC issued a promissory note in the principal amount of $42,000 to her. The note bears interest at the
rate of 10% per annum and matures on June 27, 2015. The company's failure to attain certain milestones, including specified operational cost-savings, are considered a default under the note as
is a default under other loan, security or similar agreements of TLC if the default materially affects any of TLC's property, or ability to repay the note or perform its obligations under the note or
any related document. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure period for any nonpayment default that is curable so long as
a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
On
July 1, 2014, Tamala L. Longaberger loaned Agel $158,000 and in connection therewith Agel issued a promissory note in the principal amount of $158,000 to her. The note bears interest at the rate of
10% per annum and matures on July 1, 2015 and is guaranteed by the CVSL. The company's failure to comply with the obligations under the Note, insolvency or bankruptcy proceedings or a default
under any other loan, security or similar agreements of Agel if the default materially affects any of Agel's property or Agel's ability to repay the note or perform its obligations under this note, is
a default under the note. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure period for any nonpayment default that is curable so
long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
On
July 11, 2014, Tamala L. Longaberger loaned Agel $800,000 and in connection therewith Agel issued a promissory note in the principal amount of $800,000 to her. The note bears interest at the rate
of 10% per annum and matures July 11, 2015 and is guaranteed by CVSL. The company's failure to comply with the obligations under the note, insolvency or bankruptcy proceedings or a default
under any other loan, security or similar agreements of Agel if the default materially affects any of Agel's property or Agel's ability to repay the note or perform its obligation under the note, is a
default under
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the
note. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure period for any nonpayment default that is curable so long as a notice of
breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
On October 10, 2014, we entered into the Amended Share Exchange Agreement, which will be effective upon the consummation of this offering, pursuant to which Rochon Capital's right or the right
of a Permitted Transferee (as defined below) to be issued the Second Tranche Stock will be limited solely to the right to be issued the Second Tranche 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 certain tender or exchange offers which would result in any
person or group becoming an Acquiring Person. In such event, the Second Tranche 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 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. "Acquiring Person" shall not include (1) any person who acquires 15% or more of our shares of
common stock in a transaction approved by John P. Rochon, (2) any affiliates of John P. Rochon or (3) any family members of John P. Rochon.
In addition, Rochon Capital has agreed to irrevocably waive its right to, and it has agreed that it will not (i) sell, pledge, convey or otherwise transfer all or any part of the Second Tranche
Stock or the right to receive the Second Tranche Stock to any person or entity other than to (x) John P. Rochon or his wife or both or William John Philip Rochon (each a "Permitted Transferee")
or (y) us as set forth below and (ii) be entitled to receive any cash dividends or cash distributions of any kind with respect to the Second Tranche Stock except as specifically provided below.
Rochon Capital further agreed that the Second Tranche Stock shall be redeemed by us upon a cash payment to Rochon Capital from us of One Million Dollars ($1,000,000) if any of the following events
occur: (i) our liquidation or dissolution; (ii) our merger with or into another entity where the holders of our common stock prior to the merger do not own a majority of our common stock
immediately after the merger (specifically excluding the Second Tranche Stock from such calculation); (iii) the sale of all or substantially all of our assets; (iv) the death of John P.
Rochon, in which case the redemption shall be limited to Second Tranche Stock that has not been transferred by Rochon Capital; (v) a change of control of Rochon Capital such that a majority of
the equity of Rochon Capital is not owned by immediate family members of John P. Rochon; and (vi) John P. Rochon having been found guilty or having pled guilty or nolo contendere to a felony,
any act of embezzlement, fraud, larceny or theft on or from us. Rochon Capital has also agreed that the Second Tranche Stock will be automatically redeemed by us for nominal consideration if any of
the following events should occur: (i) we commence a voluntary case under Title 11 of the United States Code or the corresponding provisions of any successor laws; (ii) an involuntary
case against us is commenced under Title 11 of the United States Code or the corresponding provisions of any successor laws and either (A) the case is not dismissed by midnight at the end of
the 90th day after commencement or (B) the court before which the case is pending issues an order for relief or similar order approving the case; or (iii) a court of competent
jurisdiction appoints, or we make an assignment of all or substantially all of our assets to, a custodian (as that term is defined in Title 11 of the United States Code or the corresponding provisions
of any successor laws) for us or all or substantially all of our assets.
Rochon Capital has agreed to irrevocably authorize and direct our transfer agent to place a permanent stop order on the Second Tranche Stock and to add a corresponding restrictive legend on the
certificate or certificates representing the Second Tranche Stock.
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DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital consists of 5,000,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par
value $0.0001 per share. As of October 14, 2014, 487,712,326 shares of common stock and no shares of preferred stock were outstanding.
Common Stock
The following is a description of the rights associated with our common stock generally. For a description of the rights associated with the Second
Tranche Stock, which may be issued in the future under certain limited circumstances pursuant to the terms of the Amended Share Exchange Agreement, see "Certain Relationships and Related Party
Transactions."
Holders
of shares of our common stock have the right to cast one vote for each share of common stock in their name on the books of our company, whether represented in person or by proxy, on all
matters submitted to a vote of holders of common stock, including the election of directors. There is no right to cumulative voting in the election of directors. Except where a greater requirement is
provided by statute, by our articles of incorporation, or by our bylaws, the presence, in person or by proxy duly authorized, of one or more holders of a majority of the outstanding shares of our
common stock constitutes a quorum for the transaction of business. The vote by the holders of a majority of outstanding shares is required to effect certain fundamental corporate changes such as
liquidation, merger, or the amendment of our articles of incorporation.
There
are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. We have not declared any dividends, and we do not plan to declare any dividends in the
foreseeable future.
Holders
of shares of our common stock are not entitled to preemptive or subscription or conversion rights, and no redemption or sinking fund provisions are applicable to our common stock. All
outstanding shares of common stock are, and the shares of common stock sold in the offering, will when issued be fully paid and non-assessable.
The
holders of our common stock are entitled to one vote per share on all matters to be voted on by the shareholders. Subject to preferences that may be applicable to any outstanding shares of
preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available therefore. If we liquidate, dissolve or wind up,
holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion or subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering will be, fully paid and non-assessable. Except as otherwise required by Florida law, other than the election of directors,
all other action is taken by the vote of a majority of the outstanding shares of common stock voting as a single class present at a meeting of shareholders at which a quorum consisting of a majority
of the outstanding shares of common stock is present in person or proxy. The election of directors by our shareholders is determined by a plurality of the votes cast by the stockholders entitled to
vote at any meeting held for such purposes at which a quorum consisting of a majority of the outstanding shares of common stock is present in person or proxy.
Reverse Stock Split
We expect to effect a -for- reverse stock split. Upon the effectiveness of the reverse stock split,
every
shares of outstanding common stock decreased to shares of common stock. Similarly, the number of shares of common stock into which each outstanding option and warrant to purchase common
stock is exercisable decreased on a -for- basis, and the exercise price of each outstanding option and warrant to purchase common stock increased
proportionately.
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Preferred Stock
Our Board has the authority, without action by our shareholders, to designate and issue up to 10,000,000 shares of preferred stock in one or more
series or classes and to designate the rights, preferences and privileges of each series or class, which may be greater than the
rights of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until our Board determines the
specific rights of the holders of the preferred stock. The effects might include:
-
- restricting dividends on our common stock;
-
- diluting the voting power of our common stock;
-
- impairing liquidation rights of our common stock; or
-
- delaying or preventing a change in control of us without further action by our shareholders.
The
Board's authority to issue preferred stock without shareholder approval could make it more difficult for a third party to acquire control of our company, and could discourage such attempt. We have
no present plans to issue any shares of preferred stock.
Warrants
Outstanding Warrants
As of July 2, 2014, a total of 1,375,000 shares of common stock were issuable upon the exercise of outstanding warrants, 375,000 have an
exercise price of $0.55 per share
(the "May 2014 Warrants") and 1,000,000 have an exercise price of $0.64 (the "July 2014 Warrant"). The May 2014 Warrants were issued to a potential supplier and are exercisable for a term that expires
on May 5, 2015; provided, however, that the term will be extended for an additional year if on May 5, 2015 the shares of common stock underlying the warrant are subject to an effective
registration statement under the Securities Act or our common stock is listed on the Nasdaq National Market, the NYSE or the NYSE MKT. In addition, the May 2014 Warrants provide for piggyback
registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the May 2014 Warrants is subject to adjustment in the event of a stock dividend or
our recapitalization, reorganization, merger or consolidation. The July 2014 Warrant was issued to a consultant and is exercisable for a ten day period commencing 720 days after issuance;
however the July 2014 warrant expires without an opportunity to exercise it on July 1, 2015, unless the term is extended for an additional year which term will be extended only if on
July 1, 2015 the shares of common stock underlying the warrant are subject to an effective registration statement under the Securities Act or our common stock is listed on the Nasdaq National
Market the NYSE or the NYSE MKT. In addition, the July 2014 Warrant provides for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon
exercise of the July 2014 Warrant is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. Warrants issued in May 2012
exercisable for an aggregate of 2,287,674 shares of common stock with an exercise price of $0.50 per share expired unexercised in May 2014.
Registration Rights
On September 25, 2012, we entered into a Registration Rights Agreement with Rochon Capital which granted the holders of Registrable Securities
(as defined below) two demand registration rights upon request of at least 25% of the then outstanding Registrable Securities (as defined below). Registrable Securities are entitled to two demand
registration rights. The holders of the Registrable Securities have unlimited piggyback registration rights. Registrable Securities are defined as: (1) any shares of common stock held by Rochon
Capital (or any assignee or transferee of any Registrable Securities) or issuable upon conversion, exercise or exchange of options, warrants, convertible securities or exchangeable securities owned by
Rochon Capital (or any assignee or transferee of any Registrable Securities) at any time, and (2) any shares of common stock issued or issuable with respect to any shares described in
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subsection (1)
above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. Tami Longaberger
was added as a party entitled to registration rights under the Registration Rights Agreement.
The
holders of the May 2014 Warrants and July 2014 Warrant (the "Warrants") have been granted piggyback registration rights for the registration of the shares of common stock underlying the Warrants,
prior to the expiration of the Warrants, if we propose to register any shares of our common stock in connection with a shelf registration statement under Rule 415 of the Securities Act. The
piggyback registration rights are not applicable to: (1) the registration of any of our securities in connection with an underwritten public offering; (2) a registration relating solely
to an employee benefit plan; (3) a registration relating solely to a transaction under Rule 145 of the Securities Act; or (4) a registration in which the only securities being
registered are shares of common stock issuable upon conversion of debt securities which are also being registered.
Potential Anti-Takeover Effects
Certain provisions set forth in our articles of incorporation, as amended, in our bylaws and under Florida law, which are summarized below, may be
deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might
result in a premium being paid over the market price for the shares held by shareholders.
Blank Check Preferred Stock. Our articles of incorporation and bylaws contain provisions that permit us to issue, without any further vote or action by the
shareholders, up to 10,000,000 shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares constituting the series and the designation of the
series, the voting powers, if any, of the shares of the series, and the preferences and relative, participating, optional and other special rights, if any, and any qualifications, limitations or
restrictions, of the shares of such series.
Special Meetings of Shareholders. Our bylaws provide that special meetings of shareholders shall be held when directed by the Board. Shareholders are not permitted
to call a special meeting of shareholders, to require that the Board call such a special meeting, or to require that our Board request the calling of a special meeting of shareholders.
While
the foregoing provisions of our articles of incorporation and bylaws and of Florida law may have an anti-takeover effect, these provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board and in the policies formulated by the Board, and to discourage certain types of transactions that may involve an actual or threatened change of control.
In that regard, these provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in
proxy fights. In addition, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market
price of
our common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management.
Potential Issuance of Second Tranche. The Amended Share Exchange Agreement, which will become effective upon the consummation of this offering, provides for the
issuance of the Second Tranche Stock to Rochon Capital or a Permitted Transferee 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 will possess no rights other than voting rights, may serve as a further deterrent to third parties looking to acquire us. See the
section of this prospectus entitled "Certain Relationships and Related Party Transactions."
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Transfer Agent
We have retained Fidelity Transfer Company as our transfer agent. They are located at 8915 South 700 East, Suite 102,
Sandy, Utah 84070. Their telephone number is (801) 562-1300.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF OUR COMMON STOCK
The following discussion describes the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition,
ownership and disposition of
our common stock issued pursuant to this offering. This discussion is not a complete analysis of all potential U.S. federal income tax consequences and does not address any tax consequences arising
under any state, local or foreign tax laws, any income tax treaties, or any other U.S. federal tax laws, including U.S. federal estate and gift tax laws (except as specifically addressed herein with
respect to U.S federal estate taxes). This discussion is based on the Internal Revenue Code of 1986, as amended ("Code"), U.S. Treasury Regulations promulgated thereunder, judicial decisions and
published rulings and administrative pronouncements of the Internal Revenue Service ("IRS"), all as in effect on the date of the initial public offering. These authorities may change, possibly
retroactively, resulting in tax consequences different from those discussed below. No rulings have been or will be sought from the IRS with respect to the matters discussed below, and there can be no
assurance that the IRS will not take a different position regarding the tax consequences of a non-U.S. holder's acquisition, ownership or disposition of our common stock or that any such position
would not be sustained by a court.
This
discussion is limited to non-U.S. holders who purchase our common stock pursuant to this offering and who hold our common stock as "capital assets" within the meaning of Code Section 1221
(generally, property held for investment). This discussion does not address all U.S. federal income tax consequences that may be relevant to a non-U.S. holder in light of the holder's particular
circumstances. It also does not consider any specific facts or circumstances that may be relevant to non-U.S. holders subject to special rules under the U.S. federal income tax laws, including,
without limitation, U.S. expatriates, banks, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, "controlled foreign corporations," "passive
foreign investment companies," corporations that accumulate earnings to avoid U.S. federal income tax, brokers, dealers or traders in securities, commodities or currencies, partnerships or other
pass-through entities (or investors in such entities), tax-exempt organizations, tax-qualified retirement plans, persons subject to the alternative minimum tax or the unearned income Medicare
contribution tax, and persons holding our common stock as part of a straddle, hedge or other risk reduction strategy or as part of a conversion transaction or other integrated investment.
WE RECOMMEND THAT PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS, ANY APPLICABLE INCOME TAX TREATIES, OR ANY OTHER U.S. FEDERAL TAX LAWS (INCLUDING
ESTATE AND GIFT TAX LAWS).
Definition of Non-U.S. Holder
As used in this discussion, a non-U.S. holder is any beneficial owner of our common stock who is not treated as a partnership for U.S. federal income
tax purposes and is not:
-
- an individual citizen or resident of the United States;
-
- a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under
the laws of the United States, any state thereof or the District of Columbia;
-
- an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
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-
- a trust (1) if a U.S. court is able to exercise primary supervision over its administration and one or more U.S.
persons have authority to control all its substantial decisions or (2) that has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.
If
any entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and the activities
of the partnership. Partnerships and their partners should consult their tax advisors as to the tax consequences to them of the acquisition, ownership and disposition of our common stock.
Distributions on Our Common Stock
As described in the section entitled, "Dividend Policy," we do not anticipate paying dividends on our common stock in the foreseeable future. If we
make a distribution of cash or other property with respect to our common stock, the distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a tax-free
return of capital to the extent
of a holder's adjusted tax basis in its common stock, but not below zero. Any remaining excess will be treated as capital gain from the sale of property.
Dividends
paid to a non-U.S. holder of our common stock that are not effectively connected to the holder's conduct of a U.S. trade or business generally will be subject to U.S. federal withholding tax
at a rate of 30% of the gross amount of the dividends, or a lower rate specified by an applicable tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or
our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying the holder's qualification for the reduced rate. A non-U.S. holder may be required to obtain a U.S. taxpayer
identification number to claim treaty benefits. This certification must be provided to us or our paying agent prior to the payment of dividends and may be required to be updated periodically. Non-U.S.
holders that do not timely provide us or our paying agent with the required certification, but which qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely
filing an appropriate claim for refund with the IRS. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
If
a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on the common stock are effectively connected with the
holder's U.S. trade or business and, if an income tax treaty applies, the non-U.S. holder maintains a "permanent establishment" in the United States to which the dividends are attributable, the
non-U.S. holder will be exempt from U.S. federal withholding tax, if the appropriate certification is provided. To claim the exemption for effectively connected income, the non-U.S. holder must
furnish to us or our paying agent a properly executed IRS Form W-8ECI (or applicable successor form) prior to the payment of the dividends. Any dividends paid on our common stock that are
effectively connected with a non-U.S. holder's U.S. trade or business generally will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates
in the same manner as if the holder were a resident of the United States, unless the holder is entitled to the benefits of a tax treaty that provides otherwise. A non-U.S. holder that is a foreign
corporation also may be subject to a branch profits tax equal to 30% (or a lower rate specified by an applicable tax treaty) of its effectively connected earnings and profits for the taxable year that
are attributable to such dividends. Non-U.S. holders should consult any applicable tax treaties that may provide for different rules.
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Gain on Disposition of Our Common Stock
Subject to the discussions below regarding backup withholding and foreign accounts, a non-U.S. holder generally will not be subject to U.S. federal
income tax on any gain realized upon the sale or other disposition of our common stock unless:
-
- the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States ; and, in
some instances if an income tax treaty applies, is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States;
-
- the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the
taxable year of the disposition and certain other requirements are met; or
-
- our common stock constitutes a U.S. real property interest by reason of our status as a U.S. real property holding
corporation at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holder's holding period for our common stock and certain other requirements are met.
Unless
an applicable tax treaty provides otherwise, gain described in the first bullet point above will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S.
federal income tax rates in the same manner as if the holder were a resident of the United States. Non-U.S. holders that are foreign corporations also may be subject to a branch profits tax equal to
30% (or a lower rate specified by an applicable tax treaty) of its effectively connected earnings and profits for the taxable year that are attributable to such gain. Non-U.S. holders should consult
any applicable tax treaties that may provide for different rules.
Gain
described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or a lower rate specified by an applicable income tax treaty), but may be offset by U.S.
source capital losses provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.
With
respect to the third bullet point above, we believe we currently are not and will not become a U.S. real property holding corporation. However, because the determination of whether we are a U.S.
real property holding corporation generally depends on whether the fair market value of our U.S. real property interests equals or exceeds 50% of the sum of the fair market value of our other trade or
business assets and our worldwide real property interests, there can be no assurance that we will not become a U.S. real property holding corporation in the future. In the event we do become a U.S.
real property holding corporation, as long as our common stock is regularly traded on an established securities market, our common stock will constitute a U.S. real property interest only with respect
to a non-U.S. holder that actually or constructively holds more than five percent of our common stock at some time during the shorter of the five-year period preceding the disposition or the non-U.S.
holder's holding period for our common stock. Any taxable gain described in the third bullet point above generally will be taxed in the same manner as gain that is effectively connected with the
conduct of a U.S. trade or business, except that the branch profits tax will not apply.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each non-U.S. holder the amount of dividends on our common stock paid to the holder and the amount of any
tax withheld with respect to those dividends. These information reporting requirements apply even if no withholding was required because the dividends were effectively connected with the holder's
conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable tax treaty. This information also may be made available under a specific treaty or agreement with the tax
authorities in the country in which the non-U.S. holder resides or is established.
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Backup withholding, currently at a rate of 28%, generally will not apply to payments of dividends to a non-U.S. holder of our common stock provided the non-U.S. holder
furnishes to us or our paying agent the required certification as to its non-U.S. status (typically, by providing a valid IRS Form W-8BEN or W-8ECI) or an exemption is otherwise established.
Payment
of the proceeds from a non-U.S. holder's disposition of our common stock made by or through a foreign office of a broker will not be subject to information reporting or backup withholding,
except that information reporting (but generally not backup withholding) may apply to those payments if the broker does not have documentary evidence that the beneficial owner is a non-U.S. holder, an
exemption is not otherwise established and the broker is, for U.S. federal income tax purposes, a United States person (as defined in the Code) or has certain other enumerated connections with the
United States.
Payment
of the proceeds from a non-U.S. holder's disposition of our common stock made by or through the U.S. office of a broker generally will be subject to information reporting and backup
withholding unless the non-U.S. holder certifies as to its non-U.S. status (such as by providing a valid IRS Form W-8BEN or W-8ECI) or otherwise establishes an exemption from information
reporting and backup withholding.
Backup
withholding is not an additional tax. Taxpayers may use amounts withheld as a credit against their U.S. federal income tax liability or may claim a refund if they timely provide certain
information to the IRS.
U.S. Federal Estate Tax
Shares of our common stock held (or deemed held) by an individual who is a non-U.S. holder at the time of his or her death will be included in such
non-U.S. holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and thus may be subject to U.S. federal estate tax.
Additional Withholding Tax Related to Foreign Accounts
Legislation enacted in 2010 and existing guidance issued thereafter will require, after June 30, 2014, withholding at a rate of 30% on
dividends in respect of, and after December 31, 2016, gross proceeds from the sale of, our common stock held by or through certain foreign financial institutions (including investment funds),
unless such institution enters into an agreement with the U.S. Treasury to report, on an annual basis, information with respect to shares in, and accounts maintained by, the institution to the extent
such shares or accounts are held by certain U.S. persons or by certain non-U.S. entities that are wholly or partially owned by U.S. persons. An intergovernmental agreement between the United States
and an applicable foreign country, or future Treasury regulations or other guidance may modify these requirements. Accordingly, the entity through which shares of our common stock are held will affect
the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale of, common stock held by an investor that is a non-financial non-U.S.
entity which does not qualify under certain exceptions will be subject to withholding at a rate of 30% beginning after the dates noted above, unless such entity either (1) certifies to us (or
another applicable withholding agent) that such entity does not have any "substantial U.S. owners" or (2) provides certain information regarding the entity's "substantial U.S. owners," which we
(or another applicable withholding agent) will in turn provide to the U.S. Treasury. We will not pay any additional amounts to holders in respect of any amounts withheld. Non-U.S. holders are
encouraged to consult with their tax advisers regarding the possible implications of these rules on their investment in our common stock.
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WE RECOMMEND THAT PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS, ANY APPLICABLE INCOME TAX TREATIES, OR ANY OTHER U.S. FEDERAL TAX LAWS (INCLUDING
ESTATE AND GIFT TAX LAWS).
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UNDERWRITING
We are offering the shares of common stock described in this prospectus through a number of underwriters. Cantor Fitzgerald & Co. is acting as
book-running manager of the offering and as representative of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions
set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:
|
|
|
Name
|
|
Number of
Shares |
Cantor Fitzgerald & Co. |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
underwriters are committed to purchase all the shares of common stock offered by us if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The
underwriters propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price
less a concession not in excess of $ per share. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriters.
The
underwriters have an option to buy up to additional shares of common stock from us to cover sales of shares by the underwriters which exceed the number of shares specified in the
table above. The underwriters have 30 days from the date of this prospectus to exercise this over-allotment option. If any shares are purchased with this over-allotment option, the underwriters
will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the
same terms as those on which the shares are being offered.
The
underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $
per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
|
|
|
|
|
|
|
|
|
|
Without
over-allotment
exercise |
|
With full
over-allotment
exercise |
|
Per Share |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
|
We
estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and
commissions, will be approximately $ .
We
have also agreed to pay certain of the underwriters' expenses relating to the offering, including: (a) the underwriters' roadshow costs and expenses not to exceed $35,000;
(b) preparation of bound volumes in such quantities as the representative may reasonably request, not to exceed $2,500; (c) the fees and disbursements of counsel to the underwriters, not
to exceed $100,000; and (d) the cost of any
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background
investigations performed by the underwriters of the principals of our company, not to exceed $2,500 per person, or $15,000 in the aggregate.
A
prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may
agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to
underwriters and selling group members that may make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is
not part of this prospectus or the registration statement of which this prospectus forms a part, has not
been approved or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.
We
have agreed that we will not (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (2) enter into
any swap or other arrangement that transfers all or a portion of the economic consequences of ownership of any shares of common stock or any such other securities (regardless of whether any of these
transactions are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise), in each case without the prior written consent of Cantor Fitzgerald &
Co. for a period of 180 days after the date of this prospectus, other than the shares of our common stock to be sold hereunder and any shares of our common stock issued upon the exercise of
options granted under our existing stock-based compensation plans.
Our
directors and executive officers, and certain of our significant shareholders have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to
which each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of Cantor
Fitzgerald & Co., (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into, or exercisable or exchangeable for, our common stock
(including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the
rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant), (2) enter into any swap or other agreement that transfers, in whole or in part,
any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of
common stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security
convertible into or exercisable or exchangeable for our common stock.
The
180-day restricted period will be automatically extended if (1) during the last 17 days of the 180-day restricted period we issue an earnings release or material news or a material
event relating to us occurs or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results or become aware that material news or a material
event will occur during the 16-day period beginning on the last day of the 180-day restricted period, in either of which case the restrictions described above will continue to apply until the
expiration of the 180-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
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Table of Contents
We
have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
Our
common stock has been approved for listing on the NYSE MKT under the symbol "CVSL," subject to meeting all of the NYSE listing standards on the date of this offering and official notice of
issuance.
In
connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the
purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common
stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open
market to cover positions created by short sales. Short sales may be "covered" shorts, which are short positions in an amount not greater than the underwriters' over-allotment option referred to
above, or may be "naked" shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in
whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open
market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a
naked short position, they will purchase shares in the open market to cover the position.
The
underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the
common stock, including the imposition of penalty bids. This means that if the representative of the underwriters purchases common stock in the open market in stabilizing transactions or to cover
short sales, the representative can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These
activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the
price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The
underwriters may carry out these transactions on the NYSE MKT, in the over-the-counter market or otherwise.
In
connection with this offering, the underwriters and selling group members may engage in passive market making transactions in our common stock on the NYSE MKT in accordance with Rule 103 of
Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker
must display its bid at a price not in excess of the highest independent bid of that security; however, if all independent bids are lowered below the passive market maker's bid, that bid must then be
lowered when specified purchase limits are exceeded.
Neither
we nor the underwriters can assure investors that an active trading market will develop for our shares of common stock, or that the shares will trade in the public market at or above the
public offering price.
Certain
of the underwriters and their affiliates have provided in the past to us and our affiliates, and may provide from time to time in the future, certain commercial banking, financial advisory,
investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In
addition, from
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time
to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or
short positions in our debt or equity securities or loans, and may do so in the future.
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action
for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the
distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such
an offer or a solicitation is unlawful.
This
document is only being distributed to and is only directed at (1) persons who are outside the United Kingdom, (2) investment professionals falling within Article 19(5) of the
Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order"), or (3) high net worth entities, and other persons to whom it may lawfully be communicated, falling with
Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). The securities are only
available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person
should not act or rely on this document or any of its contents.
In
relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State"), from and including the date on which the European Union
Prospectus Directive (the "EU Prospectus Directive") was implemented in that Relevant Member State (the "Relevant Implementation Date") an offer of securities described in this prospectus may not be
made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or,
where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that,
with effect from and including the Relevant Implementation Date, an offer of securities described in this prospectus may be made to the public in that Relevant Member State at any
time:
-
- to any legal entity which is a qualified investor as defined under the EU Prospectus Directive;
-
- to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending
Directive, 150 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive); or
-
- in any other circumstances falling within Article 3(2) of the EU Prospectus Directive, provided that no such offer
of securities described in this prospectus shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the EU Prospectus Directive.
For
the purposes of this provision, the expression an "offer of securities to the public" in relation to any securities in any Relevant Member State means the communication in any form and by any
means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied
in that Member State by any measure implementing the EU Prospectus Directive in that Member State. The expression "EU Prospectus Directive" means Directive 2003/71/EC (and any amendments
thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State, and the
expression "2010 PD Amending Directive" means Directive 2010/73/EU.
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Table of Contents
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon for us by Gracin & Marlow, LLP, New York,
New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Reed Smith LLP, New York, New York.
EXPERTS
The consolidated financial statements of CVSL Inc. and subsidiaries as of December 31, 2013 and 2012 and for each of the two years in
the period ended December 31, 2013 included in this prospectus and in the Registration Statement have been so included in reliance on the report of PMB Helin Donovan, LLP, an independent
auditor, appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing and accounting.
The
financial statements for TLC as of and for each of the two years in the period ended December 31, 2012 included in this prospectus and in the Registration Statement have been so included in
reliance on the report of Plante & Moran, PLLC, an independent auditor, appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing
and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered
hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed
therewith. For further information about us
and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of
any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full
text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without
charge at the public reference room maintained by the SEC, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement
may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also
maintains an Internet web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.
Our
website address is www.cvsl.us.com. The information contained in, and that can be accessed through, our website is not incorporated into and is not
part of this prospectus.
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Table of Contents
INDEX TO FINANCIAL STATEMENTS
CVSL INC. AND SUBSIDIARIES
THE LONGABERGER COMPANY
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of CVSL, Inc.:
We
have audited the accompanying consolidated balance sheets of CVSL, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CVSL, Inc. as of December 31,
2013 and 2012, including the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
PMB
Helin Donovan, LLP
/s/ PMB Helin Donovan, LLP
Dallas,
Texas
March 31, 2014
F-2
Table of Contents
CVSL Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2012 |
|
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,876,708 |
|
$ |
19,032,392 |
|
Marketable securities |
|
|
11,830,252 |
|
|
|
|
Accounts receivable, net |
|
|
780,237 |
|
|
100,769 |
|
Inventory |
|
|
18,734,294 |
|
|
|
|
Other current assets |
|
|
2,948,717 |
|
|
20,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
38,170,208 |
|
|
19,154,020 |
|
Property, plant and equipment, net of accumulated depreciation |
|
|
22,847,854 |
|
|
1,514 |
|
Goodwill |
|
|
4,422,928 |
|
|
|
|
Intangibles, net |
|
|
3,764,063 |
|
|
|
|
Other assets |
|
|
617,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
69,822,848 |
|
$ |
19,155,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity (deficit) |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payabletrade |
|
$ |
10,471,121 |
|
$ |
409,643 |
|
Accounts payablerelated party |
|
|
181,858 |
|
|
416,670 |
|
Line of credit payable |
|
|
9,806,002 |
|
|
22,653 |
|
Accrued commissions |
|
|
3,740,846 |
|
|
|
|
Deferred revenue |
|
|
1,661,851 |
|
|
60,548 |
|
Current portion of long-term debt |
|
|
1,128,674 |
|
|
|
|
Other current liabilities |
|
|
7,881,994 |
|
|
18,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
34,872,346 |
|
|
927,889 |
|
Long-term debt |
|
|
25,594,722 |
|
|
20,041,644 |
|
Other long-term liabilities |
|
|
499,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
60,966,708 |
|
|
20,969,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments & contingencies |
|
|
|
|
|
|
|
Stockholders' equity (deficit): |
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share, 10,000,000 authorized-0-issued and outstanding |
|
|
|
|
|
|
|
Common stock, par value $0.0001 per share, 5,000,000,000 and 490,000,000 shares authorized; 487,139,777 and 487,712,326 shares issued and
outstanding, respectively |
|
|
48,713 |
|
|
48,771 |
|
Additional paid-in capital |
|
|
14,362,493 |
|
|
2,691,942 |
|
Accumulated other comprehensive loss |
|
|
(767,569 |
) |
|
|
|
Accumulated deficit |
|
|
(13,085,777 |
) |
|
(4,554,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit) attributable to CVSL |
|
|
557,860 |
|
|
(1,813,999 |
) |
Stockholders' equity attributable to noncontrolling interest |
|
|
8,298,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit) |
|
|
8,856,140 |
|
|
(1,813,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
69,822,848 |
|
$ |
19,155,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
Table of Contents
CVSL Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013 |
|
2012 |
|
Revenues |
|
$ |
84,850,502 |
|
$ |
930,073 |
|
Program costs and discounts |
|
|
(20,139,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
64,711,161 |
|
|
930,073 |
|
Costs of sales |
|
|
29,027,643 |
|
|
324,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35,683,518 |
|
|
605,150 |
|
Commissions and incentives |
|
|
16,432,061 |
|
|
|
|
Impairment of goodwill |
|
|
|
|
|
2,488,708 |
|
Selling, general and administrative |
|
|
27,918,877 |
|
|
2,291,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(8,667,420 |
) |
|
(4,175,549 |
) |
Gain on marketable securities |
|
|
(499,949 |
) |
|
|
|
Interest expense, net |
|
|
1,609,313 |
|
|
42,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision |
|
|
(9,776,784 |
) |
|
(4,218,222 |
) |
Income tax provision |
|
|
273,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(10,049,784 |
) |
|
(4,218,222 |
) |
Loss from discontinued operations, net of income taxes of $0 |
|
|
|
|
|
(184,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(10,049,784 |
) |
|
(4,402,947 |
) |
Net loss attributable to non-controlling interest |
|
|
(1,518,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders' |
|
$ |
(8,531,065 |
) |
$ |
(4,402,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
994,102,491 |
|
|
451,274,391 |
|
Loss from continuing operations* |
|
$ |
(0.01 |
) |
$ |
(0.00 |
) |
Loss from discontinued operations |
|
|
(0.00 |
) |
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders' |
|
$ |
(0.01 |
) |
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Excludes
loss attributable to non-controlling interest.
See notes to consolidated financial statements.
F-4
Table of Contents
CVSL Inc.
Consolidated Statements of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013 |
|
2012 |
|
Net loss |
|
$ |
(10,049,784 |
) |
$ |
(4,402,947 |
) |
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
Unrealized loss on marketable securities |
|
|
(636,778 |
) |
|
|
|
Foreign currency translation adjustment |
|
|
(142,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(779,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(10,828,926 |
) |
|
(4,402,947 |
) |
Comprehensive loss attributable to non-controlling interests |
|
|
(1,530,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common stockholders' |
|
$ |
(9,298,634 |
) |
$ |
(4,402,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
Table of Contents
CVSL Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
|
|
2013 |
|
2012 |
|
Operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,049,784 |
) |
$ |
(4,402,947 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
Goodwill impairment |
|
|
|
|
|
2,488,708 |
|
Depreciation and amortization |
|
|
1,799,993 |
|
|
1,042 |
|
Interest expense |
|
|
903,007 |
|
|
41,644 |
|
Write-down of inventory |
|
|
124,000 |
|
|
|
|
Provision for losses on receivables, net |
|
|
141,801 |
|
|
|
|
Loss on discontinued operations |
|
|
|
|
|
184,725 |
|
Loss on sales of assets |
|
|
9,027 |
|
|
|
|
Deferred income tax benefit |
|
|
(22,000 |
) |
|
|
|
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
(414,911 |
) |
|
(5,216 |
) |
Inventory |
|
|
3,980,288 |
|
|
|
|
Other current assets |
|
|
690,228 |
|
|
(20,359 |
) |
Accounts payable and accrued expenses |
|
|
867,105 |
|
|
365,394 |
|
Accounts payablerelated party |
|
|
(392,315 |
) |
|
391,429 |
|
Deferred revenue |
|
|
(2,721,864 |
) |
|
(18,665 |
) |
Other long-term liabilities |
|
|
484,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(4,600,573 |
) |
|
(974,245 |
) |
Investing activities: |
|
|
|
|
|
|
|
Capital expenditures |
|
|
(454,188 |
) |
|
|
|
Proceeds from the sale of property, plant and equipment |
|
|
4,642,522 |
|
|
|
|
Investment in marketable securities |
|
|
(16,486,736 |
) |
|
|
|
Sale of marketable securities |
|
|
4,019,706 |
|
|
|
|
Cash acquired in acquisitions |
|
|
2,548,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(5,730,529 |
) |
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Proceeds from sale of convertible notes |
|
|
|
|
|
20,000,000 |
|
Line of credit, net change |
|
|
421,159 |
|
|
(1,971 |
) |
Repayments on long-term debt |
|
|
(5,215,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(4,793,936 |
) |
|
19,998,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(30,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
(15,155,684 |
) |
|
19,023,784 |
|
Cash and cash equivalents at beginning of year |
|
|
19,032,392 |
|
|
8,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,876,708 |
|
$ |
19,032,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
Interest |
|
$ |
706,306 |
|
|
|
|
Income taxes |
|
|
221,779 |
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
Convertible note converted to stock |
|
|
6,563,555 |
|
|
|
|
Convertible note issued related to acquisition |
|
|
6,500,000 |
|
|
|
|
Promissory note issued related to acquisition |
|
|
4,000,000 |
|
|
|
|
Stock issued related to acquisitions |
|
|
5,106,938 |
|
|
|
|
See notes to consolidated financial statements.
F-6
Table of Contents
CVSL Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
|
|
|
|
|
|
|
|
Additional
Paid-In
Capital |
|
Accumulated
Deficit |
|
Non-controlling
Interest |
|
Total
Stockholders'
Equity |
|
|
|
Shares |
|
Amount |
|
Balance at December 31, 2011 |
|
|
1,000 |
|
$ |
10 |
|
$ |
66,094 |
|
$ |
|
|
$ |
(151,765 |
) |
$ |
|
|
$ |
(85,661 |
) |
Issuance of shares to HCG owners in connection with the Share Exchange |
|
|
438,085,034 |
|
|
43,798 |
|
|
(43,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of assumption of CVSL asset and liabilities |
|
|
49,626,292 |
|
|
4,963 |
|
|
2,669,646 |
|
|
|
|
|
|
|
|
|
|
|
2,674,609 |
|
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,402,947 |
) |
|
|
|
|
(4,402,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
|
487,712,326 |
|
$ |
48,771 |
|
$ |
2,691,942 |
|
$ |
|
|
$ |
(4,554,712 |
) |
$ |
|
|
$ |
(1,813,999 |
) |
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,531,065 |
) |
|
(1,518,719 |
) |
|
(10,049,784 |
) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
(767,569 |
) |
|
|
|
|
(11,573 |
) |
|
(779,142 |
) |
Contribution of noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,828,572 |
|
|
9,828,572 |
|
Issuance of stock for convertible note |
|
|
32,500,000 |
|
|
3,250 |
|
|
6,560,305 |
|
|
|
|
|
|
|
|
|
|
|
6,563,555 |
|
Issuance of stock for investment in subsidiaries |
|
|
13,154,005 |
|
|
1,315 |
|
|
5,105,623 |
|
|
|
|
|
|
|
|
|
|
|
5,106,938 |
|
Contribution of stock with no consideration |
|
|
(46,226,554 |
) |
|
(4,623 |
) |
|
4,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013 |
|
|
487,139,777 |
|
$ |
48,713 |
|
$ |
14,362,493 |
|
$ |
(767,569 |
) |
$ |
(13,085,777 |
) |
$ |
8,298,280 |
|
$ |
8,856,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements
(1) Business Overview and Current Plans
CVSL
seeks to acquire companies primarily in the micro-enterprise (direct-selling) sector and companies potentially engaging in businesses related to micro-enterprise and to build within this sector
an interconnected "network of networks," in which social connections aided by the power of social media will be combined with relationship-based commerce (that is, commerce conducted between friends,
neighbors, relatives and colleagues). CVSL refers to this convergence as "social commerce." In
making acquisitions, CVSL intends to acquire millions of coordinates of sellers and their customers, out of which will be formed a virtual, online economy which will offer its members a myriad of
benefits and advantages. CVSL's acquisitions form the platform for this growing online economy.
In
considering appropriate acquisition targets, CVSL anticipates that it will evaluate companies of varying sizes in our targeted space, particularly companies that management believes are accretive
or otherwise add value to one or more of our businesses. CVSL plans to consider companies that are currently profitable and looking to enhance their growth, as well as companies that have experienced
financial and operational difficulties or limitations and can, in our opinion, be strengthened by improved strategic and tactical guidance. All of the acquisitions, large or small, profitable or
otherwise, will add additional coordinates of sellers and customers, thereby adding size and continually increasing the scope of CVSL's network of networks.
The
Company owns a 51.7% controlling interest in The Longaberger Company ("TLC"). TLC is a direct-selling business based in Newark, Ohio that sells premium hand-crafted baskets and a line of products
for the home, including pottery, cookware, wrought iron and other home décor products, through a nationwide network of independent sales representatives. TLC also has showrooms in
various states, which offer merchandise and serve as sales force support centers.
The
Company substantially owns 100% of Agel Enterprises Inc. ("AEI"). Because of foreign ownership regulations in our Argentina, Colombia, Mexico and Panama subsidiaries, AEI is limited to 99%
ownership in these subsidiaries. An individual owns an approximately 1% noncontrolling interest in these subsidiaries of AEI. AEI is a direct-selling business based in Springville, Utah that sells
nutritional supplements and skin care products through a worldwide network of independent sales representatives. AEI's products are sold in over 40 countries.
The
Company owns 100% of Your Inspiration At Home Pty Ltd. ("YIAH"). YIAH is an innovative and award-winning direct seller of hand-crafted spices from around the world. YIAH originated in
Australia and has expanded its operations to North America during the third quarter of 2013.
The
Company owns 100% of CVSL TBT LLC which operates Tomboy Tools ("TBT"), a direct seller of a line of tools designed for women, as well as home security monitoring services.
The
Company owns 100% of Paperly, Inc., a direct seller that allows its independent sales consultants to work with customers to design and create custom stationery through home parties, events
and individual appointments.
The
Company owns a 90% controlling interest in My Secret Kitchen, Ltd ("MSK"), an award-winning United Kingdom-based direct seller of a unique line of food products.
The
Company owns 100% of Happenings Communications Group, Inc. ("HCG"). HCG publishes a monthly magazine, Happenings Magazine that references events and attractions, entertainment and
recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, and can provide such services to direct-selling businesses.
Services may include creating brochures, sales materials, websites and other communications for
F-8
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(1) Business Overview and Current Plans (Continued)
independent
sales representatives and ultimate customers. As a result, HCG is available to serve as a valuable "in-house" resource for providing marketing and creative services to the direct-selling
companies that we expect to acquire.
(2) Summary of Significant Accounting Policies
Consolidation
CVSL
consolidates all entities in which it owns or controls more than 50% of the voting shares, including any investments where we have determined to have control. The portion of the entity not owned
by us is reflected as a non-controlling interest within the equity section of the consolidated
balance sheets. As of December 31, 2013, the non-controlling interest consisted of minority shareholder interests in TLC, certain international subsidiaries of AEI and MSK. As of
December 31, 2012, there was no non-controlling interest. All inter-company balances and transactions have been eliminated in consolidation.
Business Combinations
Business
combinations are accounted for using the acquisition method of accounting as of the acquisition date, which is the date on which control of the acquired company is transferred to CVSL.
Control is assessed by considering the legal transfer of voting rights that are currently exercisable and managerial control of the entity. Goodwill is measured at the acquisition date as the fair
value of the consideration transferred less the net fair value of identifiable assets acquired and liabilities assumed. Any contingent consideration is measured at fair value at the acquisition date.
Transaction costs, other than those associated with the issuance of debt or equity securities, related to a business combination are expensed as incurred.
Reclassifications
Certain
amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
The
preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. These estimates are based
on information available as of the date of the consolidated financial statements. Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
Cash
equivalents are short-term, highly-liquid instruments with original maturities of 90 days or less. We maintain our cash primarily with major U.S. domestic banks. The amounts held in
interest bearing accounts periodically exceed the Federal Deposit Insurance Corporation insured limit of $250,000 at December 31, 2013 and December 31, 2012. The amounts held in these
banks exceeded the insured limit of $250,000 as of December 31, 2013 and December 31, 2012 totaling $898,077 and $19,032,392, respectively. We have not incurred any losses related to
these deposits.
F-9
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Marketable Securities
CVSL
invests in the ordinary course of business, and such investments may include equity securities, debt instruments and mutual funds. The investments are classified as available-for-sale investments
that are considered temporary. The investments are recorded at fair value with unrealized gains and losses included in accumulated other comprehensive income and realized gains and losses reported
separately on the income statement.
Accounts Receivable
The
carrying value of our accounts receivable, net of allowance for doubtful accounts, represents their estimated net realizable value. We estimate the allowance for doubtful accounts based on type of
customer, age of outstanding receivable, historical collection trends, and existing economic conditions. If events or changes in circumstances indicate that a specific receivable balance may be
unrealizable, further consideration is given to the collectibility of those balances, and the allowance is adjusted accordingly. Receivable balances deemed uncollectible are written off against the
allowance. We have recorded an allowance for doubtful accounts of $132,976 and $8,500 at December 31, 2013 and 2012, respectively.
Inventory
Inventories
are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The Company records provisions for obsolete, excess and unmarketable inventory in cost of
goods sold.
Property, Plant and Equipment
Property,
plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. Provisions for amortization of leasehold improvements are
made at annual rates based upon the lesser of the estimated useful lives of the assets or terms of the leases. Expenditures for maintenance and repairs are expensed as incurred.
At
December 31, 2013, the useful lives used for depreciation and amortization were as follows:
|
|
|
Buildings |
|
7 to 40 years |
Land improvements |
|
3 to 25 years |
Leasehold improvements |
|
3 to 15 years |
Equipment |
|
3 to 25 years |
Impairment of Long-Lived Assets
CVSL
management reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives for impairment in accordance with accounting guidance. Management
determines whether there has been an impairment of long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the
asset or asset group to the carrying value of the asset. The amount of any resulting impairment is calculated by comparing the carrying value to the fair value. Long-lived assets that meet the
definition of held for sale are valued at the lower of carrying amount or net realizable value. Assets or asset groups are determined at the lowest level possible for which identifiable cash flows are
largely
F-10
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
independent
of the cash flows of other assets and liabilities. For assets whose aggregate undiscounted cash flows are less than its carrying value, the assets are considered potentially impaired and
actual impairments, if any, would be determined to the extent the assets carrying value exceeds its aggregate fair value computed as the aggregate of discounted cash flow.
Goodwill and Other Intangibles
CVSL
management performs its goodwill and other indefinite-lived intangible impairment test annually or when changes in circumstances indicate an impairment event may have occurred by estimating the
fair value of each reporting unit compared to its carrying value. Our reporting units represent an operating segment or a reporting level below an operating segment.
Additionally,
the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods.
We use a discounted cash flow model and a market approach to calculate the fair value of our reporting units. The model includes a number of significant assumptions and estimates regarding future cash
flows and these estimates could be materially impacted by adverse changes in market conditions.
Goodwill
is measured for impairment by comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying
value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference
is recorded. After the Share Exchange Agreement in 2012, we determined that the goodwill associated with that acquisition was impaired. As a result, we recorded $2,488,708 in goodwill impairment that
represented all goodwill associated with the Share Exchange Agreement. The impairment charge is included in the consolidated statements of operations.
Indefinite-lived
assets are measured for impairment by comparing the fair value of the indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible
asset is lower than its carrying value, an impairment charge equal to the difference is recorded.
Income Taxes
CVSL
and its U.S. subsidiaries (excluding TLC) file a consolidated Federal income tax return. Deferred income taxes are provided for temporary differences between financial statement and tax bases of
asset and liabilities. Benefits from tax credits are reflected currently in earnings. We record income tax
positions based on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.
Translation of Foreign Currencies
The
functional currency of our foreign subsidiaries is the local currency of their country of domicile. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollar amounts at
month-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates for the monthly accounting period to which they relate. Equity accounts are translated at historical
rates. Foreign currency translation adjustments are accumulated as a component of other comprehensive income.
F-11
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Fair Value
We
established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input
that is significant to the fair value measurement. Level 1 represents unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 represents quoted prices
for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly. Level 3 represents valuations derived
from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Comprehensive Income (Loss)
We
report comprehensive income (loss) in our consolidated statements of comprehensive income (loss). Comprehensive income (loss) consists of net earnings (loss) plus gains and losses affecting
stockholders' equity that, under generally accepted accounting principles, are excluded from net earnings (loss), such as gains and losses related to available for sale marketable securities and the
translation effect of foreign currency assets and liabilities, net of taxes.
Revenue Recognition and Deferred Revenue
In
the ordinary course of business we receive payments, primarily via credit card, for the sale of products at the time customers place orders. Sales and related fees such as shipping and handling,
net of applicable sales discounts, are recorded as revenue when the product is shipped and when title and the risk of ownership passes to the customer. The Company presents revenues net of any taxes
collected from customers which are remitted to governmental authorities. Payments received for undelivered products are recorded as deferred revenue and are included in current liabilities on the
Company's consolidated balance sheets. Certain incentives offered on the sale of our products, including sales discounts, described in the paragraph below are classified as program costs and
discounts. A provision for product returns and allowances is recorded and is founded on historical experience and is classified as a reduction of revenues and costs of sales. At December 31,
2013 and 2012, our allowance for sales returns totaled $221,396 and $0, respectively.
Program costs and discounts
Program
costs and discounts represent the various methods of promoting our products. We offer benefits such as discounts on starter kits for new consultants, promotional pricing for the host of a home
show, which vary depending on the value of the orders placed and general discounts on our products.
Cost of Sales
Cost
of sales includes the cost of raw materials, finished goods, shipping expenses, and the direct and indirect costs associated with the personnel, resources and property, plant and equipment
related to the manufacturing, warehousing, inventory management and order fulfillment functions.
Commissions and Incentives
Commissions
and incentives include all forms of commissions, overrides and incentives related to the sales force. We accrue expenses for incentive trips over qualification periods as they are earned.
The
F-12
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Company
analyzes incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results
could result in liabilities being more or less than the amounts recorded.
In
order to more closely conform to the financial presentation of other companies involved in direct selling, we reclassified certain amounts previously reported in interim financial information
totaling $8.2 million from program costs and discounts and $3.5 million selling, general and administrative expenses, $0.5 million in costs of sales to commissions and incentives
for the year ended 2013.
The
intial presentation relating to commissions and incentives were included in both program costs and discounts and in selling, general and administrative expenses in the consolidated financial
statements of operations. Certain personal sales incentives were presented in program costs and discounts as they represent what are referred to as retained commissions in the party plan segment in
direct selling industry. Other commissions related to a consultant's downline (override commissions) were recorded
and presented in selling, general and administrative expenses. As we acquired other companies in the direct selling industry, we noticed variations of compensation plans and presentation in the
statements of operations. As a result, we decided to standardize our presentation of commissions and incentives. We added the commissions and incentives category for the year-ended December 31,
2013. We did not reclassify any amounts for the year-ended December 31, 2012, as we did not operate any companies in the direct selling industry during that year.
Selling, General and Administrative
Selling,
general and administrative expenses include wages and related benefits associated with various administrative departments, including human resources, legal, information technology, finance
and executive, as well as professional fees and administrative facility costs associated with leased buildings, depreciation related to owned buildings, office equipment and supplies.
In
order to more closely conform to the financial presentation of other companies involved in direct selling, we reclassified certain amounts previously reported in interim financial information
totaling $1.4 million that offset selling, general and administrative expenses to revenues.
Loss per Share of Common Stock
The
computation of basic earnings (loss) per common share is based upon the weighted average number of shares outstanding in accordance with current accounting guidance.
Outstanding
Stock Warrants and shares issuable upon the conversion of the Convertible Note issued to Richmont Capital Partners V L.P. are not included in the computation of dilutive loss per common
share because we have experienced operating losses in all periods presented and, therefore, the effect would be anti-dilutive. The 504,813,514 shares available to Rochon Capital are included in the
December 31, 2013 basic and diluted share calculation as the conditions have been met for the shares to be available for issuance.
Recent Accounting Pronouncements
In
the fourth quarter of 2013, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring an entity to disclose additional information about reclassifications out of
accumulated other comprehensive income (loss), including (1) changes in accumulated other
F-13
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
comprehensive
income (loss) balances by component and (2) significant items reclassified out of accumulated other comprehensive income (loss) and the effect on the respective line items in net
income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting
period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of this guidance only impacts our disclosures and has no impact
on its consolidated financial position, results of operations or cash flows. As a result of the adoption of the new guidance, we disclosed this information within the notes to the consolidated
financial statements.
In
the third quarter of 2013, we adopted guidance issued by the FASB on disclosure requirements for the presentation of comprehensive income (loss). This guidance requires entities to report total
comprehensive income (loss), the components of net income (loss), and the components of comprehensive income (loss) in either (1) a continuous statement of comprehensive income (loss) or
(2) two separate but consecutive statements. As a result of the adoption, the Company's financial statements now include a separate consolidated statement of comprehensive income (loss)
immediately following the consolidated statements of operations.
In
the first quarter of 2013, we adopted guidance that simplifies how entities test indefinite-lived intangible assets for impairment and improves consistency in impairment testing guidance among
long-lived asset categories. The guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as
a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with U.S. generally accepted accounting principles. An entity will have an option not to
calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. The adoption of this guidance did not
have a material impact on our consolidated financial statements. We did not elect the qualitative option in testing goodwill in 2013.
In
July 2013, the FASB issued guidance requiring entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit
carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction
to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does
not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax
assets. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect this guidance to have a
material impact on its consolidated financial statements.
In
July 2013, the FASB issued guidance permitting the Fed Funds Effective Swap Rate ("Overnight Index Swap Rate" or OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes in
addition to interest rates on direct obligations of the U.S. Treasury (UST) and the London Interbank Offered Rate (LIBOR) swap rate. The guidance also removed the restriction on using different
benchmark rates for similar hedges. The new guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We did not have
any new or redesignated interest rate hedging transactions during the period from July 17, 2013 to December 31, 2013. We will evaluate the impact of this guidance on its consolidated
financial statements when applicable.
F-14
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies (Continued)
In
April 2013, the FASB issued guidance requiring an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. In addition, the guidance
provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The new guidance is
effective prospectively for entities that determine liquidation is imminent during fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. We do not
expect this guidance to have a material impact on its consolidated financial statements.
In
March 2013, the FASB issued guidance requiring an entity to release any related cumulative translation adjustment into net income when it either sells a part or all of its investment in a foreign
entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the guidance resolves the
diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The new guidance is effective prospectively for fiscal years, and interim reporting
periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In
February 2013, the FASB issued guidance requiring an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at
the reporting date. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about the obligation. The new guidance is effective
retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.
In
December 2011, the FASB issued guidance requiring an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative
instruments. The objective is to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards. The new disclosures will
give financial statement users information about both gross and net exposures. In January 2013, the FASB issued an update and clarified the scope of transactions that are subject to disclosures
concerning offsetting. These disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and
should be applied retrospectively for all comparative periods presented. The adoption of these disclosure requirements did not have a material impact on its consolidated financial statements.
(3) Acquisitions, Dispositions and Other Transactions
Paperly Acquisition
On
December 31, 2013, we completed the asset purchase of Paperly, a direct seller that allows its independent sales consultants to work with customers to design and create custom stationery
through home parties, events and individual appointments. CVSL assumed $45,376 of seller's liabilities that existed prior to the transaction and issued 155,926 shares of our common stock, par value
$0.0001 ("Common Stock") to Paperly at a fair value of $73,269 on the acquisition date. We also agreed to an earn-out based on 10% of Earnings before Interest, Taxes, Depreciation and Amortization
("EBITDA") from 2014 to 2016. We recorded $8,639 in other long-term liabilities associated with the earn-out. As a result, the total fair value of the consideration was $81,908. Since we did not
deliver the shares of our
F-15
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
common
stock until January 2014, we recorded a payable totaling $73,269 at December 31, 2013. Goodwill arising from the transaction totaled $113,279 at December 31, 2013. We recognized
goodwill in the acquisition as the business had management in place, established distribution methods, an established consultant base and brand recognition. In addition to these factors, goodwill was
recognized in this transaction because of the expected synergies that management anticipates and the overall benefits of bringing additional consultants into the CVSL network.
The Longaberger Golf Club Sale
On
December 30, 2013, we completed the sale of The Longaberger Golf Club for $4,036,000 that resulted in a gain of $2,000 which is included in selling, general and administrative expenses. We
used the proceeds from the sale to pay down the Key Bank term loan. See footnote (7) for further details regarding the Key Bank term loan.
My Secret Kitchen Acquisition
On
December 20, 2013, we completed the acquisition of MSK, an award-winning United Kingdom-based direct seller of a unique line of food products. As consideration for the acquisition, CVSL
assumed $35,028 of seller's liabilities that existed prior to the transaction and issued 317,804
shares of our Common Stock at a fair value of $133,446 on the acquisition date for 90% ownership in MSK and agreed to an earn-out based on 5% of EBITDA from 2014 to 2016. We recorded $5,894 in other
long-term liabilities associated with the earn-out. As a result, the total fair value of the consideration was $139,340. Since we did not deliver the shares of our common stock until January 2014, we
recorded a payable of $133,446 at December 31, 2013. Goodwill arising from the transaction totaled $155,856 at December 31, 2013. We recognized goodwill in the acquisition as the
business had management in place, established distribution methods, an established consultant base and brand recognition. In addition to these factors, goodwill was recognized in this transaction
because of the expected synergies that management anticipates and the overall benefits of bringing additional consultants into the CVSL network.
Agel Acquisition
On
October 22, 2013, Agel Enterprises, Inc. ("AEI"), a wholly-owned subsidiary of CVSL completed the acquisition of substantially all the assets of Agel Enterprises, LLC (later renamed Lega
Enterprises, LLC). AIE sells nutritional supplements and skin care products through a worldwide network of independent sales representatives. AEI's products are sold in over 40 countries.
Consideration for the acquisition consisted of 7,446,600 shares of Common Stock at a fair value of $3.4 million on the acquisition date and, the delivery of a Purchase Money Note, dated
on the closing date, in the original principal amount of $1,700,000 and the assumption of certain liabilities. Since we did not deliver 572,549 of the 7,446,600 shares of our Common Stock until
January 2014, we recorded a payable totaling $263,373 at December 31, 2013. Goodwill arising from the transaction totaled $1.9 million. We recognized goodwill and intangible assets
related to the acquisition as the business had management in place globally, established distribution methods, an established consultant base and brand recognition.
Pursuant
to the acquisition, AEI purchased Agel's trade name, certain trademarks and other intellectual property. The fair value of the trademarks and trade name at December 31, 2013 totaled
$3.4 million and is estimated to have a useful life of 20 years. The fair value of the other intellectual property at December 31, 2013 totaled $0.3 million and is
estimated to have a useful life of 5 years.
F-16
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
Tomboy Tools Acquisition
On
October 1, 2013, we completed the asset purchase of Tomboy Tools Inc. ("TBT"), a direct seller of a line of tools designed for women as well as home security monitoring services. As
consideration for the acquisition, we assumed certain liabilities and issued 1,766,979 shares of our Common Stock at a fair value of $0.6 million at the acquisition date. Goodwill arising from
the acquisition totaled $0.6 million at December 31, 2013. We recognized goodwill in the acquisition as the business had management in place, established distribution methods, an
established consultant base and brand recognition.
Your Inspiration At Home Acquisition
On
August 22, 2013, we completed the asset purchase of award-winning YIAH, a direct seller of hand-crafted spice blends and gourmet foods from around the world in consideration of the issuance
of 4,512,975 shares of our Common Stock at a fair value of $1.4 million at the acquisition date. Goodwill arising from the acquisition totaled $1.4 million at December 31,
2013. We recognized goodwill in the acquisition as the business had management in place globally, established distribution methods, an established consultant base and brand recognition.
Happenings Communications Group, Inc. Acquisition
On
August 24, 2012 we entered into a Share Exchange Agreement (the "Share Exchange Agreement"), with, Happenings Communications Group, Inc. ("HCG") and Rochon Capital
Partners, Ltd. ("Rochon Capital"). Under the Share Exchange Agreement, in exchange for all of the capital stock of HCG, we issued 438,086,034 shares of our restricted common stock to Rochon
Capital (the "Initial Share Exchange"). The shares of our Common Stock received by Rochon Capital totaled approximately 90% of our issued and outstanding stock at the time of issuance. The Initial
Share Exchange was completed on September 25, 2012 and resulted in a change in control and HCG becoming our wholly owned subsidiary. In May 2013, we amended our Articles of Incorporation to
increase our authorized number of shares of Common Stock to 5,000,000,000 and changed our name to CVSL Inc.
Possible Issuance of Additional Common Stock under Share Exchange Agreement
Under the Share Exchange Agreement, Rochon Capital also purchased and has the right to an additional 504,813,514 shares of Common Stock (the
"Additional Shares"). The second closing of the transactions and the issuance of the Additional Shares contemplated by the Share Exchange Agreement (the "Second Tranche Closing") was to occur on the
date that was the later of: (i) the 20th calendar day following the date on which we first mailed an Information Statement to our shareholders; (ii) the date the
Financial Industry Regulatory Authority ("FINRA") approved the Amendment; or (iii) the first business day following the satisfaction or waiver of all other conditions and obligations of the
parties to consummate the transactions contemplated by the Share Exchange Agreement, or on such other date and at such other time as the parties may mutually determine.
On
April 12, 2013, the Company filed Articles of Amendment to its Articles of Incorporation with the Florida Secretary of State to effect: (i) an increase in the number of authorized
shares of the Corporation's common stock from 490,000,000 to 5,000,000,000 shares (the "Increase") and (ii) a change in the name of the Corporation to CVSL Inc. (the "Name Change") on
May 27, 2013. The Company's shareholders holding a majority of its outstanding shares of common stock have approved
F-17
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
the
Increase and the Name Change and the Articles of Amendment (the "Amendment") effecting such transactions.
However,
at the time of the filing of the Amendment, Rochon Capital and CVSL each determined that it was not in the best interests of CVSL to consummate the Second Tranche Closing and the issuance of
the Additional Shares at that time. As a result, the Share Exchange Agreement was amended on April 10, 2013 to provide that, among other things, the Second Tranche Closing will occur on the
date specified in a written notice provided by Rochon Capital, which date shall not be prior to the 20th calendar day following the date on which we first mailed our Information
Statement to our shareholders and the date the FINRA approves the Amendment.
The
amendment to the Share Exchange Agreement also (a) clarifies and redefines the number of shares that are to be issued at the Second Tranche Closing as 504,813,514 shares of our Common
Stock, or any portion thereof provided for in the notice from Rochon Capital and (b) modifies the date tied to certain restrictions set forth in Section 7.08, since the Second Tranche
Closing Date cannot be
determined at this time. We have the ability to issue the Additional Shares to Rochon Capital, as agreed to in the Share Exchange Agreement, as amended, upon our receipt of written notice from Rochon
Capital.
Convertible Note Settlement
On
June 14, 2013, in accordance with the mandatory conversion provisions of the Convertible Subordinated Unsecured Promissory Note in the principal amount of $6,500,000 (the "Note") that we
issued to the Tamala L. Longaberger Trust (the "Trust") as part of the consideration of the acquisition of TLC, we issued the Trust 32,500,000 shares of our Common Stock upon conversion
of the Note.
Equity Contribution
On
June 18, 2013, Rochon Capital Partners, Ltd. entered into an Equity Contribution Agreement with CVSL pursuant to which Rochon Capital Partners, Ltd. contributed to CVSL for no consideration
32,500,000 shares of our Common Stock to offset the shares issued to the Trust. During the fourth quarter of 2013, Rochon Capital Partners, Ltd. contributed and CVSL cancelled a total of
13,726,554 shares, which consisted of 4,512,975 shares related to the YIAH acquisition, 1,766,979 shares related to the TBT acquisition, 7,446,600 shares related to the
Agel acquisition. The cancelled shares are not being held as treasury shares.
The Longaberger Acquisition
On
March 18, 2013, we acquired a controlling interest in TLC, a direct-selling business based in Newark, Ohio. The transaction resulted in the Company acquiring 64.6% of the voting stock and
51.7% of all the stock in TLC in return for a $6,500,000 convertible note and a $4,000,000 promissory note. We incurred acquisition related costs of approximately $338,000 recorded during the fourth
quarter of 2012, $138,000
during the first quarter of 2013 and $165,000 during the second quarter of 2013. The costs were recorded in selling, general and administrative expenses in the consolidated income statements. The
acquisition is being accounted for under the purchase method of accounting and as of March 18, 2013 TLC is a consolidated subsidiary of CVSL. No Goodwill was recorded relating to this
transaction.
F-18
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
TLC Results from Operations
The following table presents the operating results of TLC included in the Company's consolidated statements of operations for the period beginning
March 19, 2013 to December 31, 2013.
|
|
|
|
|
Revenues |
|
$ |
72,666,018 |
|
|
|
|
|
|
|
|
|
|
Net loss attributed to CVSL |
|
$ |
(1,623,461 |
) |
|
|
|
|
|
|
|
|
|
Pro forma Results
The following table presents the unaudited pro forma consolidated results as if the business combination occurred as of January 1, 2013 and
2012, respectively. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition taken
place as of January 1, 2013 and 2012, respectively.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2013* |
|
2012** |
|
Revenues |
|
$ |
101,330,694 |
|
$ |
116,046,062 |
|
Net loss attributed to CVSL |
|
|
(10,080,898 |
) |
|
(9,544,932 |
) |
Basic and diluted loss per share: |
|
|
|
|
|
|
|
Weighted average common share outstanding |
|
|
994,102,491 |
|
|
451,274,391 |
|
Net loss per share attributable to CVSL |
|
$ |
(0.01 |
) |
$ |
(0.02 |
) |
- *
- Includes
a proforma adjustment representing interest expense associated with the $6.5 million convertible note and $4.0 million promissory note
for the time period January 1, 2013 to March 18, 2013.
- **
- We
increased revenues by $2,245,907 to reflect the reclassifications made during the year-ended December 31, 2013, discussed in footnote (2). We
removed one time nonrecurring expenses for impairment of property, plant and equipment for $12,144,038 and loss on disposal of assets for $11,324,399. The adjustments were made to properly reflect
TLC's operating results. We increased interest expense by $360,948 to reflect the interest expense associated with the $6.5 million convertible note and $4.0 million promissory note.
F-19
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(3) Acquisitions, Dispositions and Other Transactions (Continued)
Opening balance sheets
The
following summary represents the fair value of TLC, YIAH, TBT, AEI, MSK and Paperly balance sheets as of the respective acquisition dates and is subject to change following management's final
evaluation of the fair value assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLC |
|
AEI |
|
All Other |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
84,062 |
|
$ |
2,454,236 |
|
$ |
9,869 |
|
$ |
2,548,167 |
|
Accounts receivable |
|
|
259,602 |
|
|
70,656 |
|
|
43,458 |
|
|
373,716 |
|
Inventory |
|
|
19,892,740 |
|
|
2,642,320 |
|
|
410,884 |
|
|
22,945,944 |
|
Prepaid expenses and other |
|
|
1,074,420 |
|
|
2,287,575 |
|
|
7,696 |
|
|
3,369,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
21,310,824 |
|
|
7,454,787 |
|
|
471,907 |
|
|
29,237,518 |
|
Property, plant and equipment |
|
|
28,469,390 |
|
|
241,089 |
|
|
51,208 |
|
|
28,761,687 |
|
Goodwill |
|
|
|
|
|
1,937,801 |
|
|
2,487,535 |
|
|
4,425,336 |
|
Intangibles, net |
|
|
|
|
|
3,764,102 |
|
|
|
|
|
3,764,102 |
|
Other assets |
|
|
3,946,570 |
|
|
553,194 |
|
|
44,335 |
|
|
4,544,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
53,726,784 |
|
$ |
13,950,973 |
|
$ |
3,054,985 |
|
$ |
70,732,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payabletrade |
|
$ |
6,383,107 |
|
$ |
1,952,801 |
|
$ |
202,922 |
|
$ |
8,538,830 |
|
Accounts payablerelated party |
|
|
|
|
|
6,091 |
|
|
251,931 |
|
|
258,022 |
|
Line of credit payable |
|
|
9,319,612 |
|
|
|
|
|
40,615 |
|
|
9,360,227 |
|
Accrued commissions |
|
|
204,042 |
|
|
4,476,382 |
|
|
|
|
|
4,680,424 |
|
Deferred revenue |
|
|
4,132,386 |
|
|
196,504 |
|
|
|
|
|
4,328,890 |
|
Current portion of long-term debt |
|
|
354,390 |
|
|
306,965 |
|
|
|
|
|
661,355 |
|
Other current liabilities |
|
|
3,758,003 |
|
|
2,401,793 |
|
|
585,426 |
|
|
6,745,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
24,151,540 |
|
|
9,340,536 |
|
|
1,080,894 |
|
|
34,572,970 |
|
Long-term debt |
|
|
9,265,766 |
|
|
1,393,035 |
|
|
|
|
|
10,658,801 |
|
Other long-term liabilities |
|
|
|
|
|
50,928 |
|
|
14,533 |
|
|
65,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
33,417,306 |
|
|
10,784,499 |
|
|
1,095,427 |
|
|
45,297,232 |
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity attributable to CVSL |
|
|
10,500,000 |
|
|
3,162,063 |
|
|
1,944,875 |
|
|
15,606,938 |
|
Stockholders' equity attributable to noncontrolling interest |
|
|
9,809,478 |
|
|
4,411 |
|
|
14,683 |
|
|
9,828,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
20,309,478 |
|
|
3,166,474 |
|
|
1,959,558 |
|
|
25,435,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
53,726,784 |
|
$ |
13,950,973 |
|
$ |
3,054,985 |
|
$ |
70,732,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(4) Marketable Securities
Our
marketable securities as of December 31, 2013 include fixed income and equity investments classified as available for sale. At December 31, 2013, the fair value of the equity
securities totaled $1,390,355 and the fair value of the fixed income securities totaled $10,439,897. The gross proceeds from sales of our marketable securities during the years ended
December 31, 2013 and 2012 totaled $4.0 million and $-0-, respectively. Unrealized losses on the investments included in consolidated
statements of other comprehensive income were $636,778 and $-0- for the years ended December 31, 2013 and 2012, respectively. Our realized gains from the sale of our marketable securities
totaled $499,949 and $-0- for the years ended December 31, 2013 and 2012, respectively. The unrealized loss has been in that position for less than one year. Accordingly, management does not
believe that the investments have experienced any other than temporary losses.
(5) Inventory
Inventories
are stated at lower of cost or market. Cost is determined using the first-in, first-out method. Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2012 |
|
Raw material and supplies |
|
$ |
2,640,842 |
|
$ |
|
|
Work in process |
|
|
339,581 |
|
|
|
|
Finished goods |
|
|
15,753,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,734,294 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
reserve for inventory obsolesence at December 31, 2013 and 2012 totaled at $124,000 and $0, respectively.
(6) Property, plant and equipment
Property,
plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2012 |
|
Land and improvements |
|
$ |
3,049,765 |
|
$ |
|
|
Buildings and improvements |
|
|
19,788,447 |
|
|
|
|
Equipment |
|
|
1,306,597 |
|
|
34,562 |
|
Construction in progress |
|
|
425,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,570,233 |
|
|
34,562 |
|
Less accumulated depreciation |
|
|
1,722,379 |
|
|
33,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,847,854 |
|
$ |
1,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $1,799,993 and $1,042 for years ended December 31, 2013 and 2012, respectively. Certain assets disposed of in 2013 reduced accumulated depreciation at
December 31, 2013.
F-21
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(7) Long-term debt and other financing arrangements
The
Company's long-term borrowing consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
December 31,
2013 |
|
December 31,
2012 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
20,881,096 |
|
$ |
20,041,644 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,734,695 |
|
|
|
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,649,880 |
|
|
|
|
Term loanKeyBank |
|
|
7.70% |
* |
|
427,481 |
|
|
|
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,723,396 |
|
|
20,041,644 |
|
Less current maturities |
|
|
|
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,594,722 |
|
$ |
20,041,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Represents
the weighted average interest rate at December 31, 2013. The interest rate is variable based on the agreement described below.
The
schedule of maturities of the Company's long-term debt are as follows:
|
|
|
|
|
2014 |
|
$ |
1,128,674 |
|
2015 |
|
|
696,406 |
|
2016 |
|
|
722,928 |
|
2017 |
|
|
750,565 |
|
2018 |
|
|
714,939 |
|
Thereafter |
|
|
1,828,788 |
|
|
|
|
|
|
|
|
|
|
Total excluding convertible note |
|
|
5,842,300 |
|
Convertible note |
|
|
20,881,096 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt including current maturities |
|
$ |
26,723,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. was separated in the schedule of maturities as it will likely be converted into Common Stock
as discussed below.
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P.
On
December 12, 2012 (the "Issuance Date"), we signed, closed, and received, as the maker, $20,000,000 in cash proceeds from Richmont Capital Partners V L.P., a Texas limited partnership
("RCP V"), pursuant to a Convertible Subordinated Unsecured Promissory Note, in the original principal amount of $20,000,000 (the "Note"), issued pursuant to a Convertible Subordinated
Unsecured Note Purchase Agreement between CVSL and RCP V (the "Purchase Agreement"). The Note is (i) an unsecured obligation of the Company and (ii) subordinated to any bank,
financial institution, or other lender providing funded debt to CVSL or any direct or indirect subsidiary of CVSL, including any seller debt financing provided by the owners of any entity(ies) that
may be
F-22
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(7) Long-term debt and other financing arrangements (Continued)
acquired
by us. Principal payments of $1,333,333 are due and payable on each anniversary of the Issuance Date beginning on the third anniversary of the Issuance Date. A final principal payment, equal
to the then unpaid principal balance of the Note, is due and payable on the 10th anniversary of the Issuance Date. The Note bears interest at an annual rate of 4%, which interest is payable on
each anniversary of the Issuance Date; provided, however, that interest payable through the third anniversary of the Issuance Date may, at our option, be paid in kind ("PIK Interest") and any such PIK
Interest will be added to the outstanding principal amount of the Note. Beginning 380 days from the Issuance Date, the Note may be prepaid, in whole or in part, at any time without premium or
penalty.
On
June 17, 2013, the Note was amended to extend the date of mandatory conversion of the Note to provide that the Note be mandatorily convertible into shares of Common Stock (subject to a
maximum of 64,000,000 shares being issued) within ten days of June 17, 2014. The full amount of the Note (including any and all accrued interest thereon, whether previously converted to
principal or otherwise) will be converted (the "Conversion"), into no more than 64,000,000 shares of Common Stock at a price of $0.33 per share of Common Stock.
John
Rochon, Jr. is the 100% owner, and is in control, of Richmont Street LLC, the sole general partner of RCP V. Michael Bishop, a director of the Company, is a limited partner of
RCP V. John Rochon, Jr. is a director of the Company and the son of John P. Rochon, the Company's Chairman and Chief Executive Officer.
Promissory NoteLega Enterprises, LLC
On
October 22, 2013, we issued a $1,700,000 Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) in connection with AEI's acquisition of assets from Agel
Enterprises LLC. The Promissory Note bears interest at 5% per annum, and is payable in equal monthly installments of outstanding principal and interest and matures on October 22, 2018.
Promissory Notepayable to former shareholder of TLC
On
March 14, 2013, the Company issued a $4,000,000 Promissory Note in connection with the Purchase Agreement with TLC. The Promissory Note bears interest at 2.63% per annum, has a ten-year
maturity, and is payable in equal monthly installments of outstanding principal and interest.
Term loanKey Bank
In
conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6,500,000 term loan from Key Bank. The interest rate on the term loan is either Key Bank's prime
rate plus 5.75% or LIBOR plus 7.50%. The term note is due in monthly installments beginning April 1, 2013 and due in full on October 23, 2015. As of March 1, 2014 TLC has paid in
full the outstanding balance of the term note through monthly amortization payments beginning April 1, 2013 and proceeds of the sale of non-core assets, primarily real estate. The line of
credit described below is collateralized by substantially all assets of TLC. Under the agreement, TLC is subject to certain financial covenants,
including a fixed charge coverage ratio and limitations on capital expenditures, additional indebtedness, and incurrence of liens. TLC obtained a waiver for the fixed charge coverage calculation as
the term loan had been reduced to $427,481, and was in compliance with the financial covenants at December 31, 2013.
F-23
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(7) Long-term debt and other financing arrangements (Continued)
Line of Credit Payable
Key Bank
TLC
has a line of credit agreement which expires on October 23, 2015. Under the agreement, TLC has available borrowings up to $12,000,000, limited to a formula primarily based on accounts
receivable and inventory. The agreement provides for interest based on Key Bank's prime rate plus 1.75% or LIBOR plus 3.50%. Interest at December 31, 2013 was 3.94%. The line of credit balance
was $8,067,573 of December 31, 2013.
UBS Margin Loan
CVSL
has a margin loan agreement with UBS that allows us to purchase investments. The maximum loan amount is based on a percentage of marketable securities held by us. Interest on the outstanding
balance of $1,663,534 was 1.67% at December 31, 2013. The loan is included in the line of credit on our consolidated balance sheets.
Outstanding Warrants
On
May 15, 2012, we issued 2,666,666 shares of our restricted Common Stock to an investor in satisfaction of $250,000 principal and $16,666 interest due pursuant to a convertible note.
In connection with the conversion of that note, we granted 1,277,537 warrants to the investor. Each warrant is exercisable into one share of our Common Stock at the price of $0.50 per share.
The warrants are exercisable for a term of two years from the date of grant. Both the restricted common stock and warrants were assumed upon the Share Exchange Agreement dated August 24, 2012
by and among the Company, HCG and Rochon Capital Partners, Ltd. (the "Share Exchange Agreement").
On
May 16, 2012, we issued 2,380,000 shares of our restricted Common Stock to an investor in satisfaction of $225,000 principal and $13,000 interest due pursuant to a convertible note.
In connection with the conversion of this note, we granted 1,010,137 warrants to the investor. Each warrant is exercisable into one share of the Company's Common Stock at the price of $0.50 per
share. The warrants are exercisable for a term of two years from the date of grant. Both the restricted common stock and the warrants were assumed upon the Share Exchange Agreement.
(8) Accumulated Other Comprehensive Loss
Accumulated
other comprehensive loss, net of taxes, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation |
|
Unrealized Gain
(Loss) on
Available-for-
Sale Securities |
|
Total
Accumulated
Other
Comprehensive
Income (Loss) |
|
Balance at December 31, 2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Other comprehensive income (loss) before reclassifications |
|
|
(142,364 |
) |
|
(136,829 |
) |
|
(279,193 |
) |
Amount reclassified from AOCI |
|
|
|
|
|
(499,949 |
) |
|
(499,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss) at December 31, 2013 |
|
$ |
(142,364 |
) |
$ |
(636,778 |
) |
$ |
(799,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(8) Accumulated Other Comprehensive Loss (Continued)
|
|
|
|
|
Components of AOCI
|
|
Amounts
reclassified
from AOCI |
|
Realized gain/(loss) on sale of marketable securities |
|
$ |
499,949 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of income taxes |
|
$ |
499,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) Fair Value
We
established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input
that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
Level 1Unadjusted
quoted prices in active markets for identical assets and liabilities;
Level 2Quoted
prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and
Level 3Valuations
derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The
carrying values of cash and cash equivalents, accounts receivable, accounts payable trade and related party and line of credit payable are considered to be representative of their respective fair
values. Our available for sale securities (Level 1) was $1,390,355 and (Level 2) $10,439,897. We do not have other assets or intangible assets measured at fair value on a non-recurring
basis at December 31, 2013. We did not record any impairment charges for property, plant and equipment for the years ended December 31, 2013 and 2012.
(10) Commitments and Contingencies
Minimum
lease commitments for noncancelable leases for the years ended December 31, are as follows:
|
|
|
|
|
2014 |
|
$ |
1,301,497 |
|
2015 |
|
|
596,498 |
|
2016 |
|
|
236,918 |
|
2017 |
|
|
23,660 |
|
2018 |
|
|
5,360 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,163,933 |
|
Total
rental expense was $792,553 and $19,560 for the years ended 2013 and 2012, respectively.
Contingencies
The
Company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome
against the Company is remote. As such, management believes that the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations.
F-25
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(10) Commitments and Contingencies (Continued)
Worker's Compensation Liability
Certain of the Company's employees are covered under a self-insured worker's compensation plan. The Company estimates its worker's compensation
liability based on current employee levels and past claims experience, and has an accrued liability to cover estimated future costs. At December 31, 2013, the accrued liability was
approximately $1.1 million. There can be no assurance that the Company's estimates are accurate, and any differences could be material.
(11) Income Taxes
The
income tax expense from continuing operations for the years ended December 31, 2013 and December 31, 2012 differs from the U.S statutory rate of 34% primarily due the Company's
valuation allowance. The Company's income tax expense for 2013 and 2012 of $273,000 and $0, respectively reflect the valuation allowance established during 2012 followed by the current year tax
expense related to operations in new tax jurisdictions due to asset acquisitions. The Company has fully reserved its net deferred tax assets in both years due to the uncertainty of future taxable
income.
Notes to Consolidated Financial Statements: Income Taxes
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Current: |
|
|
|
|
|
|
|
U.S. |
|
$ |
|
|
$ |
|
|
State |
|
|
|
|
|
|
|
Foreign |
|
|
251,000 |
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
U.S. |
|
|
22,000 |
|
|
|
|
State |
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
273,000 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
Reconciliation of the expected U.S. tax expense/(benefit) to income taxes related to continuing operations is as follows:
|
|
|
|
|
|
|
2013 |
|
Expected tax expense at U.S. statutory rate |
|
$ |
(2,651,000 |
) |
Permanent Adjustments |
|
|
89,000 |
|
Foreign Income Taxes |
|
|
238,000 |
|
Increase in Valuation Allowance |
|
|
2,690,000 |
|
Rate DifferenceU.S. to Foreign |
|
|
(93,000 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
273,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
F-26
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(11) Income Taxes (Continued)
purposes.
Components of the Company's deferred income taxes as of December 31, 2013 and 2012 are as follows.
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Deferred Tax Assets |
|
|
|
|
|
|
|
Fixed Assets |
|
$ |
9,901,000 |
|
$ |
|
|
Net Operating LossesU.S. |
|
|
3,358,000 |
|
|
|
|
Net Operating LossesForeign |
|
|
140,000 |
|
|
|
|
Foreign Tax Credit |
|
|
251,000 |
|
|
|
|
Deferred Tax Liabilities |
|
|
|
|
|
|
|
Intangibles |
|
|
(36,000 |
) |
|
|
|
Prepaid Expenses |
|
|
(406,000 |
) |
|
|
|
Valuation Allowance |
|
|
(13,230,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset/Liability |
|
$ |
(22,000 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has fully reserved its U.S. and Foreign net deferred tax assets in 2013 due to an inability to project future taxable income. The Company has U.S. net operating loss carryforwards of
approximately $ 9,878,000 which begin to expire in 2032. The Company has net operating losses of approximately $497,000 in several foreign countries which will begin to expire at various times. The
Company has foreign tax credits of approximately $ 251,000 which will begin to expire in 2023.
|
|
|
|
|
|
|
2013 |
|
Unrecognized Tax Benefits |
|
|
|
|
Unrecognized Tax Benefits, December 31, 2012 |
|
$ |
|
|
Gross IncreasesTax Positions in Prior Period |
|
|
|
|
Gross DecreasesTax Positions in Prior Period |
|
|
|
|
Gross IncreasesCurrent Period Tax Positions |
|
|
168,000 |
|
Settlements |
|
|
|
|
Lapse of Statute of Limitations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits, December 31, 2013 |
|
$ |
168,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Unrecognized Tax Benefits shown here relate to an ongoing audit of one entity acquired by the Company during 2013 in Spain. This audit is ongoing and is in dispute. It is reasonable that the
Company's existing liability for Unrecognized Tax Benefits may increase or decrease within the next twelve months primarily due to resolution of this audit. The Company cannot reasonably estimate a
range of potential changes in such benefits due to the unresolved nature of the Spanish audit.
(12) Share-based compensation plans
We
have two share-based compensation plans, the 2013 Director Smart Bonus Unit Plan and 2013 Smart Bonus Unit Award Plan. These plans provide for the issuance of a cash bonus for stock appreciation. A
Committee comprised of members of the Board of Directors approves all awards that are granted under our share-based compensation plan. We classify the awards as a liability as the value
F-27
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(12) Share-based compensation plans (Continued)
of
the award will be settled in cash, notes, or stock. The Company awarded 4,700,000 equivalent shares of stock appreciation rights ("SARs") that are remeasured each reporting period and is recognized
ratably over the contractual term. The SARs vest over a period of three years and have a contractual term of five years. The liability related to these awards is included in other long-term
liabilities on our consolidated balance sheets. Share-based compensation expense for the years ended December 31, 2013 and 2012 of $339,661 and $-0-, respectively, is included in selling,
general and administrative expenses on the Company's consolidated income statements. As of December 31, 2013, total unrecognized compensation cost related to unvested share-based compensation
was $1,534,689, which is expected to be recognized over a three-year period.
(13) Earnings per share attributable to CVSL
In
calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for any periods presented. We included the additional 504,813,512 shares available to Rochon
Capital as discussed in footnote (3) in the calculation of basic and diluted shares as the conditions were met during the year-ended December 31, 2013 for the shares to be available for
issuance. We did not include the outstanding warrants nor the shares issuable upon the conversion of the Convertible Note Issued to Richmont Capital Partners V L.P. as discussed in
footnote (7) in the calculation of dilutive shares because we recorded losses from continuing operations, therefore, the effect would be anti-dilutive.
(14) Segment Information
CVSL
operates in a single reporting segment as a direct selling company that sells a wide range of products sold primarily by independent sales force across many countries around the world. For the
year ended December 31, 2013, approximately $10.3 million or 16% of our net revenues were generated in international markets with 13% or $8.3 million comprised of countries in
Europe including Russia and Ukraine. We do not view any product groups as segments but have grouped similar products into the following five categories for disclosure purposes only: gourmet foods,
nutritional and wellness, home décor, publishing and printing and other. For the year ended December 31, 2013, approximately $1.5 million or 1.7% of our revenues were
derived from the sale of gourmet food products, $9.3 million or 11.0% of our revenues were derived from the sale of nutritional and wellness products, $72.7 million or 85.6% of our
revenues were derived from the sale of home décor products, $1.0 million or 1.1% of our revenues were derived from the sale of our publishing and printing services and products
and $0.4 million or 0.5% of our revenues were derived from the sale of our other products. During the year ended December 31, 2012, all of our revenues were derived from the sale of our
publishing and printing services and products. Substantially all our long-lived assets are located in the US. Our chief operating decision-maker is our Chief Executive Officer who reviews financial
information presented on a consolidated basis. Accordingly, we have determined that we operate in one reportable business segment.
F-28
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(14) Segment Information (Continued)
Revenues
by product groups for the years ended December 31 are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Gourmet Food Products |
|
$ |
1,483 |
|
$ |
|
|
Home Décor |
|
$ |
72,666 |
|
$ |
|
|
Nutritionals and Wellness |
|
$ |
9,312 |
|
$ |
|
|
Publishing & Printing |
|
$ |
951 |
|
$ |
930 |
|
Other |
|
$ |
439 |
|
$ |
|
|
(15) Related party transactions
During
the fourth quarter of 2013, we renewed a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings. CVSL has begun to establish an infrastructure of personnel and
resources necessary to identify, analyze, negotiate and conduct due diligence on
direct-selling acquisition candidates. However, we continue to need advice and assistance in areas related to identification, analysis, financing, due diligence, negotiations and other strategic
planning, accounting, tax and legal matters associated with such potential acquisitions. Richmont Holdings and its affiliates have experience in the above areas and we wish to draw upon such
experience. In addition, Richmont Holdings had already developed a strategy of acquisitions in the direct-selling industry and has assigned and transfered to us the opportunities it has previously
analyzed and pursued. CVSL has agreed to pay Richmont Holdings a reimbursement fee (the "Reimbursement Fee") each month equal to One Hundred Sixty Thousand dollars ($160,000) and we agreed to
reimburse or pay the substantial due diligence, financial analysis, legal, travel and other costs Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring and
negotiating potential transactions. During the years ended December 31, 2013 and 2012, we recorded $1,870,000 and $450,000, respectively in Expense Reimbursement Fees that were included in
selling, general and administrative expense.
Other
related party transactions include the following discussed at footnote (3) and (7):
-
- Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (Note 7)
-
- Conversion of Convertible Subordinated Unsecured Promissory NoteTamala L. Longaberger Trust
(Note 7)
-
- Equity contribution by Rochon Capital Partners, Ltd. (Note 3)
(16) Subsequent Events
On
January 23, 2014, we announced the signing of a definitive agreement to acquire Golden Girls LLC, which offers women a safe and trusted way to sell their jewelry for cash. Founded in 2008,
Golden Girls LLC purchases precious metals from guests at Golden Girls LLC home parties. Hosts and buyers earn commissions on all jewelry purchased at the parties. The company provides training to
buyers, enabling them to pay fair value for jewelry on the spot. As of the date of this filing, this transaction has not yet closed and we are currently unable to ascertain the consideration to be
paid by us in connection with such acquisition as the consideration is based upon achievement of a certain
F-29
Table of Contents
CVSL Inc.
Notes to the Consolidated Financial Statements (Continued)
(16) Subsequent Events (Continued)
EBITDA
at the end of 2014, 2015 and 2016 and other milestones that are not expected to occur prior to closing.
On
March 14, 2014, we completed the acquisition of Uppercase Living LLC ("Uppercase Living"). Salt Lake City-based Uppercase Living offers an extensive line of customizable vinyl expressions
for display on walls. Its independent sales force sells throughout the United States. Consideration for the acquisition consists of 578,387 shares of our Common Stock. The shares of our Common
Stock have not been issued as of March 31, 2014.
F-30
Table of Contents
CVSL Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
(Unaudited)
June 30,
2014 |
|
(Audited)
December 31,
2013 |
|
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,176,351 |
|
$ |
3,876,708 |
|
Marketable securities |
|
|
5,223,472 |
|
|
11,830,252 |
|
Accounts receivable, net |
|
|
777,871 |
|
|
780,237 |
|
Inventory, net |
|
|
17,607,749 |
|
|
18,734,294 |
|
Other current assets |
|
|
2,983,941 |
|
|
2,948,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
30,769,384 |
|
|
38,170,208 |
|
Property, plant and equipment, net of accumulated depreciation |
|
|
21,025,616 |
|
|
22,847,854 |
|
Goodwill |
|
|
4,736,771 |
|
|
4,422,928 |
|
Intangibles, net |
|
|
3,660,930 |
|
|
3,764,063 |
|
Other assets |
|
|
955,769 |
|
|
617,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
61,148,470 |
|
$ |
69,822,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity (deficit) |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payabletrade |
|
$ |
10,767,036 |
|
$ |
10,471,121 |
|
Accounts payablerelated party |
|
|
|
|
|
181,858 |
|
Lines of credit |
|
|
7,944,270 |
|
|
9,806,002 |
|
Accrued commissions |
|
|
4,485,547 |
|
|
3,740,846 |
|
Deferred revenue |
|
|
3,154,541 |
|
|
1,661,851 |
|
Current portion of long-term debt |
|
|
711,398 |
|
|
1,128,674 |
|
Other current liabilities |
|
|
5,621,187 |
|
|
7,881,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
32,683,979 |
|
|
34,872,346 |
|
Long-term debt |
|
|
25,694,232 |
|
|
25,594,722 |
|
Other long-term liabilities |
|
|
889,164 |
|
|
499,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
59,267,375 |
|
|
60,966,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments & contingencies |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share, 10,000,000 authorized-0-issued and outstanding |
|
|
|
|
|
|
|
Common stock, par value $0.0001 per share, 5,000,000,000 and 5,000,000,000 shares authorized; 487,712,326 and 487,139,777 shares issued and
outstanding, respectively |
|
|
48,770 |
|
|
48,713 |
|
Additional paid-in capital |
|
|
15,052,359 |
|
|
14,362,493 |
|
Accumulated other comprehensive loss |
|
|
(80,481 |
) |
|
(767,569 |
) |
Accumulated deficit |
|
|
(19,767,575 |
) |
|
(13,085,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit) attributable to CVSL stockholders' |
|
|
(4,746,927 |
) |
|
557,860 |
|
Stockholders' equity attributable to noncontrolling interest |
|
|
6,628,022 |
|
|
8,298,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
1,881,095 |
|
|
8,856,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
61,148,470 |
|
$ |
69,822,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
F-31
Table of Contents
CVSL Inc.
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Revenues |
|
$ |
24,586,118 |
|
$ |
20,575,794 |
|
$ |
51,257,039 |
|
$ |
24,843,804 |
|
Program costs and discounts |
|
|
(5,220,414 |
) |
|
(5,327,012 |
) |
|
(10,196,353 |
) |
|
(6,358,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
19,365,704 |
|
|
15,248,782 |
|
|
41,060,686 |
|
|
18,484,822 |
|
Costs of sales |
|
|
5,862,635 |
|
|
7,756,963 |
|
|
13,878,643 |
|
|
9,153,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,503,069 |
|
|
7,491,819 |
|
|
27,182,043 |
|
|
9,331,673 |
|
Commissions and incentives |
|
|
6,004,515 |
|
|
2,689,836 |
|
|
12,978,029 |
|
|
3,203,947 |
|
Gain on sale of assets |
|
|
(140,985 |
) |
|
|
|
|
(406,912 |
) |
|
|
|
Selling, general and administrative |
|
|
11,745,831 |
|
|
8,140,390 |
|
|
21,455,360 |
|
|
10,454,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(4,106,292 |
) |
|
(3,338,407 |
) |
|
(6,844,434 |
) |
|
(4,327,080 |
) |
Loss on marketable securities |
|
|
58,289 |
|
|
|
|
|
552,085 |
|
|
|
|
Interest expense, net |
|
|
213,459 |
|
|
367,052 |
|
|
479,378 |
|
|
604,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision |
|
|
(4,378,040 |
) |
|
(3,705,459 |
) |
|
(7,875,897 |
) |
|
(4,931,128 |
) |
Income tax provision |
|
|
212,921 |
|
|
|
|
|
491,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(4,590,961 |
) |
|
(3,705,459 |
) |
|
(8,367,818 |
) |
|
(4,931,128 |
) |
Net loss attributable to noncontrolling interest |
|
|
(1,046,175 |
) |
|
(808,117 |
) |
|
(1,686,020 |
) |
|
(784,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to CVSL stockholders |
|
$ |
(3,544,786 |
) |
$ |
(2,897,342 |
) |
$ |
(6,681,798 |
) |
$ |
(4,146,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
992,831,373 |
|
|
992,525,840 |
|
|
992,882,941 |
|
|
992,525,840 |
|
Net loss per share attributable to CVSL stockholders |
|
$ |
0.00 |
|
$ |
0.00 |
|
$ |
0.01 |
|
$ |
0.00 |
|
See notes to unaudited consolidated financial statements.
F-32
Table of Contents
CVSL Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Net loss |
|
$ |
(4,590,961 |
) |
$ |
(3,705,459 |
) |
$ |
(8,367,818 |
) |
$ |
(4,931,128 |
) |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities |
|
|
183,824 |
|
|
|
|
|
652,761 |
|
|
|
|
Foreign currency translation adjustment |
|
|
43,929 |
|
|
|
|
|
34,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
227,753 |
|
|
|
|
|
687,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(4,363,208 |
) |
|
(3,705,459 |
) |
|
(7,680,730 |
) |
|
(4,931,128 |
) |
Comprehensive loss attributable to noncontrolling interest |
|
|
(1,046,175 |
) |
|
(808,117 |
) |
|
(1,686,020 |
) |
|
(784,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to CVSL stockholders |
|
$ |
(3,317,033 |
) |
$ |
(2,897,342 |
) |
$ |
(5,994,710 |
) |
$ |
(4,146,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
F-33
Table of Contents
CVSL Inc.
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2014 |
|
2013 |
|
Operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,367,818 |
) |
$ |
(4,931,128 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,223,820 |
|
|
765,237 |
|
Loss on marketable securities |
|
|
552,085 |
|
|
|
|
Interest expense |
|
|
400,001 |
|
|
604,048 |
|
Share-based compensation |
|
|
397,965 |
|
|
|
|
Provision for losses on receivables, net |
|
|
139,800 |
|
|
|
|
Provision for obsolete inventory |
|
|
41,000 |
|
|
|
|
Gain on sales of assets |
|
|
(406,912 |
) |
|
|
|
Deferred income tax |
|
|
89,462 |
|
|
|
|
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
(135,692 |
) |
|
(143,076 |
) |
Inventory |
|
|
1,182,042 |
|
|
1,087,672 |
|
Other current assets |
|
|
(161,122 |
) |
|
(472,713 |
) |
Accounts payable and accrued expenses |
|
|
(833,273 |
) |
|
2,054,336 |
|
Accounts payablerelated party |
|
|
(277,195 |
) |
|
12,449 |
|
Deferred revenue |
|
|
1,288,582 |
|
|
475,450 |
|
Other long-term liabilities |
|
|
(145,896 |
) |
|
113,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(5,013,151 |
) |
|
(433,975 |
) |
Investing activities: |
|
|
|
|
|
|
|
Capital expenditures |
|
|
(644,773 |
) |
|
|
|
Proceeds from the sale of property, plant and equipment |
|
|
1,831,315 |
|
|
|
|
Sale of marketable securities |
|
|
6,238,219 |
|
|
|
|
Cash acquired in acquisitions |
|
|
2,000 |
|
|
84,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
7,426,761 |
|
|
84,062 |
|
Financing activities: |
|
|
|
|
|
|
|
Line of credit, net change |
|
|
(1,861,732 |
) |
|
80,886 |
|
Proceeds from long-term debt issuance |
|
|
42,000 |
|
|
|
|
Repayments on long-term debt |
|
|
(799,630 |
) |
|
(316,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(2,619,362 |
) |
|
(235,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
505,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
299,643 |
|
|
(585,339 |
) |
Cash and cash equivalents at beginning of year |
|
|
3,876,708 |
|
|
19,032,392 |
|
Cash and cash equivalents at end of period |
|
$ |
4,176,351 |
|
$ |
18,447,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
Interest |
|
$ |
130,382 |
|
$ |
|
|
Income taxes |
|
|
516,602 |
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
Convertible note converted to stock |
|
|
|
|
|
6,563,555 |
|
Convertible note issued related to acquisition |
|
|
|
|
|
6,500,000 |
|
Promissory note issued related to acquisition |
|
|
|
|
|
4,000,000 |
|
Stock issued for purchase of subsidiary |
|
|
607,148 |
|
|
|
|
See notes to unaudited consolidated financial statements.
F-34
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements
(1) General
Interim Financial Information
The consolidated financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"), reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows for the
interim periods on a basis consistent with the annual audited statements. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for any other interim period or for a full year. Certain information, accounting policies and footnote disclosures normally included in condensed
consolidated financial statements prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP") have been omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction
with our audited consolidated financial statements included in our Annual Report on Form 10-K filed by CVSL Inc. ("CVSL," and together with its consolidated subsidiaries, the "Company"),
for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 31, 2014 ("Form 10-K").
Reclassifications
The Company reclassified certain amounts previously reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013
("Form 10-Q") to conform to our consolidated financial statements presented for the year ended December 31, 2013 on its Form 10-K and the quarter ended June 30, 2014. These
changes had no impact on operating or net income. The operating losses of $3,338,407 and $4,327,080 for the three and six months ended June 30, 2013, respectively, in this Form 10-Q are
the same as previously presented. For the three and six months ended June 30, 2013 commission and incentives expense of $2,689,836 and $3,203,947, respectively, is now shown as a separate
expense line item as opposed to being included in program costs and discounts. Program costs and discounts decreased $2,327,355 and $2,820,009 for the three and six months ended June 30, 2013.
Miscellaneous revenues of $458,926 and $554,602 that had previously been classified as an offset to selling, general and administrative costs has been reclassified as revenue for the three and six
months ended June 30, 2013, respectively. Gross profit increased $2,974,689 and $3,591,502 for the three and six months ended June 30, 2013 as a result of the reclassification.
The
intial presentation relating to commissions and incentives were included in both program costs and discounts and in selling, general and administrative expenses in the consolidated financial
statements of operations. Certain personal sales incentives were presented in program costs and discounts as they represent what are referred to as retained commissions in the party plan segment in
direct selling industry. Other commissions related to a consultant's downline (override commissions) were recorded and presented in selling, general and administrative expenses. As we acquired other
companies in the direct selling industry, we noticed variations of compensation plans and presentation in the statements of operations. As a result, we decided to standardize our presentation of
commissions and incentives.
We added the commissions and incentives category for the year-ended December 31, 2013. During the first quarter ended March 31, 2014 and 2013, and the second quarter ended
June 30, 2014 and 2013, we presented the commissions and incentives based on the presentation for the year-ended December 31, 2013.
F-35
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(1) General (Continued)
Significant Accounting Policies
CVSL has expanded its disclosure of the policies below in response to the SEC comments to our Registration Statement on Form S-1 filed on
May 22, 2014. Other than the expanded disclosure below there have been no material changes to the Company's significant accounting policies during the three and six months ended June 30,
2014, as compared to the significant accounting policies disclosed in Note 2 of the Company's consolidated financial statements in the Form 10-K.
Revenue Recognition and Deferred Revenue
In the ordinary course of business, CVSL receives payments, primarily via credit card, for the sale of products at the time customers place orders.
Sales and related fees such as shipping and handling, net of applicable sales discounts, are recorded as revenue when the product is shipped and when title and the risk of ownership passes to the
customer. The Company presents revenues net of any taxes collected from customers which are remitted to governmental authorities. Payments received for undelivered products are recorded as deferred
revenue and are included in current liabilities on the Company's consolidated balance sheets. Certain incentives offered to our independent sales representatives and their customers, including sales
discounts, described in the paragraph below are classified as program costs and discounts. A provision for product returns and allowances is recorded and is founded on historical experience and is
classified as a reduction of net revenues. At June 30, 2014 and December 31, 2013, our allowance for sales returns totaled $226,603 and $221,396, respectively.
Program Costs and Discounts
Program costs and discounts represent various methods of promoting our products. CVSL offers benefits such as discounts on starter kits for new
consultants, promotional pricing for the host of a home show, which may vary depending on the value of the orders placed and general discounts on our products.
Goodwill and Other Intangibles
CVSL management performs its goodwill and other indefinite-lived intangible impairment tests annually or when changes in circumstances indicate an
impairment event may have occurred by estimating the fair value of each reporting unit compared to its carrying value. Our reporting units represent an operating segment or a reporting level below an
operating segment. Additionally, the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and
distribution methods. We use a discounted cash flow model and a market approach to calculate the fair value of our reporting units. The model includes a number of significant assumptions and estimates
regarding future cash flows and these estimates could be materially impacted by adverse changes in market conditions. Goodwill is measured for impairment by comparing the fair value of the reporting
unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If
the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded. After the Share Exchange Agreement in 2012, we determined that the
goodwill associated with that acquisition was impaired. As a result, we recorded $2,488,708 in goodwill impairment that represented all goodwill
F-36
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(1) General (Continued)
associated
with the Share Exchange Agreement. The impairment charge is included in the consolidated statements of operations. Indefinite-lived assets are measured for impairment by comparing the fair
value of the indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible asset is lower than its carrying value, an impairment charge equal to the
difference is recorded.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples
include provisions for bad debts, useful lives of property and equipment, impairment of goodwill, other intangibles and property and equipment, deferred taxes, and the provision for and disclosure of
litigation and loss contingencies. Actual results may differ materially from those estimates.
Business Overview and Current Plans
CVSL operates a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce
strategies to drive a high-growth global business. CVSL is engaged in a long-term strategy to develop a large, diverse company in the micro-enterprise sector that combines the entrepreneurship,
innovation and relationship-based commerce of micro-enterprises with the infrastructure and operational excellence of a large scale company. CVSL seeks to acquire companies primarily in the
micro-enterprise (direct-selling) sector and companies potentially engaging in businesses related to micro-enterprise.
In
considering appropriate acquisition targets, CVSL anticipates that it will evaluate companies of varying sizes in our targeted space, particularly companies that management believes are accretive
or otherwise add value to our businesses. CVSL plans to consider companies that are currently profitable and looking to enhance their growth, as well as companies that have experienced financial and
operational difficulties or limitations and can, in our opinion, be strengthened by improved strategic and tactical guidance. All of the acquisitions, large or small, profitable or otherwise, will add
additional coordinates of sellers and customers, thereby adding size and continually increasing the scope of CVSL's network of networks. CVSL's acquisitions
include:
-
- 100% ownership of Uppercase Acquisition, Inc. ("UAI") in March 2014, which operates Uppercase Living ("Uppercase Living"),
a direct seller of an extensive line of customizable vinyl expressions for display on walls.
-
- 100% ownership of Paperly, Inc. in December 2013, a direct seller that allows its independent sales consultants to work
with customers to design and create custom stationery through home parties, events and individual appointments.
-
- A 90% controlling interest in My Secret Kitchen, Ltd ("MSK") in December 2013, an award-winning United
Kingdom-based direct seller of a unique line of food products.
-
- Substantially 100% of Agel Enterprises Inc. ("AEI"). Because of foreign ownership regulations in our Argentina, Colombia,
Mexico and Panama subsidiaries, AEI is limited to 99% ownership in these subsidiaries. An individual owns an approximately 1% noncontrolling interest in these
F-37
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(1) General (Continued)
(2) Acquisitions, Dispositions and Other Transactions
Uppercase Living
On March 14, 2014, UAI, a wholly- owned subsidiary of CVSL, acquired substantially all the assets of Uppercase Living, LLC, a direct seller of
an extensive line of customizable vinyl expressions for display on walls. CVSL assumed $512,195 of seller's liabilities that existed prior to the transaction and agreed to issue 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. CVSL also delivered 323,897 shares of our common stock at a fair value
of $123,081 to escrow accounts for up to 24 months that will be issued to the seller upon remediation of certain closing conditions. CVSL also agreed to pay the seller three subsequent
contingent payments equal to 10% of Earnings before Interest, Taxes,
Depreciation and Amortization ("EBITDA") for each of the years ending 2014 to 2016. We have not recorded any contingent earn-out as of June 30, 2014. Goodwill arising from the transaction
totaled $469,065. CVSL recognized goodwill in the acquisition as the business had management in place, established distribution methods, an established consultant base and brand recognition. In
addition to these factors, goodwill was recognized in this transaction because of the expected synergies that management anticipates and the overall benefits of bringing additional consultants into
the CVSL network.
F-38
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(2) Acquisitions, Dispositions and Other Transactions (Continued)
Opening balance sheet for Uppercase Living acquisition on March 14, 2014
The following summary represents the fair value of UAI as of the acquisition date and is subject to change following management's final evaluation of
the fair value assumptions.
|
|
|
|
|
|
|
UAI |
|
Assets |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
2,000 |
|
Accounts receivable |
|
|
1,742 |
|
Inventory |
|
|
96,497 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
100,239 |
|
Property, plant and equipment |
|
|
23,230 |
|
Goodwill |
|
|
469,065 |
|
Other assets |
|
|
16,366 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
608,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payabletrade |
|
$ |
267,337 |
|
Accrued commissions |
|
|
79,003 |
|
Deferred revenue |
|
|
28,399 |
|
Other current liabilities |
|
|
96,706 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
471,445 |
|
Other long-term liabilities |
|
|
137,455 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
608,900 |
|
Stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
608,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions
During the quarter ended March 31, 2014, TLC sold an industrial building at ECO Business Park in Frazeysburg, Ohio for gross proceeds of
$1,333,857 for a gain on sale of $271,970. During the quarter ended June 30, 2014, TLC sold three properties in Dresden, Ohio for gross proceeds of $497,458 for a gain on sale of $35,309. The
gain on sale is included in consolidated statements of operations. We also had net gain on sales of other assets of $99,633 for the six months ended June 30, 2014.
The Longaberger Company
On March 18, 2013, the Company acquired a controlling interest in TLC, a direct-selling business based in Newark, Ohio. The transaction
resulted in CVSL acquiring 64.6% of the voting stock and 51.7% of all the stock in TLC in return for a $6,500,000 convertible note and a $4,000,000 promissory note. The acquisition was accounted for
under the purchase method of accounting and TLC is a consolidated subsidiary of CVSL.
F-39
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(2) Acquisitions, Dispositions and Other Transactions (Continued)
Convertible Note Settlement
On June 14, 2013, in accordance with the mandatory conversion provisions of the Convertible Subordinated Unsecured Promissory Note in the
principal amount of $6,500,000 (the "Note") that CVSL issued to the Tamala L. Longaberger Trust (the "Trust") as part of the consideration of the acquisition of TLC, CVSL issued the Trust
32,500,000 shares of Common Stock upon conversion of the Note.
Equity Contribution
On June 18, 2013, Rochon Capital Partners, Ltd. entered into an Equity Contribution Agreement with CVSL pursuant to which Rochon Capital
Partners, Ltd. contributed to CVSL for no consideration 32,500,000 shares of Common Stock to offset the shares issued to the Trust. As a result, CVSL's issued and outstanding shares of Common
Stock remained at 487,712,326. The returned shares were cancelled and are not being held as treasury shares.
Possible Issuance of Additional Common Stock under Share Exchange Agreement
On August 24, 2012 CVSL entered into a Share Exchange Agreement (the "Share Exchange Agreement") with HCG and Rochon Capital Partners, Ltd.
("Rochon Capital"). Under the Share Exchange Agreement, in exchange for all of the capital stock of HCG, we issued 438,086,034 shares of our restricted common stock to Rochon Capital (the
"Initial Share Exchange"). The shares of our Common Stock received by Rochon Capital totaled approximately 90% of CVSL's issued and outstanding stock at the time of issuance. The Initial Share
Exchange was completed on September 25, 2012 and resulted in a change in control and HCG becoming CVSL's wholly-owned subsidiary.
Under
the Share Exchange Agreement, Rochon Capital also purchased and has the right to an additional 504,813,514 shares of Common Stock (the "Additional Shares"). The second closing of the
transactions and the issuance of the Additional Shares contemplated by the Share Exchange Agreement (the "Second Tranche Closing") was to occur on the date that was the later of: (i) the 20th
calendar day following the date on which we first mailed an Information Statement to our shareholders; (ii) the date the Financial Industry Regulatory Authority ("FINRA") approved the
Amendment; or (iii) the first business day following the satisfaction or waiver of all other conditions and obligations of the parties to consummate the transactions contemplated by the Share
Exchange Agreement, or on such other date and at such other time as the parties may mutually determine.
On
April 12, 2013, CVSL filed Articles of Amendment to its Articles of Incorporation with the Florida Secretary of State to effect: (i) an increase in the number of authorized shares of
the Corporation's common stock from 490,000,000 to 5,000,000,000 shares (the "Increase") and (ii) a change in the name of the Corporation to CVSL Inc. (the "Name Change") which
was effectuated on May 27, 2013. CVSL's shareholders holding a majority of its outstanding shares of common stock approved the Increase and the Name Change and the Articles of Amendment (the
"Amendment") effecting such transactions.
However,
at the time of the filing of the Amendment, Rochon Capital and CVSL each determined that it was not in the best interests of CVSL to consummate the Second Tranche Closing and the issuance of
the Additional Shares at that time. As a result, the Share Exchange Agreement was amended on April 10, 2013 to provide that, among other things, the Second Tranche Closing will occur on the
date
F-40
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(2) Acquisitions, Dispositions and Other Transactions (Continued)
specified in a written notice provided by Rochon Capital, which date shall not be prior to the 20th calendar day following the date on which we first mailed our Information Statement to our
shareholders and the date the FINRA approves the Amendment.
The
amendment to the Share Exchange Agreement also (a) clarifies and redefines the number of shares that are to be issued at the Second Tranche Closing as 504,813,514 shares of our
Common Stock, or any portion thereof provided for in the notice from Rochon Capital and (b) modifies the date tied to certain restrictions set forth in Section 7.08 of the Share Exchange
Agreement, since the Second Tranche Closing Date cannot be determined at this time. CVSL has the ability to issue the Additional Shares to Rochon Capital, as agreed to in the Share Exchange Agreement,
as amended, upon its receipt of written notice from Rochon Capital.
(3) Marketable Securities
The Company's marketable securities as of June 30, 2014 include fixed income and equity investments classified as available for sale. At June 30, 2014, the fair value of the equity
securities totaled $0 and the fair value of the fixed income securities totaled $5,223,472. At December 31, 2013, the fair value of the equity securities totaled $1,390,355 and the fair value
of the fixed income securities totaled $10,439,897. The gross proceeds from sales of our marketable securities were $2,820,515 and $6,238,219 for the three and six months ended June 30, 2014,
respectively, and $-0- for three and six months ended June 30, 2013. Unrealized gain on the investments for the three and six months ended June 30, 2014 was $183,824 and $652,761,
respectively. These amounts were included in the consolidated statements of comprehensive income. The Company's realized losses from the sale of marketable securities included in the consolidated
statements of operations were $58,289 and $552,085 for the three and six months ended June 30, 2014, respectively, and $-0- for the three and six months ended June 30, 2013.
(4) Inventory
Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out method. Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Raw material and supplies |
|
$ |
2,896,445 |
|
$ |
2,640,842 |
|
Work in process |
|
|
254,016 |
|
|
339,581 |
|
Finished goods |
|
|
14,457,288 |
|
|
15,753,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,607,749 |
|
$ |
18,734,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's reserve for inventory obsolescence at June 30, 2014 and December 31, 2013 were $141,000 and $124,000, respectively.
F-41
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(5) Property, plant and equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2014 |
|
December 31,
2013 |
|
Land and improvements |
|
$ |
2,884,462 |
|
$ |
3,049,765 |
|
Buildings and improvements |
|
|
18,325,355 |
|
|
19,788,447 |
|
Equipment |
|
|
2,313,515 |
|
|
1,306,597 |
|
Construction in progress |
|
|
170,013 |
|
|
425,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,693,345 |
|
|
24,570,233 |
|
Less accumulated depreciation |
|
|
2,667,729 |
|
|
1,722,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,025,616 |
|
$ |
22,847,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $554,194 and $1,065,838 for three and six months ended June 30, 2014, respectively, and was $525,660 and $765,237 for three and six months ended June 30, 2013,
respectively. Certain assets disposed of in 2014 reduced accumulated depreciation at June 30, 2014. See footnote (2) for dispositions.
(6) Long-term debt and other financing arrangements
The Company's long-term borrowing consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
rate |
|
June 30,
2014 |
|
December 31,
2013 |
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P. (including accrued interest) |
|
|
4.00 |
% |
$ |
21,281,097 |
|
$ |
20,881,096 |
|
Promissory Notepayable to former shareholder of TLC |
|
|
2.63 |
% |
|
3,555,293 |
|
|
3,734,695 |
|
Promissory NoteLega Enterprises, LLC (formerly Agel Enterprises, LLC) |
|
|
5.00 |
% |
|
1,496,996 |
|
|
1,649,880 |
|
Promissory Notepayable to Tamala L. Longaberger |
|
|
10.00 |
% |
|
42,000 |
|
|
|
|
Term loanKeyBank |
|
|
|
|
|
|
|
|
427,481 |
|
Other, equipment notes |
|
|
|
|
|
30,244 |
|
|
30,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
26,405,630 |
|
|
26,723,396 |
|
Less current maturities |
|
|
|
|
|
711,398 |
|
|
1,128,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
$ |
25,694,232 |
|
$ |
25,594,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Subordinated Unsecured Promissory NoteRichmont Capital Partners V L.P.
On December 12, 2012 (the "Issuance Date"), CVSL signed, closed, and received, as the maker, $20,000,000 in cash proceeds from Richmont
Capital Partners V L.P., a Texas limited partnership ("RCP V"), pursuant to a Convertible Subordinated Unsecured Promissory Note, in the original principal amount of $20,000,000 (the
"Note"), issued pursuant to a Convertible Subordinated Unsecured Note Purchase Agreement between CVSL and RCP V (the "Purchase
Agreement"). The Note is (i) an unsecured obligation of CVSL and (ii) subordinated to any bank, financial institution, or other lender providing funded debt to CVSL or any direct or
indirect subsidiary of CVSL, including any seller debt financing provided by the owners of any entity(ies) that may be acquired by CVSL.
F-42
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(6) Long-term debt and other financing arrangements (Continued)
Principal
payments of $1,333,333 are due and payable on each anniversary of the Issuance Date beginning on the third anniversary of the Issuance Date. A final principal payment, equal to the then
unpaid principal balance of the Note, is due and payable on the 10th anniversary of the Issuance Date. The Note bears interest at an annual rate of 4%, which interest is payable on each
anniversary of the Issuance Date; provided, however, that interest payable through the third anniversary of the Issuance Date may, at CVSL's option, be paid in kind ("PIK Interest") and any such PIK
Interest will be added to the outstanding principal amount of the Note. Beginning 380 days from the Issuance Date, the Note may be prepaid, in whole or in part, at any time without premium or
penalty.
On
June 17, 2013, the Note was amended to extend the date of mandatory conversion of the Note to provide that the Note be mandatorily convertible into shares of Common Stock (subject to a
maximum of 64,000,000 shares being issued) within ten days of June 17, 2014. The full amount of the Note (including any and all accrued interest thereon, whether previously converted to
principal or otherwise) will be converted (the "Conversion"), into no more than 64,000,000 shares of Common Stock at a price of $0.33 per share of Common Stock.
On
June 12, 2014, CVSL and RCP V entered into a Second Amendment to Convertible Subordinated Unsecured Promissory Note (the "Second Amendment"), which amends the Note. The Second
Amendment amends the Note to extend the date of mandatory conversion of the Note. As amended by the Second Amendment, the original principal amount of, and all accrued interest under, the Note is
convertible mandatorily into shares of the Company's common stock (subject to a maximum of 64,000,000 shares being issued) within ten days after June 12, 2015, or such earlier time as
may be mutually agreed upon by the Company and RCP V. All other terms and conditions of the Note remain unchanged and in effect.
John
Rochon, Jr. is the 100% owner, and is in control, of Richmont Street LLC, the sole general partner of RCP V. Michael Bishop, a director of CVSL, is a limited partner of RCP V. John
Rochon, Jr. is a director of CVSL and the son of John P. Rochon, CVSL's Chairman, President, and Chief Executive Officer.
Promissory Notepayable to former shareholder of TLC
On March 14, 2013, CVSL issued a $4,000,000 Promissory Note in connection with the purchase of TLC. The Promissory Note bears interest at
2.63% per annum, has a ten-year maturity, and is payable in equal monthly installments of outstanding principal and interest.
Promissory NoteLega Enterprises, LLC
On October 22, 2013, CVSL issued a $1,700,000 Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) in connection with
AEI's acquisition of assets from Agel Enterprises LLC. The Promissory Note bears interest at 5% per annum, and is payable in equal monthly installments of outstanding principal and interest and
matures on October 22, 2018.
Term loan
In conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6,500,000 term loan from Key Bank. As of
March 1, 2014, TLC had paid in full the outstanding balance of the term loan.
F-43
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(6) Long-term debt and other financing arrangements (Continued)
Promissory Notepayable to Tamala L. Longaberger
On June 27, 2014, Tamala L. Longaberger lent TLC $42,000 and in connection therewith TLC issued a promissory note in the principal
amount of $42,000 to her. The note bears interest at the rate of 10% per annum and matures on June 27, 2015. The company's failure to attain certain milestones, including specified operational
cost-savings, are considered a default under
the note as is a default under other loan, security or similar agreements of TLC if the default materially affects any of TLC's property, or ability to repay the note or perform its obligations under
the note or any related document. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure period for any nonpayment default that is
curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
Lines of Credit
Key Bank
Prior to payoff in full on July 31, 2014, TLC had a line of credit agreement through October 23, 2015. Under the agreement, TLC had
available borrowings up to $12,000,000, limited to a formula primarily based on accounts receivable and inventory. The agreement provided for interest based on Key Bank's prime rate plus 1.75% or
LIBOR plus 3.50%. Interest at June 30, 2014 and December 31, 2013 was 3.94% and 3.94%, respectively. The balance was $6,633,250 and $8,067,573 on June 30, 2014 and
December 31, 2013, respectively. The line of credit was collateralized by substantially all assets of TLC. TLC was subject to certain financial covenants, including a fixed charge coverage
ratio and limitations on capital expenditures, additional indebtedness, and incurrence of liens. TLC obtained a waiver for the fixed charge coverage calculation, as the term loan had been paid in
full, and was in compliance with all other the financial covenants for the period ended June 30, 2014. The loan is included in the lines of credit on our consolidated balance sheets.
On
July 31, 2014, TLC has repaid in full all remaining line of credit amounts with proceeds from a Sale Leaseback transaction, as described in Subsequent Events in footnote (15).
UBS Margin Loan
CVSL has a margin loan agreement with UBS that allows us to purchase investments. The maximum loan amount is based on a percentage of marketable
securities held by us. The interest rate at June 30, 2014 and December 31, 2013 was 1.65% and 1.67%, respectively. The outstanding balance was $1,174,174 and $1,663,534 on
June 30, 2014 and December 31, 2013, respectively. The loan is included in the lines of credit on our consolidated balance sheets.
Outstanding Warrants
On May 6, 2014, CVSL issued warrants to purchase up to 250,000 and 125,000 shares of its Common Stock, respectively, in connection with
exclusivity agreements. The warrants will be exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a
cashless exercise basis at an exercise price of $0.55 per share, representing the average closing price of our common stock for the ten days preceding the issuance. In addition, the warrants provide
for piggyback registration rights upon request, in certain cases. The
F-44
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(6) Long-term debt and other financing arrangements (Continued)
exercise
price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation.
The fair value of the warrants on the date of issuance approximated $116,000.
(7) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of taxes, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation |
|
Unrealized Gain
(Loss) on
Available-for-
Sale Securities |
|
Total
Accumulated
Other
Comprehensive
Income (Loss) |
|
Balance at December 31, 2013 |
|
$ |
(130,791 |
) |
$ |
(636,778 |
) |
$ |
(767,569 |
) |
Other comprehensive income (loss) before reclassifications |
|
|
34,327 |
|
|
100,676 |
|
|
135,003 |
|
Amount reclassified from AOCI |
|
|
|
|
|
552,085 |
|
|
552,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss) |
|
|
34,327 |
|
|
652,761 |
|
|
687,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014 |
|
$ |
(96,464 |
) |
$ |
15,983 |
|
$ |
(80,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of AOCI
|
|
Amounts
reclassified
from AOCI |
|
Realized gain/(loss) on sale of marketable securities |
|
$ |
(552,085 |
) |
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of income taxes |
|
$ |
(552,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Fair Value
The Company established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest
level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
Level 1Unadjusted
quoted prices in active markets for identical assets and liabilities;
Level 2Quoted
prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and
Level 3Valuations
derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The
carrying values of cash and cash equivalents, accounts receivable, accounts payable trade and related party and line of credit payable are considered to be representative of their respective fair
values. The Company's available for sale securities (Level 1) was $-0- and (Level 2) $5,223,472 at June 30, 2014. Our available for sale securities (Level 1) was $1,390,355
and (Level 2) $10,439,897 at December 31, 2013. The Company does not have other assets or intangible assets measured at fair value on a non-recurring basis at June 30, 2014 and
December 31, 2013.
F-45
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(9) Commitments and Contingencies
The Company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome
against the Company is remote. As such, management believes that the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations.
(10) Income Taxes
As of December 31, 2013, the Company lacked a history of earnings that would allow it to record any of its net deferred tax assets without a corresponding valuation allowance. Using the same
methodology, and updating the earnings history based on actual earnings for the six months ended June 30, 2014, the Company is unable to reduce its valuation allowance. Therefore, no net
deferred tax asset is reflected as of June 30, 2014. Additionally, due to some of its historical acquisitions which included indefinite lived intangibles, the Company continues to accumulate a
deferred tax liability which is recorded outside the net deferred tax asset and valuation allowance. This deferred tax liability increased by $44,731 and $89,462 during the three and six months ended
June 30, 2014, respectively. The Company recorded a similar amount of deferred tax expense. The Company records no current income tax
expense related to its domestic activities due to historical or current net operating losses. Current tax expense of $212,921 and $491,921 for the three and six months ended June 30, 2014 has
been recorded based on the Company's activities in certain foreign jurisdictions which are currently profitable and no loss carryover is available to offset the income.
(11) Share-based compensation plans
CVSL has two share-based compensation plans, the 2013 Director Smart Bonus Unit Plan and 2013 Smart Bonus Unit Award Plan. These plans provide for the issuance of a cash bonus for stock appreciation.
A Committee comprised of members of the Board of Directors approves all awards that are granted under its incentive-based compensation plan. CVSL classifies the awards as a liability as the value of
the award will be settled in cash. As of June 30, 2014, we have 5,655,000 equivalent shares of stock appreciation rights ("SARs") outstanding. During the six months ended June 30, 2014,
CVSL has granted 1,504,998 SARs and have forfeitures of 550,000. The SARs are remeasured each reporting period and is recognized ratably over the vesting period of the award. The SARs vest over a
period of three years and are paid to the recipient in three annual payments of one-third the vested award amount. The liability related to these awards is included in other long-term liabilities on
our consolidated balance sheets. SARs expense for the three and six months ended June 30, 2014 was $311,453 and $397,965, respectively, as compared to $113,750 for the three and six months
ended June 30, 2013. The SARs are included in selling, general and administrative expenses in the Company's consolidated statement of operations. As of June 30, 2014, total unrecognized
compensation cost related to unvested SARs was $2,356,016.
(12) Loss per share attributable to CVSL
In calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for any periods presented. The Company included the additional 504,813,512 shares available to
Rochon Capital discussed in footnote (2) in the calculation of basic and diluted shares as the conditions were met for the shares to be available for issuance. The Company did not include the
outstanding warrants nor the shares issuable upon the conversion of the Convertible Note issued to Richmont Capital
F-46
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(12) Loss per share attributable to CVSL (Continued)
Partners V L.P.
discussed in footnote (6) in the calculation of dilutive shares because we recorded losses from continuing operations; therefore, the effect would be
anti-dilutive.
(13) Related party transactions
During the fourth quarter of 2013, CVSL renewed a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings. CVSL has begun to establish an infrastructure of personnel and
resources necessary to identify, analyze, negotiate and conduct due diligence on direct-selling acquisition candidates. However, CVSL continues to need advice and assistance in areas related to
identification, analysis, financing, due diligence, negotiations and other strategic planning, accounting, tax and legal matters associated with such potential acquisitions. Richmont Holdings and its
affiliates have experience in the above areas and CVSL wishes to draw upon such experience. In addition, Richmont Holdings had already developed a strategy of acquisitions in the direct-selling
industry and has assigned and transferred to us the opportunities it has previously analyzed and pursued. CVSL has agreed to pay Richmont Holdings a reimbursement fee (the "Reimbursement Fee") each
month equal to One Hundred Sixty Thousand dollars ($160,000) and CVSL agreed to reimburse or pay the substantial due diligence, financial analysis, legal, travel and other costs Richmont Holdings
incurred in identifying, analyzing, performing due diligence, structuring and negotiating potential transactions. CVSL recorded $480,000 and $960,000 during the three and six month ended
June 30, 2014 and 2013, respectively, and $460,000 and $910,000 for the three and six months ended June 30, 2013. The Expense Reimbursement Fees were included in selling, general and
administrative expense.
During
the three and six months ended June 30, 2014, we paid a total of $15,279 and $131,644, respectively, to Actitech, L.P., an entity owned by Michael Bishop, for the use of the entity's
production capabilities for the production of products for YIAH that are being sold in the United States. In addition, in 2014 CVSL began initial production runs of certain Agel products in this
facility and expect to continue to utilize this facility to meet some of AEI production needs in the future.
Tamala L.
Longaberger lent TLC $42,000 for the period ended June 30, 2014 and AEI $958,000 subsequent to June 30, 2014. The terms of these loans are described in
footnotes (6) and (14).
(14) Segment Information
CVSL operates in a single reporting segment as a direct selling company that sells a wide range of products sold primarily by an independent sales force around the world. For the six months ended
June 30, 2014, 32% of our revenues were generated in international markets with 29%, or $15.0 million derived from countries in Europe (primarily Russia and Italy). One hundred percent
of our revenues were domestically generated for the six months ended June 30, 2013. We do not view any product groups as segments but have grouped similar products into the following the
following five categories for disclosure purposes only: gourmet foods, nutritional and wellness, home décor, publishing and printing and other. For the six months ended June 30,
2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of our revenues were derived from the sale of
nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products, $0.6 million or 1.2% of our revenues were
derived from the sale of our publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale of our other products. For the six months ended
June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and
F-47
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(14) Segment Information (Continued)
$0.5 million
or 2.0% of our revenues were derived from the sale of our publishing and printing services and products. Substantially all our long-lived assets are located in the U.S. Our chief
operating decision maker is our Chief Executive Officer who reviews financial information presented on a consolidated basis. Accordingly, we have determined that we operate in one reportable business
segment. Revenues by product groups are shown in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, |
|
|
|
2014 |
|
2013 |
|
Gourmet Food Products |
|
$ |
2,608 |
|
|
|
|
Home Décor |
|
$ |
27,458 |
|
$ |
24,349 |
|
Nutritionals and Wellness |
|
$ |
20,156 |
|
|
|
|
Publishing & Printing |
|
$ |
613 |
|
$ |
495 |
|
Other |
|
$ |
422 |
|
|
|
|
(15) Subsequent Events
On July 1, 2014, Tamala L. Longaberger lent AEI $158,000 and in connection there with AEI issued a promissory note in the principal amount of $158,000 to her. The note bears interest at
the rate of 10% per annum and matures on July 1, 2015 and is guaranteed by CVSL. The company's failure to comply with the obligations under the Note, insolvency or bankruptcy proceedings or a
default under any other loan, security or similar agreements of AEI if the default materially affects any of AEI property or AEI ability to repay the note or perform its obligations under this note,
is a default under the note. The note may be prepaid in whole or in part at any time without premium or penalty. The note also provides for a cure period for any nonpayment default that is curable so
long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the note.
On
July 2, 2014, CVSL issued a warrant exercisable for 1,000,000 shares of our common stock at an exercise price of $0.64 per share in consideration of a two-year consulting agreement
with an individual with direct selling industry experience. The warrant is exercisable for a term of one year from its issuance date; provided, however, that the term will be extended for an
additional year if on July 1, 2015 the shares of common stock underlying the warrant are subject to an effective registration statement under the Securities Act or our common stock is listed on
the Nasdaq National Market or the NYSE MKT. In addition, the warrant provides for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon
exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation.
On
July 9, 2014, we issued 106,315 shares of common stock to a director as director compensation and an aggregate of 105,262 shares of restricted common stock (for which restrictions lapse on
July 8, 2015) to two newly appointed directors for compensation for their service as directors.
On
July 11, 2014, Tamala L. Longaberger lent AEI $800,000 and in connection therewith AEI issued a promissory note in the principal amount of $800,000 to her. The note bears interest at
the rate of 10% per annum and matures July 11, 2015 and is guaranteed by CVSL. The company's failure to comply
with the obligations under the note, insolvency or bankruptcy proceedings or a default under any other loan, security or similar agreements of AEI if the default materially affects any of AEI property
or AEI
F-48
Table of Contents
CVSL Inc.
Notes to the Unaudited Consolidated Financial Statements (Continued)
(15) Subsequent Events (Continued)
ability
to repay the note or perform its obligation under the note, is a default under the note. The note may be prepaid in whole or in part at any time without premium or penalty. The note also
provides for a cure period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the
note holder may accelerate the time of payment of the note.
On
July 31, 2014, TLC, a subsidiary of CVSL and CFI NNN Raiders, LLC. ("CFI"), entered into a Sale Leaseback Agreement (the "Sale Leaseback Agreement") pursuant to which TLC agreed to
sell to CFI certain real estate owned by TLC and used by TLC in its manufacturing, distribution and showroom activities. The real estate described in the Sale Leaseback Agreement was purchased by CFI,
for an aggregate purchase price of $15,800,000 ($4,400,000 of which is held with CFI as a security deposit and will be released to TLC over time as certain targets are met).
Concurrently
with entering into the Sale Leaseback Agreement, CVSL and CFI entered into a Master Lease Agreement (the "Master Lease Agreement"). The Master Lease Agreement provides for a 15-year lease
term and specifies the base quarterly rental for the real estate described in the rental schedule. The base quarterly rent in the first year is $551,772 and increases 3% annually each year thereafter.
During the lease term, all of the costs, expenses and liabilities associated with the real estate are to be borne by the Company, and the Company is entitled to the unlimited use of the real estate.
The Master Lease Agreement includes customary events of default, including non-payment by the Company of the quarterly rental or other charges due under any The Master Lease Agreement. The Company
intends to utilize the proceeds from the sale of the real estate to pay off outstanding bank debt and for working capital purposes.
F-49
Table of Contents
Independent Auditor's Report
To
the Board of Directors
The Longaberger Company
Report on the Financial Statements
We have audited the accompanying financial statements of The Longaberger Company, which comprise the balance sheet as of December 31, 2012 and
2011 and the related statements of operations, stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free
from material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Longaberger
Company as of December 31, 2012 and 2011 and the results of
F-50
Table of Contents
its
operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
April 1,
2013
F-51
Table of Contents
Balance Sheet
|
|
|
|
|
|
|
|
|
|
December 31,
2012 |
|
December 31,
2011 |
|
Assets |
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
Cash |
|
$ |
440,453 |
|
$ |
376,052 |
|
Accounts receivableNet of allowance for doubtful accounts of approximately $129,000 in 2012 and $167,000 in 2011 |
|
|
1,410,580 |
|
|
1,470,363 |
|
InventoryNet (Note 2) |
|
|
19,290,189 |
|
|
24,207,531 |
|
Property held for sale |
|
|
|
|
|
1,500,000 |
|
Prepaid expenses and other current assets |
|
|
1,317,695 |
|
|
1,364,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
22,458,917 |
|
|
28,918,680 |
|
Property and EquipmentNet (Note 3) |
|
|
59,516,212 |
|
|
99,400,105 |
|
Other AssetsNet of reserve for notes receivable of approximately $208,000 for both 2012 and 2011 |
|
|
1,342,661 |
|
|
1,102,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
83,317,790 |
|
$ |
129,421,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,347,953 |
|
$ |
5,730,607 |
|
Revolving line of credit (Note 4) |
|
|
8,625,167 |
|
|
15,500,245 |
|
Current portion of long-term debt (Note 5) |
|
|
956,748 |
|
|
5,790,223 |
|
Accrued and other current liabilities: |
|
|
|
|
|
|
|
Payroll and other taxes |
|
|
1,083,493 |
|
|
1,307,577 |
|
Salaries and wages |
|
|
936,418 |
|
|
937,871 |
|
Customer advance payments |
|
|
2,240,629 |
|
|
1,902,457 |
|
Other accrued liabilities |
|
|
3,507,097 |
|
|
4,346,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
23,697,505 |
|
|
35,514,981 |
|
Long-term DebtNet of current portion (Note 5) |
|
|
5,267,395 |
|
|
6,500,000 |
|
Stockholders' Equity |
|
|
54,352,890 |
|
|
87,406,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
83,317,790 |
|
$ |
129,421,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-52
Table of Contents
Statement of Operations
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31,
2012 |
|
December 31,
2011 |
|
Revenue |
|
|
|
|
|
|
|
Baskets and other products |
|
$ |
84,718,460 |
|
$ |
97,497,108 |
|
Shipping and handling |
|
|
8,262,429 |
|
|
10,120,857 |
|
Destinations |
|
|
19,889,193 |
|
|
23,550,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
112,870,082 |
|
|
131,168,919 |
|
Less program costs, discounts, and retainage |
|
|
(38,988,444 |
) |
|
(41,899,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
73,881,638 |
|
|
89,269,597 |
|
Cost of Revenue |
|
|
|
|
|
|
|
Baskets and other products |
|
|
22,522,979 |
|
|
26,713,657 |
|
Shipping and handling |
|
|
8,739,966 |
|
|
10,954,309 |
|
Destinations |
|
|
18,804,966 |
|
|
22,036,675 |
|
Impairment of property and equipment |
|
|
12,144,038 |
|
|
497,610 |
|
Loss on disposal of assets |
|
|
5,244,410 |
|
|
83,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
67,456,359 |
|
|
60,285,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
6,425,279 |
|
|
28,983,673 |
|
Operating Expenses |
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
29,968,755 |
|
|
31,183,313 |
|
Loss on disposal of assets |
|
|
6,079,989 |
|
|
708,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
36,048,744 |
|
|
31,891,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(29,623,465 |
) |
|
(2,907,731 |
) |
Nonoperating Income (Expense) |
|
|
|
|
|
|
|
Interest income |
|
|
3,852 |
|
|
3,815 |
|
Interest expense |
|
|
(2,899,923 |
) |
|
(3,821,234 |
) |
Other expenseNet |
|
|
(533,766 |
) |
|
(530,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating expense |
|
|
(3,429,837 |
) |
|
(4,348,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(33,053,302 |
) |
$ |
(7,256,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-53
Table of Contents
Statement of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Class A |
|
Common
Stock
Class B |
|
Additional
Paid-in
Capital |
|
Retained
Earnings |
|
Total |
|
BalanceJanuary 1, 2011 |
|
$ |
1,020 |
|
$ |
980 |
|
$ |
2,504 |
|
$ |
94,657,832 |
|
$ |
94,662,336 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(7,256,144 |
) |
|
(7,256,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceDecember 31, 2011 |
|
|
1,020 |
|
|
980 |
|
|
2,504 |
|
|
87,401,688 |
|
|
87,406,192 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(33,053,302 |
) |
|
(33,053,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceDecember 31, 2012 |
|
$ |
1,020 |
|
$ |
980 |
|
$ |
2,504 |
|
$ |
54,348,386 |
|
$ |
54,352,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-54
Table of Contents
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31,
2012 |
|
December 31,
2011 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
Net loss |
|
$ |
(33,053,302 |
) |
$ |
(7,256,144 |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,560,026 |
|
|
7,260,909 |
|
Loss on disposal of property and equipment |
|
|
11,324,399 |
|
|
791,764 |
|
Loss on impairmentProperty and equipment |
|
|
12,144,038 |
|
|
497,610 |
|
Changes in operating assets and liabilities which provided (used) cash: |
|
|
|
|
|
|
|
Accounts receivable and other assets |
|
|
438,629 |
|
|
1,426,210 |
|
Inventory |
|
|
4,917,342 |
|
|
6,325,722 |
|
Accounts payable and accrued liabilities |
|
|
(447,094 |
) |
|
(5,068,709 |
) |
Customer advance payments |
|
|
338,172 |
|
|
(723,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,222,210 |
|
|
3,253,789 |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(584,037 |
) |
|
(612,583 |
) |
Proceeds from sale of property and equipment |
|
|
12,153,875 |
|
|
2,599,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
11,569,838 |
|
|
1,986,532 |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
Net payments on revolving line of credit |
|
|
(6,875,078 |
) |
|
(825,441 |
) |
Proceeds from debt |
|
|
6,600,000 |
|
|
|
|
Payments on long-term debt |
|
|
(12,666,080 |
) |
|
(4,444,297 |
) |
Debt issuance costs |
|
|
(786,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(13,727,647 |
) |
|
(5,269,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash |
|
|
64,401 |
|
|
(29,417 |
) |
CashBeginning of year |
|
|
376,052 |
|
|
405,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CashEnd of year |
|
$ |
440,453 |
|
$ |
376,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow InformationCash paid for interest |
|
$ |
3,251,319 |
|
$ |
3,302,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-55
Table of Contents
Notes to Financial Statements
December 31, 2012 and 2011
Note 1Nature of Business and Significant Accounting Policies
The Longaberger Company (the "Company") manufactures hand-woven baskets and woodcraft products that are sold together with other home products primarily by independent sales consultants through home
shows throughout the United States. The Company also operates retail shops, showrooms, restaurants, and a golf course through its Destinations division.
Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates.
Accounts ReceivableAccounts receivable consists primarily of amounts due from the Company's independent sales consultants. The Company grants credit without
collateral to independent sales consultants who are located throughout the United States. The allowance for doubtful accounts determination is based on whether the amounts are due from active or
inactive independent sales associates and the length of time the account is past due.
ReclassificationCertain 2011 amounts for impairment expense and loss on disposal of assets have been reclassified to conform to the 2012 presentation.
InventoryInventory is stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) method.
Property Held for SaleIn 2011, property held for sale represents the value of a hotel and related real estate held at the lower of cost or market value. The
Company stopped depreciating the hotel during 2011 when the Company entered into a nonbinding contract to sell the related property. Furthermore, the Company recognized a loss on the related property
of approximately $498,000 during 2011 when it became apparent that the estimated sales price was less than the net book value. The hotel was sold during 2012 and no assets are held for sale as of
December 31, 2012.
Property and EquipmentProperty and equipment are recorded at cost. The straight-line method is used for computing depreciation. Assets are depreciated over their
estimated useful lives. Costs of maintenance and repairs are charged to expense when incurred.
Intangible AssetsIntangible assets subject to amortization consist of various patents and tradenames. Intangible assets are stated at cost and are amortized using
the straight- line method over the estimated useful lives of the assets. Other assets include approximately $293,000 and $483,000 of intangible assets, net of accumulated amortization at
December 31, 2012 and 2011, respectively. Amortization expense of approximately $173,000 and $185,000 was recorded on the statement of operations for the years ended December 31, 2012
and 2011, respectively. Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.
Debt Issuance CostsDebt issuance costs were incurred by the Company in connection with obtaining financing under its revolving line of credit and term loan. Other
assets include approximately $743,000 and $409,000 of debt issuance costs, net of accumulated amortization at December 31, 2012 and 2011, respectively. These costs are amortized over the term
of the related debt. Amortization expense for the years ended December 31, 2012 and 2011 was approximately $603,000 and $615,000, respectively.
F-56
Table of Contents
Notes to Financial Statements (Continued)
December 31, 2012 and 2011
Note 1Nature of Business and Significant Accounting Policies (Continued)
Impairment or Disposal of Long-lived AssetsThe Company reviews the recoverability of long-lived assets, including buildings, equipment, internal-use software, and
other assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to
recover the carrying value of the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying
value of such an asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to make estimates of
these cash flows related to long-lived assets, as well as other fair value determinations. The property held for sale is subject to measurement at fair value on a nonrecurring basis.
During
2012, the Company determined that, based on estimated future cash flows, the carrying amount of the golf course assets exceeds its fair value by approximately $12,144,000; accordingly, an
impairment loss of that amount was recognized and is included on the statement of operations. During 2011, the Company recorded an impairment loss of approximately $498,000 on the asset held for sale,
which represents the difference between the carrying value and the fair value of the property.
Accounting
standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for
determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.
Fair
values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair
values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and
liabilities in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3
inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value
measurements are based
primarily on management's own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.
The
Company measured the long-lived assets noted above at fair value on a nonrecurring basis, resulting in the recorded impairment losses. The fair value estimate was based primarily on Level 3
inputs as described above. The fair value of the long-lived assets was determined by real estate appraisal valuations using income capitalization and sales comparison approaches based on expected cash
flows, discount rates, market sales prices, and other inputs and assumptions.
Fair Value of Financial InstrumentsFinancial instruments consist of accounts receivable, notes receivable, accounts payable, and debt. The carrying amount of all
significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.
Income TaxesPursuant to provisions of the Internal Revenue Code, the Company has elected to be taxed as an S Corporation. Generally, the income of an S Corporation
is not subject to federal income tax at the corporate level, but rather the stockholders are required to include a pro rata share of the
F-57
Table of Contents
Notes to Financial Statements (Continued)
December 31, 2012 and 2011
Note 1Nature of Business and Significant Accounting Policies (Continued)
corporation's
taxable income or loss in their personal income tax returns, irrespective of whether dividends have been paid. Accordingly, no provision for federal income taxes has been made in the
accompanying financial statements.
As
of December 31, 2012 and 2011, the Company's unrecognized tax benefits were not significant. There were no significant penalties or interest recognized during the year or accrued at year
end.
The
Company files income tax returns in U.S. federal and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by tax
authorities for years before December 2009.
Revenue RecognitionThe Company recognizes revenue when its product is shipped for its direct sales and e-commerce businesses and at point of sale for in-store
retail sales.
Subsequent EventsThe financial statements and related disclosures include evaluation of events through and including April 1, 2013, which is the date the
financial statements were available to be issued.
Note 2Inventory
Inventory at December 31, 2012 and 2011 consists of the following:
|
|
|
|
|
|
|
|
|
|
2012 |
|
2011 |
|
Raw materials and supplies |
|
$ |
1,708,063 |
|
$ |
3,423,488 |
|
Work in progress |
|
|
521,535 |
|
|
539,772 |
|
Finished goods |
|
|
2,225,956 |
|
|
2,974,903 |
|
Purchased products |
|
|
10,604,951 |
|
|
9,828,655 |
|
Destinations |
|
|
4,022,815 |
|
|
7,209,437 |
|
Promotional supplies |
|
|
206,869 |
|
|
231,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
19,290,189 |
|
$ |
24,207,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in total inventory is the reserve for excess/retired inventory of approximately $7,170,000 and $5,854,000 as of December 31, 2012 and 2011, respectively.
F-58
Table of Contents
Notes to Financial Statements (Continued)
December 31, 2012 and 2011
Note 3Property and Equipment
Property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
2011 |
|
Depreciable
LifeYears |
|
Land |
|
$ |
7,617,348 |
|
$ |
15,733,474 |
|
|
|
|
Land improvements |
|
|
37,023,618 |
|
|
41,029,946 |
|
|
10-31 |
|
Buildings |
|
|
98,052,136 |
|
|
133,774,715 |
|
|
10-31 |
|
Machinery and equipment |
|
|
92,389,677 |
|
|
114,993,122 |
|
|
5-10 |
|
Motor vehicles and aircraft |
|
|
1,614,302 |
|
|
2,225,244 |
|
|
3-5 |
|
Furniture and fixtures |
|
|
10,761,016 |
|
|
11,542,661 |
|
|
5-10 |
|
Computer equipment and software |
|
|
22,119,443 |
|
|
23,595,889 |
|
|
3-10 |
|
Leasehold improvements |
|
|
|
|
|
2,059,977 |
|
|
5-31 |
|
Construction in progress |
|
|
108,633 |
|
|
1,522,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost |
|
|
269,686,173 |
|
|
346,477,237 |
|
|
|
|
Accumulated depreciation |
|
|
210,169,961 |
|
|
247,077,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
59,516,212 |
|
$ |
99,400,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was approximately $6,387,000 in 2012 and $7,076,000 in 2011.
During
2012, operating property and equipment with a carrying amount of approximately $21,937,000 were listed and sold. The Company recognized a loss on sale of approximately $11,324,000 during 2012.
The proceeds received from the sale were used to pay down existing debt outstanding as disclosed in Note 5.
Certain
property was held for sale as of December 31, 2011. The property had a cost of approximately $4,805,000 and accumulated depreciation and impairment reserves of approximately $3,305,000.
Note 4Revolving Line of Credit
During 2012, the Company refinanced the expired line of credit with a new lender. Under the refinanced line of credit, the Company has available borrowings up to $15,000,000, limited to a formula
based primarily on accounts receivable and inventory. The new agreement matures on October 23, 2015 and interest accrues daily at 1.75 percent above the higher of the bank's prime rate
or the federal funds effective rate plus 0.50 percent (an effective rate of 5.0 percent at December 31, 2012). The line of credit is collateralized by substantially all assets of
the Company.
In
2011, the Company's revolving line of credit agreement allowed for borrowings up to $29,000,000 with interest payable monthly at the greater of LIBOR plus an applicable margin or 3.5 percent
plus an applicable margin (an effective rate of 10.0 percent at December 31, 2011). The line of credit expired on September 16, 2012. Commitment fees of approximately $62,000 and
$54,000 are included in interest expense for the years ended December 31, 2012 and 2011, respectively.
At
December 31, 2012 and 2011, the unused portion on the line of credit was $6,374,833 and $13,499,755, respectively.
Under
the revolving line of credit agreement, the Company is subject to various financial covenants. See Note 5 for further details.
F-59
Table of Contents
Notes to Financial Statements (Continued)
December 31, 2012 and 2011
Note 5Long-term Debt
Long-term debt at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
2012 |
|
2011 |
|
Note payable to a financial institution in quarterly installments of $1,000,000 including interest at either LIBOR plus 8.5 percent or
the greater of 7.5 percent above the prime rate or 7.5 percent above the federal funds rate (an effective rate of 8.87 percent as of December 31, 2011). The note is collateralized by substantially all assets of the Company and was
due on September 18, 2012. This note was repaid and replaced with a $6,500,000 term note in October 2012 as described below |
|
$ |
|
|
$ |
12,290,223 |
|
On October 23, 2012, the Company obtained a $6,500,000 term loan from a bank. The interest rate on the term debt is
5.75 percent above the higher of the bank's prime rate or the federal funds effective rate plus 0.50 percent (an effective rate of 9 percent as of December 31, 2012). The term loan, which is collateralized by substantially all
Company assets, is due in monthly installments of interest only through March 31, 2013. Monthly payments of principal and interest commence April 1, 2013 and the loan is due in full on October 23, 2015 |
|
|
6,160,907 |
|
|
|
|
Term loan for $100,000 due in monthly installments of principal and interest of $3,260 with a fixed rate of
0.89 percent. The loan is collateralized by the equipment and matures in February 2015 |
|
$ |
63,236 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,224,143 |
|
|
12,290,223 |
|
Less current portion |
|
|
956,748 |
|
|
5,790,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion |
|
$ |
5,267,395 |
|
$ |
6,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
balance of the above debt matures as follows:
|
|
|
|
|
2013 |
|
$ |
956,748 |
|
2014 |
|
|
1,262,805 |
|
2015 |
|
|
4,004,590 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,224,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the agreements with the bank, the Company is subject to certain financial covenants, including a minimum EBITDA amount, fixed charge coverage, and limitations on capital expenditures and
management fees.
Note 6Operating Leases
The Company is obligated under operating leases primarily for certain equipment, expiring at various dates through 2092. Total rent expense under these leases was approximately $1,066,000 and
$1,657,000 for the years ended December 31, 2012 and 2011, respectively.
The
Company leases certain warehouse and storage space from an entity related through common stockholders. On June 30, 2011, the lease was terminated in its entirety and all obligations were
F-60
Table of Contents
Notes to Financial Statements (Continued)
December 31, 2012 and 2011
Note 6Operating Leases (Continued)
released.
Rent expense incurred for this lease was approximately $264,000 for the year ended December 31, 2011.
Future
minimum annual commitments under these operating leases are as follows:
|
|
|
|
|
Years Ending December 31
|
|
Amount |
|
2013 |
|
$ |
509,505 |
|
2014 |
|
|
75,322 |
|
2015 |
|
|
49,385 |
|
2016 |
|
|
27,494 |
|
2017 |
|
|
1,200 |
|
Thereafter |
|
|
90,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
752,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7Self-insurance
The Company has a self-insured medical plan covering all of its eligible employees. The Company's individual excess risk benefit level per employee for the years ended December 31, 2012 and
2011 was $200,000 with total exposure limited to $5,000,000. Losses in excess of these limitations are covered by reinsurance. Amounts expensed by the Company under the plan were approximately
$2,133,000 and
$2,584,000 for the years ended December 31, 2012 and 2011, respectively. The Company has recorded an accrual of approximately $235,000 and $389,000 at December 31, 2012 and 2011,
respectively, for known claims and estimated claims incurred but not reported.
Furthermore,
the Company is self-insured for workers' compensation. The Company has obtained specific excess reinsurance coverage for claims in excess of $1,000,000 per accident. Amounts charged to
operations related to this plan totaled approximately $387,000 and $760,000 in 2012 and 2011, respectively. The Company has recorded an accrual of approximately $1,442,000 and $2,154,000 at
December 31, 2012 and 2011, respectively, for known claims and estimated claims incurred but not reported.
Note 8Capital Stock
As of December 31, 2012 and 2011, common stock consists of 2,500 authorized, issued, and outstanding shares of no par value Class A stock, with a stated value of $0.408 and 2,500
authorized, issued, and outstanding shares of no par value, nonvoting Class B stock, with a stated value of $0.392, respectively.
Note 9Retirement Plans
The Company sponsors a 401(k) plan for all employees age 21 and over. The plan provides for the Company to make a discretionary matching contribution. Employer contributions become fully vested after
three years of employment. There were no employer contributions in 2012 or 2011.
Note 10Contingencies
The Company has a noncancelable maintenance agreement for certain information technology services requiring payments of approximately $351,000 each year through 2014.
F-61
Table of Contents
Notes to Financial Statements (Continued)
December 31, 2012 and 2011
Note 10Contingencies (Continued)
The
Company is subject to claims and lawsuits in the ordinary course of its business. It is the Company's policy to vigorously defend any action brought against it, to the fullest extent, in the
normal legal process. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, is either adequately covered by insurance, or if not insured,
will not, in the aggregate, have a material adverse effect upon the Company's financial position or its results of operations.
Note 11Management's Plans
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the
Company has sustained substantial operating losses in recent years and has seen a reduction in net sales in successive years. In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its obligations as they become due, and the success
of its future operations.
Management
believes the following actions presently being taken to revise the Company's operations provide the opportunity for the Company to continue as a going
concern:
-
- Refinancing of the line of credit and term debt and amendment of covenants through October 2015
-
- The Company exceeded budgeted sales of baskets and other products for the fourth quarter of 2012 and picked up new
business lines that are expected to add profit in 2013.
-
- Continuous plans to sell unused, vacant land and underutilized property of which proceeds are being used to pay down
outstanding debt balances
-
- Updates to the Sales Field Career Plan completed July 1, 2012 driving recruiting growth
-
- Continuous expense management through budget reviews and challenging new costs/contracts
-
- Selling older excess inventory through showrooms and online store
Note 12Subsequent Events
On March 18, 2013, certain Longaberger stockholders exchanged their stock for debt which is in part convertible to shares in a public company, CVSL. This transaction resulted in a change of
control of Longaberger which is now majority owned by CVSL. The Company is in the process of evaluating the effects of this transaction on the Company's financial statements.
F-62
Table of Contents
Shares
Common Stock
PROSPECTUS
Cantor Fitzgerald & Co.
, 2014
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses to be paid by the registrant in connection with this offering, other than estimated underwriting
discounts and commissions. All amounts shown are estimates with the exception of the SEC registration fee, the FINRA filing fee and the NYSE MKT listing fee.
|
|
|
|
|
SEC registration fee |
|
$ |
8,887 |
|
FINRA filing fee |
|
|
10,850 |
|
NYSE MKT listing fee |
|
|
75,000 |
|
Accounting fees and expenses |
|
|
|
* |
Legal fees and expenses |
|
|
|
* |
Printing and engraving expenses |
|
|
|
* |
Transfer agent and registrar fees and expenses |
|
|
|
* |
Non-accountable expense allowance |
|
|
|
* |
Miscellaneous fees and expenses |
|
|
|
* |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- To
be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Under the provisions of Section 607.0850 of Florida Business Corporations Act, we may indemnify our directors, officers, employees and agents
and maintain liability insurance for those persons. Section 607.0850 provides that a corporation may indemnify a person made a party to a proceeding because the person is or was a director
against liability incurred in the proceeding if the person's conduct was in good faith. In the case of conduct in an official capacity with the corporation,
the person may be indemnified if the person reasonably believed that such conduct was in the corporation's best interests. In all other cases, the corporation may indemnify the person if the person
reasonably believed that such conduct was at least not opposed to the corporation's best interests. In the case of any criminal proceeding, the person may be indemnified if the person had no
reasonable cause to believe the person's conduct was unlawful.
Our
amended bylaws provide for indemnification of our directors and executive officers to the maximum extent permitted by the Florida Business Corporations Act.
In
addition, we have entered into indemnification agreements with each of our current directors and executive officers. These agreements will require us to indemnify these individuals to the fullest
extent permitted under the Florida Business Corporations Act against liabilities that may arise by reason of their service to us and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers.
In
any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors,
our officers and persons who control us, within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), against certain liabilities.
Insofar
as indemnification for liabilities for damages arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provision, or
otherwise, we
II-1
Table of Contents
have
been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 15. Recent Sales and Issuances of Unregistered Securities.
During the last three years, we have issued unregistered securities to certain persons, as described below. None of these transactions involved any
underwriters, underwriting
discounts or commissions, or any public offering, and the registrant believes that, except as otherwise set forth below, each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(a)(2) thereof and/or Regulation D promulgated thereunder. All recipients had adequate access, though their relationships with the registrant, to
information about the registrant. The following issuances have not been adjusted to reflect the -for- reverse stock split.
On
July 9, 2014, we issued 106,315 shares of common stock to a director as director compensation and an aggregate of 105,262 shares of restricted common stock to two directors for which restrictions
lapse on July 8, 2015.
On
July 2, 2014, we issued a warrant exercisable for 1,000,000 shares of our common stock at an exercise price of $0.64 per share. The warrant is exercisable for a term of one year from its
issuance date; provided, however, that the term will be extended for an additional year if on July 1, 2015 the shares of common stock underlying the warrant are subject to an effective
registration statement under the Securities Act or our common stock is listed on the Nasdaq National Market or the NYSE MKT. In addition, the warrant provides for piggyback registration rights upon
request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization,
reorganization, merger or consolidation.
On
June 5, 2014, we issued 323,897 shares of common stock in connection with our acquisition of certain assets in the Uppercase Living transaction, which shares have not yet been released and
are being held in escrow subject to certain closing conditions.
On
May 6, 2014, we issued warrants exercisable for an aggregate of 375,000 shares of our common stock at an exercise price of $0.55 per share. The warrants are exercisable for a term of
one year from their issuance date; provided, however, that the term will be extended for an additional year if on May 5, 2014 the shares of common stock underlying the warrant are subject to an
effective registration statement under the Securities Act or our common stock is listed on the Nasdaq National Market or the NYSE MKT. In addition, the warrants provide for piggyback
registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our
recapitalization, reorganization, merger or consolidation.
On
April 24, 2014, we issued 254,490 shares of common stock to UL SLC, LLC in connection with our acquisition of assets.
On
January 7, 2014, we issued 572,549 shares of common stock to Lega Enterprises, LLC in connection with our acquisition of assets.
On
January 6, 2014, we issued 155,926 shares of common stock to Paperly in connection with our acquisition of assets.
On
January 6, 2014, we issued 317,804 shares of common stock to the five former shareholders of MSKin connection with our acquisition of the stock of MSK.
On
November 27, 2013, we issued 3,150,751 shares of common stock to Lega Enterprises, LLC and TPark One LLC in connection with our acquisition of assets.
II-2
Table of Contents
On
October 22, 2013, we issued 3,723,300 shares of common stock to Lega Enterprises, LLC in connection with our acquisition of assets.
On
October 1, 2013, we issued 1,766,979 shares of common stock to TBT in connection with our acquisition of assets.
On
August 22, 2013, we issued 4,512,975 shares of common stock to Inspired Portfolio Pty, Ltd. in connection with our acquisition of assets.
On
June 14, 2013, we issued 32,500,000 shares of common stock to the Trust upon conversion of the Convertible Subordinated Unsecured Promissory Note in the principal amount of $6,500,000
issued to the Trust. The issuance qualified for exemption under Section 3(a)(9) of the Securities Act.
On
March 18, 2013, we issued a Convertible Subordinated Unsecured Promissory Note in the principal amount of $6.5 million in connection with our acquisition of TLC. This note was
converted into shares of our common stock on June 14, 2013, as described above.
On
December 12, 2012, we issued a convertible subordinated unsecured promissory note in the principal amount of $20,000,000 to an entity controlled by one of our directors.
On
August 2012, we issued 500,000 shares of our common stock to two investors in satisfaction of certain obligations under a prior contract.
On
September 25, 2012, we issued 438,086,034 shares of our common stock to Rochon Capital in connection with the Initial Share Exchange.
On
May 15, 2012, the holder of two convertible promissory notes dated April 5, 2011 and February 15, 2012 converted the principal amount of $250,000 plus accrued interest into
2,666,666 shares of our common stock in full satisfaction of all principal and interest due thereunder. The issuance of the shares of common stock qualified for exemption under
Section 3(a)(9) of the Securities Act. In connection with the February 15, 2012 note, we granted the holder one warrant for each one share converted. Each warrant was exercisable into
one share of our common stock at the price of $0.50 per share.
On
May 16, 2012, the holder of two convertible promissory notes dated April 1, 2011 and February 24, 2012 converted the principal amount of $225,000 plus accrued interest into
2,380,000 shares of our common stock in full satisfaction of all principal and interest due thereunder. The issuance of the shares of common stock qualified for exemption under
Section 3(a)(9) of the Securities Act. In connection with the February 24, 2012 note, we granted the holder one warrant for each one share converted. Each warrant was exercisable into
one share of our common stock at the price of $0.50 per share.
On
April 11, 2012, we issued 50,000 restricted shares of common stock for services related to our guidewire device.
On
March 7, 2012, we issued 50,000 restricted shares of our common stock for bookkeeping services rendered to us.
On
March 7, 2012, we issued 50,000 restricted shares of our common stock for fabricating the prototype for our guidewire bookkeeping services rendered to us.
On
March 7, 2012, we issued 30,000 restricted shares of our common stock for legal services.
On
March 7, 2012, we issued 8,830,000 restricted shares of our common stock for consulting services in financial, business and marketing.
On
March 7, 2012, we issued 2,830,000 restricted shares of our common stock for consulting services in financial, business and marketing.
II-3
Table of Contents
On
March 7, 2012, we issued 25,000 restricted shares of our common stock for assistance with marketing our products.
On
March 7, 2012, we issued 5,000 restricted shares of our common stock for strategic introductions.
On
March 7, 2012, we issued 6,556,000 restricted shares of our common stock to our then vice president and director, Michael DiCicco, for services rendered to us.
On
March 7, 2012, we issued 1,000,000 restricted shares of common stock to our then director, Douglas Miscoll, for service rendered to us.
On
March 7, 2012, we issued 6,830,000 restricted shares of common stock to a consultant for services rendered to us.
On
March 7, 2012, we issued 2,830,000 restricted shares of common stock to a consultant for services rendered to us.
On
February 13, 2012, we issued 298,350 restricted shares of common stock to Olympus Capital Group in exchange for satisfaction of a convertible note in the amount of $7,500.
On
February 13, 2012, we issued an aggregate of 175,000 restricted shares of common stock to six persons for advisory services rendered.
On
February 13, 2012, we issued 99,450 restricted shares of common stock to Rada Advisors, Inc. in exchange for satisfaction of a convertible note in the amount of $2,500.
During
November 2011, we issued $470,000 worth of convertible notes to three investors. The notes were convertible into shares of our restricted common stock. These notes were converted into
2,256,818 shares of our common stock on December 1, 2011. The issuance of the shares of common stock upon conversion of the notes qualified for exemption under Section 3(a)(9) of
the Securities Act.
On
July 28, 2011, we issued 1,444,000 restricted shares of common stock to a former vice president and director for services rendered.
On
July 28, 2011, we issued 1,740,000 restricted shares of common stock to a consultant for services rendered.
On
July 28, 2011, we issued 1,174,000 restricted shares of common stock to Joseph Babiak for services rendered.
Item 16. Exhibits.
|
|
|
|
Exhibit No. |
|
Description |
|
1.1 |
+ |
Form of Underwriting Agreement between CVSL Inc. and Cantor Fitzgerald & Co., as representative of the several underwriters |
|
2.1 |
|
Share Exchange Agreement, dated August 24, 2012, by and among Computer Vision Systems Laboratories, Corp., Happenings Communications Group, Inc. and Rochon Capital Partners, Ltd. (incorporated by
reference to Exhibit 10.10 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on August 30, 2012) |
|
3.1 |
|
Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Registration Statement on Form SB-2 (File Number 333-145738) filed with the Commission on August 28, 2007) |
|
3.2 |
|
Bylaws of Cardio Vascular Medical Device (incorporated by reference to Exhibit 3.2 of our Registration Statement on Form SB-2 (File Number 333-145738) filed with the Commission on August 28,
2007) |
II-4
Table of Contents
|
|
|
|
Exhibit No. |
|
Description |
|
3.3 |
|
Articles of Incorporation (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on June 28, 2011) |
|
3.4 |
|
Bylaws of Computer Vision Systems Laboratories, Corp. (incorporated by reference to Exhibit 3.4 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on June 28,
2011) |
|
3.5 |
|
Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on May 30,
2013) |
|
3.6 |
|
Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.7 of our Current Report on Form 10-Q (File No. 000-52818) filed with the Commission on August 14,
2013) |
|
3.7 |
|
Amendment to Bylaws of Computer Vision Systems Laboratories, Corp., effective as of September 28, 2012 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on October 1, 2012) |
|
3.8 |
|
Amendment to Bylaws effective July 9, 2014 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on July 15,
2014) |
|
4.1 |
|
Registration Rights Agreement, dated September 25, 2012, by and between Computer Vision Systems Laboratories, Corp. and Rochon Capital Partners, Ltd. (incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K (File No. 000-52818) filed with the Commission on October 1, 2012) |
|
4.2 |
|
Convertible Subordinated Unsecured Promissory Note, dated December 12, 2012, in the original principal amount of $20,000,000, from Computer Vision Systems Laboratories, Corp., (as Maker), to Richmont Capital
Partners V LP, (as Payee) (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on December 18, 2012) |
|
4.3 |
|
Lockup Agreement between International Equities Group and Computer Vision Systems Laboratories dated February 15, 2013 (incorporated by reference to 99.10 to Schedule 13D/A (File No. 005-85515) filed
with the Commission on February 19, 2013) |
|
4.4 |
|
Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6,500,000, issued by Computer Vision Systems Laboratories, Corp. to The Longaberger Company
(incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on March 20, 2013) |
|
4.5 |
|
Promissory Note, dated March 14, 2013, in the original principal amount of $4,000,000, issued by Computer Vision Systems Laboratories, Corp. to The Longaberger Company (incorporated by reference to
Exhibit 10.4 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on March 20, 2013) |
|
4.6 |
|
Amendment to Share Exchange Agreement to Defer Second Tranche Closing Indefinitely dated April 10, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 000-52818) filed
April 12, 2013) |
II-5
Table of Contents
|
|
|
|
Exhibit No. |
|
Description |
|
4.7 |
|
First Amendment to Convertible Subordinated Unsecured Promissory Note, dated as of June 17, 2013, between CVSL Inc. and Richmont Capital Partners V LP (incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K (File No. 000-52818) filed with the Commission on June 21, 2013) |
|
4.8 |
|
Irrevocable Proxy between Computer Vision Systems Laboratories and Rochon Capital Partners Ltd. (incorporated by reference to Exhibit 99.12 to Schedule 13-D/A (File No. 005-85515) filed with the
Commission on June 27, 2013) |
|
4.9 |
|
Director Smart Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 000-52818) filed with the Commission on July 24, 2013) |
|
4.10 |
# |
Form of Warrant issued in May 2014 |
|
4.11 |
# |
Form of Warrant issued in July 2014 |
|
4.12 |
|
Second Amendment to Convertible Subordinated Unsecured Promissory Note, dated as of June 12, 2014, between CVSL Inc. and Richmont Capital Partners V LP (incorporated by reference to
Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on June 16, 2014) |
|
4.13 |
|
Promissory note dated July 11, 2014 between Agel Enterprises, Inc. and Tamala L. Longaberger (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed with
the Commission on July 15, 2014) |
|
4.14 |
|
Amendment to Share Exchange Agreement dated as of October 10, 2014 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on
October 14, 2014) |
|
5.1 |
+ |
Legal Opinion of Gracin & Marlow, LLP |
|
9.1 |
|
Voting Agreement by and among Tamala L. Longaberger Revocable Trust, Rochon Capital Partners Ltd, Computer Vision Systems Laboratories Corp. dated March 18, 2013 (incorporated by reference to
Exhibit 99.11 to Schedule 13D/A (File No. 005-85515) filed with the Commission on June 27, 2013) |
|
10.1 |
|
Indemnification Agreement entered into between Computer Vision Systems Laboratories, Corp. and John P. Rochon (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on October 1, 2012) |
|
10.2 |
|
Convertible Subordinated Unsecured Note Purchase Agreement, dated December 12, 2012, by and between Computer Vision Systems Laboratories, Corp., and Richmont Capital Partners V LP (incorporated by reference
to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on December 18, 2012) |
|
10.3 |
|
Purchase Agreement, dated March 15, 2013, by and among Computer Vision Systems Laboratories, Corp., The Longaberger Company, TMRCL Holding Company, TMRCL Holding LLC, and The Longaberger Company Canada
(incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed with the Commission on March 20, 2013) |
|
10.4 |
|
Subscription Agreement, dated March 14, 2013, by and between the Company and The Longaberger Company (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K (File No. 000-52818)
filed with the Commission on March 20, 2013) |
II-6
Table of Contents
|
|
|
|
Exhibit No. |
|
Description |
|
10.5 |
|
Guarantee Agreement, dated March 14, 2013, made by Computer Vision Systems Laboratories, Corp. (incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K (File No. 000-52818) filed
with the Commission on March 20, 2013) |
|
10.6 |
|
Employment Agreement, dated March 18, 2013, by and between Computer Vision Systems Laboratories, Corp. and Tamala L. Longaberger (incorporated by reference to Exhibit 10.1 of our Current Report on
Form 8-K (File No. 000-52818) filed with the Commission on March 22, 2013) |
|
10.7 |
|
Reimbursement of Services Agreement between Computer Vision Systems Laboratories Corp., a Florida corporation and Richmont Holdings, Inc., (incorporated by reference to Exhibit 10.11 of our Annual Report on
Form 10-K (File No. 000-52818) filed with the Commission on March 29, 2013) |
|
10.8 |
|
Amendment to Share Exchange Agreement to Defer Second Tranche Closing Indefinitely dated April 10, 2013 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on April 12, 2013) |
|
10.9 |
|
Equity Contribution Agreement, dated as of June 18, 2013, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on June 21, 2013) |
|
10.10 |
|
Asset Purchase Agreement, dated September 25, 2013, between Agel Enterprises, Inc. and Agel Enterprises, LLC. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File
No. 000-52818) filed with the Commission on October 1, 2013) |
|
10.11 |
|
Purchase Money Note issued by Agel Enterprises, Inc. in the principal amount of $1,700,000 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed
with the Commission on October 1, 2013) |
|
10.12 |
|
Equity Contribution Agreement, dated as of November 11, 2013, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 13 to Schedule 13D/A (File
No. 005-85515) filed with the Commission on April 1, 2014 by Rochon Capital Partners, Ltd.) |
|
10.13 |
|
Satisfaction of Obligation dated December 3, 2013 between CVSL, Rochon Capital Partners Ltd. and International Equities Group, Inc. (incorporated by reference to Exhibit 14 to Schedule 13D/A
(File No. 005-85515) filed with the Commission on April 1, 2014 by Rochon Capital Partners, Ltd.) |
|
10.14 |
|
Equity Contribution Agreement, dated as of May 1, 2014, between Rochon Capital Partners, Ltd. and CVSL Inc. (incorporated by reference to Exhibit 99.13 to Schedule 13D/A (File
No. 005-85515) filed with the Commission on May 7, 2014 by Rochon Capital Partners, Ltd.) |
|
10.15 |
# |
Credit and Security Agreement dated October 23, 2012 among Keybank National Association and The Longaberger Company |
|
10.16 |
# |
First Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company |
|
10.17 |
# |
Second Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company |
|
10.18 |
# |
Third Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company |
II-7
Table of Contents
|
|
|
|
Exhibit No. |
|
Description |
|
10.19 |
# |
Fourth Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company |
|
10.20 |
# |
Fifth Amendment Agreement to Credit and Security Agreement by and between Keybank National Association and The Longaberger Company |
|
10.21 |
|
Restricted Stock Agreement between CVSL Inc. and Roy Damary dated July 9, 2014 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed with the
Commission on July 15, 2014) |
|
10.22 |
|
Restricted Stock Agreement between CVSL Inc. and Bernard Ivaldi dated July 9, 2014 (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K (File No. 000-52818) filed with
the Commission on July 15, 2014) |
|
10.23 |
|
Agreement for Purchase and Sale dated as of July 31, 2014 between The Longaberger Company and CFI NNN Raiders, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818)
filed with the Commission on August 1, 2014). |
|
10.24 |
|
Master Lease Agreement made as of July 31, 2014 by and between CFI NNN Raisers, LLC and CVSL Inc. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (File No. 000-52818) filed with the
Commission on August 1, 2014). |
|
10.22 |
|
Restricted Stock Agreement between CVSL Inc. and John W. Bickel dated September 16, 2014 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 000-52818) filed
with the Commission on September 18, 2014) |
|
21 |
|
List of Subsidiaries (incorporated by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K (File No. 000-52818) filed March 31, 2014) |
|
23.1 |
* |
Consent of PMB Helin Donovan, LLP |
|
23.2 |
* |
Consent of Plante & Moran, PLLC |
|
23.4 |
+ |
Consent of Gracin & Marlow, LLP (included in its opinion filed as Exhibit 5.1) |
|
24.1 |
# |
Power of Attorney |
|
24.2 |
# |
Power of Attorney |
|
24.3 |
# |
Power of Attorney |
|
101 |
* |
The following materials formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheet at December 31, 2013 and June 30, 2014 (unaudited), (ii) Consolidated Statements
of Operations and Comprehensive Loss for the three month periods ended June 30, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for the three month periods ended June 30, 2014 and 2013 (unaudited), (iv) Notes to
Unaudited Consolidated Financial Statements, (v) Consolidated Balance Sheets for the years ended December 31, 2013 and 2012, (vi) Consolidated Statements of Operations for the years ended December 31, 2013 and 2012,
(vii) Consolidated Statements of Changes in Stockholders' (Deficit) for the years ended December 31, 2013 and 2012, (viii) Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012, and (ix) Notes
to Audited Consolidated Financial Statements. |
- *
- Filed
herewith.
- #
- Previously
filed.
II-8
Table of Contents
- +
- To
be filed by amendment.
- **
- In
accordance with Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to this Registration Statement on
Form S-1 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of
Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The
undersigned registrant hereby undertakes that:
(i) For
purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective; and
(ii) For
purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
That,
for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The
undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser
and will be considered to offer or sell such securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The
portion of any other free writing prospectuses relating to the offering containing material information about the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
II-9
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on the Amendment No. 5 to the Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Plano, State of Texas, October 14, 2014.
|
|
|
|
|
|
|
CVSL INC. |
|
|
By: |
|
/s/ JOHN P. ROCHON
John P. Rochon Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) |
|
|
Date: October 14, 2014 |
|
|
By: |
|
/s/ KELLY KITTRELL
Kelly Kittrell Chief Financial Officer, Treasurer and Director (Principal Financial and Principal Accounting Officer) |
|
|
Date: October 14, 2014 |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 5 to the Form S-1 has been signed by the following persons in the capacities and on the dates
indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ JOHN P. ROCHON
John P. Rochon |
|
Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) |
|
October 14, 2014 |
*
John P. Rochon |
|
Vice Chairman and Director |
|
October 14, 2014 |
/s/ KELLY KITTRELL
Kelly Kittrell |
|
Chief Financial Officer, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer) |
|
October 14, 2014 |
*
Russell Mack |
|
Vice President and Director |
|
October 14, 2014 |
II-10
Table of Contents
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
*
Michael Bishop |
|
Director |
|
October 14, 2014 |
*
Tamala Longaberger |
|
Director |
|
October 14, 2014 |
*
William Randall |
|
Director |
|
October 14, 2014 |
*
Julie Rasmussen |
|
Director |
|
October 14, 2014 |
*
Kay Bailey Hutchison |
|
Director |
|
October 14, 2014 |
*
Bernard Ivaldi |
|
Director |
|
October 14, 2014 |
*
Roy Damary |
|
Director |
|
October 14, 2014 |
*
John W. Bickel |
|
Director |
|
October 14, 2014 |
|
|
|
|
|
|
|
*By: |
|
/s/ JOHN P. ROCHON
John P. Rochon as Attorney-in-Fact |
|
|
|
|
II-11
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CVSL Inc.
and Subsidiaries
We consent to the use in this Amendment No. 5 to the Registration Statement on Form S-1/A of CVSL Inc. and Subsidiaries of our report dated March 31, 2014, relating to our
audits of the consolidated financial statements appearing in the Prospectus, which is part of this Registration Statement.
PMB HELIN DONOVAN, LLP
Dallas, Texas
October 10, 2014
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the inclusion of our report dated April 1, 2013 on our audit of the financial statements of The Longaberger Company for the
years ended December 31, 2012 and 2011 in this S-1 Registration Statement (File No. 333,196155) of CSVL, Inc. (Amendment 5) and to the reference to our firm under the caption
"Experts" in the Prospectus.
Columbus, Ohio
October 10, 2014
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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