Notes to Consolidated Financial Statements
(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 Florida in 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 on January 28, 2016.
Basis of Presentation
The audited consolidated financial statements and the accompanying notes include the Company's accounts and the accounts of the Company's subsidiaries. These audited consolidated 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 financial information and the instructions to the Annual Report on Form 10-K.
In accordance with the guidance for non-controlling interests in consolidated financial statements, references in this report to the earnings per share, net income, and stockholders’ equity attributable to JRjr33, Inc. do not include non-controlling interests, which is reported separately.
The Company's Portfolio
The Company has grown as a result of acquiring
nine
direct-to-consumer brands following the reverse merger of Happenings in 2012. 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 businesses in order of acquisition: The Longaberger Company, Your Inspiration at Home Proprietary Limited, CVSL TBT LLC, Agel Enterprises Inc., My Secret Kitchen Limited, Paperly, Inc., Uppercase Living, Inc., Kleeneze Limited, and Betterware Limited. In addition, Happenings Communications Group, Inc. further diversifies the portfolio by operating in the magazine publishing industry.
Going Concern Considerations
The accompanying 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. The Company had a net loss of
$34.9 million
during the
fiscal year ended December 31, 2016
, and had an accumulated deficit of approximately
$76.2 million
as of
December 31, 2016
. The Company also had negative working capital of approximately
$44.9 million
and debt of approximately
$13.5 million
as of
December 31, 2016
. Cash and cash equivalents and marketable securities were
$2.6 million
as of
December 31, 2016
, a
decrease
of
$9.2 million
from
December 31, 2015
, primarily due to a reduction in cash used to fund the net loss from operations during the fiscal year.
The assumption that the Company will continue to operate as a going concern is largely dependent upon its ability to improve operations, its ability to refinance debt as it comes due, and reliance on the Funding Request Agreement that the Company entered into on
October 18, 2017
, with Rochon Capital Partners to provide short term funding of cash shortages arising in the ordinary course of business through
October 31, 2018
. This is discussed in
Note (9)
,
Related Party Transactions
,
to the consolidated financial statements included in this report.
The Company intends to fund operations through raising additional capital through debt financing, equity financing, improvement in gross margin profitability, reduction of operating costs, and if necessary, drawing on the Funding Request Agreement with Rochon Capital Partners.
The Company is in negotiations with current debt holders to restructure and extend payment terms of the existing debt which could include a potential refinancing of 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. However, the Company has a non-binding principle agreement with a creditor to provide placement of a senior secured convertible term loan in the amount of
$5.0 million
.
In response to these financial issues, management has taken the following actions that alleviate the doubt about the Company's ability to continue as a going concern:
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The Company has entered into an agreement with Rochon Capital Partners to support the Company through October 31, 2018;
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The Company is seeking to renegotiate and potentially refinance existing debt;
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•
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The Company is seeking investment capital and has a non-binding principle agreement with a creditor to provide placement of a senior secured convertible term loan;
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The Company is aggressively targeting new distributors and looking to expand into new markets with its more successful companies;
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The Company is seeking to reduce excess inventory to improve working capital;
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The Company is aggressively reducing its operating costs; and
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The Company has approached its trade creditors for extended payment terms.
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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
December 31, 2016
, the non-controlling interest consisted of minority shareholder interests in TLC, MSK, and certain international subsidiaries of Agel. All inter-company accounts and transactions have been eliminated in the consolidated financial statements. Business combinations accounted for as purchases are included in the consolidated financial statements from their respective dates of acquisition.
Reclassifications
Certain amounts in the consolidated financial statements included for the
fiscal year ended
December 31, 2015
have been reclassified to conform to current year's presentation. The Company has reclassified select expenses to show a consistent presentation as well as changing the presentation on the 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. The Company also reclassified the current portion of the lease liability previously reported as an "
Other current liabilities
" to "
Current portion of lease obligation
" to provide additional transparency. In addition, a related party trade payable was reclassified from "
Accounts payable
" to "
Related party payables
." More details on this reclassification are discussed in
Note (9)
,
Related Party Transactions
,
to the consolidated financial statements included in this report.
Significant Accounting Policies, Estimates and Judgments
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions in these consolidated 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 preparation of the consolidated financial statements. Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
Cash equivalents are short-term, highly-liquid instruments with original maturities of 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
. At the end of
December 31, 2016
, the Company held a
zero
-cash position in FDIC insured banks and at the end of
December 31, 2015
, the Company held an amount of
$340,000
in FDIC insured banks. 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 loss
", on the consolidated balance sheets, and the realized gains and losses are included in "
Gain on marketable securities
," reported separately on the consolidated statement of operations.
Accounts Receivable
The carrying value of the Company's accounts receivable, net of allowance for doubtful accounts, represents the estimated net realizable value. The Company determines the allowance for doubtful accounts based on the 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 ability to collect the outstanding 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
$1.8 million
and
$1.0 million
as of
December 31, 2016
and
December 31, 2015
, respectively. A reconciliation of the allowance for doubtful accounts for the
fiscal year ended December 31, 2016
is included below:
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December 31, 2016
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Balance as of beginning of period
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$
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1,028
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Provisions to allowance for doubtful accounts
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1,068
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Write-offs
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(290
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)
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Balance as of end of period
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$
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1,806
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Inventory
All inventories are stated at the lower of cost or net 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)
,
Assets Held for Sale
,
to the consolidated financial statements included in this report.
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 depreciable 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.
The estimated useful life used for depreciation and amortization are generally 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.
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 December 31, 2016.
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 reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods. 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.
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.
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. The 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.
Income Taxes
The Company is subject to tax in many jurisdictions, and significant judgment is required in determining the Company's provision for income taxes. Likewise, the Company is subject to a potential audit by tax authorities in many jurisdictions. In such audits, the Company's 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 the Company's 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 carry-forwards 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 the Company's 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 (loss).
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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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. Such taxes collected that have not been remitted by the Company are included in "
Taxes payable
" on the consolidated balance sheets. Payments received for undelivered products are recorded as "
Deferred revenue
" which is included in current liabilities on the consolidated balance sheets. Certain incentives offered on the sale of products, including sale discounts, described in the paragraph below, are classified as "
Program costs and discounts
" on the consolidated statements of operations. A provision for product returns and allowances is recorded and is founded on historical experience and is classified as a reduction of revenues. As of
December 31, 2016
and
December 31, 2015
, the provision for sales returns totaled approximately
$921,000
and
$808,000
, respectively, which are recorded as "
Accrued liabilities
" included in current liabilities on the consolidated balance sheets.
Program Costs and Discounts
Program costs and discounts represent the various methods of promoting 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 the products.
Cost of Sales
Cost of sales includes the cost of raw materials, finished goods, inbound shipping expenses, customs, insurance, 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, distribution labor, and any other distribution related expenses that may arise during the ordinary course of business. The shipping and handling expense during the
fiscal year ended December 31, 2016
and
December 31, 2015
, was
$12.5 million
and
$15.9 million
, respectively.
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.
Loss on Extinguishment of Debt
The Company recognized a loss on extinguishment of debt, in accordance with ASC 470-50,
Debt Modifications and Extinguishments
, during the fiscal year 2016, in connection to the Dominion Capital monthly principle payment adjustment discussed in
Note (11)
,
Long-term Debt and Other Financing Arrangements
, to the consolidated financial statements included in this report.
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; loss on extinguishment of debt; and any additional impairments of assets.
Interest Expense
Interest on outstanding borrowings and other finance costs directly related to borrowings are expensed as incurred. Interest expense includes interest on debt, discounts on loans, penalties on loans, amortization of finance charges, and interest income which is shown net of the expense.
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, 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.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in the consolidated 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.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 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. These new standards are effective for interim and annual periods beginning after December 15, 2017, and may be adopted using either a full retrospective or a modified retrospective approach. These standards may be adopted earlier. Management is currently evaluating these ASUs, including which transition approach to use, if needed. The Company is still evaluating whether these ASUs may materially impact the Company's consolidated net income, financial position, or cash flows.
On August 27, 2014, the FASB issued Accounting Standards Update 2014-15 (ASU 2014-15),
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and to provide related footnote disclosures. The ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The Company adopted the ASU effective December 31, 2016.
On February 25, 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 new standard is effective for interim and annual periods beginning after December 15, 2018, and may be adopted using either a full retrospective or a modified retrospective approach. The standard may be adopted earlier. The Company is in the process of assessing the effects of the application of the new guidance on the Company's financial statements.
On November 17, 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, and may be adopted using either a full retrospective or a modified retrospective approach. The standard may be adopted earlier. The Company is in the process of assessing the impact on its financial statements from the adoption of the new guidance.
On January 5, 2017, the FASB issued a Accounting Standards Update 2017-01 (ASU 2017-01),
Business Combinations (Topic 805) Clarifying the Definition of a Business
, that changes the definition of a business to assist entities with evaluating when a set of assets acquired or disposed of should be considered a business. The new standard requires an entity to evaluate if substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set would not be considered a business. The new standard also requires a business to include at least one substantive process and narrows the definition of outputs. The Company expects that these provisions will reduce the number of transactions that will be considered a business. The new standard is effective for interim and annual periods beginning on January 1, 2018, and may be adopted earlier. The standard would be applied prospectively to any transaction occurring on or after the adoption date. The Company is currently evaluating the impact that this new standard will have on the Company's consolidated financial statements.
On January 26, 2017, the FASB issued a Accounting Standards Update 2017-04 (ASU 2017-04),
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, that eliminates the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The new standard is effective for interim and annual periods beginning on January 1, 2017, with early adoption permitted. The standard would be applied prospectively to any transaction occurring on or after the adoption date. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
On February 22, 2017, the FASB issued a Accounting Standards Update 2017-05 (ASU 2017-05),
Other Income – Gains and Losses from the Derecognition of Non-financial Assets
, that clarifies the scope of the derecognition of non-financial assets, defines in substance financial assets, adds guidance for partial sales of non-financial assets and clarifies the recognition of gains and losses from the transfer of non-financial assets in contracts with non-customers. The new standard is effective for interim and annual periods beginning after December 15, 2017, and may be adopted using either a full retrospective or a modified retrospective approach. The Company is required to adopt the amendments in this standard at the same time that the amendments in ASU 2014-09 are adopted. The Company is evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements.
On March 30, 2016, 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.
On May 10, 2017, the FASB issued ASU 2017-09, “
Scope of Modification Accounting.
” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 is effective for the Company beginning in fiscal 2019. The Company is evaluating the impact of the adoption of this guidance on its financial statements but does not expect it to have a material impact.
On July 13, 2017, the FASB issued ASU 2017-09,
“Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815),”
which outlines the change of the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part I of this ASU are effective for the Company as of January 1, 2019. The Company is evaluating the impact of the adoption of this standard on the Company’s consolidated 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.
Pursuant to the SPA, Trillium Pond purchased and acquired all
99,980
issued and outstanding shares of Stanley House common stock in exchange for payment to the Sellers of: (i) an aggregate cash payment of
£1.0 million
(
$1.5 million
at the time of purchase), the cash payments being funded from a portion of the cash acquired in the acquisition; (ii) convertible notes (the "Notes") in the aggregate principal amount of
£3.7 million
(
$5.8 million
at the time of purchase); and (iii)
976,184
shares of the Company’s common stock having a value on the date of issuance of
$1.7 million
. The shares of common stock issued to Mr. Way and Mr. Cohen under the SPA and issuable upon conversion of the Notes are subject to certain leak-out provisions, as set forth in a Lock-Up Agreement, that restricts the sale of stock under certain circumstances based upon the number of shares sold and the trading volume of the Company’s common stock.
The Notes mature after three (
3
) years and bear interest at a rate of two percent (
2%
) per annum, compounded annually and payable monthly. The Notes provide for aggregate cash payments of approximately (i)
£10,222
(
$16,000
at the time of purchase) on the 14th day of each of the 1-6 months after issuance; and (ii)
£20,444
(
$32,000
at the time of purchase) on the 14th day on each of the 7-36 months after issuance; provided, however that if certain milestones are not met part or all of the payment may be made at the option of the Company by the issuance of shares of the Company’s common stock instead of cash. In addition, the Notes provide for the payments in the aggregate amount of
£1.0 million
(
$1.6 million
at the time of purchase) at the Company’s election, in cash or shares of the Company’s common stock on each of the twelve, twenty four and thirty six month anniversary of the issuance date of the Notes. The Seller has the right upon a stock payment to cancel the portion of the Note subject to the stock issuance and forfeit such payment. The Notes may be prepaid in cash at any time.
The Betterware acquisition was accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed by the Company were recognized at their fair value at the acquisition date. The Company incurred approximately
$90,000
, of acquisition-related costs, all of which were expensed and included in general and administrative expenses on the consolidated statements of operations.
|
|
|
|
|
|
|
|
(in thousands)
|
Consideration
|
|
$
|
9,066
|
|
Amounts recognized for assets acquired and liabilities assumed:
|
|
|
Cash
|
|
640
|
|
Other current assets, including $1,624 of accounts receivable and $3,415 of inventory
|
|
6,933
|
|
Other long-term assets
|
|
1,129
|
|
Identifiable intangible assets
|
|
3,251
|
|
Current liabilities
|
|
(3,704
|
)
|
Other long-term liabilities
|
|
(618
|
)
|
|
|
|
Net assets acquired
|
|
7,631
|
|
|
|
|
Goodwill
|
|
$
|
1,435
|
|
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.
Pursuant to the terms of a Share Purchase Agreement with Findel Plc ("Findel,") the Company purchased
100%
of the shares of Kleeneze from Findel for total consideration of
$5.1 million
. The consideration included
$3.0 million
of senior secured debt provided by HSBC Bank PLC, which has a term of
2.0
years and an interest rate per annum of
0.60%
over the Bank of England Base Rate as published from time to time (an interest rate of approximately
1.1%
at the time of the purchase). The remaining
$2.1
million of consideration consisted of cash. Approximately
$1.9 million
in cash was acquired by the Company as part of the transaction at closing.
The fair value of the identifiable assets acquired and liabilities assumed of approximately
$8.7 million
exceeded the fair value of the purchase price of the business of approximately
$5.1 million
. As a result, the recognition and measurement of identifiable assets acquired and liabilities assumed were reassessed. The Company concluded that the valuation procedures and resulting measures were appropriate. Accordingly, the acquisition has been accounted for as a bargain purchase. Accordingly, upon conclusion of the purchase price allocation in the third quarter of 2015, the Company realized a
$3.6 million
gain on the acquisition, which is recorded to "
Gain on acquisition of a business
" in the consolidated statements of operations. 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.
The Kleeneze acquisition was accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed by the Company were recognized at their fair value at the acquisition date. The Company incurred approximately,
$113,000
of acquisition-related costs, all of which were expensed and included in "
General and administrative expense
" on the consolidated statements of operations.
|
|
|
|
|
|
|
|
(in thousands)
|
Consideration
|
|
$
|
5,100
|
|
Amounts recognized for assets acquired and liabilities assumed:
|
|
|
Current assets
|
|
12,208
|
|
Other long-term assets
|
|
764
|
|
Identifiable intangible assets
|
|
2,239
|
|
Current liabilities
|
|
(6,495
|
)
|
|
|
|
Net assets acquired
|
|
8,716
|
|
|
|
|
Gain on acquisition of Kleeneze
|
|
$
|
(3,616
|
)
|
Pro-forma Consolidated Statement of Operations
The following unaudited pro-forma financial information presents the Company's condensed financial results for the
fiscal year ended
December 31, 2015
as if the Betterware and Kleeneze acquisitions had occurred as of January 1, 2015 (in thousands, except per share data):
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Results of Operations
|
|
December 31, 2015
|
Revenue
|
|
$
|
184,303
|
|
Net loss
|
|
(19,047
|
)
|
Net loss attributable to JRjr33, Inc.
|
|
(13,264
|
)
|
Loss per common share attributable to JRjr33, Inc., basic and diluted
|
|
$
|
(0.40
|
)
|
Notes to Pro-forma 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:
|
|
•
|
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
|
|
|
•
|
The pro-forma results above exclude
$203,000
in transaction costs, all of which were expensed during the year ended
December 31, 2015
, and are included in '
General and administrative expense
' in the consolidated statement of operations.
|
(4)
Marketable Securities
The marketable securities held by the Company as of
December 31, 2016
, included fixed income investments classified as available for sale. At
December 31, 2016
and
December 31, 2015
, the fair value of the fixed income securities totaled approximately
$389,000
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Estimated
Fair Value
|
Balance at December 31, 2015
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
5,312
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
5,306
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
389
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
389
|
|
Purchases of marketable securities during the
twelve
months ended
December 31, 2016
and
December 31, 2015
totaled
$741,000
and
$25.2 million
, respectively. The proceeds from the sale of marketable securities totaled
$5.7 million
and
$20.9 million
during the
fiscal year ended December 31, 2016
and
December 31, 2015
, respectively.
The realized gains arising during the
fiscal year ended
months ended
December 31, 2016
and
December 31, 2015
, totaled
$12,000
and
$189,000
, respectively. The Company incurred unrealized holding gains on investments of
$6,000
and
$0
during the
fiscal year ended
months ended
December 31, 2016
and
December 31, 2015
, respectively.
As of
December 31, 2016
, the investments held as marketable securities had an effective maturity of
0.7
years and an average effective duration of
0.12
years. The majority of the Company's marketable securities are invested in investment-grade corporate bonds.
(5)
Inventory
All inventories are stated at the lower of cost or net realizable value. Cost of inventories are determined on a first-in, first-out basis. The Company measures inventory using the inventory classes raw materials and supplies, work in process, and finished goods. The classes presented allow the Company to accurately track product throughout a manufacturing process.
The following table shows the inventory by class (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Raw material and supplies
|
|
$
|
2,843
|
|
|
$
|
3,165
|
|
Work in process
|
|
371
|
|
|
221
|
|
Finished goods
|
|
15,790
|
|
|
20,774
|
|
Inventory, gross
|
|
19,004
|
|
|
24,160
|
|
Inventory reserve
|
|
(3,181
|
)
|
|
(3,361
|
)
|
Inventory, net
|
|
$
|
15,823
|
|
|
$
|
20,799
|
|
(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
December 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Balance as of beginning of period
|
|
$
|
1,111
|
|
|
$
|
—
|
|
Additions to held for sale
|
|
—
|
|
|
4,440
|
|
Impairment charge
|
|
—
|
|
|
(3,329
|
)
|
Sales and settlements, net
|
|
(111
|
)
|
|
—
|
|
Balance as of end of period
|
|
$
|
1,000
|
|
|
$
|
1,111
|
|
(7)
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Land and improvements
|
|
$
|
25
|
|
|
$
|
109
|
|
Buildings and improvements
|
|
1,640
|
|
|
2,472
|
|
Equipment
|
|
3,954
|
|
|
5,070
|
|
Property, plant and equipment, gross
|
|
5,619
|
|
|
7,651
|
|
Less accumulated depreciation
|
|
(2,760
|
)
|
|
(2,264
|
)
|
Property, plant and equipment, net
|
|
$
|
2,859
|
|
|
$
|
5,387
|
|
Property Under Capital leases
In addition to owned property, the Company also has approximately
$13.9 million
in leased assets, as of
December 31, 2016
, which is net of accumulated amortization of approximately
$2.9 million
. On
December 31, 2015
, leased assets totaled approximately
$14.7 million
which is net of accumulated amortization of approximately
$1.6 million
.
On July 31, 2014, TLC entered into a Sale Leaseback Agreement with CFI NNN Raiders, LLC. The lease was deemed to qualify as a capital lease and the transaction is being accounted for as a sale leaseback agreement. The Company recognized approximately
$168,000
of amortization as a result of the deferred gains from the 2014 Sale Leaseback Agreement with CFI NNN Raiders, during the fiscal year ended
December 31, 2016
and
December 31, 2015
, respectively.
Capital leases are further explained in
Note (12)
,
Commitments and Contingencies
, to the consolidated financial statements included in this report.
Dispositions
During the
fiscal year ended December 31, 2016
and
December 31, 2015
, the sale of property, plant and equipment resulted in proceeds of approximately
$303,000
and
$936,000
, respectively. The gain (loss) on sale of assets, excluding the deferred gain recognized by the 2014 Sale Leaseback Agreement with CFI NNN Raiders, totaled approximately
$(632,000)
and
$489,000
, during the
fiscal year ended December 31, 2016
and
December 31, 2015
, respectively
Depreciation and Amortization
A reconciliation of depreciation and amortization to the cash flow statement during the
fiscal year ended December 31, 2016
and
December 31, 2015
, is included below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Depreciation and amortization included in costs of sales
|
|
|
|
|
Related to property, plant and equipment
|
|
—
|
|
|
—
|
|
Related to capital leases
|
|
564
|
|
|
564
|
|
Depreciation and amortization in operating expenses
|
|
|
|
|
Related to property, plant and equipment
|
|
1,116
|
|
|
1,478
|
|
Related to capital leases
|
|
691
|
|
|
591
|
|
Related to intangible assets
|
|
701
|
|
|
145
|
|
Total depreciation and amortization
|
|
$
|
3,072
|
|
|
$
|
2,778
|
|
The amortization of intangibles is further explained in
Note (8)
,
Goodwill and Other Intangible Assets
,
to the consolidated financial statements included in this report.
(8)
Goodwill and Other Intangible 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 December 31, 2016. The Company is aggregated into
four
operating segments presented herein
Note (17)
,
Segment Information
, to the consolidated financial statements included in this report, based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods. The Company's
four
operating segments consist of: "gourmet food," "nutritional and wellness," "home décor" and "other." The valuation of goodwill is further explained in
Note (2)
,
Summary of Significant Accounting Policies
,
to the consolidated financial statements included in this report.
The Company recorded goodwill impairment charges of approximately
$3.3 million
and
$192,000
during the
fiscal year ended December 31, 2016
and
2015
, respectively. The goodwill impairment charges of
$191,000
during the first quarter of 2016 and
$192,000
during the second quarter of 2015 were related to the goodwill impairment of Tomboy Tools. In the fourth quarter of 2016, the Company recorded goodwill impairment charges of
$1.9 million
and
$1.2 million
to Agel and YIAH, respectively, as a result of expected decrease in the future results of operations.
The following table provides the components of and changes in the carrying amount of Goodwill as of
December 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
Goodwill
|
|
Accumulated Impairment
|
|
Other
|
|
Net
Carrying Amount
|
December 31, 2014
|
$
|
7,073
|
|
|
$
|
(2,978
|
)
|
|
$
|
—
|
|
|
$
|
4,095
|
|
Additions
(a)
|
1,655
|
|
|
|
|
|
|
1,655
|
|
Impairment
(b)
|
|
|
(192
|
)
|
|
|
|
(192
|
)
|
Other
(c)
|
|
|
|
|
(131
|
)
|
|
(131
|
)
|
December 31, 2015
|
$
|
8,728
|
|
|
$
|
(3,170
|
)
|
|
$
|
(131
|
)
|
|
$
|
5,427
|
|
Additions
|
—
|
|
|
|
|
|
|
—
|
|
Impairment
(b)
|
|
|
(3,319
|
)
|
|
|
|
(3,319
|
)
|
Other
(c)
|
|
|
|
|
(262
|
)
|
|
(262
|
)
|
December 31, 2016
|
$
|
8,728
|
|
|
$
|
(6,489
|
)
|
|
$
|
(393
|
)
|
|
$
|
1,846
|
|
(a)
Related to the acquisition of Betterware in 2015.
|
(b)
Related to the impairment of Tomboy Tools in 2015 and 2016, and Agel and YIAH in 2016.
|
(c)
Primarily reflects the impact of foreign exchange.
|
Identifiable Intangible Assets
The Company recorded identifiable intangible asset impairment charges of approximately
$3.4 million
during the
fiscal year ended December 31, 2016
. In the fourth quarter of 2016, the Company recorded identifiable intangible asset impairment charges of
$3.4 million
in connection to an expected decline in the future results of operations for the nutritional-and-wellness segment.
The following tables provide the components of identifiable intangible assets as of
December 31, 2016
and
December 31, 2015
(in thousands, except amortization period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Intangible Assets
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount as of
December 31, 2016
|
|
Weighted Average Amortization Period (in Years)
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade name and trademarks
(a)
|
$
|
1,812
|
|
|
$
|
—
|
|
|
$
|
1,812
|
|
|
—
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade name and trademarks
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Intellectual property
|
2,985
|
|
|
(935
|
)
|
|
2,050
|
|
|
3
|
|
|
$
|
4,800
|
|
|
$
|
(938
|
)
|
|
$
|
3,862
|
|
|
3
|
|
|
|
|
|
|
|
|
|
(a)
This includes impairments of approximately $3.4 million to Agel's indefinite-lived intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 consolidated statements of operations. During the
fiscal year ended
months ended
December 31, 2016
and
2015
, the Company recorded amortization expenses of
$701,000
and
$145,000
, respectively.
As of
December 31, 2016
, the estimated future amortization expense associated with the intangible assets for each of the five succeeding years ending December 31, is as follows (in thousands):
|
|
|
|
|
2017
|
$
|
636
|
|
2018
|
636
|
|
2019
|
572
|
|
2020
|
90
|
|
2021
|
36
|
|
Thereafter
|
80
|
|
Total amortization of intangible assets
|
$
|
2,050
|
|
(9)
Related Party Transactions
Richmont Holdings
During the fourth quarter of 2016, 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 an infrastructure of personnel and resources used to identify, analyze, negotiate and conduct due diligence on direct-to-consumer acquisition candidates. However, the Company continues to rely on advice and assistance from Richmont Holdings 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 of
$160,000
, and 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
fiscal year ended December 31, 2016
and
2015
, the Company recorded approximately
$1.9 million
and
$2.2 million
, respectively, of Reimbursement Fee expenses that are included in "
General and administrative expense
" on the consolidated statements of operations. The Board of Directors approved an additional reimbursement fee of
$232,000
over the base agreement in 2015.
As of
December 31, 2016
and
December 31, 2015
, there was a related party payable due to Richmont Holdings of approximately
$0.8 million
and
$580,000
, respectively, that is included in "
Related party payables
" within current liabilities on the consolidated balance sheets. This amount recorded as
December 31, 2016
, includes the payable for unpaid reimbursement fees of
$624,000
and short term advances of
$219,000
. The short-term advances do not bear interest and do not have a set maturity date.
Rochon Capital Partners
On September 25, 2012, the Company assumed a note payable in the principal amount of
$25,000
from Rochon Capital Partners - a closely held company owned by the Company's Chairman and CEO. The loan was made with Happenings’ prior to the Company's acquisition of the business and was used for working capital needs. The loan is included in "
Related party payables
" within current liabilities. The loan does not currently have a set maturity date.
On
June 6, 2017
, Rochon Capital Partners purchased
$1.0 million
in aggregate principal amount and
$23,000
in accrued and unpaid interest of the Note from Dominion. The promissory note bears interest at
9.75%
per annum. The note is secured by a lien on the assets of the Company. The loan is subordinate to the lien from the Dominion debt. The original note issued to Dominion has a provision that limits the conversion of the note if such conversion would cause the beneficial ownership to exceed
4.99%
of the Company's outstanding shares of common stock. As such, Rochon Capital Partners is currently not able to convert the note.
On
October 18, 2017
, the Company's Audit Committee, after conducting due diligence to substantiate the credit funding agreement's financial wherewithal cash draw formula, and
Rochon Capital Partners
have negotiated a Funding Request Agreement. The agreement provides periodic loans to the Company in the event of cash shortages arising in the ordinary course of business. The loans bear interest at
14.0%
per annum, payable quarterly in arrears, and will be convertible into preferred or common JRJR shares at a price equal to the preceding
30
-day average closing price of the shares. Notes will be convertible at the holder's option quarterly at any interest payment date upon the holder providing a
30
-day notice. Any conversion of the notes will be subject to approval by the NYSE American. Issued notes, if any under the agreement, have a maturity date of five years post issuance. The notes will be subordinate to any senior secured loans. The Funding Request Agreement will stay active through
October 31, 2018
. The Company has not utilized the Funding Request Agreement as of the filing date of this annual report. The Company's evaluation as a going concern is heavily dependent upon the funding set forth in this agreement.
See
Note (15)
,
Stockholders' Equity and Non-controlling Interest
, to the consolidated financial statements included in this report, for details about the Share Exchange Agreement with Rochon Capital Partners, which was amended during the fourth quarter of 2014.
Capital Partners V ("RCP V")
On February 26, 2015, the Company received a loan from Richmont Capital Partners V ("RCP V") - a closely held company owned by the Company's Vice-chairman and CFO - in the amount of
$425,000
. The loan does not currently bear interest and has no set maturity date.
Tamala L. Longaberger
On
June 27, 2014
, Longaberger received a promissory note in the principal amount of
$42,000
from Tamala L. Longaberger. The note bears interest at the rate of
10.0%
per annum, matured on
June 27, 2015
, and is guaranteed by the parent company, JRjr33, Inc. The Company has accrued interest of
$11,000
in connection to this note. These amounts are included in "
Related party payables
" within current liabilities.
On
July 1, 2014
, Agel received a promissory note in the principal amount of
$158,000
from Tamala L. Longaberger. The note bears interest at the rate of
10.0%
per annum, matured on
July 1, 2015
, and is guaranteed by the parent company, JRjr33, Inc. The Company has accrued interest of
$40,000
in connection to this note. These amounts are included in "
Related party payables
" within current liabilities.
On
July 11, 2014
, Agel received a promissory note in the principal amount of
$800,000
from Tamala L. Longaberger. The note bears interest at the rate of
10.0%
per annum, matured
July 11, 2015
, and is guaranteed by the parent company, JRjr33, Inc. The Company has accrued interest of
$200,000
in connection to this note. These amounts are included in "
Related party payables
" within current liabilities.
The Company determined not to make payment on the notes due to Tamala L. Longaberger pursuant to the contractual agreements. As a result, in connection with these notes, Ms. Longaberger filed a State Court Action seeking re-payment of the notes on
August 12, 2015
. 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 the week of
December 4, 2017
. The Company’s position is that Ms. Longaberger's claims are inextricably tied to the broader issues related to her terminated employment and the claims asserted against Ms. Longaberger by the Company and The Longaberger Company. The Company is claiming Ms. Longaberger was in 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, as a result of Ms. Longaberger's misconduct, the Company believes it is owed more in damages than the amounts owed on the loans.
Actitech
On
May 31, 2016
, the Company entered into an agreement with Actitech, which is owned by Michael Bishop, a member of the Board of Directors. The agreement was not approved by the Company's Audit Committee at the time it was signed. The agreement set forth the supply terms of the manufactured product made by Actitech to be sold to one of the Company's subsidiaries, Agel. In addition to the terms for supply, the agreement provided for the payment of "fees" based upon a calculation stipulated in the agreement. Pursuant to the agreement, Agel purchased approximately
$4.3 million
of products from Actitech during 2016. The Company paid approximately
$1.0 million
and
$1.4 million
, during the
fiscal year ended December 31, 2016
and
2015
, respectively, for purchases of product. The Company has a trade payable on its books of
$3.3 million
and
$98,000
as of
December 31, 2016
and
December 31, 2015
, respectively. The trade payable to Actitech is included in "
Related party payables
" on the consolidated balance sheets. Included in the
$3.3 million
December 31, 2016
payable balance is approximately
$1.9 million
of fees for penalties and interest as a result of untimely payments during the fiscal year ended December 31, 2016. Even though the Company believes these fees to be usurious in nature, the Company has recorded the fees and will maintain a balance for the fees until either the fees are paid-in-full or a resolution has been reached with Actitech.
(10)
Income Taxes
The following table presents the components of income (loss) before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
U.S. pre-tax income (loss)
|
|
$
|
(17,744
|
)
|
|
$
|
(20,183
|
)
|
Foreign pre-tax income (loss)
|
|
(16,743
|
)
|
|
1,653
|
|
Total pre-tax income (loss)
|
|
$
|
(34,487
|
)
|
|
$
|
(18,530
|
)
|
The Company records no current income tax expense related to its domestic activities due to historical and/ or current net operating losses. The current tax 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 income tax expense from continuing operations for the years ended
December 31, 2016
and
December 31, 2015
, differs from the U.S statutory rate of
34.0%
primarily due to changes in the Company's valuation allowance and foreign tax expense incurred in addition to U.S. tax in certain jurisdictions. The Company's income tax expenses for the
fiscal year ended December 31, 2016
and
December 31, 2015
of
$447,000
and
$349,000
, 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. In addition, the expense for
2016
and
2015
includes
$100,000
and
$100,000
, respectively, related to amortization of indefinite-lived intangibles for tax purposes that result in a deferred tax liability which, because the reversal cannot be determined, are excluded from the net asset covered by the Company's valuation allowance.
The income tax provision consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Current income tax:
|
|
|
|
|
U.S.
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
—
|
|
|
—
|
|
Foreign
|
|
820
|
|
|
212
|
|
Deferred income tax:
|
|
|
|
|
U.S.
|
|
(272
|
)
|
|
105
|
|
State
|
|
—
|
|
|
—
|
|
Foreign
|
|
(101
|
)
|
|
32
|
|
Total income tax
|
|
$
|
447
|
|
|
$
|
349
|
|
A reconciliation of the expected U.S. tax expense/(benefit) to the income tax provision is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Expected tax expense at U.S. statutory rate
|
|
$
|
(11,726
|
)
|
|
$
|
(6,271
|
)
|
Permanent Adjustments
|
|
24
|
|
|
(303
|
)
|
Foreign Income Tax
|
|
—
|
|
|
244
|
|
Increase in Valuation Allowance
|
|
11,063
|
|
|
7,467
|
|
Other
|
|
(3,093
|
)
|
|
(130
|
)
|
Rate Difference—U.S. to Foreign
|
|
4,179
|
|
|
(658
|
)
|
Total income tax
|
|
$
|
447
|
|
|
$
|
349
|
|
As of
December 31, 2016
, the Company did not have a history of earnings that would allow it to record any of its net deferred tax assets without a corresponding valuation allowance. Therefore,
no
net deferred tax assets are reflected as of
December 31, 2016
. Additionally, due to some of the Company's historical acquisitions which included intangibles with an indefinite life that are amortized for tax purposes, the Company has accumulated 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
$372,000
and
$744,000
in the consolidated balance sheets as of
December 31, 2016
and
December 31, 2015
, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company's deferred income taxes as of
December 31, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred Tax Assets:
|
|
|
|
|
Intangibles
|
|
$
|
1,143
|
|
|
$
|
1,268
|
|
Accrued expenses
|
|
738
|
|
|
1,168
|
|
Other
|
|
218
|
|
|
—
|
|
Net operating losses—U.S.
|
|
23,410
|
|
|
16,618
|
|
Net operating losses—foreign
|
|
5,181
|
|
|
512
|
|
Foreign tax credit
|
|
692
|
|
|
692
|
|
Deferred Tax Liabilities:
|
|
|
|
|
Intangibles
|
|
$
|
—
|
|
|
$
|
(370
|
)
|
Fixed assets
|
|
(3,318
|
)
|
|
(3,810
|
)
|
Prepaid expenses
|
|
(47
|
)
|
|
(50
|
)
|
Valuation allowance
|
|
(28,389
|
)
|
|
(16,772
|
)
|
Net deferred tax asset (liability)
|
|
$
|
(372
|
)
|
|
$
|
(744
|
)
|
The Company has U.S. net operating loss carry-forwards of approximately
$72.3 million
which begin to expire in 2032. The Company has net operating losses of approximately
$10.0 million
in several foreign countries which will begin to expire at various times. The Company can only apply the net operating loss carry-forwards if the Company can sustain taxable profits in future years.
The Company has foreign tax credits of approximately
$692,000
which will begin to expire in 2023.
Unrecognized tax benefits as of
December 31, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Unrecognized tax benefits, beginning of year
|
|
$
|
62
|
|
|
$
|
168
|
|
Gross decreases—tax positions in prior period
|
|
—
|
|
|
(107
|
)
|
Interest accrual
|
|
—
|
|
|
1
|
|
Unrecognized tax benefits, end of year
|
|
$
|
62
|
|
|
$
|
62
|
|
The Unrecognized Tax Benefits shown here relate to an ongoing audit in Spain of
one
entity acquired by the Company during 2013. This audit is ongoing and is in dispute. It is reasonable that the Company's existing liability for Unrecognized Tax Benefits may increase or decrease within the next twelve months primarily due to resolution of this audit. The Company cannot reasonably estimate a range of potential changes in such benefits due to the unresolved nature of the Spanish audit.
As of December 31, 2015, we had approximately
$3.5 million
of undistributed earnings in foreign subsidiaries. We expect to permanently reinvest these earnings outside of the United States to fund future foreign operations. We project that we will have sufficient cash flow in the United States and will not need to repatriate the foreign earnings to finance our domestic operations. If we were to distribute these earnings to the United States, we would be subject to U.S. income taxes, an adjustment for foreign tax credits, and foreign withholding taxes. We have not recorded a deferred tax liability on any portion of our undistributed earnings in foreign subsidiaries. If we were to repatriate these earnings to the United States, any associated income tax liability would be insignificant.
The Company expects to permanently reinvest earnings, when they occur, outside of the United States to fund future foreign operations. The Company projects that there will be sufficient cash flow in the United States and will not need to repatriate the foreign earnings to finance domestic operations. The Company has not recorded a deferred tax liability on any portion of our undistributed earnings in foreign subsidiaries. If the Company were to repatriate these earnings to the United States, any associated income tax liability would be insignificant.
The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions and, as such, are subject to examination in various jurisdictions. The material jurisdictions that are subject to examination by tax
authorities primarily include the United States, Italy, Netherlands, Russia, Spain, and the United Kingdom, covering tax years 2011 through 2015.
(11)
Long-term Debt and Other Financing Arrangements
The Company’s long-term borrowings as of
December 31, 2016 and December 31, 2015
, consisted of the following (in thousands, except for interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest rate
|
|
December 31, 2016
|
|
December 31, 2015
|
Convertible note—Dominion Capital
|
|
9.75
|
%
|
|
$
|
3,500
|
|
|
$
|
4,000
|
|
Convertible note loan premium—Dominion Capital
|
|
|
|
770
|
|
|
—
|
|
Unamortized debt discount, costs and fees of issuance—Dominion Capital
|
|
|
|
—
|
|
|
(1,016
|
)
|
Convertible notes—payable to former shareholders of Stanley House
|
|
2.00
|
%
|
|
3,058
|
|
|
5,502
|
|
Senior secured debt—HSBC Bank PLC
|
|
1.10
|
%
|
|
2,461
|
|
|
2,984
|
|
Promissory note—payable to former shareholder of TLC
|
|
6.00
|
%
|
|
2,750
|
|
|
3,003
|
|
Promissory note—Lega Enterprises, LLC (formerly Agel Enterprises, LLC)
|
|
5.00
|
%
|
|
778
|
|
|
1,043
|
|
Other miscellaneous notes
|
|
4.00
|
%
|
|
216
|
|
|
316
|
|
Total debt
|
|
|
|
|
13,533
|
|
|
15,832
|
|
Less current maturities
|
|
|
|
|
(11,703
|
)
|
|
(3,048
|
)
|
Long-term debt
|
|
|
|
|
$
|
1,830
|
|
|
$
|
12,784
|
|
The schedule of maturities of the Company’s long-term debt as of
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
11,703
|
|
2018
|
1,830
|
|
Total long-term debt including current maturities
|
$
|
13,533
|
|
Convertible Note—Dominion Capital
On November 20, 2015, the Company entered into a Securities Purchase Agreement with Dominion Capital 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 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. 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 of the commitment date.
On June 6, 2017, the Company entered into a Forbearance and Amendment Agreement (the “Forbearance Agreement”) with Dominion pursuant to which Dominion agreed, for a period of sixty (
60
) days (subject to extension as described below for an additional sixty (
60
) days), to forbear from exercising any of its rights or remedies with respect to Existing Defaults (as defined in the Forbearance Agreement), including the Company being unable to timely file, without unreasonable effort and expense, its Annual Report on Form 10-K for the year ended December 31, 2016 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, under the senior secured convertible note.
A condition to the forbearance was the purchase by Rochon Capital Partners of
$1.0 million
in aggregate principal amount and
$23,000
in accrued and unpaid interest of the Note from Dominion (the “Purchased Note”), the execution of a subordination agreement, and the Company agreeing to a payment restriction covenant and a revised payment schedule. The forbearance period is subject to extension for an additional
60
days by the purchase by Rochon Capital Partners of an additional
$750,000
in principal amount of the Note from Dominion. The Note that the Company issued to Dominion now has an aggregate principal balance amount of
$2.4 million
with monthly payments of
$50,000
principal and interest due by the 21st of each month through September 21, 2017 and a final principal payment of
$2.2 million
plus interest due on October 21, 2017.
In connection with this financing,
375,000
shares of 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 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 2015 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 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 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 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). As a result of the failure to timely file the June Form 10-Q, the Company has issued
350,000
of shares of its common stock to Dominion in consideration of the August 22, 2016 waiver. The Company issued
100,000
of its common stock for its failure to timely file the September 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 2016 March Form 10-Q, 2016 June Form 10-Q, and the 2016 September Form 10-Q, the Company has issued an aggregate of
1,250,000
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, to now be paid in 2017. The Company qualified for an extinguishment of debt modification assessment as a result of the late filings and the amended amortization schedule of the loan. This debt modification resulted in a loss on extinguishment of debt of approximately
$1.9 million
. Included in this loss on the extinguishment of debt are expenses related to the share issuance penalties for the untimely filing of the 2015 Form 10-K, the 2016 March Form 10-Q, 2016 June Form 10-Q, and the 2016 September Form 10-Q. During the
fiscal year ended
December 31, 2016
, the Company recorded approximately
$1.3 million
of share issuance penalties to Dominion Capital.These share issuance penalties contain an accrual for an additional
150,000
shares that were not yet issued as of the filing of this annual report, in connection to the waivers associated to the failure to timely file the 2015 Annual Report and the 2016 Quarterly Reports.
Convertible Notes—Payable to Former Shareholders of Stanley House
On October 15, 2015, the Company issued two unsecured convertible notes totaling
£3.7 million
(
$5.8 million
at the time of purchase) in connection with the acquisition of Betterware, scheduled to mature on
October 15, 2018
. The notes are denominated in British 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
£10,222
(
$16,000
at the time of purchase) for the first
six
months, followed by monthly installments totaling
£20,444
(
$32,000
at the time of purchase) for the next
30
months, with additional payments of
£1.0 million
(
$1.6
million at the time of purchase) due at the end of each annual period following the notes' issuance. The notes may be converted into common stock at the Company's election based on the value of the 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
, to the consolidated financial statements included in this report, 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 from HSBC Bank PLC, with a term of
two
(
2
) years maturing on
March 24, 2017
, and an annual interest rate of
0.60%
over the Bank of England Base Rate as published from time to time. The loan is cash-secured by approximately
$2.9 million
in cash. There are no other covenants related to the debt. The loan is now current and is included in '
Current portion of long-term debt
' on the consolidated balance sheets. Previously, the collateral for the loan was shown as '
Restricted cash
' on the consolidated balance sheets and now is included in '
Other current assets
.' The loan and cash collateral are denominated in British Pounds Sterling.
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. Due to the current financial condition of the Company, the Company was in arrears of
$182,000
in unpaid principal and interest payments, as required by the agreement, as of
December 31, 2016
. The last principal payment made was the August 2016 payment. The Company received a default notice which is discussed in
Note (12)
,
Commitments and Contingencies
, to the consolidated financial statements included in this report.
Promissory Note—Lega Enterprises, LLC
On October 22, 2013, Agel issued a
$1.7 million
Promissory Note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) in connection with the acquisition of assets from Agel Enterprises, LLC. The promissory note bears interest at
5%
per annum, 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 and the Company. The loan is subordinate to the lien from the Dominion debt. As of
December 31, 2016
, the Company was in arrears of approximately
$128,000
in unpaid principal and interest payments, as required by the agreement. The last principal payment made was the August 2016 payment.
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 utilizes both property and equipment operating leases during the normal course of business. The equipment leases mostly include office equipment and vehicles leases. These leases are included in "
Costs of sales
," "
Selling expense
," and "
General and administrative expense
" on the consolidated statements of operations. The leases entered into by the Company include both cancelable and non-cancelable operating leases. The Company has included operating lease expenses of
$1.2 million
and
$2.1 million
during the
fiscal year ended
months ended
December 31, 2016
and
December 31, 2015
, respectively.
Minimum lease commitments for non-cancelable operating leases for the years ended December 31, are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
1,492
|
|
2018
|
1,537
|
|
2019
|
1,500
|
|
2020
|
1,343
|
|
2021
|
1,347
|
|
Thereafter
|
5,125
|
|
Total non-cancelable leases
|
$
|
12,344
|
|
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. The amounts listed above includes the remaining portion of the rent for the Utah lease that was vacated on
March 17, 2017
.
Capital Leases
Sale leaseback Agreement
On July 31, 2014, TLC entered into a triple net lease agreement with CFI NNN Raiders, LLC. The lease is a result of selling
three
buildings and related surrounding property to CFI, and then subsequently leasing back those facilities from CFI. Upon evaluation 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 is included in "
Property under capital leases, net
" on the consolidated balance sheets. The asset is amortized over fifteen (
15
) years - the term of the lease - using the straight-line method. Consequently, the sale of the properties resulted in a gain on sale of assets. 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
fiscal year ended December 31, 2016
and
2015
, was
$2.2 million
. Amortization expense of
$1.1 million
was recorded in the
fiscal year ended December 31, 2016
and
2015
respectively. The gain on the sale of real estate, which is amortized over the life of the lease, totaled approximately
$168,000
for
fiscal year ended December 31, 2016
and
December 31, 2015
- which is included in "
Loss (gain) on sale of assets
" in the accompanying consolidated statements of operations. As of
December 31, 2016
and
December 31, 2015
, the current portion of the capital lease included in "
Current portion of lease obligation
" on the consolidated balance sheets, totaled
$15.7 million
and
$73,000
, respectively. The non-current portion of the capital lease, included in
Capital lease obligation, less current portion
" on the consolidated balance sheets, totaled
$0
and
$15.7 million
as of
December 31, 2016
and
December 31, 2015
, respectively.
On March 31, 2017, CFI sent a Demand for Payment Letter in connection to the Company's failure to meet the terms negotiated under the sale leaseback agreement made on July 31, 2014, between CFI and JRjr33, Inc. CFI is demanding
$102,000
for real estate tax assessed against the leased premises,
$151,000
for unpaid basic rent,
$8,000
for late charges incurred,
$103,000
for real estate taxes paid by CFI,
$15,681,000
for the remaining portion of the unpaid basic balance, and interest at the default rate on the sums due from the date due to the date when paid. CFI is in possession of a
$4.4 million
security deposit, as of
December 31, 2016
, that was initially retained by CFI when TLC entered into the sales leaseback agreement. The Company's last payment on the lease was a partial payment on the January 2017 basic rent, which is due on the first month of each quarter.
On June 26, 2017, CFI filed a complaint against the Company in connection to The Longaberger Company's failure to meet the terms negotiated under the triple net lease agreement executed on July 31, 2014, between CFI and the Company. In the action,
CFI is seeking restitution of the premises and costs associated with its recovery of the same. The legal proceeding does not currently have a set date for a hearing, however, CFI and the Company have come to an understanding that the entire property would be sold and that The Longaberger Company would either vacate the premises or in the alternative would lease an appropriate amount of space from the new owner at a market rate. The sale process is underway as of September 27, 2017.
Other Capital Leases
In addition to the sale leaseback agreement, the Company has various other capital leases ("
Other Capital Leases
"). These additional leases resulted from the financing of software, hardware, office and warehousing space, and office equipment. Multiple new leases were recognized during
2015
in part due to Betterware having numerous capital leases. Amortization expense related to the
Other Capital Leases
totaled
$202,000
and
$(462,000)
during the
fiscal year ended
months ended
December 31, 2016
and
December 31, 2015
, respectively. As of
December 31, 2016
and
December 31, 2015
, the current portion of the
Other Capital Leases
totaled
$146,000
and
$240,000
, respectively. The non-current portion of the
Other Capital Leases
totaled
$283,000
and
$507,000
as of
December 31, 2016
and
December 31, 2015
, respectively.
Minimum lease commitments for the capital leases for the years ended December 31, are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
18,106
|
|
2018
|
2,368
|
|
2019
|
2,244
|
|
2020
|
2,117
|
|
2021
|
2,014
|
|
Thereafter
|
9,260
|
|
Total minimum lease payments
|
36,109
|
|
Less amount representing interest
|
(19,970
|
)
|
Present value of minimum lease payments
|
$
|
16,139
|
|
Contingencies
Tamala L. Longaberger
During the fiscal year 2014, Longaberger and Agel received promissory notes in the combined principal amount of
$1,000,000
from Tamala L. Longaberger. The notes bear interest at the rate of
10%
per annum, matured during the fiscal year 2015, and are guaranteed by the parent company, JRjr33, Inc. As of
December 31, 2016
, the principal and accrued interest of
$251,000
related to the loans has been included in "
Related party payables
" within current liabilities on the consolidated balance sheets.
The Company determined not to make payment on the notes due to Tamala L. Longaberger pursuant to the contractual agreements. As a result, in connection with these notes, Ms. Longaberger filed a State Court Action seeking re-payment of the notes on
August 12, 2015
. 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 the week of
December 4, 2017
. The Company’s position is that Ms. Longaberger's claims are inextricably tied to the broader issues related to her terminated employment and the claims asserted against Ms. Longaberger by the Company and The Longaberger Company. The Company is claiming Ms. Longaberger was in 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, as a result of Ms. Longaberger's misconduct, the Company believes it is owed more in damages than the amounts owed on the loans.
The Company has recorded a payable of approximately
$715,000
as a result of an amended tax increment financing agreement between TLC and Licking County entered into on April 3, 2007. The agreement relates to the development of the infrastructure and local improvements near the corporate headquarters of TLC. The liability was not disclosed during the due diligence process by the seller and as a result, the Company filed a complaint against the seller on September 22, 2016. The complaint may potentially result in the reimbursement of or the assumption of the liability by the seller. A contingent asset, related to the filed complaint, is not included on the consolidated balance sheet.
Rachel Longaberger-Stuckey
On November 7, 2016, Rachel Longaberger-Stuckey filed a complaint against The Longaberger Company and JRjr33, Inc. in the Court of Common Pleas of Franklin County, Ohio. Ms. Stuckey 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
$25,000
per count. The note referenced in Ms. Stuckey’s complaint is a March 14, 2013 Promissory Note in the original amount of
$4,000,000
executed by Ms. Stuckey’s sister, Tamala L. Longaberger as the then President of The Longaberger Company. The note referenced in Ms. Stuckey's complaint is also guaranteed by Tamala L. Longaberger in a guarantee agreement. A formal answer was filed by the Company on February 8, 2017. The Clerk of the Franklin County Common Pleas Court has set a trial assignment of
December 11, 2017
. As of
December 31, 2016
, the Company has a liability of
$2,750,000
in relation to unpaid principle balance, all of which is included in "
Current portion of long-term debt
" on the consolidated balance sheets.
Licking County
On
April 5, 2017
, Licking County Ohio filed an action in foreclosure to collect
$715,000
of delinquent real estate taxes, assessments, interests, and penalties due and/ or owing on the former Longaberger headquarters. The Company timely filed its answer to the action. A non-oral hearing occurred on
October 16, 2017
in which no decisions were rendered. The County may direct the sale of the property to collect from the proceeds of the sale if the amount is not paid in full. The Company currently has a book value of
$1.0 million
for the property mentioned in this lawsuit. The Company is currently engaged in discussions with the County in hopes of resolving the matter upon the sale of the former Longaberger headquarters.
Spanish Taxing Authorities
The Company is disputing an income tax assessments and withholding tax assessment, along with the related interest and penalties, assessed by the Spanish Taxing Authorities. The Spanish Taxing Authorities have asserted that Agel had maintained permanent establishment in Spain for the years 2008 to 2010 and as such, are liable for income and withholding taxes incurred during that time. The Company assumed these liabilities as part of the acquisition of Agel. Agel has vigorously disputed these claims on the basis that Agel believes it did not have a permanent establishment during the years 2008 to 2010, and therefore, any compensation paid to independent representatives should not have been subject to income and withholding taxes. As of
December 31, 2016
and
December 31, 2015
, Agel maintained a liability of approximately
$500,000
, respectively, in accrued liabilities for the disputed amount, which is reflected in the consolidated financial statements. The amount remains due, along with the penalties and interest, if the appeal is unsuccessful, otherwise the payments made to date will be refunded to Agel.
In regards to the income tax assessment, during the fiscal year 2014, Agel filed an appeal in Tribunal Económico-Administrativo Regional de Cataluña. The ultimate resolution of the dispute cannot be determined at this time. Agel paid income tax of approximately
$269,000
(at the time of payment) during the fiscal year 2014, in good faith towards the disputed withholding tax liability to preserve the appeal process. Additionally, Agel has been assessed amounts owed for late interest and penalties of
€1,282
(
$1,348
as of
December 31, 2016
) on the income tax.
In regards to the withholding tax assessment, during the fiscal year 2014, Agel paid
$420,000
(at the time of payment) to the Spanish Taxing Authorities toward its outstanding withholding tax assessment. Although the Company has appealed the assessment by the Spanish Taxing Authorities and are defending the position, the payment was made to prevent the Spanish Taxing Authorities from beginning certain legal proceedings that would have negatively affected Agel’s European operations. Additionally, Agel has been assessed amounts owed for late interest and penalties of
€10,819
(
$11,381
as of
December 31, 2016
) on the withholding tax.
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. The Company makes no assumptions on the materiality of any dispute and its impact on the Company’s
consolidated results of operations, consolidated cash flows, and financial condition
. Other than the above, the Company is not aware of any, 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. This fully insured plan lapsed on January 1, 2017. 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
$1.2 million
and
$1.1 million
at
December 31, 2016
and
December 31, 2015
, respectively. 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, and related party payables are considered to be representative of their respective fair values due to the immediate or short-term nature or maturity. The available for sale securities (Level 1) totaled
$389,000
and (Level 2)
$0
as of
December 31, 2016
and (Level 1) totaled
$5.3 million
and (Level 2) was
$0
as of
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 the 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
, to the consolidated financial statements included in this report.
The Company recorded goodwill and intangible impairment charges of approximately
$6.7 million
and
$192,000
during the
fiscal year ended December 31, 2016
and
2015
, respectively.
In addition to assets and liabilities - which are recorded at fair value on a recurring basis - the Company 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 qualified for an extinguishment of debt modification assessment as a result of the late filings and the amended amortization schedule of the loan. This debt modification resulted in a loss on extinguishment of debt of approximately
$1.9 million
. The fair value measurement of the Dominion debt was developed using significant unobservable inputs (Level 3) utilizing a discounted cash flow model to find the present value of the debt.
The Company's estimate of the fair value of the debt and capital lease obligations, using Level 2 and Level 3 inputs, is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Recorded Amount:
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
13,533
|
|
|
$
|
15,832
|
|
Capital leases, including current portion
|
|
16,139
|
|
|
16,529
|
|
Total debt and capital lease commitments
|
|
$
|
29,672
|
|
|
32,361
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
11,976
|
|
|
$
|
14,024
|
|
Capital leases, including current portion
|
|
$
|
15,329
|
|
|
$
|
10,040
|
|
Total debt and capital lease commitments
|
|
$
|
27,305
|
|
|
$
|
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 the Company's 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
8,000
equivalent shares of stock appreciation rights (“SARs") in
2016
(and
154,000
in 2015) 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 the consolidated balance sheets. Share-based compensation expense related to the SARs during the
fiscal year ended
months ended
December 31, 2016
and
December 31, 2015
, totaled approximately
$(12,000)
and
$(1.2) million
, respectively. As of
December 31, 2016
, the unrecognized compensation related to unvested share-based compensation was
$(2,000)
, 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 approved 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
December 31, 2016
, there were approximately
1,175,000
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 subsequently amortized over the vesting period of
three
years. These options have since been been forfeited due to the departure of the recipients from the Company.
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
$1.21
, and vesting as to
25%
of the grant on the
two
,
three
,
four
and
five
-year anniversary of the date of the grant. The fair value of the options is amortized over the vesting period. The fair value of the options totaled
$611,000
at issuance.
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. The fair value of the options are amortized over the vesting period. The fair value of the options totaled
$39,000
at issuance.
The fair value of all options totaled approximately
$687,000
(
$0.58
per share) on
December 31, 2016
compared to the fair value of
$1.2 million
(
$1.08
per share) on
December 31, 2015
. During the
fiscal year ended
months ended
December 31, 2016
and
December 31, 2015
, the share-based compensation expense was approximately
$157,000
and
$1.1 million
. As of
December 31, 2016
, total unrecognized compensation expense related to unvested share-based compensation was
$528,000
, 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 the fair value estimated using the Black-Scholes valuation model.
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 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. An expense of
$2,000
and
$7,000
has been recognized for the
fiscal year ended December 31, 2016
and
December 31, 2015
, respectively.
Details on the warrants issued in the "March 4, 2015 public offering" are detailed in
Note (15)
,
Stockholders' Equity and Non-controlling Interest
, to the consolidated financial statements included in this report.
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:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Stock Options:
|
|
|
|
|
Weighted average expected volatility
|
|
101
|
%
|
|
92
|
%
|
Weighted Average Term (in years)
|
|
10
|
|
|
10
|
|
Risk-free interest rate
|
|
2
|
%
|
|
2
|
%
|
Weighted average forfeiture rate
|
|
55
|
%
|
|
—
|
%
|
Weighted average fair value at date of grant
|
|
$
|
0.59
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted Average Exercise Price Per Share
|
Outstanding as of December 31, 2015
|
|
1,100,000
|
|
|
$
|
1.27
|
|
Granted
|
|
1,310,000
|
|
|
1.11
|
|
Expired, forfeited, and revoked
|
|
(1,235,000
|
)
|
|
1.27
|
|
Exercised
|
|
—
|
|
|
—
|
|
Outstanding as of December 31, 2016
|
|
1,175,000
|
|
|
1.08
|
|
Options exercisable as of December 31, 2016
|
|
—
|
|
|
—
|
|
Remaining unvested options outstanding and expected to vest
|
|
1,175,000
|
|
|
$
|
1.08
|
|
Board of Director Fees
The stock compensation portion of the Board of Directors ("Board") fees are accrued evenly from the date of election to the earn date. The stock compensation is earned one year after the prior year Annual Shareholder Meeting, the date of election for each board member. In an event that a new board member is elected after the date of election, the stock compensation will be accrued pro rata from the date of election to the next Annual Shareholder Meeting.
The stock compensation expense related to the Board is contained in "
General and administrative expense
" on the consolidated statements of operations. During the
fiscal year ended December 31, 2016
and
2015
, the Company recorded approximately
$437,000
and
$410,000
, respectively, of director fees related to stock compensation. The accrued directors fees are contained in "
Accrued liabilities
" within current liabilities on the consolidated balance sheets. The accrued director fees as of
December 31, 2016
and
December 31, 2015
, total approximately
$360,000
and
$398,000
, respectively.
(15)
Stockholders' Equity and Non-controlling Interest
Public Offering
On March 4, 2015, the Company raised proceeds of
$20 million
through the sale of
6,667,000
shares of common stock, and warrants to purchase up to an aggregate of
6,667,000
shares of common stock at a combined offering price of
$3.00
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.
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 prior to the stated maturity date.
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 was approximately
$9.0 million
as calculated using the Black Scholes model at the time of purchase.
The warrants will be exercisable when 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 warrants. 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 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 the Company's shelf registration statement on Form S-3 (File No. 333-200712), which became effective on January 15, 2015. During
fiscal year ended December 31, 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
fiscal year ended December 31, 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 the shelf registration statement on Form S-3 is available for use.
Possible Issuance of Additional Common Stock under Share Exchange Agreement
Rochon Capital Partners, LTD 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 the Company's 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 written request, which request shall be in Rochon Capital's, or a Permitted Transferee's, 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 common stock then outstanding. The term "Acquiring Person" shall not include (1) any person who acquires
15%
or more of the Company's 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.
Accumulated Other Comprehensive Income (Loss)
A summary of the net changes in accumulated other comprehensive income attributable to JRjr33, Inc. shareholders and significant amounts reclassified out of accumulated other comprehensive income for the
fiscal year ended December 31, 2016
and
December 31, 2015
follows (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
|
|
(1,799
|
)
|
|
6
|
|
|
(1,793
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
Transactions with non-controlling interests
|
|
(11
|
)
|
|
—
|
|
|
(11
|
)
|
Net other comprehensive loss at December 31, 2016
|
|
$
|
(2,390
|
)
|
|
$
|
—
|
|
|
$
|
(2,390
|
)
|
Non-controlling Interest
On
December 31, 2016
and
December 31, 2015
, the non-controlling interest of shareholder's equity totaled
$(6.0) million
and
$(2.1) million
, respectively. Non-controlling interest arises as a result of the Company holding ownership percentages of more than 20% but less than 100% of The Longaberger Company, My Secret Kitchen, and numerous Agel entities.
(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 the Company has 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):
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Stock options
|
1,175,000
|
|
|
1,100,000
|
|
Warrants
|
—
|
|
|
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
|
33,737,551
|
|
|
33,712,551
|
|
(17)
Segment Information
As a direct selling platform, the Company has a variety of products offerings sold primarily by independent sales force members across many countries around the world. During the
fiscal year ended December 31, 2016
and
December 31, 2015
, gross revenue generated in international markets totaled approximately
$115.9 million
or
80.4%
and
$98.2 million
or
71.0%
, respectively. The Company's long-lived assets are concentrated in the United States, even after the acquisitions of Kleeneze and Betterware.
The Company shows results for
four
operating segments,
three
of which qualify as reportable segments. The Company has grouped the operating segments into the following product offerings: "gourmet food," "nutritional and wellness," "home décor" and "other." Of these operating segments, the home décor segment, nutritional-and-wellness segment, and gourmet food segment qualify as reportable segments under the SEC reporting regulations.
Each identified reportable segment engages in business activities, incurs expenses, and produces revenue. The operating results of these segments are regularly reviewed by CODMs and there is discrete financial information available for each unit. In addition, the gross revenue of each reportable segment, both external and inter-company, equates and/ or exceeds
10%
of the Company's consolidated gross revenue. As such, the CODMs view these segments as appropriate for decision making purposes because they each represent a significant part of the business.
The following is a brief description of each reportable segment:
Home Décor
- This segment consists of operations related to the production, sourcing, and sale of premium hand-crafted baskets and the selling of products for the home, including pottery, cleaning, beauty, outdoor, and customizable vinyl expressions for display. These operations are primarily located within the United States and the United Kingdom. Kleeneze, Betterware, Longaberger, and Uppercase Living are the primary subsidiaries involved in this reportable segment.
Nutritional and Wellness
- This segment consists of operations related to the selling of nutritional supplements and skin care products. These operations have a presence in approximately
50
countries, such as Italy, Russia, and Thailand. Agel is the primary subsidiary in this reportable segment.
Gourmet Food
- This 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 the Company's 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.
The Company notes that these
three
segments exceed
75%
of the Company's consolidated revenue. Therefore, no further aggregation or disclosures are required for the remaining operating segments.
In addition to the reportable segments, the Company has included an "other" segment in all tables to provide increased transparency and ease the reconciliation process to the results found on the consolidated statements of operations. The "other" segment consists of operations related HCG, Paperly, and Tomboy Tools.
Post the 2015 acquisitions, the CODMs began placing a greater focus on the management of the segments. Prior to 2016, the CODMs only looked at the revenue and gross profit of the segments, as shown below in the 2015 table. Currently, the Company's CODMs look at each segment's gross profit, operating income, and other non-GAAP measures such as EBITDA to evaluate performance of the segments. As a result, the Company has presented the 2016 revenue, gross profit, operating expenses, and other expenses by operating segment in the table below. None of the reportable segments cross sell to other reportable segments.
Segment information, which includes all operating segments, for the
fiscal year ended December 31, 2016
and
December 31, 2015
are shown in the tables below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gourmet Food
|
|
Home Décor
|
|
Nutritional and Wellness
|
|
Other
|
|
Consolidated
|
2016
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
12,686
|
|
|
$
|
105,239
|
|
|
$
|
25,337
|
|
|
$
|
983
|
|
|
$
|
144,245
|
|
Gross profit
|
7,040
|
|
|
51,644
|
|
|
19,157
|
|
|
583
|
|
|
78,424
|
|
Operating expenses
|
10,231
|
|
|
64,435
|
|
|
28,185
|
|
|
5,900
|
|
|
108,751
|
|
Gain on sale of marketable securities
|
—
|
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
(12
|
)
|
Interest expense
|
9
|
|
|
2,263
|
|
|
42
|
|
|
1,858
|
|
|
4,172
|
|
Loss before income tax provision
|
$
|
(3,200
|
)
|
|
$
|
(15,054
|
)
|
|
$
|
(9,070
|
)
|
|
$
|
(7,163
|
)
|
|
$
|
(34,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
18,243
|
|
|
$
|
88,048
|
|
|
$
|
30,629
|
|
|
$
|
1,432
|
|
|
$
|
138,352
|
|
Gross profit
|
10,282
|
|
|
43,813
|
|
|
24,086
|
|
|
910
|
|
|
79,091
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
98,847
|
|
Gain on sale of marketable securities
|
|
|
|
|
|
|
|
|
(189
|
)
|
Gain on acquisition of a business
|
|
|
|
|
|
|
|
|
(3,625
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
2,588
|
|
Loss before income tax provision
|
|
|
|
|
|
|
|
|
$
|
(18,530
|
)
|
The following table shows the total assets for each reportable segment as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Gourmet food
|
|
$
|
347
|
|
|
$
|
197
|
|
Home décor
|
|
40,962
|
|
|
60,895
|
|
Nutritional and wellness
|
|
2,343
|
|
|
7,092
|
|
Other
|
|
9,839
|
|
|
14,320
|
|
Consolidated total assets
|
|
$
|
53,491
|
|
|
$
|
82,504
|
|
The following table summarizes goodwill for each reportable segment as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Gourmet food
|
|
$
|
—
|
|
|
$
|
1,161
|
|
Home décor
|
|
1,846
|
|
|
2,137
|
|
Nutritional and wellness
|
|
—
|
|
|
1,938
|
|
Other
|
|
—
|
|
|
191
|
|
Consolidated goodwill
|
|
$
|
1,846
|
|
|
$
|
5,427
|
|
(18)
Subsequent Events
Worker's Compensation Insurance
On January 1, 2017, the Company lapsed on its worker's compensation insurance. 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
$1.2 million
and
$1.1 million
at
December 31, 2016
and
December 31, 2015
, respectively. There can be no assurance that actual results will not materially differ from the Company's estimates.
NYSE American Deficiency Letter
On January 10, 2017, the Company received a Deficiency Letter from the NYSE American that it was not in compliance with certain NYSE American continued listing standards relating to stockholders’ equity as of September 30, 2016. Specifically, the Deficiency Letter stated that the Company is not in compliance with Section 1003(a)(1) (requiring stockholders’ equity of
$2.0 million
or more if it has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years), Section 1003(a)(ii) (requiring stockholders’ equity of
$4.0 million
or more if it has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years); and Section 1003(a)(iii) (requiring stockholders’ equity of
$6.0 million
or more if it has reported losses from continuing operations and/or net losses in its five most recent fiscal years). The Deficiency Letter noted that the Company had a stockholders’ equity deficit of
$(10.3) million
as of September 30, 2016, and has reported net losses in its five most recent fiscal years. The Company was required to, and did, submit a plan to the NYSE American by February 9, 2017, advising of actions it has taken or will take to regain compliance with the continued listing standards by July 10, 2018. On March 17, 2017, the NYSE American notified the Company that it has reviewed the Company’s Plan and determined to accept the Plan and grant a Plan period through July 10, 2018. NYSE Regulation Staff will review the Company periodically for compliance with the initiatives outlined in the Plan. If the Company is not in compliance with the continued listing standards by July 18, 2018, or if the Company does not make progress consistent within the Plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.
On April 18, 2017, the Company received a letter from the NYSE American notifying the Company that it is not in compliance with Section 802.01E of the NYSE Listed Company Manual as a result of its failure to timely file this Annual Report on Form 10-K for the year ended
December 31, 2016
, with the Securities and Exchange Commission. The filing of this Form 10-K is a condition for the Company’s continued listing on the NYSE American as required by Sections 134 and 1101 of the NYSE Company Guide. The Company filed this Form 10-K on
October 18, 2017
. The Company must submit a plan to the NYSE American by May 18, 2017, advising of actions it has taken or will take to regain compliance with the continued listed standards. The Company has regained compliance with the NYSE American listing standards by filing this Form 10-K with the SEC prior to October 18, 2017. The letter from the NYSE American also notes that the NYSE American may nevertheless commence delisting proceedings at any time if it deems that the circumstances warrant.
Stock Option Issuance
On February 8, 2017, an executive officer was granted options to purchase
300,000
shares of common stock, with an exercise
price of
$0.79
. One third of the total amount of options vested and became exercisable as of the grant date and the remaining options vest one-third each year pro rata for
two years
beginning on February 8, 2018, the first anniversary of the date of the grant. The fair value of the options are amortized over the vesting period.
Funding Request Agreement
On
October 18, 2017
, the Company entered into a related party agreement with Rochon Capital Partners to provide short term funding of cash shortages arising in the ordinary course of business through
October 31, 2018
. This agreement is further discussed in
Note (9)
,
Related Party Transactions
,
to the consolidated financial statements included in this report.
Private Placement of Senior Secured Convertible Term Loan
The Company has a non-binding principle agreement with a creditor to provide placement of a senior secured convertible term loan in the amount of
$5.0 million
. The loan would have an interest rate of
14%
per annum and a maturity of
three
years.