Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1)
General
JRjr33, Inc. ("JRJR" or "the Company", and together with the Company's consolidated subsidiaries, "we", "us" and "our") was incorporated under the laws of Delaware in April 2007. The Company changed its name to JRjr33, Inc. on March 7, 2016 and began doing business as JRjr Networks, using the stock symbol JRJR in January 2016.
Basis of Presentation
The unaudited condensed consolidated financial statements and the accompanying notes include the Company's accounts and the accounts of the Company's subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. Business combinations accounted for as purchases are included in the condensed consolidated financial statements from their respective dates of acquisition. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the Company's opinion, necessary for a fair presentation of the information as of and for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q. Accordingly, they do not include all disclosures required under GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K filed by the Company for the year ended
December 31, 2015
(the "2015 Form 10-K".) 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results. Actual results could differ from those estimates. All amounts have been presented in USD currency unless otherwise noted.
The Company's Portfolio
The Company has grown as a result of acquisitions. The Company intends to pursue additional acquisitions that improve the fundamental strength of the existing business. The Company's platform of direct-to-consumer brands is currently comprised of the following nine businesses in order of acquisition: The Longaberger Company ("Longaberger" or “TLC”), Your Inspiration at Home Proprietary Limited (“Your Inspiration at Home” or “YIAH”), CVSL TBT LLC ("Tomboy Tools" or "TBT"), Agel Enterprises Inc. (“Agel” or "AEI"), My Secret Kitchen Limited ("My Secret Kitchen" or “MSK”), Paperly, Inc. (“Paperly”), Uppercase Living, Inc. ("Uppercase Living"), Kleeneze Limited (“Kleeneze”) and Betterware Limited ("Betterware"). In addition, Happenings Communications Group, Inc. ("Happenings" or "HCG") further diversifies the portfolio by operating in the magazine publishing industry.
Going Concern Considerations
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of
June 30, 2016
, the Company had an accumulated deficit of approximately
$56.6 million
and recurring losses from operations. The Company also had negative working capital of approximately
$15.4 million
and debt with maturities of approximately
$14.7 million
as of
June 30, 2016
.
The Company intends to fund operations through raising additional capital through debt financing, increased sales, and reduced operating expenses, which may be insufficient to fund its capital expenditures, working capital or other cash requirements over the course of the next twelve months from the filing date of this Form 10-Q.
The Company is in negotiations with current debt holders to restructure and extend payment terms of the existing short term debt as well as potentially refinancing the debt. The Company is seeking additional funds to finance its immediate and long-term operations. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
In response to these financial issues, management has taken the following actions:
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The Company is seeking to renegotiate and potentially refinance existing debt.
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The Company is seeking investment capital.
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The Company is aggressively targeting new distributors and looking to expand into new markets with our more successful companies.
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The Company is seeking to reduce excess inventory to improve working capital.
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(2)
Summary of Significant Accounting Policies
Consolidation
The Company consolidates all entities in which it owns or controls more than
50%
of the voting shares, including any investments where the Company has 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
June 30, 2016
, the non-controlling interest consisted of minority shareholder interests in TLC, MSK, and certain international subsidiaries of Agel. All inter-company balances and transactions have been eliminated in the condensed consolidated financial statements.
Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the
six months ended
June 30, 2016
, as compared with those disclosed in the Company’s consolidated financial statements in the Annual Report on Form 10-K for the year ended
December 31, 2015
.
Reclassifications
Certain amounts in the condensed consolidated financial statements included in our Form 10-Q for the quarter ended
June 30, 2015
have been reclassified to conform to current period's presentation. The Company has reclassified select expenditures to show a consistent presentation as well as changing the presentation on the condensed consolidated statement of operations to show selling expense separate from general and administrative expense. In addition, reclassifications between program costs and discounts, cost of sales, distributor expenses, selling expenses, and general and administrative expenses were made to improve the comparability of the statements. None of the adjustments had any effect on the prior period net loss.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. Significant estimates and assumptions in these condensed financial statements require the exercise of judgment and are used for, but not limited to, the allowance for doubtful accounts, inventory valuation and obsolescence, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, allocation of purchase price to the fair value of net assets acquired, useful lives for depreciation and amortization, revenue recognition, income taxes and deferred tax valuation allowances, lease classification, and contingencies. These estimates are based on information available as of the date of the condensed 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 ninety days or less. The Company maintains cash primarily with multinational banks. The amounts held in interest bearing accounts periodically exceed the Federal Deposit Insurance Corporation insured limit of
$250,000
. The amounts held in banks that are FDIC insured total
$326,000
and
$340,000
at the end of
June 30, 2016
and
December 31, 2015
, respectively. The insured limit of
$250,000
was not exceeded by any individual FDIC insured account in either period. The Company has not incurred any losses related to these deposits.
Marketable Securities
Investments in marketable securities may include equity securities, debt instruments, and mutual funds. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Management determines the appropriate classification at the time of purchase and re-evaluates such designation as of each balance sheet date. 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 statement of operations.
Accounts Receivable
The carrying value of our accounts receivable, net of allowance for doubtful accounts, represents the estimated net realizable value. The Company determines the allowance for doubtful accounts based on type of customer, age of outstanding receivable, historical collection trends, and existing economic conditions. If events or changes in circumstances indicate that a specific receivable balance may be unrealizable, further consideration is given to the collectability of those balances, and the allowance is adjusted accordingly. Receivable balances deemed not collectible are written off against the allowance. The Company has recorded an allowance for doubtful accounts of approximately
$2.7 million
and
$1.0 million
as of
June 30, 2016
and
December 31, 2015
, respectively.
Inventory
All inventories are stated at the lower of cost or realizable values. Cost of inventories are determined on a first-in, first-out (FIFO) basis. The Company records provisions for obsolete, excess, and unmarketable inventory in cost of goods sold.
Assets Held for Sale
The Company classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation that the sale will be completed within one year. The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell. See additional discussion regarding the Company’s assets held for sale in
Note (6)
.
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
June 30, 2016
, the useful lives used for depreciation and amortization were as follows:
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Buildings
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7 to 40 years
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Land improvements
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3 to 25 years
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Leasehold improvements
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3 to 15 years
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Equipment
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3 to 25 years
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Leases
Leases are contractual agreements between lessees and lessors in which lessees get the right to use leased assets for a specified period in exchange for regular payments. Capital leases resemble asset purchases because there is an implied transfer of the benefits and risks of ownership from lessor to lessee, and the lessee is responsible for repairs and maintenance. The Company treats asset leases as capital leases if the life of the lease exceeds 75 percent of the asset's useful life, there is an ownership transfer to the lessee at the end of the lease, there is a "bargain" purchase option at the end of the lease or the discounted present value of the lease payments exceeds 90 percent of the fair-market value of the asset at the beginning of the lease term. Capital lease obligations, and the related assets, are recorded at the commencement of the lease based on the present value of the minimum lease payments. Property under capital leases is amortized on a straight-line basis over the useful life.
Impairment of Long-Lived Assets
The Company's 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, when present, are valued at the lower of carrying amount or fair value, less costs to sell. 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.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting as of the acquisition date - the date on which control of the acquired company is transferred to the Company. 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 by taking the fair value of the consideration transferred and subtracting 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.
Goodwill and Other Intangibles
Goodwill arising from business combinations, if applicable, represents the excess of the purchase prices over the value assigned to the net acquired assets and other specifically identified intangibles. Specifically identified intangibles generally include trade names, trademarks, and other intellectual property.
The Company's 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. The last annual impairment analysis was performed as of November 30, 2015.
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.
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.
The Company uses a discounted cash flow model and a market approach to calculate the fair value of intangible assets. 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.
Income Taxes
The Company is subject to tax in many jurisdictions, and significant judgment is required in determining our provision for income taxes. Likewise, we are subject to audit by tax authorities in many jurisdictions. In such audits, our interpretation of tax legislation may be challenged and tax authorities in various jurisdictions may disagree with, and subsequently challenge, the amount of profits taxed in such jurisdictions under our inter-company agreements.
Deferred income taxes are provided for temporary differences between financial statement and tax bases of asset and liabilities. The Company maintains a full valuation allowance for domestic and foreign deferred tax assets, including net operating loss carryforwards and tax credits. The Company records income tax positions, including those that are uncertain, based on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.
Translation of Foreign Currencies
The functional currency of our foreign subsidiaries is the local currency of their country of domicile. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollar amounts at period-end exchange rates. Revenue and expenditures are translated at the weighted-average rates for the quarterly accounting period to which they relate. Equity accounts are translated at historical rates. Foreign currency translation adjustments are accumulated as a component of other comprehensive income.
Management has determined the functional currency of each primary operating subsidiary by evaluating indicators such as cash flows, sales prices, sales markets, expenses, financing, and intra-entity transactions and arrangements. The Company has listed below the functional and reporting currencies for each subsidiary.
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Subsidiary
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Functional Currency
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Reporting Currency
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The Longaberger Company
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USD
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USD
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Uppercase Acquisition, Inc.
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USD
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USD
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CVSL TBT LLC
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USD
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USD
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My Secret Kitchen, Ltd.
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GBP
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USD
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Your Inspiration At Home Pty Ltd.
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AUD
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USD
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Paperly, Inc.
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USD
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USD
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Happenings Communications Group, Inc.
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USD
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USD
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Agel Enterprises Inc.
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USD
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USD
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Kleeneze Ltd.
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GBP
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USD
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Betterware Ltd.
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GBP
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USD
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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. 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)
The Company reports comprehensive income (loss) in our condensed statements of comprehensive income (loss). Comprehensive income (loss) consists of net income (loss) plus gains and losses affecting stockholders’ equity that are excluded from net income (loss), such as gains and losses related to available for sale marketable securities and the translation effect of foreign currency assets and liabilities.
Revenue Recognition and Deferred Revenue
In the ordinary course of business, the Company 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 revenue 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 condensed 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. For the
six months ended June 30, 2016
and
June 30, 2015
, our provision for sales returns totaled approximately
$400,000
and
$440,000
, respectively.
Program costs and discounts
Program costs and discounts represent the various methods of promoting our products. The Company offers 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, inbound shipping expenses, and the direct and indirect costs associated with the personnel, resources and property, plant and equipment related to the manufacturing and inventory management functions.
Distributor Expense
Distributor expenses include all forms of commissions, overrides and incentives related to the sales force. The Company accrues expenses for incentive trips over qualification periods as they are earned. The 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 accruals. Actual results could result in liabilities being more or less than the amounts recorded.
Selling Expense
Selling expenses include merchant fees, freight out shipping expenses, distribution supplies as well as other distribution related expenses.
General and Administrative Expense
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 and Amortization
Depreciation and amortization includes depreciation related to owned buildings, office equipment and supplies, warehousing, and order fulfillment. In addition, it also includes the amortization of leasehold improvements and intangibles. The depreciation of manufacturing facilities and equipment as well as depreciation associated to inventory management are included in cost of sales.
Share-based Compensation
The Company's share-based compensation plans include cash-settled plans, stock options, and warrants. Cash settled plans are treated as liability awards, with payments determined based on changes in the trading prices of the Company's common stock. Stock options and warrants are generally evaluated using a Black-Scholes model, with expenses recorded on a straight-line basis over the required period of service.
Operating Expenses
The Company evaluates operating expenses to view holistically the expenditures that the Company incurs to engage in any activities not directly associated with the production of goods or services. Operating expenses include commissions and incentives; selling expenses; general and administrative expenses; share-based compensation; depreciation and amortization; gain or loss on sale of assets; impairment of intangibles and goodwill; and any additional impairments of assets.
Basic and Diluted Loss Per Share
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 options and warrants, and convertible notes, are not included in the computation of dilutive loss per common share because the Company has experienced operating losses in all periods presented and, therefore, the effect would be anti-dilutive.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02),
Leases.
This new standard is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2018. Early application is permitted as of the beginning of an interim or annual reporting period. The Company is in the process of assessing the effects of the application of the new guidance on our financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
.This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Subsequently, FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which contains certain practical expedients in response to identified implementation issues. This guidance will become effective for the Company in the first quarter of 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt these ASUs. Management is currently evaluating these ASUs, including which transition approach to use, if needed. The Company does not expect these ASUs to materially impact the Company's consolidated net income, financial position or cash flows.
In March 2016, the FASB issued Accounting Standards Update 2016-09 (ASU 2016-09),
Improvements to Employee Share-Based Payment Accounting
. The ASU simplifies several aspects of employee share-based payment accounting, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance will become effective for the Company beginning in the first quarter of 2017. Early adoption is permitted. The Company is in the process of assessing the effects of the application of the new guidance on our financial statements.
In October 2016, the FASB issued Accounting Standards Update 2016-16 (ASU 2016-16),
Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory
. The ASU requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than deferring such recognition until the asset is sold to an outside party. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017 (Fiscal 2018). Early adoption is permitted. The amendments in the ASU should be adopted on a retrospective basis. The Company is in the process of assessing the impact on its financial statements from the adoption of the new guidance.
In November 2016, the FASB issued Accounting Standards Update 2016-18 (ASU 2016-18),
Statement of Cash Flows: Restricted Cash
. This ASU provides guidance on the classification of restricted cash in the statement of cash flows. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017 (Fiscal 2018). Early adoption is permitted. The amendments in the ASU should be adopted on a retrospective basis. The Company is in the process of assessing the impact on its financial statements from the adoption of the new guidance.
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the condensed financial statements.
(3)
Acquisitions and Other Transactions
Betterware
On October 15, 2015, Trillium Pond AG, a corporation organized in Switzerland (“Trillium Pond”), wholly owned by a Swiss subsidiary (CVSL AG) of the Company, entered into and consummated a Share Purchase Agreement (the “SPA”) with Robert Way and Andrew Lynton Cohen (“Sellers”) pursuant to which Trillium Pond purchased from the Sellers all of the issued and outstanding share capital of Stanley House Distribution Limited (“Stanley House”), a company incorporated in England. Stanley House has
one
wholly owned subsidiary, Betterware.
Kleeneze
On March 24, 2015, the Company completed the acquisition of Kleeneze, a direct-to-consumer business based in the United Kingdom. Kleeneze offers a wide variety of cleaning, health, beauty, home, outdoor and other products to customers across the United Kingdom and Ireland.
Upon conclusion of the purchase price allocation in the third quarter of 2015, the Company realized a
$3.6 million
gain on the acquisition. The transaction resulted in a gain primarily due to the significantly low purchase price, which is a result of the continual declines in revenues and operating profits Kleeneze had seen prior to the acquisition. Starting in 2015, changes to the purchase accounting are no longer shown retroactively in the condensed consolidated financial statements.
Pro-forma Condensed Consolidated Statement of Operations
The following unaudited pro-forma financial information presents the Company's condensed financial results for the
three and six
months ended
June 30, 2015
as if the Betterware and Kleeneze acquisitions had occurred as of January 1, 2015 (in thousands, except per share data):
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Three Months Ended
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Six Months Ended
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June 30, 2015
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June 30, 2015
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Revenue
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$
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46,062
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$
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90,479
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Net loss
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(4,209
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)
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(9,042
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)
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Net loss attributable to JRjr33, Inc.
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(3,193
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)
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(7,356
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)
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Loss per common share attributable to JRjr33, Inc., basic and diluted
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$
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(0.09
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)
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$
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(0.23
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)
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Notes to Pro-forma Condensed Consolidated Statements of Operations:
These pro-forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that actually would have resulted had the acquisitions been effective at the beginning of
2015
and are not necessarily representative of future results. The pro-forma results include the following adjustments:
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Losses were incurred by Kleeneze as a result of the write down of inter-company receivables in the amount of
$33.1 million
that were forgiven prior to and in accordance with the transaction. As these losses were direct and one-time events related specifically to the acquisition, the Company has excluded these items from the pro-forma results above; and
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•
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The pro-forma results above exclude transaction costs related to the
two
acquisitions that were expensed in
2015
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(4)
Marketable Securities
Our marketable securities as of
June 30, 2016
included fixed income investments classified as available for sale. At
June 30, 2016
and
December 31, 2015
, the fair value of the fixed income securities totaled approximately
$1.2 million
and
$5.3 million
, respectively.
The following is a summary of available-for-sale securities as of the end of the periods presented (in thousands):
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Cost
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Gross Unrealized Gains
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Gross Unrealized Losses
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Estimated Fair Value
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Balance at December 31, 2015
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Mutual Funds
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$
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5,312
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$
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—
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$
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(6
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)
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$
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5,306
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Balance at June 30, 2016
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Mutual Funds
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$
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1,248
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$
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—
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$
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(1
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)
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$
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1,247
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Purchases of marketable securities during the
six
months ended
June 30, 2015
totaled
$18.9 million
. The proceeds from the sale of marketable securities totaled
$4.1 million
and
$13.9 million
during the
six months ended June 30, 2016
and
June 30, 2015
, respectively.
The realized gains arising during the
three and six
months ended
June 30, 2016
totaled
$7,000
and
$9,000
, respectively. The Company incurred unrealized holding gains on investments of
$2,000
and
$5,000
during the
three and six
months ended
June 30, 2016
, respectively.
The realized gains arising during the
three and six
months ended
June 30, 2015
totaled
$0
and
$192,000
, respectively. The Company incurred unrealized holding gains on investments of
$0
and
$7,000
during the
three and six
months ended
June 30, 2015
, respectively.
As of
June 30, 2016
our marketable securities investments had an effective maturity of
1.0
years and an average effective duration of
0.14
years. The majority of our marketable securities are invested in investment-grade corporate bonds.
(5)
Inventory
Inventory consisted of the following (in thousands):
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June 30, 2016
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December 31, 2015
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Raw material and supplies
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$
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2,496
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|
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$
|
3,165
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Work in process
|
376
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|
221
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Finished goods
|
18,770
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|
|
20,164
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Inventory, gross
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21,642
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|
|
23,550
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Inventory reserve
|
(2,332
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)
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|
(2,751
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)
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Inventory, net
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$
|
19,310
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|
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$
|
20,799
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(6)
Assets Held for Sale
In the fiscal year
2015
, the Company began actively marketing several of Longaberger's excess facilities. Through this process, the Company identified the equipment, land and buildings to be sold and the assets that will be retained by the Company. At
June 30, 2016
and
December 31, 2015
, the assets held for sale totaled
$1.0 million
and
$1.1 million
, respectively.
The following table shows the additions, sales, impairments and gains and losses related to assets held for sale during the period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Balance as of beginning of period
|
$
|
1,111
|
|
|
$
|
—
|
|
|
Additions to held for sale
|
—
|
|
|
4,440
|
|
|
Realized gains (losses)
|
—
|
|
|
—
|
|
|
Impairment charge
|
—
|
|
|
(3,329
|
)
|
|
Sales and settlements, net
|
(113
|
)
|
|
—
|
|
|
Balance as of end of period
|
$
|
998
|
|
|
$
|
1,111
|
|
(7)
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Land and improvements
|
$
|
109
|
|
|
$
|
109
|
|
|
Buildings and improvements
|
2,473
|
|
|
2,472
|
|
|
Equipment
|
4,944
|
|
|
5,070
|
|
|
Construction in progress
|
10
|
|
|
—
|
|
|
Property, plant and equipment, gross
|
7,536
|
|
|
7,651
|
|
|
Less accumulated depreciation
|
(2,849
|
)
|
|
(2,264
|
)
|
|
Property, plant and equipment, net
|
$
|
4,687
|
|
|
$
|
5,387
|
|
The total depreciation and amortization expense incurred during the
three and six
months ended
June 30, 2016
, totaled approximately
$838,000
and
$1.7 million
, respectively. Included in the depreciation and amortization is depreciation expense related to property, plant and equipment totaling
$351,000
and
$678,000
for the
three and six
months ended
June 30, 2016
; amortization of capital lease assets of
$301,000
and
$602,000
, respectively - of which
$141,000
and
$282,000
is included in cost of sales, respectively; and amortization of intangibles totaling
$186,000
and
$370,000
, respectively.
The total depreciation and amortization expense incurred during the
three and six
months ended
June 30, 2015
, totaled
$633,000
and
$1.1 million
, respectively. Included in the depreciation and amortization is a depreciation expense related to property, plant and equipment totaling
$361,000
and
$678,000
for the
three and six
months ended
June 30, 2016
; amortization of capital lease assets of
$263,000
and
$527,000
, respectively - of which
$141,000
and
$282,000
is included in cost of sales, respectively; and amortization of intangibles totaling
$9,000
and
$(152,000)
, respectively.
The amortization of intangibles is further explained in
Note (8)
Goodwill and Other Intangible Assets.
Capital Leased Assets
In addition to owned property, the Company also has
$14.1 million
in leased assets, which is net of accumulated amortization of approximately
$2.2 million
as of
June 30, 2016
. At
December 31, 2015
leased assets totaled
$14.7 million
which is net of accumulated amortization of approximately
$1.6 million
.
During the three months ended
June 30, 2016
and
2015
, the Company recorded
$42,000
, respectively, of amortization as a result of the deferred gains from the 2014 Sale Leaseback Agreement with CFI NNN Raiders. The Company recorded
$84,000
of amortization during both the
six
months ended
June 30, 2016
and
June 30, 2015
, respectively.
Capital leases are further explained in
Note (12)
Commitments and Contingencies.
Dispositions
During the
six months ended June 30, 2016
and
2015
, the sale of fixed assets resulted in proceeds of
$141,000
and
$60,000
, respectively. The gain (loss) on sale of assets, excluding the deferred gain recognized by the 2014 Sale Leaseback Agreement with CFI NNN Raiders, totaled
$28,000
and
$(2,000)
during the
three months ended June 30, 2016
and
2015
, respectively. During the
six months ended June 30, 2016
and
2015
, the gain (loss) on sale of assets totaled
$28,000
and
$(1,000)
, respectively.
(8)
Goodwill and Other Assets
Goodwill
The Company's 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. The last annual impairment test took place as of November 30, 2015. The Company is aggregated into
four
operating segments presented herein (
Note (17)
) based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods. Our four operating segments consist of: 1) gourmet food, 2) home décor, 3) nutritional and wellness and 4) other. The valuation of goodwill is further explained in
Note (2)
Summary of Significant Accounting Policies.
The Company recorded goodwill impairment charges of approximately
$192,000
during the
three months ended June 30, 2015
. Impairment charges of approximately
$191,000
and
$192,000
were recorded during the
six months ended June 30, 2016
and
2015
. The goodwill impairment charges of
$191,000
during the second quarter of 2015 and
$192,000
during the first quarter of 2016 were related to the goodwill impairment of Tomboy Tools.
The following table provides the components of and changes in the carrying amount of Goodwill as of
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Goodwill
|
|
Accumulated Impairment
|
|
Other
|
|
Net Carrying Amount
|
|
Balance December 31, 2014
|
$
|
7,073
|
|
|
$
|
(2,978
|
)
|
|
$
|
—
|
|
|
$
|
4,095
|
|
|
Additions
(a)
|
1,655
|
|
|
|
|
|
|
1,655
|
|
|
Impairment
(b)
|
|
|
(192
|
)
|
|
|
|
(192
|
)
|
|
Other
(c)
|
|
|
|
|
(131
|
)
|
|
(131
|
)
|
|
Balance December 31, 2015
|
$
|
8,728
|
|
|
$
|
(3,170
|
)
|
|
$
|
(131
|
)
|
|
$
|
5,427
|
|
|
Additions
|
—
|
|
|
|
|
|
|
—
|
|
|
Impairment
(b)
|
|
|
(191
|
)
|
|
|
|
(191
|
)
|
|
Other
(c)
|
|
|
|
|
(90
|
)
|
|
(90
|
)
|
|
Balance March 31, 2016
|
$
|
8,728
|
|
|
$
|
(3,361
|
)
|
|
$
|
(221
|
)
|
|
$
|
5,146
|
|
|
(a)
Related to the acquisition of Betterware in 2015.
|
|
(b)
Related to the impairment of Tomboy Tools in 2015 and 2016.
|
|
(c)
Primarily reflects the impact of foreign exchange.
|
Identifiable Intangible Assets
The following tables provide the components of identifiable intangible assets as of
June 30, 2016
and
December 31, 2015
(in thousands, except amortization period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Intangible Assets
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount as of
June 30, 2016
|
|
Weighted Average Amortization Period (in Years)
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trade name and trademarks
|
$
|
5,447
|
|
|
$
|
—
|
|
|
$
|
5,447
|
|
|
—
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trade name and trademarks
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
Intellectual property
|
3,326
|
|
|
(685
|
)
|
|
2,641
|
|
|
4
|
|
|
|
$
|
8,776
|
|
|
$
|
(688
|
)
|
|
$
|
8,088
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount as of
December 31, 2015
|
|
Weighted Average Amortization Period (in Years)
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trade name and trademarks
|
$
|
5,614
|
|
|
$
|
—
|
|
|
$
|
5,614
|
|
|
—
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademarks
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
Intellectual property
|
3,534
|
|
|
(347
|
)
|
|
3,187
|
|
|
4
|
|
|
|
$
|
9,151
|
|
|
$
|
(350
|
)
|
|
$
|
8,801
|
|
|
4
|
|
Amortization
Amortization expense related to intangible assets is included in depreciation and amortization in the accompanying condensed consolidated statements of operations. During the
three and six
months ended
June 30, 2016
, the Company recorded an amortization of
$186,000
and
$370,000
, respectively. An amortization expense (credit) of
$9,000
and
$(152,000)
was recorded during the
three and six
months ended
June 30, 2015
.
The
$(152,000)
amortization expenses recorded for the
six months ended June 30, 2015
, includes a
$170,000
amortization credit resulting from correcting an error in the amortization of an indefinite-lived asset as a restatement adjustment in the March 31, 2015 Form 10-Q/A. The pro-forma amortization expense for
six months ended June 30, 2015
was
$18,000
, when adjusting for the amortization credit.
As of
June 30, 2016
, the estimated future amortization expense associated with our intangible assets for each of the five succeeding years ending December 31, is as follows (in thousands):
|
|
|
|
|
|
|
|
2016 (remaining portion)
|
$
|
357
|
|
|
2017
|
714
|
|
|
2018
|
714
|
|
|
2019
|
642
|
|
|
2020
|
97
|
|
|
Thereafter
|
117
|
|
|
Total amortization of intangible assets
|
$
|
2,641
|
|
Potential Impairment
The Company may need to potentially impair the goodwill and intangible assets if the Company continues to experience a downturn in revenue and continued losses. Agel's goodwill and indefinite intangible assets are at risk of potential impairment if the Company's profitability does not improve.
(9)
Related Party Transactions
During the fourth quarter of
2015
, the Company renewed a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings - a closely held company owned by the Company's Chairman and CEO. The Company has begun to establish an infrastructure of personnel and resources necessary to identify, analyze, negotiate and conduct due diligence on direct-to-consumer acquisition candidates. However, the Company continues to need advice and assistance in areas related to identification, analysis, financing, due diligence, strategic planning, accounting, tax, and legal matters associated with such potential acquisitions. Richmont Holdings and its affiliates have experience in these areas and the Company wishes to draw upon such experience. In addition, Richmont Holdings had already developed a strategy of acquisitions in the direct-to-consumer industry and has assigned and transferred to us the opportunities it has previously analyzed and pursued.
The Company has agreed to pay Richmont Holdings a reimbursement fee (the “Reimbursement Fee”) each month and the Company agreed to reimburse or pay the due diligence, financial analysis, legal, travel, and other costs Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring, and negotiating potential transactions. During the
three months ended June 30, 2016
and
2015
, the Company recorded approximately
$480,000
and
$552,000
, respectively, of Reimbursement Fee
expenses that are included in 'general and administrative expenses' on the condensed consolidated statements of operations. The Company incurred reimbursement fees of approximately
$960,000
and
$1.1 million
during the
six months ended June 30, 2016
and
2015
, respectively.
On February 26, 2015 the Company received a loan from Richmont Capital Partners V (“RCP V”) in the amount of
$425,000
. The loan does not currently bear interest and has no set maturity date. The balance of the loan is included in the Richmont Holdings related party payable. As of
June 30, 2016
and
December 31, 2015
, there was a related party payable balance of approximately
$774,000
and
$576,000
, respectively, due to Richmont Holdings that is included in 'related party payables' within current liabilities on the condensed consolidated balance sheets.
On September 25, 2012, upon acquisition of HCG, the Company inherited a related party shareholder payable of
$25,000
related to a loan made by HCG’s former shareholder, Rochon Capital, to HCG for working capital. This amount is included in 'related-party payables' within current liabilities. The loan does not currently have a set maturity date.
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
10.0%
per annum and matured on
June 27, 2015
. This amount is included in 'related-party payables' within current liabilities.
On July 1, 2014, Tamala L. Longaberger lent AEI
$158,000
and in connection therewith
AEI
issued a promissory note in the principal amount of
$158,000
to her. The note bears interest at the rate of
10.0%
per annum and matured on
July 1, 2015
and is guaranteed by us. This amount is included in 'related-party payables' within current liabilities.
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
10.0%
per annum and matured
July 11, 2015
and is guaranteed by us. This amount is included in 'related-party payables' within current liabilities.
The Company determined not to service the loans related to Tamala L. Longaberger. As a result, in connection with these notes, Ms. Longaberger on
August 12, 2015
filed an action in Franklin County Common Pleas Court of Columbus, Ohio (“State Court Action”) seeking re-payment of the notes. However, it is the Company’s position that her claims are inextricably tied to the broader issues related to her terminated employment and the claims asserted against her by the Company and The Longaberger Company, including breach of fiduciary duty, fraud, negligence, conversion, misappropriation of company funds, civil theft, breach of contract, and misappropriation of trade secrets, in an arbitration action in Columbus Ohio. Therefore, on
October 12, 2015
, the Company filed a motion to compel arbitration and dismiss claims in the State Court Action.On July 5, 2016, the Court overruled the Company’s motion and on July 26, 2016, Ms. Longaberger filed a motion for judgment on the pleadings against AEI. On August 9, 2016 the Company filed both a memorandum contra of Ms. Longaberger’s motion on the pleadings and its first amended answer, affirmative defenses and counterclaims. On August 17, 2016, the Court eliminated the trial setting and further stated it will issue a new case schedule upon conclusion of the arbitration scheduled for December 2016. On August 18, 2016 Ms. Longaberger withdrew her motion for judgment on the pleadings.
The Company utilizes third party manufacturers for majority of the products offered. One manufacture in particular, Actitech, is owned by Michael Bishop, a member of our Board of Directors. The Company utilizes Actitech to produce products for Agel that are distributed globally. The Company paid Actitech
$1.0 million
and
$389,000
, during the
six months ended June 30, 2016
and
2015
, respectively. On
June 30, 2016
and
December 31, 2015
, Actitech was owed
$750,000
and
$98,000
, respectively, which is included in 'accounts payable' on the condensed consolidated balance sheets.
(10)
Income Taxes
As of
June 30, 2016
, the Company could not recognize net deferred tax assets without a corresponding valuation allowance due to not having a history of earnings. Therefore,
no
net deferred tax assets are reflected as of
June 30, 2016
. Additionally, due to some of its historical acquisitions which included intangibles with an indefinite life that are amortized for tax purposes, the Company continues to accumulate a deferred tax liability which is recognized separately from net deferred tax assets and valuation allowance. A deferred tax liability is recorded within non-current liabilities in the amounts of
$780,000
and
$744,000
in our condensed consolidated balance sheets as of
June 30, 2016
and
December 31, 2015
, respectively.
During the periods presented, the Company has
no
t recorded current income tax expense related to its domestic activities due to net operating losses incurred currently and/or historically. Current tax expense for the
three months ended June 30, 2016
and
June 30, 2015
was
$295,000
and
$156,000
, respectively and is based on the Company's activities in certain foreign jurisdictions
which are currently profitable and for which
no
loss carryover is available to offset the income. The deferred tax expense for the
three months ended June 30, 2016
and
June 30, 2015
was approximately
$39,000
and
$39,000
, respectively.
Current tax expense for the
six months ended June 30, 2016
and
June 30, 2015
was
$341,000
and
$313,000
, respectively and is based on the Company's activities in certain foreign jurisdictions which are currently profitable and for which
no
loss carryover is available to offset the income. The deferred tax expense for the
six months ended June 30, 2016
and
June 30, 2015
was approximately
$69,000
and
$73,000
, respectively.
(11)
Long-Term Debt and Other Financing Arrangements
The Company’s long-term borrowings consisted of the following (in thousands, except for interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest rate
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Convertible note—Dominion Capital
|
|
9.75
|
%
|
|
$
|
3,800
|
|
|
$
|
4,000
|
|
|
Unamortized debt discount, costs and fees of issuance—Dominion Capital
|
|
|
|
(633
|
)
|
|
(1,016
|
)
|
|
Convertible notes—payable to former shareholders of Stanley House
|
|
2.00
|
%
|
|
4,856
|
|
|
5,502
|
|
|
Senior secured debt—HSBC Bank PLC
|
|
1.10
|
%
|
|
2,781
|
|
|
2,984
|
|
|
Promissory note—payable to former shareholder of TLC
|
|
2.63
|
%
|
|
2,813
|
|
|
3,003
|
|
|
Promissory note—Lega Enterprises, LLC (formerly Agel Enterprises, LLC)
|
|
5.00
|
%
|
|
874
|
|
|
1,043
|
|
|
Other miscellaneous notes
|
|
4.00
|
%
|
|
213
|
|
|
316
|
|
|
Total debt
|
|
|
|
|
14,704
|
|
|
15,832
|
|
|
Less current maturities
|
|
|
|
|
(8,627
|
)
|
|
(3,048
|
)
|
|
Long-term debt
|
|
|
|
|
$
|
6,077
|
|
|
$
|
12,784
|
|
The schedule of maturities of the Company’s long-term debt are as follows (in thousands):
|
|
|
|
|
|
|
|
2016 (remaining portion)
|
$
|
1,923
|
|
|
2017
|
8,619
|
|
|
2018
|
2,333
|
|
|
2019
|
412
|
|
|
2020
|
423
|
|
|
Thereafter
|
994
|
|
|
Total long-term debt including current maturities
|
$
|
14,704
|
|
Convertible Note—Dominion Capital
On November 20, 2015, the Company entered into a Securities Purchase Agreement with Dominion Capital ("Dominion"), pursuant to which the Company issued a
$4.0 million
senior secured note. The note bears interest at
9.75%
per annum, payable monthly. The note's principal is payable in monthly installments of
$50,000
starting in March 2016, increasing to
$325,000
in January 2017, with a final payment of
$2.2
million due in May 2017. The note is convertible at the option of Dominion into shares of our common stock at a conversion price of
$3.00
per share and is secured by the assets of the Company and its subsidiaries, subject to existing senior security interests of other lenders. The Company has evaluated the conversion feature and determined that it does not need to be bifurcated from the note and accounted for separately, since it is eligible for the derivative scope exception under ASC 815-10. The Company also determined that there is no beneficial conversion feature since the effective conversion price is higher than the market price of the underlying common stock as the commitment date.
In connection with this financing,
375,000
shares of our common stock valued at
$510,000
were issued and other costs and fees totaling
$583,000
were paid. These amounts have been treated as reductions of the proceeds received or issuance costs, and are being amortized over the term of the note using the effective interest method.
The unamortized balance of the debt discount, fees and issuance costs have been offset against the principal amount of the related debt in the condensed consolidated balance sheets.
The Dominion senior secured note contained certain covenants including the covenant requirement for the timely filing of the Company’s filings with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company
missed the timely filing requirement with the SEC of its 2015 Form 10-K and received a waiver (the “Form 10-K Waiver”) from Dominion until April 25, 2016. After April 25, 2016, the Form 10-K waiver stayed active provided that the Company issued
50,000
shares for each ten (
10
) business days until it filed its 2015 Form 10-K in compliance with its requirements under the Exchange Act. The 2015 Form 10-K was filed with the SEC on June 28, 2016, which resulted in the Company issuing a total of
200,000
shares of common stock to Dominion in connection with the Form 10-K Waiver.
A second waiver from Dominion (the “March Form 10-Q Waiver”) was received on May 17, 2016 for the Company’s failure to timely file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (the “March Form 10-Q”). The March Form 10-Q Waiver stayed active provided that the Company issued to Dominion
50,000
shares of the Company’s common stock for each such
ten
(10) business day period required beyond May 23, 2016,which was the due date of the March Form 10-Q (without regard to whether the Company requires the full
ten
(10) business day period for any given extension). As a result of the failure to timely file the March Form 10-Q, the Company issued a total of
500,000
shares of its common stock to Dominion in consideration of the March Form 10-Q Waiver.
In connection with the delay in the filing of its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (the “June Form 10-Q”) with the SEC, the Company obtained from Dominion an irrevocable waiver dated August 22, 2016 (the “Third Waiver”) that the Company’s failure to timely file the June Form 10-Q, as well any failure to timely file the Form 10-Q for the quarter ended September 30, 2016 (the “September Form 10-Q”), would not constitute an event of default under the Note, and that any further notice to Dominion under the Note in respect of the same would not be required, provided that the Company issues to Dominion
50,000
shares of its common stock for each extension period required beyond August 22, 2016 with respect to the June Form 10-Q and beyond November 21, 2016 with respect to the September Form 10-Q (without regard to whether the Company requires the full ten (10) business day period for any given extension). To date, the Company has issued
350,000
shares of its common stock for its failure to timely file its June Form 10-Q.
In addition, the Third Waiver also provides that the Company’s failure to comply with any other covenant set forth in Section 14 of the Note would not constitute an event of default under the Note, and that any further notice to Dominion under the Note in respect of the same would not be required; provided that the Company issues to Dominion
100,000
shares of its common stock; provided that such Waiver shall not apply to any compliance failures that occur after January 1, 2017.
In connection with the failure to timely file the 2015 Form 10-K, the March Form 10-Q and the June Form 10-Q, the Company has issued an aggregate of
1,150,000
shares of its common stock in 2016 to Dominion.
In addition, the Third Waiver amended the amortization of debt. The amended amortization resulted in
$550,000
of principal previously scheduled to be paid in 2016, is now scheduled to be paid in 2017.
The Company has recorded the expense related to the share issuances as a result of late filing as interest expense on the condensed consolidated statement of operations. During the
three and six
months ended
June 30, 2016
, the company has recorded interest expense related to the share issuances to Dominion Capital totaling approximately
$203,000
.
Convertible Notes—Payable to Former Shareholders of Stanley House
On October 15, 2015, the Company issued two unsecured convertible notes totaling
$5.8
million at that time in connection with the acquisition of Betterware, maturing after three years. The notes are denominated in pounds sterling (GBP) and bear interest at
2%
per annum, payable at the time of principal payments. The notes' principal is payable in monthly installments totaling
$16,000
for the first six months, followed by monthly installments totaling
$32,000
for the next
30
months, with additional payments of
$1.6
million due at the end of each annual period following the notes' issuance. The notes may be converted into the Company's common stock at our election based on the value of our shares at the time of payment. The valuation of the notes was considered in connection with the Betterware acquisition, and were determined to have been issued at fair value on the acquisition date. Refer to
Note (3)
Acquisitions and Other Transactions for further discussion on the Betterware acquisition.
Senior Secured Debt—HSBC Bank PLC
On March 24, 2015, the Company secured
$3.0 million
in senior secured debt at that time from HSBC Bank PLC, with a term of
two
(2) years and an annual interest rate of
0.60%
over the Bank of England Base Rate as published from time to time. The loan is denominated in pounds sterling (GBP) and secured by approximately
$2.9 million
in cash. There are no other covenants related to the debt. The loan is now current and shown as 'current portion of long-term debt.' Previously, the collateral for the loan was shown as 'restricted cash' on our condensed consolidated balance sheets and now is included in 'other current assets.' The cash collateral is held in a GBP denominated account.
Promissory Note—Payable to Former Shareholder of TLC
On March 14, 2013, the Company issued a
$4.0 million
unsecured 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.
Promissory Note—Lega Enterprises, LLC
On October 22, 2013, the Company issued a
$1.7 million
Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) in connection with our acquisition of assets from Agel Enterprises, LLC. The promissory note bears interest at
5%
per annum, and is payable in equal monthly installments of outstanding principal and interest and matures on October 22, 2018. The note is secured by a lien on the assets of Agel, which lien is subordinate to the lien to Dominion. Due to our current financial condition, the Company was in arrears of
$32,000
on principle and interest payments, as required by the agreement, as of
June 30, 2016
.
Promissory Note—Other Miscellaneous
On December 4, 2014, the Company issued a
$500,000
unsecured promissory note, maturing in May 2017, in connection with a settlement agreement. The promissory note bears interest at
4.0%
per annum, and is payable in equal monthly installments of outstanding principal and interest.
(12)
Commitments and Contingencies
Commitments
The Company currently has non-cancelable operating leases. The operating leases include property and equipment leases. The equipment leases mostly include office equipment and vehicles leases. These leases are included in cost of sales, selling expenses, and general and administrative expenses on the condensed consolidated statement of operations. The Company has included operating lease expenses of
$368,000
and
$734,000
during the
three and six
months ended
June 30, 2016
, respectively, on the condensed consolidated statement of operations. The Company incurred operating lease expenses of
$720,000
and
$1.1 million
during the
three and six
months ended
June 30, 2015
, respectively.
Minimum lease commitments for non-cancelable operating leases for the years ended December 31, are as follows (in thousands):
|
|
|
|
|
|
|
|
2016 (remaining portion)
|
$
|
733
|
|
|
2017
|
1,523
|
|
|
2018
|
1,524
|
|
|
2019
|
1,520
|
|
|
2020
|
1,191
|
|
|
Thereafter
|
8,487
|
|
|
Total non-cancelable leases
|
$
|
14,978
|
|
The leases for certain of the Company's facilities include rent escalation provisions, which are accounted for on a straight-line basis over the lease terms for purposes of determining rental expense.
Capital Leases
Sale leaseback Agreement
On July 31, 2014, TLC entered into a triple net lease agreement (referred to as the"sales leaseback agreement") with CFI NNN Raiders. Upon valuation of the lease, the lease was deemed to qualify as a capital lease instead of an operating lease as a result of the term of the lease exceeding 75% of the estimated economic life of the property. The assets and related liabilities of the properties sold were removed from the balance sheet. The leased asset will be included in 'property under capital leases, net' on the condensed consolidated balance sheets. The asset will be amortized over fifteen (
15
) years - the term of the lease - using the straight-line method. The accounting for the sale leaseback resulted in a gain arising from the sale of three buildings and the related property. The gain has been recognized as a deferred gain which will be recognized over the term of the lease.
The payments under the lease are accounted for as interest and principal payments under the capital lease using a fifteen (15) year amortization. Interest expense recognized for the
three months ended June 30, 2016
and
2015
was
$559,000
and
$552,000
, respectively. Amortization expense of
$263,000
was recorded in the
three months ended June 30, 2016
and
2015
respectively. The gain on sales of real estate amortized over the life of the lease was
$42,000
for
three months ended June 30, 2016
and
June 30, 2015
- which is included in gain on sale of assets in the accompanying condensed consolidated statements of operations.
Interest expense recognized for the
six months ended June 30, 2016
and
2015
was
$1.1 million
. Amortization expense of
$527,000
was recorded in the
six months ended June 30, 2016
and
2015
respectively. The gain on sales of real estate amortized over the life of the lease was
84,000
for
six months ended June 30, 2016
and
June 30, 2015
. On
June 30, 2016
and
December 31, 2015
the current portion of the lease totaled
$113,000
and
$73,000
, respectively. The current portion of the capital leases are included in 'other current liabilities' on the condensed consolidated balance sheets.
Other Capital Leases
In addition to the sale leaseback agreement, the Company has various other capital leases. These additional leases resulted from the financing of software, hardware, and office equipment. Multiple new leases were recognized during
2015
in part due to Betterware having numerous capital leases. Amortization expense related to these additional capital leases totaled
$54,000
and
$108,000
during the
three and six
months ended
June 30, 2016
, respectively. On
June 30, 2016
and
December 31, 2015
the current portion of the other leases totaled
$177,000
and
$124,000
, respectively.
Minimum lease commitments for our capital leases for the years ended December 31, are as follows (in thousands):
|
|
|
|
|
|
|
|
2016, remaining portion
|
$
|
1,299
|
|
|
2017
|
2,566
|
|
|
2018
|
2,617
|
|
|
2019
|
2,651
|
|
|
2020
|
2,633
|
|
|
Thereafter
|
25,700
|
|
|
Total minimum lease payments
|
37,466
|
|
|
Less amount representing interest
|
(21,125
|
)
|
|
Present value of minimum lease payments
|
$
|
16,341
|
|
Contingencies
During 2014, Tamala L. Longaberger loaned a total of
$1,000,000
to the Company, bearing interest at
10%
and maturing in 2015. The Company determined to not service the loans related to Tamala L. Longaberger. In connection with these notes, Ms. Longaberger on August 12, 2015 filed an action in Franklin County Common Pleas Court of Columbus, Ohio (“State Court Action”) seeking re-payment of the notes. However, it is the Company’s position that her claims are inextricably tied to the broader issues related to her terminated employment and the claims asserted against her by the Company and The Longaberger Company, including breach of fiduciary duty, fraud, negligence, conversion, misappropriation of company funds, civil theft, breach of contract, and misappropriation of trade secrets. As a result of her misconduct, the Company claims it is owed damages in amounts that exceed and therefore offset Ms. Longaberger’s claims. Therefore, on October 12, 2015, the Company filed a motion to compel arbitration and dismiss claims in the State Court Action. On July 5, 2016, the Court overruled the Company’s motion and on July 26, 2016, Ms. Longaberger filed a motion for judgment on the pleadings against AEI. On August 9, 2016, the Company filed both a memorandum contra of Ms. Longaberger’s motion on the pleadings and its first amended answer, affirmative defenses and counterclaims. On August 17, 2016, the Court eliminated the trial setting and further stated it will issue a new case schedule upon conclusion of the arbitration scheduled for December 2016. On August 18, 2016 Ms. Longaberger withdrew her motion for judgment on the pleadings. As of
June 30, 2016
, the Company has recorded a liability of
$1,000,000
which is included in related party payables on the condensed consolidated balance sheet.
On November 7, 2016, Rachel Longaberger Stuckey (“Plaintiff”) filed a complaint against The Longaberger Company and JRJR33, Inc. (“Defendants”) in the Court of Common Pleas of Franklin County, Ohio. Plaintiff alleges counts of breach of note, breach of guarantee, unjust enrichment, and promissory estoppel in the amount of damages to be determined at trial, but in excess of twenty five thousand (
$25,000
) per count. The note referenced in Plaintiff’s complaint is a March 14, 2013 Promissory Note in the original amount of four million dollars (
$4,000,000
) executed by Plaintiff’s sister, Tamala Longaberger as the then President of The Longaberger Company. A formal answer is not yet due in the case, but Defendants will use all available legal and equitable means to defend against these allegations. The Clerk of the Franklin County Common Pleas Court has make an original trial assignment of November 20, 2017. As of
June 30, 2016
, the Company has recorded a liability of
$2,813,000
of which
$2,427,000
is included in long-term debt and
$386,000
is included in current portion of long-term debt on the condensed consolidated balance sheet.
The Company has recorded a payable of
$609,000
that transpired from an amended tax increment financing agreement that TLC entered into on April 3, 2007 related to the development of the infrastructure surrounding corporate headquarters. Due to this liability not being disclosed during the due diligence, the Company has filed a complaint against the seller on September 22, 2016. This complaint may potentially result in the reimbursement of or the assumption of this liability by the seller. This contingent asset is not included on the condensed consolidated balance sheet.
The Company is disputing a tax and penalty assessment by the Spanish Taxing Authorities relating to Agel. Prior to the Company's acquisition of the assets of Agel Enterprises LLC, 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, the Company agreed to assume this liability. Agel, 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 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
$269,000
in good faith towards the disputed withholding tax liability to preserve the appeal process.
During the second quarter of 2014, AEI paid
$420,000
to the Spanish Taxing Authorities toward its outstanding tax assessment. The Company did not make any payments in the third or fourth quarters of 2014. Although the Company has appealed this assessment by the Spanish Taxing Authorities and are defending the 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. Additionally, AEI has been assessed amounts owed for late interest on the withholding and income tax of
€10,819
and
€1,282
, respectively (
$11,799
and
$1,398
, respectively). The amount remains due if the appeal is unsuccessful, otherwise the payments made to date will be refunded to us. As of
June 30, 2016
and
December 31, 2015
AEI maintained a liability of approximately
$500,000
, respectively, in accrued liabilities for this disputed amount, which is reflected in the condensed consolidated financial statements.
The Company is occasionally involved in other 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 not subject to reasonable estimation. However, management believes that the ultimate outcome of any lawsuits will not have a material impact on the
Company’s financial position or results of operations. Other than the above, the Company is not aware of any material, active, pending or threatened proceeding against the Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation.
Worker’s Compensation Liability
Certain of the Company’s employees were covered under a self-insured worker’s compensation plan which was replaced by a fully insured plan in December 2014. The Company estimates its remaining self-insured worker’s compensation liability based on past claims experience, and has an accrued liability to cover estimated future costs. The accrued liability was approximately
$1.1 million
at
June 30, 2016
and
December 31, 2015
. There can be no assurance that actual results will not materially differ from the Company's estimates.
(13)
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 1—Unadjusted quoted prices in active markets for identical assets and liabilities;
Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying values of cash and cash equivalents, accounts receivable, accounts payable trade and related party payables are considered to be representative of their respective fair values due to the immediate or short-term nature or maturity. Our available for sale securities (Level 1) was
$1.2 million
and (Level 2)
$0
at
June 30, 2016
and (Level 1) was
$5.3 million
and (Level 2) was
$0
on
December 31, 2015
.
The Company measures certain non-financial assets and liabilities at fair value that are recognized or disclosed on a nonrecurring basis (e.g. impaired goodwill and property, plant and equipment classified as held for sale). During the fourth quarter of fiscal year 2015, a
$3.3 million
impairment charge was recorded for the Longaberger facilities held for sale. The facilities held for sale served as the previous corporate headquarters, day care center, and a separate manufacturing site. The fair value of the net assets to be sold was determined using Level 3 inputs utilizing a market participant bid. See additional discussion regarding the Company’s assets held for sale in
Note (6)
Assets Held for Sale.
The Company recorded goodwill and intangible impairment charges of approximately
$0
and
$192,000
during the
three months ended June 30, 2016
and
2015
, respectively. Impairment charges of approximately
$191,000
and
$192,000
were recorded during the
six months ended June 30, 2016
and
2015
.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we recorded certain assets and liabilities at fair value on a nonrecurring basis. These assets and liabilities are measured at fair value on a nonrecurring basis and are primarily related to write-downs associated with goodwill and other intangible assets.The fair value measurement for goodwill and other intangible assets was developed using significant unobservable inputs (Level 3) utilizing a discounted cash flow model.
The Company has estimated the fair value of our debt and capital lease obligations using Level 2 and Level 3 inputs, and they are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Recorded Amount
|
|
|
|
|
Long-term debt, including current portion
|
$
|
14,704
|
|
|
$
|
15,832
|
|
|
Capital leases, including current portion
|
16,341
|
|
|
16,529
|
|
|
Total debt and capital lease commitments
|
$
|
31,045
|
|
|
32,361
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Long-term debt, including current portion
|
$
|
13,676
|
|
|
$
|
14,024
|
|
|
Capital leases, including current portion
|
$
|
10,385
|
|
|
$
|
10,040
|
|
|
Total debt and capital lease commitments
|
$
|
24,061
|
|
|
$
|
24,064
|
|
(14)
Share-Based Compensation Plans
The Company has
two
cash-settled, 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. The Company classifies the awards as a liability as the value of the award will be settled in cash, notes, or stock. The Company awarded
5,000
equivalent shares of stock appreciation rights (“SARs”) in
2016
that are measured each reporting period and are recognized pro-rata 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 condensed consolidated balance sheets. Share-based compensation expense related to the SARs during the
three and six
months ended
June 30, 2016
totaled approximately
$(2,000)
and
(10,000)
, respectively. During the
three and six
months ended
June 30, 2015
, the share-based compensation expense related to the SARs totaled
$(30,000)
and
$(1.2) million
, respectively. As of
June 30, 2016
, the unrecognized compensation related to unvested share-based compensation was
$17,000
, which is expected to be recognized over a
three
-year period.
On May 22, 2015, the Company’s Board of Directors approved the 2015 Stock Incentive Plan (the “2015 Stock Plan”), which was subsequently approved by the Company’s stockholders on June 23, 2015. On September 15, 2016, the shareholders approve an increase to the share issuance to up to
3,500,000
shares of common stock. The
2015
Stock Plan allows for the issuance of up to
3,500,000
shares of common stock to be granted through incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. The exercise price of stock options under the
2015
Stock Plan is determined by the compensation committee of the Board of Directors, and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. The total number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee of the Company or a subsidiary during any
one
-year period under the
2015
plan shall not exceed
500,000
. Options become exercisable over various periods from the date of grant, and generally expire
10
years after the grant date. As of
June 30, 2016
, there were approximately
1,200,000
options issued and outstanding under the
2015
Stock Plan.
On June 23, 2015,
50,000
options were granted to each of
two
executive officers of the Company. These options were issued at an exercise price of
$1.23
, vesting in equal quarterly installments over
three
years beginning July 1, 2015. These options are recognized as equity and expensed over the vesting period of three years.
On July 30, 2015, the Company entered into separate consulting agreements with
two
individuals pursuant to which each would provide certain business and financial advisory services to the Company. In connection with the consulting agreements, each consultant was granted options exercisable for
500,000
shares of the Company’s common stock, par value
$0.0001
per share under the Company’s
2015
Stock Incentive Plan (for an aggregate of
1,000,000
shares). The options had an exercise price of
$1.27
, would have expired on July 30, 2020, and were fully vested on the date of the grant. On January 6, 2016, the options of these individuals were revoked as the contracts were terminated for cause, pursuant to the stock option agreements.
On February 17, 2016, certain executive officers of the Company were granted options to purchase a total of
130,000
shares of common stock, with an exercise price
$1.04
, and vesting on the
one
-year anniversary of the date of grant. The total fair value of the options was
$125,000
and is being amortized over the vesting period.
On March 25, 2016, certain executive officers and employees of the Company were granted options to purchase
1,030,000
shares of common stock, with an exercise price of
$1.12
, and vesting as to 25% of the grant on the two, three, four and five-year anniversary
of the date of the grant. The total fair value of the options was
$611,000
and is being amortized over the vesting period.
The fair value of all options totaled approximately
$784,000
(
$0.65
per share) on
June 30, 2016
compared to the fair value of
$1.2 million
(
$1.08
per share) on
December 31, 2015
. During the
three and six
months ended
June 30, 2016
, the share-based compensation expense was approximately
$50,000
and
$56,000
. As of
June 30, 2016
, total unrecognized compensation expense related to unvested share-based compensation was
$720,000
, which is expected to be recognized over a
three
-year period.
The Company determines the expense related to the SARs, employee stock options and warrants under the guidance of ASC 718, and estimates the fair value using the Black-Scholes valuation model. For non-employee awards, the awards are accounted for under the guidance of ASC 505-50, with fair value estimated using the Black-Scholes valuation model.
The grant date fair value of each option award and warrant is calculated using a Black-Scholes valuation model, which incorporates the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Stock Options
|
|
|
|
|
Weighted average expected volatility
|
103
|
%
|
|
92
|
%
|
|
Weighted Average Term (in years)
|
10
|
|
|
10
|
|
|
Risk-free interest rate
|
2
|
%
|
|
2
|
%
|
|
Weighted average forfeiture rate
|
41
|
%
|
|
—
|
%
|
|
Weighted average fair value at date of grant
|
$
|
0.63
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
Weighted average expected volatility
|
|
|
|
69
|
%
|
|
Weighted Average Term (in years)
|
|
|
|
2
|
|
|
Risk-free interest rate
|
|
|
|
2
|
%
|
|
Weighted average fair value at date of grant
|
|
|
|
$
|
1.24
|
|
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Number
|
|
Exercise Price Per Share
|
|
Outstanding as of December 31, 2015
|
1,100,000
|
|
|
$
|
1.27
|
|
|
Granted
|
1,160,000
|
|
|
1.11
|
|
|
Expired, forfeited, and revoked
|
(1,060,000
|
)
|
|
1.27
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Outstanding as of June 30, 2016
|
1,200,000
|
|
|
1.12
|
|
|
Options exercisable as of June 30, 2016
|
17,000
|
|
|
1.23
|
|
|
Remaining unvested options outstanding and expected to vest
|
1,183,000
|
|
|
$
|
1.11
|
|
(15)
Stockholders' Equity and Non-controlling Interest
Public Offering
On March 4, 2015 the Company raised proceeds of
$20 million
though the sale of
6,667,000
shares of its common stock and warrants to purchase up to an aggregate of
6,667,000
shares of its common stock at a combined offering price of
$3.00
in an underwritten public offering (“Offering”). The warrants have a per share exercise price of
$3.75
, are exercisable immediately and will expire
five
years from the date of issuance. The Company granted the underwriters a
45
-day option to purchase up to an additional
1,000,050
shares of common stock and/or warrants to purchase up to an aggregate of
1,000,050
shares of common stock to cover additional over-allotments, if any. On March 4, 2015, the underwriters exercised a portion of their over-allotment option with respect to
113,200
warrants. In addition,
166,675
warrants were issued to the underwriters. The over-allotment option has expired as of the date of this filing.
The gross proceeds to the Company, including the underwriters' partial exercise of their over-allotment option, were approximately
$20 million
before deducting underwriting discounts and commissions and other estimated offering expenses payable by the
Company. The net proceeds from the Offering were approximately
$17.8 million
. Assuming the exercise of all
6,667,000
warrants at the exercise price of
$3.75
each, and assuming the Company maintains the conditions necessary for a cash exercise, the total additional gross aggregate proceeds to the Company would be approximately
$25 million
. However, there can be no assurance that any warrants will be exercised or that the Company will maintain conditions necessary for a cash exercise.
The exercise price of the warrants are subject to anti-dilutive adjustments (such as stock splits, stock dividends, recapitalizations or other similar events). There are no cash settlement alternatives associated with the warrant agreements that would require the Company to pay a holder of such warrant cash at exercise or at any other event. The fair value of the warrants is approximately
$9.0 million
as calculated using the Black Scholes model. In accordance with GAAP, the Company has accounted for the warrants as equity instruments.
The Warrants will be exercisable at any time a registration statement registering the issuance of the shares of Common Stock underlying the Warrants under the Securities Act is effective and available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment in full in immediately available funds for the number of shares of Common Stock purchased upon such exercise. If a registration statement registering the issuance of the shares of Common Stock underlying the warrants under the Securities Act is not effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, the holder may, in its sole discretion, elect to exercise the Warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Common Stock determined according to the formula set forth in the Warrant. The Company currently does not have a registration statement available that registers the common stock underlying the warrants.
A holder of Warrants will not have the right to exercise any portion of the Warrant if such exercise would result in the holder (together with its affiliates) beneficially owning in excess of
4.99%
of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, unless the holder provides at least
61
days' prior notice to the company. In no event may the Warrant holder's ownership exceed
9.99%
At-the-Market Issuance Sales Agreement
On December 3, 2014, the Company entered into an “At-the-Market Issuance Sales Agreement” with MLV & Co. LLC (“MLV”) pursuant to which the Company may offer and sell shares of our common stock having an aggregate offering price of up to
$25,000,000
from time to time through MLV, acting as agent. Sale of shares under this agreement were sold pursuant to our shelf registration statement on Form S-3 (File No. 333-200712), which became effective on January 15, 2015. During
six months ended June 30, 2015
, the Company sold
101,083
shares under the agreement and received aggregate net proceeds of approximately
$684,000
.
No
shares were sold during the
three months ended June 30, 2015
and
six months ended June 30, 2016
. The Company is no longer eligible to sell stock under the At-the-Market Issuance Sales Agreement and will not be eligible to do so until our shelf registration statement on Form S-3 is available for use.
Possible Issuance of Additional Common Stock under Share Exchange Agreement
Rochon Capital is controlled by John P. Rochon and beneficially owns approximately
40%
of the Company's outstanding common stock.
Under a certain Share Exchange Agreement with Rochon Capital, which was amended during the fourth quarter of 2014 (the "Amended Share Exchange Agreement") Rochon Capital has rights to be issued the
25,240,676
shares of our common stock (the "Second Tranche Parent Stock") upon the public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below), or upon the commencement or announcement of a tender or exchange offer which would result in any person or group becoming an Acquiring Person. In such event, the Second Tranche Parent Stock will be issued to Rochon Capital, or a Permitted Transferee to whom the right has been transferred, within ten (
10
) days of its written request, which request shall be in its sole discretion. A person or group of affiliated or associated persons becomes an "Acquiring Person," thus triggering the issuance of the Second Tranche Parent Stock to Rochon Capital, or a Permitted Transferee to whom the right has been transferred, upon acquiring, subsequent to the date of the Amended Share Exchange Agreement, beneficial ownership of
15%
or more of the shares of our common stock then outstanding. The term "Acquiring Person" shall not include (1) any person who acquires
15%
or more of our shares of common stock in a transaction approved by John P. Rochon, (2) any affiliates of John P. Rochon or (3) any family members of John P. Rochon.
Other Outstanding Warrants
On July 30, 2015, the Company executed an extension on a consulting agreement through July of 2017 in exchange for the issuance of warrants exercisable for
50,000
shares of our common stock at an exercise price of
$1.16
per share. The warrant is also exercisable for a
ten
(10) day period commencing
720
days after issuance. During the
three months ended June 30, 2016
, a warrant expense of
$1,000
was recorded. An expense of
$4,000
and
$0
has been recognized for the
six months ended June 30, 2016
and
June 30, 2015
, respectively.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive loss ("AOCI") is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Unrealized Gain
(Loss) on
Available-for-
Sale Securities
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance at December 31, 2014
|
|
$
|
128
|
|
|
$
|
193
|
|
|
$
|
321
|
|
|
Other comprehensive loss before reclassifications
|
|
(706
|
)
|
|
—
|
|
|
(706
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(199
|
)
|
|
(199
|
)
|
|
Transactions with non-controlling interests
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
Balance at December 31, 2015
|
|
(580
|
)
|
|
(6
|
)
|
|
(586
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
(1,469
|
)
|
|
5
|
|
|
(1,464
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transactions with non-controlling interests
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
Net other comprehensive loss at June 30, 2016
|
|
$
|
(2,055
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2,056
|
)
|
(16)
Loss Per Share Attributable to JRJR
Basic net loss per common share is computed by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Potentially dilutive securities 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 potentially dilutive securities that are excluded from the diluted loss per share calculation are summarized as follows (additional shares subject to issuance):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Stock options
|
1,200,000
|
|
|
1,100,000
|
|
|
Warrants
|
50,000
|
|
|
50,000
|
|
|
Warrants issued in public offering
|
6,946,875
|
|
|
6,946,875
|
|
|
Convertible notes
|
375,000
|
|
|
375,000
|
|
|
Shares potentially issuable to Rochon Capital
|
25,240,676
|
|
|
25,240,676
|
|
|
Total excluded securities
|
33,812,551
|
|
|
33,712,551
|
|
(17)
Segment Information
The Company operates
four
operating segments,
three
of which are reportable segments, as a direct selling company that sells a wide range of products sold primarily by independent sales force members across many countries around the world. During the
three months ended June 30, 2016
and
June 30, 2015
, respectively, approximately
$30.6 million
or
84.0%
and
$25.7 million
or
71.4%
of our revenue was generated in international markets. During the
six months ended June 30, 2016
and
June 30, 2015
, revenue generated in international markets totaled approximately
$58.8 million
or
81.1%
and
$34.8 million
or
62.3%
, respectively.
The Company has grouped our products into the following
four
operating segments: gourmet food, nutritional and wellness, home décor and other. Substantially all of our long-lived assets are located in the U.S. Of these
four
operating segments, gourmet food, home décor, and nutritional and wellness qualify as reportable segments.
The Company has identified
three
reportable segments as each segment engages in business activities, incurring expenses and producing revenues. The operating results of these segments are regularly reviewed by chief operating decision makers ("CODMs") and there is discrete financial information available for each unit. Also, the reported revenue of each reportable segment, both external and inter-company, is
10%
or more of the combined revenue of all of the operating segments.
Gourmet Food
- Segment consists of operations related to the production and sale of hand-crafted spices, oils and other food products from around the world. These operations have a presence in many of our markets both in the U.S. and internationally such as in Australia, New Zealand, Canada, and the United Kingdom. The subsidiaries involved in this line of business are Your Inspiration at Home and My Secret Kitchen.
Home Décor
- Segment consists of operations related to the production and sale of premium hand-crafted baskets and the selling of products for the home, including pottery, cleaning, health, beauty, outdoor and customizable vinyl expressions for display. These operations are primarily located within the United States and the United Kingdom. The primary subsidiaries involved in this line of business are Kleeneze, Betterware, TLC and Uppercase Living.
Nutritional and Wellness
- Segment consists of operations related to the selling of nutritional supplements and skin care products. These operations have a presence in many foreign markets and over
50
countries such as Italy, Russia, Spain, and Thailand. The subsidiary primarily involved in this type of products is Agel.
The Company notes that these three segments exceed
75.0%
of the Company's consolidated revenue. Therefore, no further aggregation or disclosures are required for the remaining operating segments.
The Company has included an "other" within the tables below consisting of HCG, Paperly, and Tomboy Tools to provide easier reconciliation to our results found on the condensed consolidated statements of operations and further transparency.
In the tables below the Company presents revenue, gross profit, operating expenses, and other expenses by operating segment. When evaluating performance, our chief operating decision makers look at each segments gross profit to evaluate profitability. The CODMs view our operating expenses as holistic due to many shared expenses that occur at the corporate level. These shared expenses occur when corporate provides services to our operating segments, which is consistent with our post-acquisition integration strategies. None of the reportable segments cross sell to other reportable segments.
Segment information, which includes all operating segments, for the
three months ended June 30, 2016
and
June 30, 2015
are shown in the tables below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gourmet Food
|
|
Home Décor
|
|
Nutritional and Wellness
|
|
Other
|
|
Consolidated
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
3,587
|
|
|
$
|
25,311
|
|
|
$
|
7,250
|
|
|
$
|
266
|
|
|
$
|
36,414
|
|
|
Gross profit
|
1,862
|
|
|
12,699
|
|
|
6,125
|
|
|
162
|
|
|
20,848
|
|
|
Operating expenses
|
2,133
|
|
|
16,372
|
|
|
5,248
|
|
|
1,601
|
|
|
25,354
|
|
|
Gain on sale of marketable securities
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
|
Interest expense
|
—
|
|
|
546
|
|
|
12
|
|
|
479
|
|
|
1,037
|
|
|
Income (loss) before income tax provision
|
$
|
(271
|
)
|
|
$
|
(4,219
|
)
|
|
$
|
865
|
|
|
$
|
(1,911
|
)
|
|
$
|
(5,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
5,190
|
|
|
$
|
22,459
|
|
|
$
|
7,981
|
|
|
$
|
398
|
|
|
$
|
36,028
|
|
|
Gross profit
|
3,132
|
|
|
11,232
|
|
|
6,397
|
|
|
246
|
|
|
21,007
|
|
|
Operating expenses
|
2,889
|
|
|
14,149
|
|
|
6,449
|
|
|
798
|
|
|
24,285
|
|
|
Gain on sale of marketable securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
(3
|
)
|
|
(22
|
)
|
|
15
|
|
|
575
|
|
|
565
|
|
|
Income (loss) before income tax provision
|
$
|
246
|
|
|
$
|
(2,895
|
)
|
|
$
|
(67
|
)
|
|
$
|
(1,127
|
)
|
|
$
|
(3,843
|
)
|
Segment information, which includes all operating segments, for the
six months ended June 30, 2016
and
June 30, 2015
are shown in the tables below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gourmet Food
|
|
Home Décor
|
|
Nutritional and Wellness
|
|
Other
|
|
Consolidated
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
6,514
|
|
|
$
|
51,964
|
|
|
$
|
13,516
|
|
|
$
|
495
|
|
|
$
|
72,489
|
|
|
Gross profit
|
3,359
|
|
|
25,813
|
|
|
11,095
|
|
|
302
|
|
|
40,569
|
|
|
Operating expenses
|
4,259
|
|
|
32,919
|
|
|
11,309
|
|
|
3,416
|
|
|
51,903
|
|
|
Gain on sale of marketable securities
|
—
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
(9
|
)
|
|
Interest expense
|
1
|
|
|
1,112
|
|
|
28
|
|
|
727
|
|
|
1,868
|
|
|
Loss before income tax provision
|
$
|
(901
|
)
|
|
$
|
(8,218
|
)
|
|
$
|
(242
|
)
|
|
$
|
(3,832
|
)
|
|
$
|
(13,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
7,735
|
|
|
$
|
32,630
|
|
|
$
|
14,757
|
|
|
$
|
784
|
|
|
$
|
55,906
|
|
|
Gross profit
|
4,388
|
|
|
16,536
|
|
|
11,702
|
|
|
498
|
|
|
33,124
|
|
|
Operating expenses
|
4,715
|
|
|
20,658
|
|
|
12,284
|
|
|
2,940
|
|
|
40,597
|
|
|
Gain on sale of marketable securities
|
—
|
|
|
—
|
|
|
—
|
|
|
(192
|
)
|
|
(192
|
)
|
|
Interest expense
|
18
|
|
|
168
|
|
|
32
|
|
|
946
|
|
|
1,164
|
|
|
Loss before income tax provision
|
$
|
(345
|
)
|
|
$
|
(4,290
|
)
|
|
$
|
(614
|
)
|
|
$
|
(3,196
|
)
|
|
$
|
(8,445
|
)
|
The following table shows the total assets for each reportable segment as of
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Gourmet food
|
|
$
|
1,728
|
|
|
$
|
2,324
|
|
|
Home décor
|
|
47,621
|
|
|
53,887
|
|
|
Nutritional and wellness
|
|
8,884
|
|
|
9,686
|
|
|
Other
|
|
11,214
|
|
|
16,607
|
|
|
Consolidated total assets
|
|
$
|
69,447
|
|
|
$
|
82,504
|
|
The following table summarizes goodwill for each reportable segment as of
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Gourmet food
|
|
$
|
1,184
|
|
|
$
|
1,161
|
|
|
Home décor
|
|
2,024
|
|
|
2,137
|
|
|
Nutritional and wellness
|
|
1,938
|
|
|
1,938
|
|
|
Other
|
|
—
|
|
|
191
|
|
|
Consolidated goodwill
|
|
$
|
5,146
|
|
|
$
|
5,427
|
|
(18)
Subsequent Events
On July 8, 2016, the Company received a letter from the NYSE MKT LLC (the "Exchange") stating that the Exchange had accepted the Company’s plan of compliance (the “Plan”) for continued listing relating to the Company’s failure to timely file its March Form 10-Q. On July 8, 2016, the Exchange notified the Company that it has until October 17, 2016 to regain compliance with the continued listing standards of the Company Guide. The Company will be subject to periodic review by the Exchange during the Plan Period.
On August 23, 2016, the Company received a letter from the Exchange stating that the Company did not timely file with the SEC its June Form 10-Q by its requisite deadline. As such, the Company remains non-compliant with Sections 134 and 1101 of the Company Guide.
The Company remains subject to the conditions set forth in the Exchange letter dated May 23, 2016. Failure to make progress consistent with the Plan or to regain compliance with the continued listing standards of the Company Guide by the end of the Plan Period could result in the Company being delisted from the Exchange. On October 7, 2016, the Company requested an additional extension to file the June Form 10-Q. The Company received the extension for the June Form 10-Q and the Company was provided an extension to file the June Form 10-Q and September Form 10-Q by December 30, 2016. On November 22, 2016, the Company received a letter from the Exchange notifying the Company that as a result of its failure to timely file its September Form 10-Q that it remained non-compliant with Sections 134 and 1101 of the Company Guide and has again become subject to the procedures and requirements of Section 1009 of the Company Guide.
On September 15, 2016, the Company's stockholders, at the Company's Annual Meeting of Stockholders, approved an amendment to the 2015 Stock Incentive Plan to increase the number of shares of common stock that the Company will have authority to grant under the 2015 Stock Incentive Plan from
1,500,000
to
3,500,000
.
On November 3, 2016, an executive officer was granted options to purchase
150,000
shares of common stock, with an exercise price of
$0.87
, and vesting as to
33%
of the grant on the
one
,
two
, and
three
-year anniversary of the date of the grant.