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CVSL INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 22, 2014]

CVSL INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Business 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.

Results of Operations 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 2013, YIAH during the third quarter 2013, TBT, AEI, MSK and Paperly during the fourth quarter of 2013 and Uppercase Living in the first quarter of 2014. Comparisons between our year end numbers for the quarter ended March 31, 2014 and 2013 may not be meaningful on a quantitative or qualitative basis.

20-------------------------------------------------------------------------------- Table of Contents During the quarter ended March 31, 2014, our gross sales were $26.7 million compared to $4.3 million for the quarter ended March 31, 2013. Revenues by product groups are shown in the table below (dollars in thousands): Three Months ended March 31, 2014 2013 Gourmet Food Products $ 963 - Home Décor $ 15,022 $ 3,999 Nutritionals and Wellness $ 10,202 - Publishing & Printing $ 294 $ 269 Other $ 190 - Operating Losses Our operating loss was $2.7 million for the three months ended March 31, 2014, as compared to $1.0 million for the three months ended March 31, 2013. 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 months ended March 31, 2014, we incurred approximately $7.0 million in commissions and incentives costs, compared to $0.6 million for the three months ended March 31, 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 increased from $2.2 million comparing the quarter ended March 31, 2013 to $9.7 million for the quarter ended March 31, 2014. The year over year increase is primarily the result of various administrative departments at each of the acquired companies, including human resources, legal, information technology, finance and executive, as well as costs associated with leased buildings. Additionally, we incurred professional and legal fees associated with 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 months ended March 31, 2014 and 2013, we recorded $0.5 million and $0.5 million, respectively, in reimbursement expenses.

Loss on Marketable Securities Our loss on marketable securities for the three months ended March 31, 2013 totaled $0.5 million. We did not have any investments for the three months ended March 31, 2013.

Non-controlling Interest Non-controlling interest increased to a net loss of $0.6 million for three months ended March 31, 2014 compared to a net income of $23,445 for the three months ended March 31, 2013. The increase is primarily 21-------------------------------------------------------------------------------- Table of Contents the result of losses generated at TLC. Additionally, the three month period ended March 31, 2013 only included 13 days of results for TLC.

Liquidity and Capital Resources See footnote (6), Long-term debt and other financing arrangements, included in the unaudited consolidated financial statements included in this report for additional information.

The table below reflects our highly liquid assets: March 31, December 31, 2014 2013 Cash $ 5,200,150 $ 3,876,708 Marketable Securities 8,387,689 11,830,252 Accounts Receivable, net 987,326 780,237 Total $ 14,575,165 $ 16,487,197 Our working capital at March 31, 2014 totaled $1.6 million. In December 2012, we received $20 million in proceeds from the sale of a Convertible Note to Richmont Capital Partners V L.P. 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 the 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 for any such acquisition. To the extent that cash will need to be paid as some portion of the acquisition consideration, we expect, to the extent necessary, to use our cash on hand and if necessary to raise cash through debt and/or equity financing. We believe that additional debt or equity financing will be available to us based on the assets and financials of the acquisition candidate and based on management's experience with respect to debt financing and equity financing. We expect to be able to raise capital from lenders and equity investors who will understand our direct-selling acquisition strategy.

Cash Flows Cash used in operating activities for the quarter ended March 31, 2014 was $1.5 million, as compared to net cash used in operating activities of $0.8 million for the quarter ended March 31, 2013. Our principal uses of cash have included legal and professional fees associated with the acquisitions, legal, due diligence and other fees related to other potential acquisitions, the cost of buying inventory, labor and benefits costs and commissions and incentives.

Net cash provided by investing activities for the quarter ended March 31, 2014 was $4.4 million, as compared to $0.1 for the quarter ended March 31, 2013. Net cash provided by investing activities was the result of $3.4 million in sales of marketable securities in addition to $1.3 million associated with TLC's sale of a building in the ECO Business Park in Frazeysburg, Ohio. The cash inflows were offset by $0.3 million in capital expenditures primarily associated with our information technology implementation.

Net cash used in financing activities was $1.6 million for the quarter ended March 31, 2014 as we paid down $1.4 million on our lines of credit and paid $0.6 million in debt primarily related to the payoff of the term loan with Key Bank. During the quarter ended March 31, 2013, we increased our borrowings under our line of credit by $0.4 million.

Contractual Obligations As a smaller reporting company, we are not required to disclose contractual obligations.

22-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations promulgated by the Securities and Exchange Commission ("SEC"), we make assumptions, judgments and estimates that can have a significant impact on our net income/(loss) and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, income taxes, and long-lived assets, have the greatest impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2014, as compared to the critical accounting policies and estimates disclosed in Items 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 31, 2014.

Recent Accounting Pronouncements See footnote (1) of our accompanying unaudited consolidated financial statements for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.

Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Forward-Looking Statements Certain of the matters discussed within this report include forward-looking statements on our current expectations and projections about future events. In some cases you can identify forward-looking statements by terminology such as "may," "should," "potential," "continue," "expects," "anticipates," "intends," "plans," "believes," "estimates," and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Item 1A. "Risk Factors" included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2013. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to "CVSL," "we," "us," "our," and refer to CVSL Inc. and its subsidiaries.

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