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CVSL INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q/A. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled "Risk Factors." Overview We operate a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce strategies to drive a high-growth global business. We are engaged in a long-term strategy to develop a large, global diverse company that combines the entrepreneurship, innovation and relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a large scale company. We seek to acquire companies primarily in the direct selling (micro-enterprise) business and companies potentially engaging in businesses related to micro-enterprise and to build within this sector an interconnected "network of networks," in which social connections aided by the power of social media will be combined with relationship-based commerce (that is, commerce conducted between friends, neighbors, relatives and colleagues). Our goal is to form a virtual, online economy with the sellers and customers, from the businesses we acquire, which will offer its members a myriad of benefits and advantages. Our acquisitions form the platform for this growing online economy. Through a series of seven recent acquisitions of direct selling companies offering a diverse product mix, we have expanded our product offerings as well as our base of sales representatives and customers. In addition to our acquisition of TLC, we completed the acquisition of the assets or stock of the following companies in 2013 and during the first quarter of 2014: Your Inspiration at Home, Ltd., an Australian company ("YIAH") (a direct seller of hand-crafted spices from around the world), Tomboy Tools, Inc., a Colorado company ("TBT") (a direct seller of a line of tools designed for women as well as home security monitoring services), Agel Enterprises, LLC ("Agel") (a direct seller of nutritional supplements and skin care products), My Secret Kitchen Limited ("MSK"), (a direct seller of a unique line of gourmet food products), Paperly, LLC ("Paperly"), (a direct seller of custom stationery and paper products), and Uppercase Living, LLC ("Uppercase") (a direct seller of customizable vinyl expressions for display on walls). During the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls LLC ("Golden Girls") (a direct seller and purchaser of jewelry for cash), but have not yet closed this transaction. Each company we acquire maintains its own unique product line, independent sales representatives and culture. Our objective with each acquisition is to maintain these unique elements, while reducing the cost of operations and goods for each acquired company through economies of scale, operating efficiencies. We have grown at a rapid pace as a result of our recent acquisitions. With each acquisition we have expanded our product base and our base of independent sales representatives and potential customers. In this respect, we believe we have something valuable that social media companies wish they had. Social media companies help people stay connected, but have been unable to fully translate these connections directly into commerce. In contrast, our companies' virtual communities of sellers and customers are already conducting commerce, much of it using our online business tools, such as personalized web sites. This convergence of personal relationships, social media and relationship-based commerce is what gives us our unique blend of attributes for growth. As we scale up through additional acquisitions and organic growth, we expect these attributes will be magnified. Our combined revenues have increased significantly as a result of the acquisitions we have made in the past 18 months. Our revenues increased by $84.0 million for the year ended December 31, 2013 as compared to our revenues for the year ended December 31, 2012 and our operating losses for the year ended December 31, 2013 increased by $4.5 million as compared to our operating losses for the year ended 23 -------------------------------------------------------------------------------- Table of Contents December 31, 2012. Our revenues were $24.6 million and $51.3 million for the three and six months ended June 30, 2014, respectively, as compared to our revenue of $20.6 million and $24.8 million for the three and six months ended June 30, 2013, respectively. Our operating losses for the three and six months ended June 30, 2014 increased by $0.8 million and $2.5 million, respectively, as compared to our operating losses for the three and six months ended June 30, 2013. Collectively, TLC, Agel and YIAH represented over 90% of our reported revenues in 2013. We do not view any product groups as segments but have grouped similar products into the following five categories for disclosure purposes only: gourmet foods, nutritional and wellness, home décor, publishing and printing and other. For the year ended December 31, 2013, approximately $1.5 million or 1.7% of our revenues were derived from the sale of gourmet food products, $9.3 million or 11.0% of our revenues were derived from the sale of nutritional and wellness products, $72.7 million or 85.6% of our revenues were derived from the sale of home décor products, $1.0 million or 1.1% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.5% of our revenues were derived from the sale of our other products. During the year ended December 31, 2012, all of our revenues were derived from the sale of our publishing and printing services and products. For the six months ended June 30, 2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of our revenues were derived from the sale of nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products, $0.6 million or 1.2% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale of our other products. For the six months ended June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and $0.5 million or 2.0% of our revenues were derived from the sale of our publishing and printing services and products. We expect that our revenue will continue to increase as we continue to acquire companies and we continue to integrate the companies we have acquired with newly-acquired companies. We believe that our visibility in the direct selling industry increased during 2013, as news about us circulated through the industry and increasing numbers of people in the industry became more familiar with CVSL's strategy and progress. We also believe that this visibility has made us more attractive to potential acquisition targets. At the same time, however, the costs of growth through acquisition, such as legal costs and other due diligence-related costs, have been significant and have affected CVSL's profitability. In addition, conditions affecting each individual company have posed challenges to our company as a whole. We anticipate that our operating losses and net loss will decrease over time as we are able to implement certain operating and administrative efficiencies for the acquired companies as a whole. Our results are impacted by economic, political, demographic and business trends and conditions in the United States as well as globally. A rise or fall in economic conditions, including such factors as inflation, economic confidence, recession and disposable income can affect the direct selling industry, as the independent sales representatives who comprise the sales forces of our various companies make decisions based, at times, on those economic factors. A weak economy historically has been favorable to micro-enterprise/direct selling companies, because in times of economic distress, increasing numbers of individuals look for ways to supplement or replace their income and becoming an independent sales representative can provide supplemental income. Similarly, when jobs are lost, many are forced to seek independent means of earning a living or supplementing family income. However, economic distress can reduce customers' disposable income, making it more difficult to convince a customer to buy a non-essential product or service from a direct seller and therefore negatively impacting our revenue. Political changes in a stable country like the United States do not generally have much impact on a direct selling business, unless there are significant regulatory changes that make it more difficult for our companies to do business. Outside the United States, political instability can have a potential effect on our business in any particular country, if that country is a significant market for one of our companies. For example, Ukraine and Russia are markets for one of our companies, Agel. To date, the instability in those countries has not had a major impact on Agel's ability to do business; however, there can be no assurance that it will not have a negative impact in the future. As we grow, our presence in various international 24 -------------------------------------------------------------------------------- Table of Contents markets could be affected by instability in any of those markets. Even amid instability, consumers still tend to buy and sell products. The largest demographic factor affecting our business is the aging of the population. As a sales force and customer base ages, in some cases their selling or buying power could decrease. Offsetting this is the fact that aging also allows more free time to carry on a part-time business, and aging consumers often make purchases for children and grandchildren. As a sales force ages, it is necessary to try to replace retiring members with younger recruits. We are attempting to do this by marketing more effectively to younger demographics, such as through the use of technology. The male/female demographic's affect on our business depends upon the company: some CVSL companies are predominantly male, others female. Various business trends can affect our companies. For example, tightening of credit availability can affect our ability to raise capital for growth. In addition, tighter credit availability can impact customer disposable income, thus negatively impacting spending. The trend toward greater reliance on Internet technology requires us to continually keep our internal and external Internet-based tools in good order (financial management/web sites for sales forces, etc.). The trend toward greater speed and personalization in business (through social media) requires us to put more emphasis on communicating within our businesses through those methods. The micro-enterprise sector also has the benefit of diversity, in the sense that it includes many different categories of products and services, spread across different demographics and across global markets. When one segment of our direct selling company weakens, it is likely that another will strengthen or remain unaffected as independent sales representatives move around and follow opportunities. We believe this diversification is a particular strength of ours, as we already have sales from seven different product categories and in multiple global markets. We expect that this diversification should enable us to take advantage of changing trends in the industry. Further acquisitions are expected to increase this diversification. In considering appropriate acquisition targets, we anticipate that we will evaluate companies of varying sizes in our targeted space. We do not plan to limit our acquisition opportunities to companies of any particular size, and we will periodically evaluate smaller companies in our targeted space, particularly companies that management believes are accretive or would otherwise add value to one or more of our businesses. We will consider companies that are currently profitable and that are looking to enhance their growth by leveraging the global foundation for growth we have built, as well as companies that can, in our opinion, be strengthened by improved strategic and tactical guidance. Companies that have experienced financial and operational difficulties are the best candidates to benefit almost immediately from cost reductions that our shared resources can provide. All of the acquisitions, large or small, profitable or otherwise, will add additional coordinates of sellers and customers, thereby adding size and continually increasing the scope of our network of networks. Overview of Recently Acquired Companies and Companies to be Acquired Happenings Communications Group On September 25, 2012, we acquired 100% of HCG as part of the Share Exchange Agreement. HCG publishes a monthly magazine, Happenings Magazine that highlights events and attractions, entertainment and recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, and can provide such services to direct selling businesses. Services HCG provides may include creating brochures, sales materials, websites and other communications for independent sales representatives and ultimate customers. As a result, HCG is available to serve as an "in-house" resource for providing marketing and creative services to the direct selling companies that we have acquired and hope to acquire in the future. 25 -------------------------------------------------------------------------------- Table of Contents The Longaberger Company In March 2013, we acquired a 51.7% controlling interest in TLC. TLC is a direct selling business based in Newark, Ohio which sells premium hand-crafted baskets and a line of products for the home, including pottery, cookware, wrought iron and other home décor products, through a nationwide network of independent sales representatives. TLC also has showrooms in various states, which offer merchandise and serve as support centers for independent sales representatives. We acquired, in two separate transactions, a total of 1,616 shares of TLC's Class A common stock ("TLC Class A Common Stock"), representing 64.6% of the issued and outstanding TLC Class A Common Stock, which class has sole voting rights at TLC, and acquired 968 shares of TLC's Class B common stock, which are non-voting shares ("TLC Class B Common Stock" and, together with the TLC Class A Common Stock, the "TLC Stock"). Together, the two transactions resulted in CVSL acquiring 51.7% of all issued and outstanding TLC Stock. As consideration, we issued to a trust of which Tamala Longaberger is the trustee (the "Trust"), a Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6.5 million (the "Convertible Note"), and, to TLC, we issued a ten year, $4.0 million unsecured promissory note, dated March 14, 2013, payable in monthly installments. On June 14, 2013, the Convertible Note was converted into 1,625,000 shares of our common stock. At the time of the acquisition, TLC had $22.9 million in liabilities, which after the transaction were reflected in our financial statements in addition to the additional debt incurred as a result of the issuance of the notes to the Trust and TLC. Along with its well-respected brand, its hand-crafted products and its loyal sales force, one of the many aspects of TLC's operation that was attractive to us was its abundance of assets. TLC had $15.6 million in inventory as of December 31, 2013, compared to $19.3 million at December 31, 2012, with further reductions planned in future quarters. We have worked with TLC to begin reducing its inventory through selling more items online, through TLC's showrooms (which provide commissioned sales to members of its independent sales force) and by expanding into new territories. Another challenge we have faced with TLC is bringing its costs and selling, general and administrative expenses under control. We believe the sale of excess inventory will help us to generate cash, which will help us to reduce our liabilities and fund our operations. Another characteristic of TLC which we found attractive was the variety of fixed assets and real estate that were being underutilized in TLC's operations. We intend to make use of these assets at our other CVSL companies (including those we own now and those we will acquire in the future). For example, YIAH has begun operations in North America, operating out of TLC's Newark, Ohio office building and Project Home has shifted inventory and distribution to TLC's Ohio facilities. While we intend to find new uses for certain under-utilized assets, other assets owned by TLC are non-core assets which can be sold to further reduce our liabilities and generate positive cash. Your Inspiration At Home In August 2013, we formed Your Inspiration At Home, Pty. Ltd., an Australian corporation, which acquired substantially all of the assets of YIAH. YIAH is an innovative and award-winning direct seller of hand-crafted spices from around the world. YIAH originated in Australia and has expanded its operations to North America during the third quarter of 2013. We acquired substantially all the assets of YIAH in exchange for total consideration of 225,649 shares of our common stock and the assumption of liabilities of $140,647 in connection with the acquisition. Project Home In October 2013, we formed CVSL TBT, LLC, a Texas limited liability company, which acquired substantially all of the assets of Tomboy Tools, Inc., a direct seller of a line of tools designed for women as well as home security systems. We acquired substantially all the assets of Tomboy Tools, Inc. in exchange for total consideration of 88,349 shares of our common stock and the assumption of liabilities of $471,477 in connection with the acquisition. 26 -------------------------------------------------------------------------------- Table of Contents Agel Enterprises In October 2013, we formed Agel Enterprises, Inc., a Delaware corporation which acquired substantially all of the assets of Agel Enterprises, LLC. Agel is a direct selling business based in Utah that sells nutritional supplements and skin care products through a worldwide network of independent sales representatives. Agel's products are sold in over 40 countries. Agel acquired substantially all the assets of Agel Enterprises, LLC in exchange for total consideration of 372,330 shares of our common stock (of which 28,628 shares were issued in January 2014), the delivery of a purchase money note, dated the closing date, in the original principal amount of $1.7 million and the assumption of $9.1 million in liabilities, which after the transaction were reflected in our financial statements in addition to the additional $1.7 million purchase money note. Paperly In December 2013, we formed Paperly, Inc., a Delaware corporation, which acquired substantially all of the assets of Paperly, a direct seller that allows its independent sales representatives to work with customers to design and create custom stationery through home parties, events and individual appointments. We acquired substantially all the assets of Paperly in exchange for total consideration of 7,797 shares of our common stock and payment of an earn out of 10% of earnings before interest, taxes, depreciation and amortization ("EBITDA") from 2014 to 2016. The shares of our common stock for this acquisition were issued in 2014. We assumed liabilities of $110,022 in connection with the acquisition. My Secret Kitchen In December 2013, we formed CVSL A.G., a Switzerland company, which acquired a 90% controlling interest of MSK, an award-winning United Kingdom-based direct seller of a unique line of food products. We acquired substantially all the stock of MSK in exchange for total consideration of 15,891 shares of our common stock and payment of an earn-out of 5% of MSK's EBITDA from 2014 to 2016. The shares of our common stock for this acquisition were issued in January 2014. At the time of the acquisition, MSK had $168,515 in liabilities, which after the transaction were reflected in our financial statements. Uppercase Living In March 2014, we formed Uppercase Acquisition, Inc. a Delaware corporation which acquired substantially all the assets of Uppercase Living, a direct seller of customizable vinyl expressions for display on walls. Consideration consisted of 28,920 shares of our common stock and payment of an earn out equal to 10% of the EBITDA of the subsidiary that acquired the assets for the years ended December 31, 2014, 2015 and 2016 payable in cash or shares of our common stock at our discretion. The shares of common stock for this acquisition were issued in April and June 2014. We assumed liabilities of $471,445 in connection with the acquisition. Golden Girls During the first quarter of 2014, we entered into a definitive agreement to acquire Golden Girls, a direct seller and purchaser of jewelry for cash. Upon the closing of the acquisition, we will acquire substantially all the assets of Golden Girls in exchange for shares of our common stock. As of the date of this filing, this transaction has not yet closed and there can be no assurance that it will close. We do not expect to assume any liabilities in connection with this acquisition. Recent Developments On July 31, 2014, TLC and CFI entered into the Sale Leaseback Agreement pursuant to which TLC agreed to sell to CFI certain real estate owned by TLC and used by TLC in its manufacturing, distribution and showroom activities. The real estate described in the Sale Leaseback Agreement was purchased by 27 -------------------------------------------------------------------------------- Table of Contents CFI and the aggregate purchase price was $15.8 million ($4.4 million of which is held with CFI as a security deposit and will be released to TLC over time as certain targets are met). Concurrently with entering into the Sale Leaseback Agreement, we entered into the Master Lease Agreement with CFI. The Master Lease Agreement provides for a 15-year lease term and specifies the base quarterly rental for the real estate leased. The base quarterly rent in the first year is $551,772 and increases 3% annually each year thereafter. During the lease term, all of the costs, expenses and liabilities associated with the real estate are to be borne by us, and we are entitled to the unlimited use of the real estate. The Master Lease Agreement includes customary events of default, including non-payment by us of the quarterly rental or other charges due under the Master Lease Agreement. We used the proceeds from the sale of the real estate to pay off outstanding bank debt and intend to use the remaining proceeds for working capital purposes. Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013 Revenues Our substantial growth during 2013 results in significant challenges in the comparison of year over year results. As described above, we acquired TLC during the first quarter of 2013, YIAH during the third quarter of 2013, Project Home, AEI, MSK and Paperly during the fourth quarter of 2013 and Uppercase Living in the first quarter of 2014. As such, we caution that a comparative discussion of our results of operations for the three and six months ended June 30, 2014 and 2013, may not be meaningful on a quantitative or qualitative basis. In addition, our consolidated financial statements for the six months ended June 30, 2013 reflect only partial-quarter revenue for TLC and no revenue for any other companies we acquired in 2013, as these companies were all acquired after June 30, 2013. During the three and six months ended June 30, 2014, our revenues were $24.6 million and $51.3 million, respectively, as compared to $20.6 million and $24.8 million for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2014, TLC, Agel and YIAH collectively represented over 90% of the reported revenues. For the six months ended June 30, 2014, approximately $2.6 million or 5.1% of our revenues were derived from the sale of gourmet food products, $20.2 million or 39.3% of our revenues were derived from the sale of nutritional and wellness products, $27.5 million or 53.6% of our revenues were derived from the sale of home décor products, $0.6 million or 1.2% of our revenues were derived from the sale of our publishing and printing services and products and $0.4 million or 0.8% of our revenues were derived from the sale of our other products. For the six months ended June 30, 2013, $24.3 million or 98.0% of our revenues were derived from the sale of home décor products, and $0.5 or 2.0% of our revenues were derived from the sale of our publishing and printing services and products. Revenues by product groups are shown in the table below (dollars in thousands): Six Months ended June 30, 2014 2013 Gourmet Food Products $ 2,608 - Home Décor $ 27,458 $ 24,349 Nutritionals and Wellness $ 20,156 - Publishing & Printing $ 613 $ 495 Other $ 422 - Operating Losses Our operating losses were $4.1 million and $6.8 million for the three and six months ended June 30, 2014, respectively, as compared to $3.3 million and $4.3 for the three and six months ended June 30, 2013, respectively. The increase in operating losses was the result of the six acquisitions completed in 2013. 28 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Commissions and Incentives Commissions and incentives represent costs to compensate and incentivize members of our independent sales force. These expenses may include costs for certain corporate sponsored events that contain qualification requirements in order for individuals to attend. During the three and six months ended June 30, 2014, we incurred approximately $6.0 million and $13.0 million in commissions and incentives costs, respectively, as compared to $2.7 million and $3.2 million for the three and six months ended June 30, 2013, respectively. The increase is primarily due to increased commissions paid as a result of the numerous companies that we acquired. Selling, General and Administrative Our selling, general and administrative costs were $11.7 million and $21.5 million for the three and six months ended June 30, 2014, respectively, as compared to $8.1 million and $10.5 million for the three and six months ended June 30, 2013, respectively. The increase is primarily the result of the addition of various administrative departments at each of the acquired companies, including human resources, legal, information technology, finance and executive, as well as costs associated with leased buildings. Additionally, we incurred professional and legal fees associated with the acquisitions and the pursuit of potential acquisitions. Included in selling, general and administrative expenses are fees paid to Richmont Holdings pursuant to a Reimbursement of Services Agreement for services provided by Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring and negotiating potential transactions. For the three and six months ended June 30, 2014, we recorded $0.5 million and $1.0 million in reimbursement expenses, respectively, as compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2013, respectively. Loss on Marketable Securities Our loss on marketable securities for the three and six months ended June 30, 2014 totaled $58,000 and $0.6 million, respectively. We did not have any investments for the three and six months ended June 30, 2013. Non-controlling Interest Non-controlling interest was a net loss of $1.0 million and $1.7 million for three and six months ended June 30, 2014, respectively, as compared to $0.8 million and $0.8 million for the three and six months ended June 30, 2013, respectively. The increase is primarily the result of losses generated at TLC. Additionally, the six months ended June 30, 2013 only included TLC results for the period beginning March 19, 2013 through June 30, 2013, which was the acquisition date of TLC. Liquidity and Capital Resources See footnote (6), Long-term debt and other financing arrangements, included in the unaudited consolidated financial statements included in this report for additional information. The table below reflects our highly liquid assets as of June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 Cash $ 4,176,351 $ 3,876,708 Marketable Securities 5,223,472 11,830,252 Accounts Receivable, net 777,871 780,237 Total $ 10,177,694 $ 16,487,197 29 -------------------------------------------------------------------------------- Table of Contents At June 30, 2014 we had cash and marketable securities of $9.4 million. In December 2012, we received $20.0 million in proceeds from the sale of a convertible note to RCP V which provided working capital for our current operations and smaller acquisitions. Our investments in marketable securities enable us to also provide needed liquidity for acquisitions, debt service and operating expenses. Our principal uses of cash have included legal and professional fees associated with our acquisitions, legal, due diligence and other fees related to other potential acquisitions and the cost of buying inventory. We plan to continue acquiring additional businesses engaged in direct selling and intend to fund such acquisitions primarily by issuing shares of our common stock as consideration. To the extent that we need to pay cash as a portion of the acquisition consideration, we expect to use our cash on hand and, to the extent necessary, to raise any additional cash through debt and/or equity financing. We expect to fund any large acquisitions from a combination of the proceeds of our planned issuance of equity securities and potentially through other public or private equity or debt offerings. We believe that additional debt or equity financing will be available to us based on the assets and financials of any potential acquisition candidate we would consider and based on management's experience with debt and equity financings. We expect to be able to raise capital from lenders and equity investors who will understand our direct selling acquisition strategy, but there is no assurance that we will be able to raise the capital. Cash Flows Cash used in operating activities for the six months ended June 30, 2014 was $5.0 million, as compared to net cash used in operating activities of $0.4 million for the six months ended June 30, 2013. Our principal uses of cash have included legal and professional fees associated with our acquisitions, legal, due diligence and other fees related to other potential acquisitions, the cost of buying inventory, labor and benefits costs and commissions and incentives. Net cash provided by investing activities for the six months ended June 30, 2014 was $7.4 million, as compared to $84,000 for the six months ended June 30, 2013. Net cash provided by investing activities was the result of $6.2 million in sales of marketable securities in addition to $1.8 million associated with TLC's sale of a building in the ECO Business Park in Frazeysburg, Ohio and three properties in Dresden, Ohio. The cash inflows were offset by $0.6 million in capital expenditures primarily associated with our information technology implementation. Net cash used in financing activities was $2.6 million for the six months ended June 20, 2014 as we paid down $1.9 million on our lines of credit and paid $0.8 million in debt primarily related to the payoff of the term loan with Key Bank. During the six months ended June 30, 2013, we used $0.2 million, primarily related to long-term debt payments. The Company's long-term borrowing consisted of the following: Interest June 30, December 31, Description rate 2014 2013 Convertible Subordinated Unsecured Promissory Note-Richmont Capital Partners V L.P. (including accrued interest) 4.00 % $ 21,281,097 $ 20,881,096 Promissory Note-payable to former shareholder of TLC 2.63 % 3,555,293 3,734,695 Promissory Note-Lega Enterprises, LLC (formerly Agel Enterprises, LLC) 5.00 % 1,496,996 1,649,880 Promissory Note-payable to Tamala L. Longaberger 10.00 % 42,000 - Term loan-KeyBank - 427,481 Other, equipment notes 30,244 30,244 Total debt 26,405,630 26,723,396 Less current maturities 711,398 1,128,674 Long-term debt $ 25,694,232 $ 25,594,722 30 -------------------------------------------------------------------------------- Table of Contents Subsequent to June 30, 2014, Agel issued two promissory notes in the aggregate principal amount of $958,000 to Tamala L. Longaberger. The two notes issued by Agel to Tamala L. Longaberger and the note issued by TLC to Tamala L. Longaberger bear interest at 10% per annum. The note in the principal amount of $42,000 matures on June 27, 2015 and the other notes in the principal amounts of $158,000 and $800,000 mature on July 1, 2015 and July 11, 2015, respectively. The notes may be prepaid in whole or in part at any time without premium or penalty. The notes also provide for a cure period for any nonpayment default that is curable so long as a notice of breach of the same provision has not been given within the preceding 12 months. Upon default, the note holder may accelerate the time of payment of the notes. On July 31, 2014, we entered into the Master Lease Agreement in connection with the Sale Leaseback Agreement. TLC used approximately $6.2 million from the proceeds of the sale of certain real estate owned by TLC to repay the outstanding balance owed under the Key Bank Line of Credit. The schedule of maturities of our long-term debt is as follows: 2014 $ 1,128,674 2015 696,406 2016 722,928 2017 750,565 2018 714,939 Thereafter 1,828,788 Total excluding convertible note 5,842,300 Convertible note 20,881,096 Total long-term debt including current maturities $ 26,723,396 Convertible Subordinated Unsecured Promissory Note-Richmont Capital Partners V L.P. On December 12, 2012 (the "Issuance Date"), we received cash proceeds of $20.0 million and issued to RCP V, a Convertible Subordinated Unsecured Promissory Note, in the original principal amount of $20.0 million. The note is an unsecured obligation and subordinated to any bank, financial institution, or other lender providing funded debt to us (or any direct or indirect subsidiary of ours), including any debt financing provided by the sellers of any entity(ies) that we may acquire. Principal payments of $1,333,333 are due and payable on each anniversary of the Issuance Date beginning on the third anniversary of the Issuance Date. A final principal payment, equal to the then unpaid principal balance of the Note, is due and payable on the 10th anniversary of the Issuance Date. The Note bears interest at an annual rate of 4%. Interest is payable on each anniversary of the Issuance Date; however, that interest payable through the third anniversary of the Issuance Date may, at our option, be paid in kind ("PIK Interest") and any such PIK Interest will be added to the outstanding principal amount of the Note. Beginning 380 days from the Issuance Date, the Note may be prepaid, in whole or in part, at any time without premium or penalty. On June 17, 2013, the Note was amended to extend the date of mandatory conversion of the Note to provide that the Note be mandatorily convertible into shares of Common Stock (subject to a maximum of 3,200,000 shares being issued) within ten days of June 17, 2014. The full amount of the Note (including any and all accrued interest thereon, whether previously converted to principal or otherwise) will be converted (the "Conversion"), into no more than 3,200,000 shares of Common Stock at a price of $6.60 per share of Common Stock. On June 12, 2014, we and RCP V entered into a Second Amendment to Convertible Subordinated Unsecured Promissory Note (the "Second Amendment"), which amends the Note. The Second Amendment amends the Note to extend the date of mandatory conversion of the Note. As amended by the Second Amendment, the original principal amount of, and all accrued interest under, the Note is convertible mandatorily into shares of the Company's common stock (subject to a maximum of 31 -------------------------------------------------------------------------------- Table of Contents 3,200,000 shares being issued) within ten days after June 12, 2015, or such earlier time as may be mutually agreed upon by us and RCP V. All other terms and conditions of the Note remain unchanged and in effect. John Rochon, Jr., our Vice Chairman and one of our directors and the son of our Chief Executive Officer, is the 100% owner, and is in control, of Richmont Street LLC, the sole general partner of RCP V. Michael Bishop, a director of CVSL, is a limited partner of RCP V. Promissory Note-payable 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 Note-Lega Enterprises, LLC On October 22, 2013, CVSL issued a $1.7 million Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) pursuant to the Asset Purchase Agreement between AEI and Agel Enterprises LLC. The Promissory Note bears interest at 5% per annum, matures on October 22, 2018 and is payable in equal monthly installments of outstanding principal and interest. Term loan In conjunction with the Line of Credit described below, on October 23, 2012, TLC obtained a $6.5 million term loan from Key Bank. As of March 1, 2014, TLC had paid in full the outstanding balance of the term loan. Promissory Note-payable 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 Payable-Key Bank In July 2014, we used the proceeds that we received under the Sale Leaseback Agreement to repay all amounts owed under the TLC line of credit with Key Bank. TLC had a line of credit agreement through October 23, 2015. Under the agreement with Key Bank, TLC had available borrowings of up to $12.0 million, calculated in accordance with a formula primarily based on accounts receivable and inventory. The interest rate for the line of credit was based on Key Bank's prime rate plus 1.75%, or LIBOR plus 3.50%. Interest at June 30, 2014 and December 31, 2013 was 3.94%. The line of credit balance was $6,633,250, at June 30, 2014, and $8,067,573 at December 31, 2013. The line of credit was collateralized by substantially all of the assets of TLC. Under the agreement, TLC was subject to certain financial covenants, including a fixed charge coverage ratio and limitations on capital expenditures, additional indebtedness, and incurrence of liens. TLC was not in compliance with the fixed charge covenant for the period ended June 30, 2014. TLC obtained a waiver for the fixed charge coverage calculation, as the term loan had been paid in full, and was in compliance with all other the financial covenants at June 30, 2014. The loan is included in the lines of credit on our consolidated balance sheets. 32 -------------------------------------------------------------------------------- Table of Contents Term loan-Key Bank In conjunction with the Key Bank line of credit described above, on October 23, 2012, TLC obtained a $6.5 million term loan from Key Bank. The interest rate on the term loan was either Key Bank's prime rate plus 5.75%, or LIBOR plus 7.50%. The term loan was repayable in monthly installments beginning April 1, 2013 and was repayable in full on October 23, 2015. As of March 1, 2014, TLC had paid in full the outstanding balance of the term loan through monthly amortization payments and proceeds from our sale of non-core assets, primarily real estate. UBS Margin Loan We have a margin loan agreement with UBS that allows us to purchase investments. The maximum loan amount is based on a percentage of marketable securities held by us. The interest rate at June 30, 2014 and December 31, 2013 was 1.65% and 1.67%, respectively. The outstanding balance was $1,174,174 and $1,663,534 on June 30, 2014 and December 31, 2013, respectively. The loan is included in the line of credit on our consolidated balance sheets. Outstanding Warrants On May 6, 2014, CVSL issued warrants to purchase up to 12,500 and 6,250 shares of its common stock, respectively, in connection with exclusivity agreements. The warrants will be exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a cashless exercise basis at an exercise price of $11.00 per share, representing the average closing price of our common stock for the ten days preceding the issuance. In addition, the warrants provide for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. The fair value of the warrants on the date of issuance totaled $116,000. Contractual Obligations As a smaller reporting company, we are not required to disclose contractual obligations. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimations and assumptions, including those related to the valuation allowances for receivables, inventory and sales returns and allowances, the carrying value of non-current assets and income taxes, on an ongoing basis. Estimates and assumptions are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results in future periods could differ materially from these estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, income taxes, and long-lived assets, have the greatest impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. 33 -------------------------------------------------------------------------------- Table of Contents There have been no significant changes to our critical accounting policies and estimates during the three and six months ended June 30, 2014, as compared to the critical accounting policies and estimates disclosed in Items 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K/A for the year ended December 31, 2013, which was filed with the SEC on October 22, 2014. Recent Accounting Pronouncements See footnote (1) of our accompanying unaudited consolidated financial statements for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Forward-Looking Statements Certain of the matters discussed within this report include forward-looking statements on our current expectations and projections about future events. In some cases you can identify forward-looking statements by terminology such as "may," "should," "potential," "continue," "expects," "anticipates," "intends," "plans," "believes," "estimates," and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Item 1A. "Risk Factors" included in this Form 10-Q/A. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to "CVSL," "we," "us," "our," and refer to CVSL Inc. and its subsidiaries. |