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EX-10.1 - EXHIBIT 10.1 - JRjr33, Inc.exhibit101fundingrequestag.htm
EX-32.2 - EXHIBIT 32.2 - JRjr33, Inc.a12312016exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - JRjr33, Inc.a12312016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - JRjr33, Inc.a12312016exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - JRjr33, Inc.a12312016exhibit311.htm
EX-23.2 - EXHIBIT 23.2 - JRjr33, Inc.exhibit232bdo-16.htm
EX-23.1 - EXHIBIT 23.1 - JRjr33, Inc.exhibit231wp-16.htm
EX-21 - EXHIBIT 21 - JRjr33, Inc.exhibit212017.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K 
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal period ended December 31, 2016
  or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                    to

Commission File Number: 001-36755 

JRjr33, Inc.
(Exact name of registrant as specified in its charter) 
Florida
(State or other jurisdiction of incorporation or organization)
98-0534701
(I.R.S Employer Identification No.)
2950 North Harwood Street, 22nd Floor, Dallas, Texas
(Address of principal executive offices)
75201
(Zip Code)
 
(469) 913-4115
(Registrant’s telephone number, including area code)
Title of each class
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
NYSE American, LLC

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ý
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ý

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

As of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately $19,802,992, based on $0.90, the closing price of the Registrant's common stock reported by the NYSE American, LLC on that date.

As of October 18, 2017, 40,591,108 shares of the common stock, $0.0001 par value per share, of the registrant were issued and outstanding.

Documents incorporate by reference:
None.
 




Jrjr33, Inc.
Table of Contents
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
 
 
 
 
 
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.
Item 16.
Form 10-K Summary
 
 




PART I.

Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K (this "Annual Report") contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act,") that involve substantial risks and uncertainties. The forward-looking statements are contained principally in Part I, Item 1. "Business," Part I, Item 1A, "Risk Factors," and Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" but are also contained elsewhere in this Annual Report. In some cases readers can identify forward-looking statements by terminology such as "may," "should," "potential," "continue," "expects," "anticipates," "intends," "plans," "believes," "estimates," and similar expressions. These statements are based on the Company's current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond the Company's control, that could cause actual results to differ materially from those expressed, projected, or implied by the forward-looking statement. Such risks and uncertainties include the risks noted under "Item 1A Risk Factors."

Readers should refer to Item 1A. "Risk Factors" of this Annual Report for a discussion of important factors that may cause the Company's actual results to differ materially from those expressed or implied by forward-looking statements. As a result of these factors, the Company cannot assure readers that forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if forward-looking statements prove to be inaccurate, the inaccuracies may be material. In light of the significant uncertainties in these forward-looking statements, readers should not regard these statements as a representation or warranty by the Company or any other person that will achieve the objectives and plans in any specified time frame, or at all. The Company does not undertake any obligation to update any of the forward-looking statements.

Unless the context requires otherwise, references to "we," "us," "our," "the Company," "JRJR," and "JRJR Networks" refer to JRjr33, Inc. and its subsidiaries.


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Item 1. Business

JRjr33, Inc. is a global platform of direct-to-consumer brands offering one "product," a business opportunity for independent sales representatives. The Company views itself as a place where independent sales representatives, around the world, can pursue earning opportunities at their own pace, using company-provided systems, including back office and e-commerce tools, to enhance their ability to serve customers. The Company provides an opportunity for the representatives to earn income for their families and have the freedom to decide how much time and effort to put into their business.

In April 2007, the Company was incorporated under the laws of Delaware under the name Cardio Vascular Medical Device Corporation. In June 2011, the Company converted to a Florida corporation. During the conversion, the Company changed its name to Computer Vision Systems Laboratories, Corp. On May 27, 2013, the Company once again changed its name, this time to CVSL Inc. ("CVSL"). On September 25, 2012, the Company completed an initial share exchange whereby the Company acquired 100% of the issued and outstanding capital stock of Happenings Communications Group, Inc., a magazine publisher, in exchange for 21,904,302 shares of the Company's common stock representing approximately 90.0% of the Company's issued and outstanding capital stock at such time. On October 16, 2014, the Company effected a 1-for-20 reverse stock split of the Company's authorized, issued, and outstanding common stock.. On March 7, 2016, the Company changed its name to JRjr33, Inc. and began doing business as JRjr Networks. Since January 28, 2016, the Company’s common stock has traded under the stock symbol "JRJR."'

Competition

The Company operates in an industry with numerous manufacturers, distributors, and retailers of consumer goods. The market for products is intensely competitive. Many competitors, such as Avon Products Inc., Tupperware Brands Corp. and others are significantly larger, have greater financial resources, and have more name recognition. The Company relies on the independent sales representatives to market and sell the products through direct marketing techniques. The ability to compete with other direct marketing companies depends greatly on the ability to attract and retain qualified independent sales representatives. In addition, the Company currently does not have significant patent or other proprietary protection, and competitors may introduce products with the same or similar ingredients. As a result, the Company may have difficulty differentiating products from competitors’ products and other competing products that enter the market. There can be no assurance that future operations would not be harmed as a result of changing market conditions and future competition.


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JRJR Portfolio

The Company's disciplined acquisition strategy is derived from the industry knowledge and operating expertise of the management team, which the Company believes improves the ability to identify, evaluate, and integrate direct-to-consumer companies that can benefit from the Company’s resources, while contributing to the overall growth strategy. The year-over-year growth the Company has experienced is a result of revenue from acquisitions. The Company intends to continue to pursue opportunistic acquisitions and seeks to improve the financial condition of the business by identifying cost efficiencies across its platform of companies.

Below is the portfolio of companies in order of acquisition.

Happenings Communications Group ("Happenings") ("HCG")

Acquired on September 25, 2012, JRJR's first acquisition, Happenings, operating solely in the United States. Happening's monthly magazine showcases the best of Northeast Pennsylvania in high gloss and full color. Published monthly since 1969, the forty-plus year publication is available on the first of each month through paid subscription and complimentary distribution at 800 locations. Happenings is the only company in the portfolio that does not generate sales through independent sales representatives.

The Longaberger Company ("Longaberger") ("TLC")

On March 18, 2013, JRJR acquired a 51.7% interest in The Longaberger Company. In 1978, Dave Longaberger started selling Longaberger baskets through home shows, as he believed an educated home consultant would be the ideal way to showcase the craftsmanship of each basket and share the history of Longaberger and the tradition of quality with consumers.

Today, Dave’s traditions are carried on by John Rochon Jr.. The Longaberger Company remains a premier maker of handcrafted baskets and offers other home and lifestyle products, including pottery, wrought iron, and fabric accessories. The company is based in Frazeysburg, Ohio, and there are thousands of independent Home Consultants located in the United States and Australia who sell Longaberger products.

Your Inspiration at Home, Pty. Ltd. ("Your Inspiration at Home") ("YIAH")

Your Inspiration at Home was acquired on August 22, 2013. Based in Australia, YIAH is an innovative and award-winning direct-to-consumer company. YIAH sells hand-crafted spices, dip mixes, dukkahs, baking mixes, oils, and vinegars from all corners of the world. YIAH now operates in Australia, the United States, Canada, and New Zealand, the last three which were added through expansion since acquisition.

Tomboy Tools, Inc. ("TBT")

Acquired on October 1, 2013, Tomboy Tools, a former "Entrepreneur Magazine Top 100 Brilliant Company," is a provider of high-quality tools for women. Tomboy Tools, operating in both the United States and Canada, is a direct seller of ergonomically designed for women hand and power tools as well as security products and services.

Agel Enterprises, LLC ("Agel") ("AEI")

On October 22, 2013, JRJR acquired Agel Enterprises Inc. Operating in approximately 50 countries, Agel offers nutritional supplements that take advantage of suspension gel technology, a gel technology that forces the critical nutrients to remain suspended in gel, thus optimizing their absorption in the digestive track.

My Secret Kitchen Limited ("MSK")

My Secret Kitchen, acquired on December 31, 2013, operates in England and Ireland. The company, founded in 2007, is an award-winning, United Kingdom based, direct-to-consumer company. When combined with YIAH, the two have won over three hundred "Fine Food Awards" by offering unique food products utilizing only the finest of ingredients.

Paperly, LLC ("Paperly")

JRJR acquired its seventh company in 2013 with the acquisition of Paperly on December 31, 2013. Paperly, which operates only in the United States, offers custom stationery and paper gifts for sharing, which can be used as expressions of creativity, personality and community. Paperly was awarded two prestigious "DSA Ethos Awards" for product innovation in 2012.

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Uppercase Living, LLC ("Uppercase Living") ("UAI")

Uppercase Living, founded in 2006, was acquired on March 13, 2014. Uppercase Living offers customizable vinyl expressions in the United States and Canada that create decorative mediums that allow individuals to transform their spaces into a reflection of themselves.

Kleeneze Limited ("Kleeneze")

On March 24, 2015, JRJR purchased one of the original home shopping businesses in the UK. Founded in 1923, Kleeneze has grown over the years and now operates in the U.K. and Ireland. After starting as a home solution provider, Kleeneze has expanded its product line to include health and beauty, electrical, housewares, Christmas, toys, gifts, garden, and personalized gifts.

Betterware Ltd. ("Betterware")

Betterware, the most recent acquisition, was acquired on October 15, 2015. Betterware, founded in the U.K. in 1928, offers a home shopping experience to consumers. Best known for its housewares and house care cleaning products, the range of products has grown over the years. Betterware now offers a wide range of contemporary, creative and problem solving housewares products including gifts, personal care, mobility and beauty, as well as outdoor and electrical products. Betterware currently services customers across the U.K. and Ireland.

Segments

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 chief operating decision makers ("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.


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Geographic Area Financial Information

For financial information concerning the geographic areas in which the Company operates, see Part II, Item 8, Note (17), Segment Information, to the consolidated financial statements included in this report.


8



Significant Developments

The following is a summary of significant developments affecting the business that have occurred since filing the Annual Report on Form 10-K for the year ended December 31, 2015.

Gourmet Food

During 2016 and through the date of this filing, "gourmet food" segment experienced significant declines in revenue. In the short-term, the Company continues to expect revenue to decline compared to the comparable prior year. During the fiscal year ended December 31, 2016, the segment's revenue declined $5.6 million and its number of independent sales representatives decreased by 10,000 representatives.

Home Décor

The "home décor" segment has grown compared to the prior year, in large part due to the acquisitions of Kleeneze and Betterware during 2015. During the fiscal year ended December 31, 2016, the segment's revenue increased by $17.2 million. The number of independent sales representatives as of December 31, 2016, decreased to 25,000, a decline of 6,000 representatives compared to the number of representatives on December 31, 2015.

Nutritional and Wellness

The "nutritional and wellness" segment experienced a decline of $5.3 million in revenue during the fiscal year ended December 31, 2016, compared to the prior year. The number of independent sales representatives as of December 31, 2016, decreased by 1,000 representatives compared to the number of representatives on December 31, 2015. The Company expects the revenue and the number of independent sales representatives to decline during the fiscal year ended 2017, as the Company repositions Agel by focusing on markets that management views as better profit potential. The segment's independent sales representatives count went from 13,000 independent sales representatives at December 31, 2016, to 3,000 representatives as of September 30, 2017.

Publishing and Printing

The "publishing and printing" segment was previously reported in the 2015 Annual Report on Form 10-K. This former segment is now included in the "other" segment. There have been no significant developments that have occurred since the filing of the 2015 Annual Report of Form 10-K.


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Marketing, Manufacturing and Distribution

Currently, the Company has sales in approximately 50 countries with the largest concentration of sales and independent sale representative based in the United States and Europe.

Direct Selling Industry

Direct selling is a well-established sales channel where products are marketed directly to customers, eliminating the need for middlemen, wholesalers, advertisers and retailers. The global direct selling market is a growing $184 billion industry, per the 2016 World Federation of Direct Selling Associations Annual Report. The U.S. portion of the industry alone exceeds $36 billion in annual sales. Worldwide, more than 103 million people are estimated to participate in direct selling. The World Federation of Direct Selling Associations lists the five largest direct selling markets in the world as the United States, China, Korea, Germany, and Japan.

Sales to Delivery Process

Orders are placed using the Internet, mail, telephone, fax, and directly with the Company's representatives at customer hosted events. Payments are processed, mostly via credit card, when orders are taken. Once the order is processed, products are manufactured, picked, and packaged for shipping at the respective company's distribution center. The products are then delivered to the customer using a local or national logistic company. In some markets, retail locations are utilized to serve representatives and customers.

Independent Sales Representatives

The independent sales representatives utilize marketing materials, including catalogues, and the Company's e-commerce platform to advertise products. Nearly all independent sales representatives have a personalized website for customers to place orders, which improves the order-processing accuracy and the efficiency of the independent sales representative's ability to run their business.

Representatives earn commissions by selling products to their customers. The Company generally does not have arrangements with end-users of products beyond the representatives. No individual representative accounts for more than 1% of revenues. The Company's primary method of increasing the number of independent sales representatives and the consumer base has historically been through the acquisition of direct selling companies.

The independent sales representatives are independent contractors, compensated based on the revenue generated for the Company, the performance of the representatives they recruit ("down-line representatives,") and their customers. Representatives do not receive a fee for recruiting down-line representatives. The representatives are responsible for the recruiting and training of their down-line representatives. The representatives have an incentive to recruit additional representatives in order to increase the potential revenue produced by their down-line. The independent sales representatives are compensated by their personal sales as well as the sales of their down-line representatives.

Raw Materials

The Company is not materially dependent on any single supplier for raw materials or finished goods. Raw materials are purchased from numerous domestic and international suppliers. Sufficient raw materials were available during the fiscal year 2016. The Company does not believe there will be any issues regarding the accessibility to raw materials. Alternative suppliers of raw materials are readily available if the current suppliers were to become unavailable.

Manufacturing

The Company currently manufactures select product offerings for the home décor and gourmet food segments. The Company operates manufacturing facilities in the United States and Australia. The largest manufacturing facility, is currently leased from NNN Raiders as part of the leaseback agreement discussed in Part II, Item. 8, Note (12), Commitments and Contingencies, to the consolidated financial statements included in this report.

The Company primarily utilizes third party manufacturers to produce many of the products ordered. One of the largest third party manufactures during the fiscal year ended December 31, 2016 and December 31, 2015, was Actitech, which is owned by Michael Bishop, a member of the Board of Directors. Actitech supplied many of Agel's products out of a 600,000-square foot manufacturing facility in Sherman, Texas. As of the filing of this Annual Report on Form 10-K, Actitech is no longer supplying product to Agel.

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For additional details, see Part II, Item. 8, Note (9), Related Party Transactions, to the consolidated financial statements included in this report.

The Company believes that there are several alternative manufacturing suppliers that can be utilized if needed.

Distribution

To achieve economies of scale, optimal pricing, and uniform quality, the Company relies primarily on a few principal delivery companies for the delivery of goods. The Company believes that several alternative delivery suppliers exist that could replace the current suppliers, if needed.


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Intellectual Property

The Company has acquired numerous registered trademarks relating to acquisitions that have been consummated and intend to maintain the acquired trademarks in markets that justify the cost of such compliance. The Company owns trademarks registered with the U.S. Patent and Trademark Office and in foreign jurisdictions. Registration of a trademark enables the registered owner of the trademark to bar the unauthorized use of the registered trademark in connection with similar products in the same channel of trade by any third-party in the respective country of registration, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs.

Under common law, the Company claims ownership and protection of certain product names, unregistered trademarks, and service marks. Common law trademark rights do not provide the same level of protection that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is used. The Company believes these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of the brands and the effective marketing of products. The Company intends to maintain and keep current trademark registrations and to pay all applicable renewal fees as they become due that are necessary for the continued use in the business, as long as enough capital is available to do so and the renewal fees are justifiable for such cost of compliance. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. Therefore, the Company believes that these proprietary rights have been and will continue to be important for current and future operations. If for any reason the trademarks are not able to be maintained, sales of the related products bearing such trademarks could be materially and negatively affected. For more information, see Part I, Item 1A, Risk Factors.

The Company owns certain intellectual property, including trade secrets that seek to protect the intellectual property, in part, through confidentiality agreements with employees and other parties. None of the current product offerings are protected by patents, thus confidentiality agreements, and similar agreements, are often the only form of protection to the Company. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that adequate remedies for any breach exist, or that the trade secrets will not otherwise become known to or independently developed by competitors. Proprietary product formulations are generally considered trade secrets, but are not otherwise protected under intellectual property laws.

The Company intends to protect the legal rights concerning intellectual property by all appropriate legal action. Consequently, the Company may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.


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Government Regulation

The direct selling industry is subject to a number of federal and state regulations administered by the Federal Trade Commission ("FTC") and various state agencies in the United States, as well as regulations regarding direct selling activities in foreign markets.

Laws specifically applicable to direct selling companies generally are directed at preventing deceptive or misleading marketing and sales practices. These laws often include laws referred to as "pyramid" or "chain sales" scheme laws. These "pyramid" scheme laws are focused on ensuring that product sales ultimately are made to the end consumers and that advancement within a sales organization is based on sales of products and services, rather than investments in the organization, recruiting other participants, or other non-retail sales-related criteria.

The regulatory requirements concerning direct selling programs involve a high level of subjectivity and are subject to judicial interpretation. The Company is subject to the risk that these laws or regulations, or the enforcement or interpretation of these laws and regulations by governmental agencies or courts, can change. Any direct selling company owned or acquired in the future, could be found not to be in compliance with the current or newly adopted laws and/ or regulations in one or more markets, which could prevent the Company from conducting business in those markets and harm the prospects, business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price of the Company.

The Company maintains awareness of any pending judicial actions and investigations against other companies in the direct selling industry. Adverse decisions in these cases could impact the business if "pyramid" scheme laws are interpreted more narrowly or in a manner that results in additional burdens or restrictions on the direct selling industry in that representative market. The implementation of such regulations may be influenced by public attention directed toward a direct selling company, its products, or its direct selling program, such that extensive adverse publicity could result in increased regulatory scrutiny. If any government were to ban or restrict the business model, the Company's prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations may be materially adversely affected.

Products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and authorities, including the U.S. Food and Drug Administration ("FDA,") FTC, the Consumer Product Safety Commission, the Department of Agriculture, State Attorneys General, and other state regulatory agencies in the United States; and the Ministry of Health, Labor and Welfare in Japan, and similar government agencies in each market in which the Company operates.

Government authorities regulate advertising and product claims regarding the efficacy and benefits of products. These regulatory authorities typically require adequate and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation can vary widely from market to market. There can be no assurance that the research and development efforts that would be undertaken to support the Company's claims will be deemed adequate for any particular product or claim. If the Company is unable to show adequate and reliable scientific substantiation for product claims, marketing materials, or the claims of the sales force that exceed the scope of allowed claims for nutritional supplements, spices, or skin care products, the FDA, or another regulatory authority could take enforcement action which could harm the business by requiring a revision of marketing materials, amendment of claims, or stoppage of product sales.

The Company trains the independent sales representatives on the regulations and attempts to monitor the sales representative’s marketing materials and claims. Even with these actions, the Company cannot ensure that all such representative activity and corresponding marketing materials comply with applicable regulations. If the independent sales representatives fail to comply with the restrictions, then the Company and the independent sales representatives could be subjected to claims, financial penalties, mandatory product recalls, or relabeling requirements, any of which could harm the consolidated results of operations and/ or financial condition of the Company. Although the Company takes responsibility for the actions of the independent sales representatives, in such an instance, the Company would be dependent on a determination that the Company either controlled or condoned a non-compliant advertising practice. There can be no assurance that the Company could not be held vicariously liable for the actions of the independent sales representatives.

In the United States, FDA regulations on "Good Manufacturing Practices" and "Adverse Event Reporting" requirements for the nutritional supplement industry require the Company and suppliers to maintain a good manufacturing processes, including stringent supplier qualifications, ingredient identification, manufacturing controls and record keeping. The Company is also required to report serious adverse events associated with consumer use of products. The Company's operations could be harmed if regulatory authorities make determinations that the Company, or the suppliers, are not in compliance with these regulations or public reporting of adverse events harms the Company's reputation for quality and safety. A finding of non-compliance may result in administrative warnings, penalties, or actions impacting the Company's ability to continue selling certain products. In addition, compliance with

13



these regulations has increased, and may further increase the cost of manufacturing certain products as the Company works with the suppliers to assure they are qualified and in compliance.

There are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states, and governments overseas that pertain to the Internet and doing business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies.

As a U.S. entity operating through subsidiaries in foreign jurisdictions, the Company is subject to foreign exchange control, transfer pricing, and customs laws that regulate the flow of funds between the Company and subsidiaries for product purchases, management services, and contractual obligations, such as the payment of sales commissions.

Like companies that operate in similar product categories, from time to time, the Company receives inquiries from government regulatory authorities regarding the nature of the business and other issues, such as compliance with local direct selling, transfer pricing, customs, taxation, foreign exchange control, securities, and other laws.


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Human Resources

As of December 31, 2016 and December 31, 2015, the Company had approximately 499 and 582 employees, respectively, as measured by full-time equivalence. The employees are not represented by a union or any other collective bargaining group. The Company has a good relationship with its employees.


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Executive Officers of the Registrant

The executive officers of the Company as of October 18, 2017 are set forth below.

Mr. John P. Rochon, age 66, has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since September 25, 2012. Mr. Rochon, has more than three and a half decades of wide-ranging success in finance, operations, business planning, sales, brand-building, and marketing. He is a highly accomplished investor and business strategist. By the time he was 40 years old, Mr. Rochon was chairman and CEO of a Fortune 500 global consumer goods company, serving in that role for nearly a decade.

Mr. Rochon serves as the President of Rochon Capital Partners, Ltd. He serves as the General Partner and Chairman of Richmont Capital Partners. He is the Founder of Richmont Capital Partners I LP and serves as its General Partner and Chairman. He is General Partner of Richmont Capital Partners II. During the same period, he managed the growth of a portfolio of Richmont companies, in such varied industries as financial services, marketing, international trading, food services, and office supplies. His career has included significant international operating experience, including the planning and execution of a major global expansion into 37 countries on five continents. He is a leader in the global direct selling industry.

Mr. John P. Rochon, Jr., age 40, has served as Vice Chairman of the Board of Directors since May 1, 2014 and has served as a Director since December 3, 2012. He has served as the Company's Chief Financial Officer since May 26, 2017. Prior and concurrently to his time at the Company, Mr. Rochon served as the Vice Chairman and CEO of Richmont Holdings. Mr. Rochon brings to the Company capital market knowledge and experience as well as experience in financial analysis, mergers and acquisitions, technology, and experience in reviewing, structuring, and managing new business opportunities. After receiving his degree in Business Administration from Southern Methodist University, Mr. Rochon worked on Wall Street at JP Morgan Chase before returning to Dallas, where for more than a decade he has run the Rochons' family office.


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Investor Information

Financial and other information about the Company is available on the Company's website at www.jrjrnetworks.com. The Company makes available on the website, free of charge, copies of the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the U.S. Securities and Exchange Commission ("SEC"). In addition, the Company has previously filed registration statements and other documents with the SEC. Any document filed may be inspected, without charge, at the SEC's public reference room at 100 F Street NE, Washington, DC 20549, or at the SEC's Internet address at www.sec.gov. These website addresses are not intended to function as hyperlinks, and the information contained in the website and in the SEC's website is not intended to be a part of this filing. Information related to the operation of the SEC's public reference room may be obtained by calling the SEC at 800-SEC-0330.


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Item 1A. Risk Factors

Readers should carefully consider the following risks in evaluating our business. The risks described below are the risks that we currently believe are material to our business. However, additional risks not presently known to us, or risks that we currently believe are not material, may also impair our business operations. Readers should also refer to the other information set forth in this Annual Report on Form 10-K, including the information set forth in "Business" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" as well as our consolidated financial statements and the related notes. Our business prospects, financial condition or results of operations could be adversely affected by any of the following risks. If we are adversely affected by such risks, then the market price of our common stock could decline.

Our inability to file timely and accurate periodic reports has caused us to incur significant additional costs and may continue to affect our stock price and our ability to meet listing requirements going forward.

As a public company listed on the NYSE American stock exchange, the Company is required to file annual and quarterly periodic reports containing the financial statements with the SEC within prescribed periods of time and maintain a minimal stockholders' equity. As part of the NYSE American stock exchange listing requirements, the Company is also required to provide periodic reports, or make them available, to stockholders within prescribed periods of time. The Company has not been able to, and may continue to be unable to, maintain the required minimum stockholders' equity, produce timely financial statements, and file these financial statements as part of a periodic report in a timely manner with the SEC or in compliance with the NYSE American stock exchange listing requirements.

The Company expects to continue to face many of the risks and challenges which were experienced during the recent extended filing delay periods, including:

Continued concern on the part of customers, partners, investors, and employees about the consolidated financial condition and extended filing delay status, including potential loss of business opportunities;
Additional significant time and expense required to complete future filings and the process of maintaining the listing of the common stock on NYSE American beyond the significant time and expense the Company has already incurred in connection with the accounting review to date;
Continued distraction to the senior management team and board of directors as the Company works to complete future filings;
Obtaining the minimum level of stockholders' equity required by the NYSE American stock exchange;
Due to the limited capital available to the organization, the Company will continue to operate with a limited number of accounting personnel and professional resources that may continue to result in failures to timely complete filings.
Limitations on the ability to raise capital and make acquisitions; and
The material weaknesses identified by management continue to contribute to the delays in producing and filing the required periodic reports on a timely basis. Refer to Part II, Item 9A, for the discussion of management identified material weaknesses in internal accounting controls.
General harm to reputation as a result of the foregoing.

On April 15, 2016, July 8, 2016, August 23, 2016, November 22, 2016, and December 22, 2016, the Company received notifications from the Exchange that the failure to timely file the 2015 Form 10-K, March 2016 Form 10-Q, June 2016 Form 10-Q, and September 2016 Form 10-Q resulting in the Company being subject to the procedures and requirements of Section 1009 of the Company Guide and the Company was advised that in order to maintain the listing on the Exchange, the Company was required to submit to the Exchange a plan detailing actions the Company has taken, or would take, that would bring the Company into compliance with the continued listing standards by January 31, 2017. Upon filing of the September 2016 Form 10-Q on December 30, 2016, the Company regained compliance with the NYSE American; however, on January 10, 2017 the Company received notification from the NYSE American that it is not in compliance with the continued listing standards relating to stockholders’ equity as of September 30, 2016. The Company has failed to file this 2016 Form 10-K on time and there can be no assurance that future filings will be timely filed.

The failure to timely file with the SEC the 2015 Form 10-K, the 2016 March Form 10-Q, the 2016 June Form 10-Q, and the 2016 September Form 10-Q are events of default under the senior secured note with Dominion Capital ("Dominion.") Dominion agreed to waive each such event of default provided that the Company issued to Dominion 50,000 shares of common stock for each ten (10) business days that each filing was late. In addition, Dominion has provided a waiver such that the failure to comply with any other covenant set forth in Section 14 of the Dominion 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 issued to Dominion 100,000 shares of its common stock; provided that such waiver shall not apply to any compliance failures that occur

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after January 1, 2017. The Company has cured the default with respect to the untimely filing of the 2015 Form 10-K, the filing of the March 2016 Form 10-Q, the filing of the June 2016 Form 10-Q, and the filing of the September 2016 Form 10-Q by issuing 1,250,000 shares of common stock to Dominion for such failure to timely file these reports with the SEC.

On January 10, 2017, the Company received notification (the "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 submitted a plan to the NYSE American on May 18, 2017, advising of actions it has taken or will take to regain compliance with the continued listing 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.

If the common stock listing on the Exchange is suspended or terminated, or if the stock is removed as a component of certain stock market indices, the stock price could materially suffer. In addition, the Company or members of management could be subject to investigation and sanctions by the SEC and other regulatory authorities. Any or all of the foregoing could also result in the commencement of stockholder lawsuits against the Company. Any such litigation, as well as any proceedings that could in the future arise as a result of a filing delay and the circumstances which gave rise to it, may be time consuming and expensive, may divert management attention from the conduct of business, and could have a material adverse effect on the business, consolidated financial condition, and consolidated results of operations, and may expose the Company to costly indemnification obligations to current or former officers, directors, or other personnel, regardless of the outcome of such matter, which may not be adequately covered by insurance.

We have suffered operating losses since inception and we may not be able to achieve profitability.
 
The Company had an accumulated deficit of $76.2 million as of December 31, 2016 and $45.3 million as of December 31, 2015. Net losses attributable to JRjr33 totaled $31.0 million for the fiscal year ended December 31, 2016 and $13.1 million for the fiscal year ended December 31, 2015. The Company expects revenues from the existing portfolio of businesses to continue to decline during the fiscal year ended December 31, 2017 compared to the fiscal year ended December 31, 2016 as a result of the repositioning of Agel and the continual revenue decline of some of the businesses in the existing portfolio. As a result, the Company is sustaining operating and net losses, and it is possible that the Company may never be able to achieve or sustain the revenue levels necessary to attain profitability.

We rely upon our existing cash balances and cash flow from operations to fund our business and if our cash flow from operations is inadequate, we will need to continue to raise capital through a debt or equity financing, if available, or curtail operations.

On October 18, 2017, the Company and Rochon Capital Partners negotiated a Funding Request Agreement. The agreement provides the Company funding in the event of a cash shortfall of the Company through October 31, 2018. The Company's evaluation as a going concern is heavily dependent upon the funding set forth in this agreement.


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Excluding the funding request agreement, the adequacy of the Company's cash resources to continue to meet future operational needs depends, in large part, on the ability to increase product sales and/or reduce operating costs. The Company has used a significant portion of its cash and marketable securities in the fiscal year ended December 31, 2016 to fund the Company's operating loss. If the Company is unsuccessful in generating positive cash flow from operations, the Company could exhaust the available cash resources and be required to secure additional funding through a debt or equity financing. Any such additional funding may not be available or may only be available on unfavorable terms. In addition, the failure to timely file the Annual Report on Form 10-K for the year ended December 31, 2015, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 ("March Form 10-Q,") the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 ("June Form 10-Q,") the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 ("September Form 10-Q,") and the Annual Report on Form 10-K for the year ended December 31, 2016, precludes the Company from being able to register securities on a registration statement on Form S-3 for a one year period from the filing due date of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which will make it more difficult and expensive to register common stock and attract additional capital. The Company’s warrant holders have a right to a cashless exercise if at the time of exercise a registration statement registering their underlying shares of common stock is not effective, and currently the Company’s registration statement on Form S-3 that originally registered the underlying shares of common stock is not effective.Therefore, without S-3 eligibility it will be unlikely that any warrant holders from the offering will pay cash if they effectuate their exercise within the next year.

Our consolidated financial statements have been prepared assuming that we will continue as a going concern.

The Company's operating losses, negative cash flows from operations and accumulated deficit raise substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements for the fiscal year ended December 31, 2016 do not include any adjustments that might result from the outcome of this uncertainty. The Company intends to fund operations by raising additional capital, increase sales, and by relying on the Funding Request Agreement; however, that may be insufficient to fund operations for the next twelve months from the filing date of this Annual Report on Form 10-K. Therefore, the Company may need to seek additional sources of funding, such as additional financing, which may not be available on favorable terms, if available at all. If the Company does not succeed in raising additional funds on acceptable terms, the Company may be unable to execute the intended business.

Any failure to meet our debt service obligations, or to refinance or repay our outstanding indebtedness as it matures, could materially adversely impact our business, prospects, financial condition, liquidity, results of operations and cash flows.

The ability to satisfy debt obligations and repay or refinance maturing indebtedness will depend principally upon future operating performance. The Company is required to make monthly payments under the promissory notes that mature on October 22, 2018 and February 14, 2023 that have principal balances of $778,000 and $2.8 million, respectively as of December 31, 2016. In addition, the Company was required to make monthly interest payments on senior secured debt to HSBC Bank PLC in connection to the acquisition of Kleeneze. The HSBC note matured, and was subsequently paid-in-full, on May 19, 2017. As of December 31, 2016, the HSBC note had a balance of $2.5 million that was fully secured by cash shown on the consolidated balance sheet under the 'Other current assets.' As a result, prevailing economic conditions and financial, business, legislative, regulatory and other factors, many of which are beyond the Company's control, will affect the ability to make payments on and to refinance the debt. If the Company does not generate sufficient cash flow from operations to satisfy debt service obligations, the Company may have to undertake alternative financing plans, such as refinancing or restructuring the debt, incurring additional debt, issuing equity or convertible securities, reducing discretionary expenditures, and selling certain assets (or combinations thereof). The ability to execute such alternative financing plans will depend on the capital markets and the consolidated financial condition of the Company at such time. In addition, the ability to execute such alternative financing plans may be subject to certain restrictions under the existing indebtedness. Any refinancing of debt could be at higher interest rates and may require the Company to comply with more onerous covenants compared to those associated with any debt that is being refinanced, which could further restrict the business operations. The inability to generate sufficient cash flow to satisfy debt service obligations, or the inability to refinance debt obligations on commercially reasonable terms or at all, would have a material adverse effect on the business, prospects, consolidated financial condition, liquidity, consolidated results of operations and cash flows.

The failure to comply with the terms of our outstanding senior secured convertible notes could result in a default under the terms of the notes and, if uncured, it could potentially result in action against our pledged assets.

The Company issued $4.0 million of senior secured convertible notes to an accredited investor in November 2015 that is secured by substantially all of the Company's assets and those of the subsidiaries. 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.


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The Company also issued convertible notes in the principal amount of £3.7 million ($5.8 million at the date of issuance) in connection with the October 2015 acquisition of Betterware. The $4.0 million senior secured note matured on May 19, 2017 (and paid-in-full) and the £3.7 million ($5.8 million at the date of issuance) in convertible notes issued matures in October 2018. The senior secured notes require, among other things, to maintain the security interest, make monthly installment payments, and meet various negative and affirmative covenants. The notes require the Company to maintain a listing on the NYSE American. If the Company is not able to do so or if the NYSE American commences the delisting process, the notes would be in default. If the Company fails to comply with the terms of the senior secured convertible note and/or the related agreements, the senior note holder could declare a note default and if the default were to remain uncured, the secured creditor would have the right to proceed against any or all of the collateral securing their note. In addition, in the event the Company fails to comply with the terms of the £3.7 million ($5.8 million at the date of issuance) in convertible notes, the note holders also could declare a note default and if the default were to remain uncured, as a creditor they would have the right to proceed against the Company's assets subject to the first priority of secured creditors. Any action by the secured or unsecured creditors to proceed against the Company's assets would likely have a serious disruptive effect on the business operations. The Company last made its monthly payment, as of the filing of this Annual Report on Form 10-K, on the January 2017 principal portion.

The failure to comply with the terms of our operating and capital leases could result in a default under the terms of the lease and disruptions to our business which would likely harm our business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price.

The Company utilizes capital leases, property leases, and equipment leases during the normal course of business. The property leases include the rent of facilities such as the Company's corporate headquarters, while the equipment leases mostly include office equipment and vehicles leases. If for any reason the Company would be deemed to be in breach of any of the agreements due to a lack of making timely payments that were agreed upon in the lease or for some other reason, the Company may suffer disruptions to the ordinary course of business which would likely harm the Company's business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price. The Company may also receive a default notice under the terms of the lease which could trigger cross defaults with other debt held by the Company.

On March 14, 2017, Agel received an eviction notice on the Utah office lease. Agel vacated the premises on March 17, 2017. In addition, the Company is currently in default on the sale leaseback agreement described in Part II, Item 8, Note (12), Commitments and Contingencies, to the consolidated financial statements included in this report. The sale leaseback agreement is a property lease for TLC's manufacturing, distribution, and retail store located in Frazeysburg, Ohio. If the landlord were to exercise its rights under the agreement, TLC would have to vacate the properties which would cause a significant disruption to the business and likely affect the Company's business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price.

We may not have sufficient property, casualty, and workers compensation insurance to cover future claims.

The Company uses insurance to manage a limited number of risks. The Company is not fully insured on a number of risks such as damage or destruction of personal property and casualty liability, legal liability, professional liability, workers compensation liability, umbrella liability, cargo liability, product liability, and other liability. For those risks that are insured, the Company also faces the risk that the insurer may default on its obligations or that the insurer may refuse to honor them. The risk of refusal, whether due to honest disagreement or bad faith, is inherent in any contractual situation. In addition, due the the limited insurance coverage maintained by the Company, the Company may not comply with mandated minimum insurance requirements set forth by local authorities in places of operation.

If a material claim were filed for any such liabilities not insured by the Company and judgment is entered against the Company, it is possible the Company may not have the financial resources to settle such claims.

We have identified material weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The stated growth strategy is to acquire companies, some of which may not have invested in or have adequate systems or financial and operational staffing to meet public company financial reporting standards. The Company reviews the financial reporting and other systems that each company

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has. However, in many cases, the financial systems that are in place may not be as robust as needed. In addition, the Company lacks the infrastructure necessary to overcome the weaknesses. The Company cannot provide readers with assurance that the Company's accounting department has or will maintain adequate resources to ensure that the Company will not have any future material weaknesses in the Company's system of internal controls.

The Company has identified many material weaknesses in the overall control environment. The Company’s extensive material weaknesses identified caused the Company to miss the filing dates of the periodic reports required by the SEC and NYSE American stock exchange listing requirements. Should the Company fail to maintain or implement adequate controls, readers could lose confidence in the reliability of the Company's internal control over financial reporting and in the accuracy of the periodic reports filed under the Exchange Act and the ability to obtain additional financing could be impaired. A lack of investor confidence in the reliability and accuracy of the public reporting could cause the Company's stock price to decline.

The Company has attempted to and will need to continue to thoroughly reevaluate the control environment and implement the appropriate remediation actions to have an effective control environment:

The Company will need to evaluate the existing accounting personnel and evaluate their abilities so the Company can hire the appropriate accounting personnel with the experience commensurate with maintaining an effective control environment required for a publicly traded company with international operations. The hiring of competent experienced accounting personnel is a challenge for the Company due to the Company's history of ongoing losses and the Company's budgeted resources in an ever pursuant cost reduction environment.
The Company needs to perform a risk assessment to identify all of the risks and address these risks with the appropriate processes and controls necessary to maintain an effective control environment.
The Company needs to implement processes and controls over the consolidation process.
The Company needs to implement reconciliation and review and approval processes over all material accounts in the financial statements.
The Company needs to implement processes and controls to ensure all inventory received is appropriately accounted for in the financial statements.
The Company needs to implement a reconciliation, review and approval process for all adjusting journal entries made to the Company’s financial statements.
The Company needs to ensure there is sufficient accounting personnel to identify and resolve complex accounting issues. Conversely, the Company has experienced a high employee turnover in its accounting department and does not have sufficient resources to address these complex accounting issues.
The Company needs to develop processes and control activities that maintain the appropriate segregation of duties.
The Company needs to develop controls to ensure ERP system conversions are appropriately converted and all data is included in the new ERP system.
The Company needs to develop a plan over the segregation of cash controls.
The Company needs to develop the right processes, hire the right personnel, and implement the right control activities to ensure the Company is maintaining an effective control environment.

The Company has worked to develop a plan to address some of these weaknesses but cannot assure investors that capital will be available to implement such changes. There can be no assurances because of the Company's losses that funds will be available to invest in the remediation of these weaknesses.

Our investments in marketable securities are subject to market risks, which may result in losses.
 
As of December 31, 2016 and December 31, 2015, the Company had approximately $389,000 and $5.3 million in marketable securities, respectively, invested primarily in a diversified portfolio of liquid bonds. At neither December 31, 2016 nor December 31, 2015 did the Company have any investments in equity securities. However, the Company has from time to time and may in the future invest in equity securities. These investments are subject to general credit, liquidity, market and interest rate risks that could have a negative impact on the results of operations.

Our business is difficult to evaluate because we have expanded within the last two years, and intend to continue to expand, our product offerings and customer base.

Due to the Company's primary growth strategy of increasing revenue through acquisitions of other direct-to-consumer companies, and creating partnerships with companies that are engaged in business related to the direct-to-consumer industry, it may be difficult for readers to analyze the results of operations, identify historical trends, or even to make quarter-to-quarter comparisons because the Company has operated many of the acquired businesses for a relatively limited time and intend to continue to expand product

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offerings. The growth strategy, as well as each business acquired, is subject to many of the risks common to newly acquired enterprises, including the ability to implement a business plan, market acceptance of proposed products and services, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, competition from better funded and experienced companies, and the ability to generate profits. Considering the stage of the Company's development, no assurance can be given that the Company will be able to consummate the business strategy and plans, as described herein, that the activities will be successful or that financial, technological, market, or other limitations will not force us to modify, alter, significantly delay, or significantly impede the implementation of the plans.

We may be unsuccessful in identifying suitable acquisition candidates and secure the necessary financing to close the transaction which may negatively impact our growth strategy.

There can be no assurance that the Company will be able to identify additional suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms. The failure to successfully identify suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms is likely to have an adverse effect on the prospects, business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price as the primary growth strategy is based on increasing the acquisitions of, or entering into strategic transactions with direct selling companies, and potentially companies engaged in other direct-to-consumer related businesses. The Company is continually evaluating acquisition opportunities available that the Company believes will fit the acquisition strategy, namely companies that can increase the size and geographic scope of operations or otherwise offer growth and operating efficiency opportunities.

We may seek to finance acquisitions or develop strategic relationships which may dilute the interests of our shareholders.

The financing for future acquisitions could dilute the interests of shareholders, result in an increase in indebtedness, or both. The issuance of common stock in the offering completed in March 2015 (the "Offering") resulted in dilution to existing shareholders and the issuance of additional shares of common stock upon the exercise of any Warrants issued in the Offering will result in additional dilution to current shareholders. In addition, an acquisition, financing or other strategic transaction could adversely impact cash flows and/or operating results, and dilute shareholder interests, for a number of reasons. For example, the financing of the Betterware transaction and the senior secured convertible note that the Company issued in November 2015 each allow for the payment of certain obligations under such convertible note with shares of common stock which may dilute existing stockholders. Other reasons may include:

Interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and
Any issuance of securities in connection with an acquisition or other strategic transaction which dilutes the current common stock holders.

We may be unsuccessful in integrating the business operations of our subsidiaries or any new businesses we acquire, which, if it were to occur, would negatively impact our growth strategy.

In the past, the Company's operations have been expanded via the acquisition of direct-selling businesses and engaging in the sale of new products through new distributors. The Company continues the process of integrating the operations of the entities acquired. There is a risk that the Company will be unable to successfully integrate the acquired businesses with the current management and structure. The Company is based in Dallas, Texas, and several of the businesses the Company acquired are based in other locations such as Europe, making the integration of newly acquired businesses challenging, including the generation of data required for the preparation and filing of the financial statements. The Company's estimates of capital, personnel and equipment required for the businesses are based on the historical experience of management and businesses they are familiar with.

The Company's primary growth strategy is based on increasing acquisitions of, or entering strategic transactions with direct selling companies, and potentially companies engaged in other direct selling related businesses. The failure to successfully complete the integration of the businesses acquired could have an adverse effect on prospects, business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price. The integration of acquired entities may include the following challenges:

Assimilating business operations, products and personnel with existing operations, products and personnel;
Estimating the capital, personnel and equipment required for the acquired business based on the historical experience of management;
Minimizing potential adverse effects on existing business relationships with other suppliers and customers;
Successfully developing and marketing the acquired entity’s products and services;

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Entering a market in which the Company has limited prior experience; and
Coordinating efforts throughout various distant localities and time zones where the acquired entities are based.

The growth strategy will be subject to many of the risks common to new enterprises, including the ability to implement a business plan, market acceptance of proposed products and services, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, competition from better funded and experienced companies, and the ability to generate profits. The Company can not make any assurance that the Company will be able to consummate the Company's business strategy and plans, that the Company's activities will be successful, or that the Company's financial, technological, market, or other limitations will not force the Company to modify, alter, significantly delay, or significantly impede the implementation of the plans.

The diversion of management’s attention and costs associated with acquisitions may have a negative impact on our business.

If management’s attention is diverted from the management of the existing businesses as a result of its efforts in evaluating and negotiating new acquisitions and strategic transactions, the prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations of the existing businesses may suffer. The Company may also incur unanticipated costs in connection with pursuing acquisitions and strategic transactions.

Acquisitions may subject us to additional unknown risks which may affect our customer retention and cause a reduction in our revenues.

In completing prior acquisitions and any future acquisitions, the Company has and will rely upon the representations and warranties and indemnities made by the sellers with respect to each such acquisition as well as the due diligence investigation. The Company cannot assure that such representations and warranties will be true and correct or that the due diligence will uncover all materially adverse facts relating to the consolidated results of operations and financial condition of the acquired companies or their customers. To the extent that the Company is required to pay the debt obligations of an acquired company, or if material misrepresentations exist, the Company may not realize the expected benefit from such acquisition and the Company will have overpaid in cash and/or stock for the value received in that acquisition.

We may have difficulty managing future growth.

Since the Company commenced operations in the direct-to-consumer business, the business has grown through the acquisition of revenue while the Company tries to stabilize the organic businesses. There can be no assurance that conflicts of interest will not arise with respect to John P. Rochon’s and John Rochon, Jr.’s ownership and control of the Company or that any conflicts will be resolved in a manner favorable to the other shareholders of the Company. On December 1, 2014, the Amended Share Exchange Agreement became effective, which limits Rochon Capital’s right to be issued the Second Tranche Stock solely upon the occurrence of certain stock acquisitions by third parties or the announcement of certain tender or exchange offers of common stock.

Furthermore, the issuance of the Second Tranche Stock in accordance with the terms of the Amended Share Exchange Agreement would have a further dilutive effect.

Assuming the issuance of the Second Tranche Stock occurs, the number of outstanding shares of common stock would increase to in excess of 60,000,000, with approximately 190,000,000 shares of common stock available for issuance and John P. Rochon, together with John Rochon, Jr., would beneficially own approximately 75.9% of outstanding shares of common stock. In the event the Second Tranche Stock becomes issuable, 25,240,676 additional shares of common stock will be issued. The perception that such further dilution could occur may cause the market price of the common stock to decline.

We depend heavily on John P. Rochon and John Rochon, Jr., and we may be unable to find a suitable replacement for either of them if we were to lose their services.

The Company is heavily dependent upon John P. Rochon, the Chief Executive Officer and Chairman of the Board and John Rochon, Jr., the Vice Chairman of the Board. The loss or unavailability of either of them could have a material adverse effect on the prospects, business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price because of the unique industry experience and success they contribute to the Company.

We are dependent upon affiliated parties for the provisions of a substantial portion of our administrative services as we do not have the internal capabilities to provide such services, and many of our employees are also employees of such affiliated entities.


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The Company utilizes the services of Richmont Holdings, Inc. ("Richmont Holdings,") a private investment and business management company owned 100% by John P. Rochon, under a reimbursement of services agreement pursuant to which Richmont Holdings provides transactions and consulting services. The Company has entered into an agreement with Richmont Holdings to reimburse Richmont Holdings for certain expenses incurred by the Company in connection with the access to certain of its personnel, financial analysis personnel, strategy assistance, marketing advice, taxation advice, and assorted other services related to day-to-day operations and the efforts to acquire and manage direct-to-consumer companies. The Company continues to rely upon Richmont Holdings for advice and assistance in areas related to identification, analysis, financing, due diligence, negotiations and other strategic planning, accounting, tax and legal matters associated with potential acquisitions. Richmont Holdings and its affiliates have experience in the above areas. There can be no assurance that the Company can successfully develop the necessary expertise and infrastructure without the assistance of these affiliated entities.

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.

Certain of our subsidiaries are dependent on their key personnel.

The loss of the key executive officers of certain subsidiaries would have a significant adverse effect on the operations of the affected subsidiary and its prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations. Although major decision making policies are handled by the Company’s senior management, certain subsidiaries are primarily dependent upon their founder and/or Chief Executive Officer for their leadership roles with the respective sales forces. The Company has lost the services of several of these individuals from material subsidiaries in the past year. Readers should expect to see a reduction in resources associated with this change. The loss of additional individuals could have a negative impact on revenue and sale representative recruiting. The Company believes it is critical to retain certain key leaders of the acquired businesses, however there can be no assurance that the Company will be successful in attracting and retaining the key personnel of an acquired business.

During 2017, due to organizational restructuring, the Company’s Vice Chairman of the Board, John Rochon Jr., began managing Agel and YIAH.

Our failure to establish and maintain qualified representatives and sales leader relationships for any reason could negatively impact sales of our products and harm our financial condition and operating results.

The Company distributes products exclusively to and through independent sales representatives. The Company depends upon them directly for substantially all of the Company's revenue. The independent sales representatives, including the sales leaders, may voluntarily terminate their representative agreements with the Company at any time. In general, to increase the revenue of a Company in this industry, the Company must increase the number of, or the productivity of, the independent sales representatives. Accordingly, the success of the Company depends in significant part upon the ability to recruit, retain and motivate a large base of independent sales representatives. The loss of a significant number of independent sales representatives for any reason could negatively impact the Company's product sales and could impair the Company's ability to attract new independent sales representatives. During the fiscal year ended December 31, 2016, the number of independent sales representatives decreased from 63,000 to 46,000 as compared to the fiscal year ended December 31, 2015. The revenue was significantly impacted as a result of this decline in the number of independent sales representatives In the Company's efforts to attract and retain independent sales representatives, the Company competes with other network marketing organizations, including those in the "gourmet food," "nutritional and wellness," "home décor" product industries. The Company's operating results could be harmed if existing and new business opportunities and products do not generate sufficient interest to retain existing and attract new independent sales representatives.

The Company has a high turnover rate of independent sales representatives, which is a common characteristic found in the direct selling industry. The contracts signed by the Company's independent sales representatives enable them to terminate their service at any time.

The ability to remain competitive and maintain and expand the business depends, in significant part, on the success of the subsidiaries in recruiting, retaining, and incentivizing their independent sales representatives through an appropriate compensation plan, the maintenance of an attractive product portfolio and other incentives, and innovating the direct-to-consumer model. The Company cannot ensure that the strategies for soliciting and retaining the representatives of the subsidiaries or any direct-to-consumer company acquired in the future will be successful, and if they are not, the Company's prospects, business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price could be negatively affected.

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Several factors affect the ability to attract and retain independent sales representatives, including:

On-going motivation of independent sales representatives;
General economic conditions;
Significant changes in the amount of commissions paid;
Public perception and acceptance of the industry, business and products;
Ability to provide proprietary quality-driven products that the market demands;
Competition in recruiting and retaining independent sales representatives; and
Public perception of the Company.

Changes to our compensation arrangements could be viewed negatively by some independent sales representatives and could cause failure to achieve desired long-term results and increases in commissions paid could have a negative impact on profitability.

The payment of commissions and incentives, including bonuses and prizes, is one of the Company's most significant expenses. The Company closely monitors the amount of the commissions and incentives paid as a percentage of net revenues, and may periodically adjust the compensation plan to better manage these costs.

The Company may modify components of the compensation plans from time to time in an attempt to remain competitive and attractive to existing and potential independent sales representatives including modifications to:

Address changing market dynamics;
Provide incentives to independent sales representatives that are intended to help grow the business;
Conform to local regulations; and
Address other business needs.

Because of the size of the sales force and the complexity of the compensation plans, it is difficult to predict how independent sales representatives will view such changes and whether such changes will achieve their desired results. Furthermore, any downward adjustments to commissions and incentives may make it difficult to attract and retain independent sales representatives or cause us to lose some of the existing independent sales representatives. There can be no assurance that changes to the compensation plans will be successful in achieving target levels of commissions and incentives as a percentage of net revenues and preventing these costs from having a significant adverse effect on earnings.

Our business operates in an industry with intense competition.

The business operates in an industry with numerous manufacturers, distributors and retailers of consumer goods. The market for products is intensely competitive. Many competitors, such as Avon Products Inc., Tupperware Brands Corp. and others are significantly larger, have greater financial resources, and have more name recognition. The Company relies on the independent sales representatives to market and sell the products through direct marketing techniques. The ability to compete with other direct marketing companies depends greatly on the ability to attract and retain qualified independent sales representatives. In addition, the Company currently does not have significant patent or other proprietary protection, and competitors may introduce products with the same or similar ingredients. As a result, the Company may have difficulty differentiating products from competitors’ products and other competing products that enter the market. There can be no assurance that future operations would not be harmed as a result of changing market conditions and future competition.

We and our subsidiaries generally conduct business in one channel.

The principal business is conducted worldwide in one channel, the direct-to-consumer channel. Products and services of direct-to-consumer companies are sold to retail consumers. Spending by retail consumers is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices, labor strikes and consumer confidence, all of which are beyond the Company's control. The Company may face economic challenges because customers may continue to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and falling home prices, among other things.

Changes in consumer purchasing habits, including reducing purchases of a direct-to-consumer company’s products, or reducing purchases from representatives or buying products in channels other than direct-to-consumer, such as retail, could reduce the Company's sales, impact the ability to execute the business strategy or have a material adverse effect on the prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations.

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Direct selling companies are subject to numerous laws.

The direct-to-consumer industry is subject to a number of federal and state regulations administered by the Federal Trade Commission and various state agencies in the United States, as well as regulations regarding direct-to-consumer activities in foreign markets. Laws specifically applicable to direct-to-consumer companies generally are directed at preventing deceptive or misleading marketing and sales practices, and include laws often referred to as "pyramid" or "chain sales" scheme laws. These "anti-pyramid" laws are focused on ensuring that product sales ultimately are made to end consumers and that advancement within a sales organization is based on sales of products and services rather than investments in the organization, recruiting other participants, or other non-retail sales-related criteria. The regulatory requirements concerning direct-to-consumer programs involve a high level of subjectivity and are subject to judicial interpretation. The Company is subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. Any direct-to-consumer company that is owned or acquired in the future, could be found not to be in compliance with current or newly adopted laws or regulations in one or more markets, which could prevent us from conducting business in these markets and harm the Company's prospects, business activities, consolidated cash flow, consolidated financial condition, consolidated results of operations, and stock price. The Company's is aware of pending judicial actions and investigations against other companies in the direct-to-consumer industry. Adverse decisions in these cases could impact the business if direct-to-consumer laws or anti-pyramid laws are interpreted more narrowly or in a manner that results in additional burdens or restrictions on direct selling. The implementation of such regulations may be influenced by public attention directed toward a direct-to-consumer company, its products or its direct-to-consumer program, such that extensive adverse publicity could result in increased regulatory scrutiny. If any government were to ban or restrict the business model, the Company's prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations may be materially adversely affected.

We are subject to numerous government regulations.

Products and related promotional and marketing activities are subject to extensive governmental regulation by numerous governmental agencies and authorities, including the Food and Drug Administration, the FTC, the Consumer Product Safety Commission, the Department of Agriculture, State Attorney Generals and other state regulatory agencies in the United States, and similar government agencies in each market in which the Company operates. Government authorities regulate advertising and product claims regarding the efficacy and benefits of the products. These regulatory authorities typically require adequate and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation can vary widely from market to market and there is no assurance that the research and development efforts undertaken to support the Company's claims will be deemed adequate for any particular product or claim. If the Company is unable to show adequate and reliable scientific substantiation for product claims, or marketing materials, or the claims of the sales force that exceed the scope of allowed claims for nutritional supplements, spices, or skin care products, the FDA, or other regulatory authorities could take enforcement action which could harm the business by requiring a revision of marketing materials, amendment of claims, or stoppage of product sales.

For example, the FDA recently issued warning letters to several cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims regarding gene activity, cellular rejuvenation, and rebuilding collagen. There is a degree of subjectivity in determining whether a claim is an improper structure/function claim. Given this subjectivity and the research and development focus on skin care products and dietary supplements, there is a risk that the Company could receive a warning letter, be required to modify product claims or take other actions to satisfy the FDA if the FDA determines any marketing materials include improper structure/function claims for cosmetic products. In addition, plaintiffs’ lawyers have filed class action lawsuits against some competitors after the competitors received these FDA warning letters. There can be no assurance that the Company will not be subject to governmental actions or class action lawsuits, which could harm the business.

There are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies.

As a U.S. entity operating through subsidiaries in foreign jurisdictions, the Company is subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between the Company and subsidiaries and for product purchases, management services and contractual obligations, such as the payment of sales commissions.

The failure of the representatives of our subsidiaries to comply with laws, regulations and court decisions creates potential exposure for regulatory action or lawsuits against us.

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Because the representatives that market and sell products and services are independent contractors, and not employees, the Company has limited control over their actions. In the United States, the direct-to-consumer industry and regulatory authorities have generally relied on the implementation of a company’s rules and policies governing its direct-to-consumer sales field, designed to promote retail sales, protect consumers, prevent inappropriate activities and distinguish between legitimate direct-to-consumer plans and unlawful pyramid schemes, to compel compliance with applicable laws. The Company maintains compliance measures to identify specific complaints against representatives and to remedy any violations through appropriate sanctions, including warnings, suspensions and, when necessary, terminations. Because of the significant number of representatives' subsidiaries have, it is not feasible for the subsidiaries to monitor the representatives’ day-to-day business activities. The Company must maintain the "independent contractor" status of representatives and, therefore, have limited control over their business activities. As a result, the Company cannot insure that the representatives will comply with all applicable rules and regulations, domestically or globally. Violations by the representatives of applicable laws or of the policies and procedures in dealing with customers could reflect negatively on the Company's prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations, including the business reputation, and could subject the Company to fines and penalties. In addition, it is possible that a court could hold the Company civilly or criminally accountable based on vicarious liability because of the actions of the representatives.

Although the physical labeling of products is not within the control of the representatives, the representatives must nevertheless advertise the products in compliance with the extensive regulations that exist in certain jurisdictions, such as the United States, which considers product advertising to be labeling for regulatory purposes.

Foods, nutritional supplements and skin care products are subject to rigorous FDA and related legal regimens limiting the types of therapeutic claims that can be made about the products. The treatment or cure of disease, for example, is not a permitted claim for these products. While the Company trains the independent sales representatives and attempts to monitor the sales representatives’ marketing materials, the Company cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If the Company's independent sales representatives fail to comply with these restrictions, then the Company and the independent sales representatives could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm the Company's consolidated results of operations and financial condition. Although the Company expects that responsibility for the actions of the independent sales representatives in such an instance would be dependent on a determination that the Company either controlled or condoned a non-compliant advertising practice, there can be no assurance that the Company could not be held vicariously liable for the actions of the independent sales representatives.

The United Kingdom’s vote to exit from the European Union could adversely impact us.

On June 23, 2016, in a referendum vote commonly referred to as “Brexit,” a majority of British voters voted to exit the European Union. Following the referendum, it is expected that the British government will initiate negotiations with the European Union to determine the terms of the U.K.’s exit. A withdrawal could potentially disrupt the free movement of goods, services and people between the U.K. and the European Union, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the European Union or other nations as the U.K. pursues independent trade relations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. The effects of Brexit will depend on any agreements the U.K. makes to retain access to European Union or other markets either during a transitional period or more permanently. It is unclear what long-term economic, financial, trade and legal implications the withdrawal of the U.K. from the European Union would have and how such withdrawal would affect the Company's business globally and in the region. In addition, Brexit may lead other European Union member countries to consider referendums regarding their European Union membership. Any of these events, along with any political, economic and regulatory changes that may occur, could cause political and economic uncertainty in Europe and internationally and harm the Company's business and financial results.

Our operations could be harmed if we are found not to be in compliance with Good Manufacturing Practices.

In the United States, FDA regulations on "Good Manufacturing Practices" and "Adverse Event Reporting" requirements for the nutritional supplement industry require the Company and suppliers to maintain good manufacturing processes, including stringent supplier qualifications, ingredient identification, manufacturing controls and record keeping. The ingredient identification requirement, which requires the Company to confirm the levels, identity and potency of ingredients listed on the product labels within a narrow range, is particularly burdensome and difficult for the Company with respect to the cosmetic products which contains many different ingredients. The Company is also required to report serious adverse events associated with consumer use of products. The Company operations could be harmed if regulatory authorities make determinations that the Company, or suppliers, are not in compliance with these regulations or public reporting of adverse events harms the reputation for quality and safety. A

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finding of noncompliance may result in administrative warnings, penalties or actions impacting the ability to continue selling certain products. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain products as the Company works with the suppliers to assure they are qualified and in compliance.

Furthermore, the Company is self-insured with respect to product liability claims. If a material claim were filed and judgment is entered against the Company, it is possible the Company may not have the financial resources to settle such claims.

Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies could harm our prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations.

The number of representatives and the results of operations may be affected significantly by the publics' perception of the Company and its subsidiaries and of similar companies. This perception is dependent upon opinions concerning:

The safety and quality of products, components and ingredients, as applicable;
The safety and quality of similar products, components and ingredients, as applicable, distributed by other companies’ representatives;
Marketing program;
The business of direct-to-consumer companies generally;
The financial condition of the Company; and
Industry discussion regarding the Company's commission and incentive plans.

Adverse publicity concerning any actual or purported failure of the subsidiaries or of their representatives to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the regulation of the marketing program, the licensing of the products for sale in target markets or other aspects of the business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse effect on the goodwill and could negatively affect the ability to attract, motivate and retain representatives, which would negatively impact the ability to generate revenue.

If we are unable to develop and introduce new products that gain acceptance from our customers and representatives, our business could be harmed.

The Company's continued success depends on the ability to anticipate, evaluate, and react in a timely and effective manner to changes in consumer spending patterns and preferences. The Company must continually work to discover and market new products, maintain and enhance the recognition of the brands, achieve a favorable mix of products, and refine the approach as to how and where products are marketed and sold. A critical component of the business is the ability to develop new products that create enthusiasm among the independent sales representatives and ultimate customers. If the Company is unable to introduce new products, the independent sales representatives’ productivity could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, this would harm the results of operations. Factors that could affect the ability to continue to introduce new products include, among others, government regulations, the inability to attract and retain qualified research and development staff, the termination of third-party research and collaborative arrangements, proprietary protections of competitors that may limit the ability to offer comparable products, and the difficulties in anticipating changes in consumer tastes and buying preferences.

A general economic downturn, a recession globally or in one or more of our geographic regions or other challenges may adversely affect our business and our access to liquidity and capital.

A downturn in the economies in which products are sold, including any recession in one or more of the geographic regions, or the current global macro-economic pressures, could adversely affect the business and the Company's access to liquidity and capital. The Company could experience a decline in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on liquidity and capital resources, including the ability to raise additional capital and maintain credit lines and offshore cash balances.

Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond the Company's control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of products. The Company could face continued economic challenges in the current fiscal

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year if customers continue to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit or sharply falling home prices, among other things.

Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.

Some of the nutritional supplements the Company offers are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Other nutritional supplements offered contain innovative ingredients. Although the Company believes that all of the products are safe when taken as directed, there is little long-term experience with human consumption of certain of these ingredients or combinations of ingredients in concentrated form. The Company conducts research and tests the formulation and production of products, but the Company has not performed or sponsored any clinical studies. Furthermore, because the Company is highly dependent on consumers’ perception of the efficacy, safety, and quality of the products, as well as similar products distributed by other companies, the Company could be adversely affected in the event that these products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers’ use or misuse of the products or similar products of competitors.

We frequently rely on outside suppliers and manufacturers, and if those suppliers and manufactures fail to supply products in sufficient quantities and in a timely fashion, our business could suffer.

The Company depends on outside suppliers for raw materials and finished goods. The Company may also use outside manufacturers to make all or part of the products. Profit margins and timely product delivery may be dependent upon the ability of outside suppliers and manufacturers to supply products in a timely and cost-efficient manner. The contract manufacturers acquire all of the raw materials for manufacturing products from third-party suppliers. The Company does not believe that it's materially dependent on any single supplier for raw materials or finished goods. However, in the event of a loss of multiple suppliers and experience delays in identifying or transitioning to alternative suppliers, the Company could experience product shortages or product back orders, which could harm the business. There can be no assurance that suppliers will be able to provide the contract manufacturers the raw materials or finished goods in the quantities and at the appropriate level of quality that are requested or at a price that the Company is willing to pay. The Company is also subject to delays caused by any interruption in the production of these materials including weather, crop conditions, climate change, transportation interruptions and natural disasters or other catastrophic events. The Company's ability to enter new markets and sustain satisfactory levels of sales in each market may depend on the ability of outside suppliers and manufacturers to provide required levels of ingredients and products and to comply with all applicable regulations.

The Company is dependent upon the uninterrupted and efficient operation of the manufacturers and suppliers of products. Those operations are subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA. There can be no assurance that the occurrence of these or any other operational problems at the facilities would not have a material adverse effect on the business, consolidated results of operations and/ or financial condition.

Disruptions to transportation channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those markets.

The Company may experience disruptions to the transportation channels used to distribute products, including increased airport and shipping port congestion, a lack of transportation capacity, increased fuel expenses, and a shortage of manpower. Disruptions in the container shipments may result in increased costs, including the additional use of airfreight to meet demand. Although the Company has not recently experienced significant shipping disruptions, the Company continues to watch for signs of upcoming congestion. Congestion to ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in profitability.

A failure of our information technology systems would harm our business.

The Company's IT systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters, telecommunication failures, and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although the Company has started to develop a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting the business and the results of operations. The Company recently implemented an internally developed back office system at the Longaberger Company. If this system does not provide similar functionality to that of which the old system provided, the Company could incur additional losses due to distribution issues and other related problems.


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Our business is subject to on-line security risks, including security breaches.

The businesses involve the storage and transmission of users’ proprietary information, and security breaches could expose the Company to a risk of loss or misuse of information, litigation, and potential liability. An increasing number of websites, including those of several large companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent the security measures could misappropriate the Company's or the customers’ proprietary information, cause interruption in operations, damage computers or those of customers, or otherwise damage reputation and business. Any compromise of security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to reputation, and a loss of confidence in security measures, which could harm the business.

The Company's servers are also vulnerable to computer viruses, physical or electronic break-ins, "denial-of-service" type attacks and similar disruptions that could, in certain instances, make all or portions of the websites unavailable for periods of time. The Company may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult as the number of places the Company operates increases. Security breaches, including any breach of the Company or of parties with which have commercial relationships with the Company that result in the unauthorized release of users’ personal information, could damage the reputation and expose the Company to a risk of loss or litigation and possible liability. Insurance policies carry coverage limits, which may not be adequate to reimburse the Company for losses caused by security breaches.

Furthermore, data protection in domestic and international markets is governed by local, state, and federal laws that require compliance with each of these laws. Material penalties for each compliance issue of such laws, may be levied against the Company. The Company believes its data protection policies are robust, however, there can be no assurance the Company is in full compliance with each regulation.

Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks. In addition, taxation and transfer pricing could affect our operations and we as a result we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.

The ability to capitalize on growth in new international markets and to maintain the current level of operations in the existing international markets is exposed to risks associated with international operations, including:

The possibility that a foreign government might ban or severely restrict the business method of direct selling, or that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt the operations in an international market;
The lack of well-established or reliable legal systems in certain areas where the Company operates;
The presence of high inflation in the economies of international markets in which the Company operates;
The possibility that a government authority might impose legal, tax or other financial burdens on the Company or independent sales representatives, due, for example, to the structure of operations in various markets;
The possibility that a government authority might challenge the status of the independent sales representatives as independent contractors or impose employment or social taxes on the independent sales representatives;
The possibility that governments may impose currency remittance restrictions limiting the ability to repatriate cash;
The possibility that the governments may suspend the license to sell product in certain markets due to the non-payment of tax such as sales tax and value added tax; and
Challenges to transfer prices established by the Company.

As a multinational corporation, operating in many countries, including the United States, the Company is subject to transfer pricing and other tax regulations designed to ensure that the inter-company transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the local entities, and that the Company is taxed appropriately on such transactions. In addition, the Company's operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of products.

Regulators closely monitor the corporate structure, inter-company transactions, and how inter-company fund transfers effectuate. If regulators challenge the corporate structure, transfer pricing methodologies or inter-company transfers, operations may be harmed and the Company's effective tax rate may increase. A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on the worldwide earnings and such change could be significant to the financial results. In the

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event any audit or assessments are concluded adversely to the Company, these matters could have a material impact on the consolidated financial condition.

The Company is currently subject to pending or proposed audits that are at various levels of review, assessment, or appeal in a number of jurisdictions involving transfer pricing issues, income taxes, customs duties, value added taxes, withholding taxes, sales and use and other taxes and related interest and penalties in material amounts. In some circumstances, additional taxes, interest and penalties have been assessed and the Company will be required to pay the assessments or post surety, in order to challenge the assessments.

We are not current on the remittance of collected sales and use tax and VAT tax.

As of December 31, 2016, the Company is not current on sales and use tax remittance in the United States and VAT tax remittance in foreign markets. As a result, local tax authorities may at any time take the necessary steps to collected, in full, all tax collected that was not remitted, interest on the tax collected, and penalties, warranted by failing to timely remit the tax collect. In addition the local regulatory authorities may place a lien against the Company; and limit the ability to operate in the jurisdictions with unpaid tax. The regulatory authorities may collect the taxes by levying deductions against the Company's bank accounts. If the regulatory authorities use this method to collect taxes, the Company may have greater difficulty managing cash which may have a material impact on the Company's consolidated financial condition.

Currency exchange rate fluctuations could reduce our overall profits.

In 2016, 80.4% of revenues were derived from markets outside of the United States. In 2015, 71.0% of revenues were derived from markets outside of the United States. In preparing the consolidated financial statements, certain financial information is required to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk the reported sales, operating expenses, and net income could significantly fluctuate. The Company is not able to predict the degree of exchange rate fluctuations; nor can the Company estimate the effect any future fluctuations may have upon future operations. To date, the Company has not entered into any hedging contracts or participated in any hedging or derivative activities. Therefore, the Company has material exposure to foreign exchange fluctuations.

Non-compliance with anti-corruption laws could harm our business.

International operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA"). Any allegations that the Company is not in compliance with anti-corruption laws may require the Company to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any determination that the Company's operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties. Although the Company has implemented anti-corruption policies, controls and training globally to protect against violation of these laws, the Company cannot be certain that these efforts will be effective. In the past, competitors have been under investigation in the United States for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse publicity or increased scrutiny of the industry, the business could be harmed.

We may own, obtain or license intellectual property material to our business, and our ability to compete may be adversely affected by the loss of rights to use that intellectual property.

The market for products may depend significantly upon the value associated with product innovations and brand equity. Many direct sellers own, obtain or license material patents and trademarks used in connection with the marketing and distribution of their products. Those companies must expend time and resources in developing their intellectual property and pursuing any infringement of that intellectual property. The laws of certain foreign countries may not protect a company’s intellectual property rights to the same extent as the laws of the United States. The costs required to protect a company’s patents and trademarks may be substantial.

Challenges by private parties to the direct selling system could harm our business.

Direct-to-consumer companies have historically been subject to legal challenges regarding their method of operation or other elements of their business by private parties, including their own representatives, in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting over sales. No assurance can be provided

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that the Company would not be harmed if any such actions were brought against any of the current subsidiaries or any other direct selling company acquired in the future.

As a direct selling company, we may face product liability claims and could incur damages and expenses, which could affect our prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations.

As a direct-to-consumer company, the Company may face financial liability from product liability claims if the use of products results in significant loss or injury. A substantial product liability claim could exceed the amount of insurance coverage or could be excluded under the terms of an existing insurance policy, which could adversely affect the prospects, business activities, consolidated cash flow, consolidated financial condition, and consolidated results of operations.

Selling products for human consumption such as nutritional supplements and spices as well as the sale of skin care products involve a number of risks. The Company may need to recall some of products if they become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to the reputation, and a loss of consumer confidence in the products, which could have a material adverse effect on the business results and the value of the brands. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding products could adversely affect the Company's reputation and brand image.

Furthermore, the Company is self-insured with respect to product liability claims. If a material claim were filed and judgment is entered against the Company, it is possible the Company may not have the financial resources to settle such claims.

If we fail to protect our trademarks and tradenames, then our ability to compete could be negatively affected, which would harm our consolidated results of operations and financial condition.

The market for products depends upon the goodwill associated with the trademarks and trade names. The Company owns, or has licenses to use, the material trademark and trade name rights used in connection with the packaging, marketing and distribution of the products in the majority of the markets where those products are sold. Therefore, trademark and trade name protection is important to the business. Although most of the trademarks are registered in the United States and in certain foreign countries in which operations occur, the Company may not be successful in asserting trademark or trade name protection. In addition, the laws of certain foreign countries may not protect the intellectual property rights to the same extent as the laws of the United States. The loss or infringement of trademarks or trade names could impair the goodwill associated with the brands and harm the reputation, which would harm the Company's consolidated results of operations and financial condition.

The Company permits the limited use of the trademarks by independent sales representatives to assist them in the marketing of the products. It is possible that doing so may increase the risk of unauthorized use or misuse of the trademarks in markets where their registration status differs from that asserted by the independent sales representatives, or they may be used in association with claims or products in a manner not permitted under applicable laws and regulations. Were this to occur, it is possible that this could diminish the value of these marks or otherwise impair the further use of these marks.

Our business is subject to intellectual property risks.

None of the Company's products are protected by patents. Restrictive regulations governing the precise labeling of ingredients and percentages for nutritional supplements, the large number of manufacturers that produce products with many active ingredients in common and the rapid change and frequent reformulation of products make patent protection impractical. As a result, the Company enters into confidentiality agreements with certain employees in research and development activities, independent sales representatives, suppliers, directors, officers, and consultants to help protect the intellectual property, investment in research and development activities, and trade secrets. There can be no assurance that the Company's efforts to protect intellectual property and trademarks will be successful, nor can there be any assurance that third parties will not assert claims against the Company for infringement of intellectual property rights, which could result in the business being required to obtain licenses for such rights, to pay royalties or to terminate manufacturing of infringing products, all of which could have a material negative impact on the Company's consolidated results of operations and financial condition.

We may be held responsible for certain taxes or assessments relating to the activities of our independent sales representatives, which could harm our consolidated results of operations and financial condition.

The independent sales representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on the Company to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, the

33



Company is subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to the independent sales representatives. In the event that local laws and regulations require the Company to treat the independent sales representatives as employees, or if the independent sales representatives are deemed by local regulatory authorities to be employees, rather than independent contractors, the Company may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm the consolidated results of operations and financial condition.

Several of our directors and officers have other business interests.

Several directors have other business interests, including Mr. Rochon, who controls Richmont Holdings. Those other interests may come into conflict with the Company's interests and the interests of the shareholders. Mr. Rochon and several of the other directors serve on the boards of directors of several other private companies and, as a result of their business experience, may be asked to serve on the boards of other companies. The Company may compete with these other business interests for such directors’ time and efforts.

The Company's officers may also work for Richmont Holdings or its affiliated entities. These employees have discretion to decide what time they devote to the Company's activities, which may result in a lack of availability when needed due to their other responsibilities.

Impairment of goodwill and intangible assets is possible, depending upon future operating results and the value of our common stock.

The Company tested goodwill and intangible assets for impairment during the fourth quarter of the current fiscal year and will do so in future fiscal years, and on an interim basis, if indicators of impairment exist. Factors which influence the evaluation of impairment of goodwill and intangible assets include the price of the common stock and expected future operating results. If the carrying value of a reporting unit or an intangible asset is no longer deemed to be recoverable, the Company could potentially incur material impairment charges. For the year ended December 31, 2016, the Company recognized an impairment charge of $6.7 million as a result of this testing. For the year ended December 31, 2015, the Company recognized an impairment charge of $192,000. Although the Company believes these charges are non-cash in nature and do not affect the operations or cash flow, these charges reduce stockholders’ equity and reported results of operations in the period charged and will impact the shareholders' equity required to be in compliance with the NYSE American regulations.

There currently is a limited liquid trading market for our common stock and we cannot assure investors that a robust trading market will ever develop or be sustained.

To date there has been a limited trading market for the common stock on the NYSE American. The Company cannot predict how liquid the market for the common stock may become. The Company believes the listing of the common stock on the NYSE American is beneficial to the Company and the shareholders. However, while the Company believes that the NYSE MKT listing has improved the liquidity of the common stock, reduced trading volume and increased volatility may affect the share price. A lack of an active market may impair investors’ ability to sell their shares at the time they wish to sell them or at a price they consider reasonable. The lack of an active trading market may impair the Company's ability to raise capital by selling shares of capital stock and may impair the ability to acquire other companies by using common stock as consideration.

Market prices for the common stock will be influenced by a number of factors, including:

The issuance of new equity securities, including issuances of preferred stock;
The introduction of new products or services by the Company or competitors;
The acquisition of new direct selling businesses;
Changes in interest rates;
Significant dilution caused by the anti-dilutive clauses in financial agreements;
Competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
Variations in quarterly operating results;
Change in financial estimates by securities analysts;
A limited amount of news and analyst coverage for the company;
The depth and liquidity of the market for the shares of common stock;
Sales of large blocks of common stock, including sales by Rochon Capital, any executive officers or directors appointed in the future, or by other significant shareholders;
Investor perceptions of the company and the direct selling segment generally; and

34



General economic and other national and international conditions.

Our common stock may not always be considered a "covered security".

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as "covered securities." Because the common stock is listed on the NYSE MKT, the Company's common stock is a covered security. Although the states are preempted from regulating the sale of covered securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case.

Complying with federal securities laws as a publicly traded company is expensive. Any deficiencies in our financial reporting internal controls and the lack of attracting sufficiently experience accountants could adversely affect our consolidated financial condition, our ability to issue shares in acquisitions, and our trading price of common stock.

Companies listed on the NYSE American must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain the listing on NYSE American. The Exchange Act requires that reporting issuers file quarterly and annual reports containing financial statements with the SEC. The Company failed to timely file its 2015 Form 10-K, March Form 10-Q, June Form 10-Q, and September Form 10-Q. The Company may, from time to time, again experience difficulties in meeting the SEC’s reporting requirements. The recent failure and any future failure by the Company to timely file periodic reports with the SEC could harm the Company's reputation, negatively impact the Company's consolidated financial condition, the trading price of the common stock and the Company's ability to issue shares in acquisitions. The failure to timely file with the SEC the 2015 Form 10-K, the March Form 10-Q, the June Form 10-Q, and the September Form 10-Q is an event of default under the senior secured note with Dominion. Dominion agreed to waive each such event of default provided that the Company issues Dominion 50,000 shares of common stock for each ten (10) business days that each filing is late. In addition, Dominion has provided a waiver such that the 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. The Company has cured the default with respect to the untimely filing of the 2015 Form 10-K, the filing of the March Form 10-Q, the filing of the June Form 10-Q, and the filing of the September Form 10-Q. The failure to timely file has resulted in the Company's inability to remain S-3 eligible resulting, among other things, in the failure to meet the conditions that would require a cash exercise of the Warrants issued in the recent Offering. The Company will incur significant legal, accounting and other expenses related to compliance with applicable securities laws. Failure to comply with the responsibilities thereunder could cause sanctions or other actions to be taken by the SEC against the Company.

The limited trading volume of our common stock may cause volatility in our share price.

The Company's stock has in the past been thinly traded due to the limited number of shares available for trading on the NYSE American thus causing potential large swings in price. As such, investors and potential investors may find it difficult to resell their securities at or near the original purchase price or at any price. If the stock experiences volatility, investors may not be able to sell their common stock at or above the price they paid per share. Sales of substantial amounts of the common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of the common stock and the stock price may decline substantially in a short period of time. As a result, shareholders could suffer losses or be unable to liquidate their holdings.

Market price fluctuations may negatively affect the ability of investors to sell shares at consistent prices.

Sales of our common stock under Rule 144 could impact the price of our common stock.

In general, under Rule 144 ("Rule 144,") as promulgated under the Securities Act, persons holding restricted securities in an SEC reporting company, including affiliates, must hold their shares for a period of at least six months, may not sell more than 1% of the total issued and outstanding shares in any 90-day period and must resell the shares in an unsolicited brokerage transaction at the market price. Whenever a substantial number of shares of common stock become available for resale under Rule 144, the market price for the common stock will likely be impacted. However, the Company's prior history as a shell company requires that we are current in our SEC filings in order for investors to resell stock under Rule 144. During 2015 and 2016, the Company has not timely filed SEC filings and at this time the Company is not current in SEC filings.

Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price and trading volume.

35




Securities research analysts, including those affiliated with the underwriters, establish and publish their own periodic projections for the business. These projections may vary widely from one another and may not accurately predict the results the Company actually achieves. The stock price may decline if the actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes reports on the Company downgrades the stock or publishes inaccurate or unfavorable research about the business or if one or more of these analysts ceases coverage of the company or fails to publish reports on the Company regularly, the Company's stock price or trading volume could decline. While the Company expects securities research analyst coverage, if no securities or industry analysts begin to cover the Company, the trading price for the stock and the trading volume could be adversely affected.

Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources.

It is not uncommon for securities class action litigation to be brought against a company following periods of volatility in the market price of such company’s securities. Companies in certain industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. The Company's common stock has experienced substantial price volatility in the past. This may be a result of, among other things, variations in the Company's results of operations and announcements by the Company and competitors, as well as general economic conditions. The stock price may continue to experience substantial volatility. Accordingly, the Company may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and could divert the attention and resources of management.

We may issue additional securities in the future, which will reduce investors’ ownership percentage in our outstanding securities and will dilute our share value.

If future operations or acquisitions are financed through issuing equity securities or if existing indebtedness is paid with, exchanged with, or restructured with equity securities, shareholders could experience significant dilution. The issuance of common stock in a public offering was consummated in March 2015 resulted in dilution to existing shareholders and the issuance of additional shares of common stock and/or Warrants pursuant to the Underwriters’ over-allotment option as well as the exercise of any Warrants issued in the March 2015 offering will result in additional dilution to current shareholders. In addition, the conversion of the convertible notes issued in the Betterware transaction in October 2015 and the debt financing that was consummated in November 2015, will result in additional dilution to shareholders. The securities issued in the November 2015 debt financing have rights and preferences that are senior to rights of the common stock and the Company may in the future issue securities in connection with future financing activities or potential acquisitions that may have rights and preferences senior to the rights and preferences of the common stock. The issuance of shares of the common stock upon the exercise of options, which the Company may grant in the future, may result in dilution to the shareholders. In addition, the issuance of securities in lieu of payments of outstanding debt will also have a dilutive effect. The Company may issue preferred stock that may have rights and preferences that are superior to the rights of the common stock. The Company's articles of incorporation currently authorize the Company to issue 250,000,000 shares of common stock. Assuming the issuance of the Second Tranche Stock (which shares may only be issued under certain limited circumstances, as described above), the number of outstanding shares of common stock would increase to in excess of 60,000,000 with approximately 190,000,000 shares of common stock available for issuance. The future issuance of common stock may result in substantial dilution in the percentage of common stock held by then existing shareholders. The Company may issue common stock in the future, including for services or acquisitions or other corporate actions that may have the effect of diluting the value of the shares held by the shareholders, and might have an adverse effect on any trading market for the common stock.

We have not paid and do not anticipate paying any dividends on our common stock.

The Company has not paid any dividends on common stock to date and it is not anticipated that any dividends will be paid to holders of the common stock in the foreseeable future. In addition, certain of the Company's outstanding loans prohibit the payment of dividends while the loans are outstanding. While the Company's future dividend policy will be based on the operating results and capital needs of the businesses, it is currently anticipated that any earnings will be retained to finance the future expansion and for the implementation of the business strategy. The shareholders will not realize a return on their investment in the Company unless and until they sell shares after the trading price of the common stock appreciates from the price at which a shareholder purchased shares of the common stock. As an investor, readers should consider that a lack of a dividend can further affect the market value of the common stock and could significantly affect the value of any investment in the Company.

Our articles of incorporation, bylaws and Florida law have anti-takeover provisions that could discourage, delay or prevent a change in control, which may cause our stock price to decline.

36




The Company's articles of incorporation, bylaws and Florida law contain provisions which could make it more difficult for a third party to acquire the Company, even if closing such a transaction would be beneficial to the shareholders. The Company is authorized to issue up to 500,000 shares of preferred stock and may issue preferred stock in future financings or in lieu of outstanding debt. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board without further action by shareholders. The terms of any series of preferred stock may include preferential voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. The issuance of any preferred stock could materially adversely affect the rights of the holders of common stock, and therefore, reduce the value of common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict the ability to merge with, or sell assets to, a third party and thereby preserve control by the present management.

Provisions in the articles of incorporation, bylaws and Florida law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control, including changes a shareholder might consider favorable. Such provisions may also prevent or frustrate attempts by the shareholders to replace or remove the management team. In particular, the articles of incorporation, bylaws and Florida law, as applicable, among other things, provide the Board with the ability to alter the bylaws without shareholder approval, and provide that vacancies on the Board may be filled by a majority of directors in office, although less than a quorum.

In addition, the Amended Share Exchange Agreement provides for the issuance of the Second Tranche Stock to Rochon Capital solely upon the occurrence of certain stock acquisitions by third parties or the announcement of certain tender or exchange offers of common stock. The Second Tranche Stock, which possess no rights other than voting rights, may serve as a further deterrent to third parties looking to acquire us. See the section entitled "Certain Relationships and Related Transactions, and Director Independence".

Resales of our common stock in the public market by our stockholders may cause the market price of our common stock to fall.

This issuance of shares of common stock in any offering, could result in resales of the common stock by the current stockholders concerned about the potential dilution of their holdings. In turn, these resales could have the effect of depressing the market price for the common stock.

There is no public market for the Warrants to purchase shares of our common stock that were sold in the March 2015 offering.

There is no established public trading market for the Warrants that were sold in the March 2015 offering, and the Company does not expect a market to develop. In addition, the Company does not intend to apply to list the Warrants on any national securities exchange or other nationally recognized trading system, including the NYSE American. Without an active market, the liquidity of the Warrants will be limited.


37



Item 1B. Unresolved Staff Comments

Because the Company is a smaller reporting company, the Company is not required to provide the information required by this Item.


38



Item 2. Properties

The following table sets forth the location and approximate square footage of the Company's major manufacturing, distribution and office facilities:
Entity
 
Location
 
Approximate square
footage of facilities
 
Land in acres
 
Description of property
 
Own/ Lease
 
Average Annual Value
JRJR
 
Dallas, Texas
 
9,446

 

 
JRJR corporate headquarters
 
Lease
 
$
322,000

JRJR
 
Lucerne, Switzerland
 
350

 

 
JRJR European headquarters
 
Lease
 
$
38,000

TLC
 
Newark, Ohio
 
180,000

 
22

 
Former Longaberger headquarters
 
Own
 
$

TLC
 
Frazeysburg, Ohio
 
1,291,413

 
232

 
Longaberger headquarters, manufacturing, warehouse, distribution center, and Homestead (retail, restaurants, and historic structures)
 
Lease
 
$
2,949,000

Agel
 
Pleasant Grove, Utah
 
10,656

 

 
Agel corporate headquarters (1)
 
Lease
 
$
189,000

Agel
 
Moscow, Russia
 
4,166

 

 
Agel Moscow warehouse and distribution center
 
Lease
 
$
122,000

Agel
 
St. Petersburg, Russia
 
487

 

 
Agel St. Petersburg warehouse and distribution center
 
Lease
 
$
13,000

Agel
 
Milan, Italy
 
1,399

 

 
Agel Italy warehouse and distribution center
 
Lease
 
$
14,000

Agel
 
Almaty, Kazakhstan
 
1,086

 

 
Agel Kazakhstan warehouse and distribution center
 
Lease
 
$
19,000

Agel
 
Kiev, Ukraine
 
3,610

 

 
Agel Ukraine office, warehouse, and distribution center
 
Lease
 
$
13,000

Agel
 
Bangkok, Thailand
 
861

 

 
Agel Bangkok office
 
Lease
 
$
16,000

Agel
 
Bangkok, Thailand
 
560

 

 
Agel Bangkok warehouse
 
Lease
 
$
8,000

YIAH
 
Gold Coast, Australia
 
22,066

 

 
YIAH office and manufacturing (1)
 
Lease
 
$
148,000

HCG
 
Clark's Summit, Pennsylvania
 
2,080

 

 
Happenings Communications Group headquarters
 
Lease
 
$
21,000

Kleeneze
 
Accrington, United Kingdom
 
10,000

 

 
Kleeneze office
 
Lease
 
$
234,000

Kleeneze
 
Accrington, United Kingdom
 
101,000

 
 
 
Kleeneze Warehouse
 
Lease
 
$
505,000

Betterware
 
Birmingham, United Kingdom
 
58,355

 

 
Betterware office, warehouse, and distribution center
 
Lease
 
$
379,000


(1) The Company defaulted on the lease terms of these locations in 2017. As a result, the Company no longer utilizes these properties.


39



Item 3. Legal Proceedings

CFI NNN Raiders, LLC

On June 26, 2017, CFI NNN Raiders, LLC ("CFI") filed a complaint against the Company in connection to the Company's failure to meet the terms negotiated under the triple net lease agreement (referred to as the "sale leaseback 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. CFI is in possession of a $4.4 million security deposit, as of December 31, 2016, that was initially retained by CFI upon the effective date of the sale leaseback agreement. As of May 11, 2017, CFI applied $941,000 of the security deposit towards unpaid accounts. The lawsuit 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.

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 principle 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 recorded a liability of $2,750,000, 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.

40




Spanish Taxing Authorities

As first disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, the Company is disputing an income tax assessments and withholding tax assessments, 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 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.

Complaint Against Former CEO of YIAH

During the fourth quarter of 2016, the Company received allegations that the CEO of one of the Company's subsidiaries (Your Inspiration at Home) was actively soliciting sales force members on behalf of a competitor. During the first half of 2017, the Company investigated these alleged claims. The investigation produced sufficient evidence, in the Company's opinion, to pursue a formal complaint against the now former CEO. The complaint against the former CEO was formally filed in June of 2017. The Company has claimed that the CEO interfered with existing contracts, misappropriated trade secrets, and breached other employment-related obligations. The Company is seeking in excess of $10,000,000 for damages caused by the former CEO. On October 11, 2017, both parties agreed to move the case to Federal Court and pursue the dispute in binding arbitration. Given the damages sustained by YIAH, the Company intends to voluntarily liquidate the company. The Company has taken steps to restart YIAH by launching a new brand.


41



Item 4. Mine Safety Disclosures
 
Not applicable.


42



PART II.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Market Information

Since January 28, 2016, the Company's common stock has been quoted on the NYSE American ("the exchange") under the symbol "JRJR." From December 5, 2014 to January 28, 2016, the common stock was quoted on the NYSE American under the symbol "CVSL." The last reported sale price of common stock on the NYSE American on October 18, 2017 was $0.31.

The following table sets forth, for the periods indicated, the high and low per share closing bid price quotations for the Company's common stock, as quoted on the NYSE American. The prices were reported by an online service, reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions. The fiscal year-end date is December 31.
 
 
 
 
 
 
Fiscal Year
 
 
2017
 
2016
 
2015
For the quarter ended:
 
High
 
Low
 
High
 
Low
 
High
 
Low
March 31
 
$
0.82

 
$
0.43

 
$
1.73

 
$
0.81

 
$
9.40

 
$
2.22

June 30
 
$
0.57

 
$
0.41

 
$
1.36

 
$
0.87

 
$
2.33

 
$
1.13

September 30
 
$
0.73

 
$
0.41

 
$
1.24

 
$
0.87

 
$
2.79

 
$
1.03

December 31
 
 
 
 
 
$
1.15

 
$
0.67

 
$
1.83

 
$
0.99


Holders

As of October 18, 2017, the Company had 40,591,108 shares of common stock outstanding held by approximately 2,128 shareholders, including approximately 709 holders of record. This amount excludes 25,240,676 shares issuable to Rochon Capital Partners under certain limited circumstances, as described in the Amended Share Exchange Agreement found in Part II, Item 8, Note (15), Stockholders' Equity and Non-controlling Interest, to the consolidated financial statements included in this report.

Dividends

The Company has never declared or paid a cash dividend. Any future decisions regarding dividends will be made by the Board of Directors. In addition, certain of the Company’s outstanding loans prohibit our payment of dividends while the loans are outstanding. The Company currently intends to retain and use any future earnings for the development and expansion of the business and does not anticipate paying any cash dividends in the near future. The Board of Directors has complete discretion on whether to pay dividends. Even if the Board of Directors decides to pay dividends, the form, frequency and amount of any dividends will depend upon future operations and earnings, capital requirements and surplus, general consolidated financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.

Equity Compensation Plan Information

The Company currently has two equity compensation plans for employees. See Part II, Item 8, Note (14), Share-based Compensation Plans, to the consolidated financial statements included in this report, and Part III, Item 12 of this Annual Report on Form 10-K under the heading "Equity Compensation Plan Information" for equity compensation plan information.

Unregistered Sales of Equity Securities and Use of Proceeds

All sales of unregistered securities during the year ended December 31, 2016, have been previously reported in prior quarterly reports on Form 10-Q.

Issuer Purchases of Equity Securities

There were no issuer purchases of equity securities during the fiscal year ended December 31, 2016.


43



Item 6. Selected Financial Data

Because the Company is a smaller reporting company, the Company is not required to provide the information required by this Item.


44



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included in Part II, Item 8 in this Annual Report on Form 10-K. This discussion contains forward-looking statements ("forward-looking statements") that involve risks and uncertainties. For this purpose, any statements contained in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Annual Report and in documents incorporated by reference herein, forward-looking statements include, without limitation, statements regarding the Company's expectations, beliefs, or intentions that are signified by terminology such as "subject to," "believes," "anticipates," "plans," "expects," "intends," "estimates," "may," "will," "should," "can," the negatives thereof, variations thereon and similar expressions. Such forward-looking statements reflect the Company's current views with respect to future events, based on what the Company believes are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. Actual results may differ materially from those anticipated in any forward-looking statements due to known and unknown risks, uncertainties and other factors and risks, including but not limited to those set forth under "Risk Factors" included in Part I, Item 1A of this Annual Report on Form 10-K. The Company disclaims any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise. The Company undertakes no obligation to comment on analyses, expectations or statements made by third-parties in respect of the Company or the Company's operations and consolidated results of operations.


45



Overview

JRjr33, Inc. is a global platform of direct-to-consumer brands offering one "product," a business opportunity for the independent sales representatives. The Company views itself as a place where independent sales representatives, around the world, can pursue earning opportunities at their own pace, using company-provided systems, including back office and e-commerce tools, to enhance their ability to serve customers. The Company is an opportunity for the representatives to earn income for their families and have the freedom to decide how much time and effort to put into their business.

The Company allows each subsidiary in the global platform to keep its own distinct brand identity, independent sales representatives, compensation plan, and product line. Behind the scenes, in operational areas such as finance, accounting, treasury, technology, and supply chain management, the Company looks for synergies to achieve operating efficiencies, often by searching for and eliminating duplicated efforts and costs.

The Company places an emphasis on serving and supporting the independent sales representatives. The Company is keenly aware that success is based upon the energy and activity of the independent sales representatives. Therefore, the Company focuses on providing the independent sales representatives leadership, motivation, support, tools, incentives, and the encouragement that they need to grow their businesses, benefit their families, and achieve their dreams. Due to the unique characteristics of direct selling companies, as a result of the personal relationships with the independent sales representatives, companies perform the best when managed by persons who understand the industry’s uniqueness.

JRJR is an ongoing story of finding efficiencies, spotting top-line growth opportunities, striving to achieve operational predictability, and reducing risk via portfolio diversification. As a result, the Company continues to identify cost improvements, integrate operations, and identify strengths and weaknesses of the Company and its subsidiaries.


46



Overview of Operating Segments

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. 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 revenue, gross profit, operating expenses, and other expenses by operating segment in the tables below. None of the reportable segments cross sell to other reportable segments.


47



Independent Sales Representatives

The majority of the Company utilizes a direct selling model for the distribution of products. The Company's financial results are primarily based on the productivity of the independent sales representatives in selling products and on the Company's ability to attract new and retain existing independent sales representatives. Changes in product sales are typically the result of variations in sales volume relating to fluctuations in the number of active independent sales representatives. The number of active independent sales representatives is therefore used by management as a key non-financial measure. The Company considers an independent sales representative active when the representative has placed a sale, either for personal use or for resale, during the most recent six-month period.

The following table summarizes the active independent sales representatives by segment. These numbers have been rounded to the nearest thousand as of the dates indicated.
 
 
December 31, 2016
 
December 31, 2015
Gourmet food
 
8,000

 
18,000

Home décor
 
25,000

 
31,000

Nutritional and wellness
 
13,000

 
14,000

Other
 

 

Independent sales representatives
 
46,000

 
63,000



48



Selected Financial Information

The following is an overview of the Company's consolidated results of operations for the fiscal year ended December 31, 2016 and December 31, 2015 (in thousands, except percentages):
 
 
Fiscal Year Ended December 31,
 
 
2016
 
2015
 
 
Amount
 
Percent of Revenue
 
Amount
 
Percent of Revenue
Revenue
 
$
144,245

 
100.0
 %
 
$
138,352

 
100.0
 %
Program costs and discounts
 
(24,322
)
 
(16.9
)%
 
(21,795
)
 
(15.8
)%
Net revenues
 
119,923

 
83.1
 %
 
116,557

 
84.2
 %
Costs of sales
 
41,499

 
28.7
 %
 
37,466

 
27.0
 %
Gross profit
 
78,424

 
54.4
 %
 
79,091

 
57.2
 %
Distributor expense
 
37,384

 
25.9
 %
 
36,696

 
26.7
 %
Selling expense
 
18,682

 
13.0
 %
 
15,944

 
11.5
 %
General and administrative expense
 
40,943

 
28.4
 %
 
41,245

 
29.8
 %
Share based compensation expense
 
147

 
0.1
 %
 
(116
)
 
(0.1
)%
Depreciation and amortization
 
2,508

 
1.7
 %
 
2,214

 
1.6
 %
Loss (gain) on sale of assets
 
464

 
0.3
 %
 
(657
)
 
(0.5
)%
Impairment of goodwill and intangibles
 
6,719

 
4.7
 %
 
192

 
0.1
 %
Loss on extinguishment of debt
 
1,904

 
1.3
 %
 

 
 %
Impairment of assets held for sale
 

 
 %
 
3,329

 
2.4
 %
Operating loss
 
(30,327
)
 
(21.0
)%
 
(19,756
)
 
(14.3
)%
Gain on marketable securities
 
(12
)
 
 %
 
(189
)
 
(0.1
)%
Gain on acquisition of a business
 

 
 %
 
(3,625
)
 
(2.6
)%
Interest expense, net
 
4,172

 
2.9
 %
 
2,588

 
1.8
 %
Loss from operations before income tax provision
 
(34,487
)
 
(23.9
)%
 
(18,530
)
 
(13.4
)%
Income tax provision
 
447

 
0.3
 %
 
349

 
0.2
 %
Net loss
 
(34,934
)
 
(24.2
)%
 
(18,879
)
 
(13.6
)%
Net loss attributable to non-controlling interest
 
3,975

 
2.7
 %
 
5,783

 
4.1
 %
Net loss attributed to JRjr33, Inc.
 
$
(30,959
)
 
(21.5
)%
 
$
(13,096
)
 
(9.5
)%

The following is an abbreviated discussion on the consolidated results of operations.

The revenue increased by $5.9 million, or approximately 4.3%, for the fiscal year ended December 31, 2016 compared to the prior year.
The gross profit decreased by $667,000, or 0.8%, for the fiscal year ended December 31, 2016 compared to the prior year. The gross profit margin decreased to 54.4%, from 57.2% the prior year.
The operating loss increased by $10.6 million, or 53.5%, for the fiscal year ended December 31, 2016 compared to the prior year. The operating loss margin increased to (21.0)%, from (14.3)% the prior year.

49



Results of Operations

Revenue (in thousands):

The revenue during the fiscal year ended December 31, 2016, increased by $5.9 million, or approximately 4.3%, compared to the prior year as a result of having a full twelve months of Kleeneze and Betterware revenue included in 2016.
 
 
Fiscal Year Ended
December 31, 2016
 
Fiscal Year Ended
December 31, 2015
 
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Gourmet food
 
$
12,686

 
8.8
%
 
$
18,243

 
13.2
%
Home décor
 
105,239

 
72.9
%
 
88,048

 
63.7
%
Nutritional and wellness
 
25,337

 
17.6
%
 
30,629

 
22.1
%
Other
 
983

 
0.7
%
 
1,432

 
1.0
%
Revenue
 
$
144,245

 
100.0
%
 
$
138,352

 
100.0
%

Home Décor

The home décor segment's revenue increased by $17.2 million, or 19.5%, for the fiscal year ended December 31, 2016, compared to the prior year. Kleeneze and Betterware, both acquired in 2015, added $28.2 million in revenue during the fiscal year 2016 as a result of being in the portfolio for a full year. The revenue at Longaberger declined $10.3 million, or 30.6%, compared to the prior year. Longaberger has experienced revenue declines since the year 2000, when it had over $1.0 billion in revenue. Over the years, Longaberger has tried to change its compensation plan, product categories, and sales channels to no avail. The Company believes that an aging sales force, a saturated market, and a strained supply chain are currently the primary reasons for the decline.

Nutritional and Wellness

The nutritional-and-wellness segment's revenue decreased by $5.3 million, or 17.3%, during the fiscal year ended December 31, 2016, compared to the fiscal year ended December 31, 2015. The decline is primarily driven by the currency depreciations of the Russian Ruble and Euro against the US Dollar as well as revenue declines in certain key markets, including Italy and Russia. In addition, the segments supply chain issues resulted in delayed shipments to consumers and a lack of product supply held in the operating markets. The segment has experienced significant revenue declines during the fiscal year 2017, as of the filing of this report, as a result of an exodus of sales field leaders in the segment starting in the fourth quarter of 2016. Management has started the process to reposition the segment to focus on markets that are viewed as having better profit potential.

Gourmet Food

The gourmet food segment's revenue decreased by $5.6 million, or 30.5%, during the fiscal year ended December 31, 2016, compared to the fiscal year ended December 31, 2015. The revenue in 2016 was impacted by supply chain issues arising in the Australian market which resulted in global product availability issues. The almost year long supply chain issues were compiling as the year went on which the Company believes resulted in a number of independent sales representatives leaving the Company. The Company expects that the decline in the number of independent sales representatives will have a lasting impact in 2017. The Company is currently examining options on how to regain the confidence of the departed independent sales representatives.

Geographic Revenue

For the twelve months ended December 31, 2016 and December 31, 2015, respectively, revenue generated in international markets totaled approximately $115.9 million, or 80.4% of revenue, and $98.2 million, or 71.0% of revenue. The home décor segment contributed the most to the increase of revenue generated in international markets for the fiscal year ended months ended December 31, 2016, compared to the prior year, primarily due to having a full year of revenue from the 2015 acquisitions, Kleeneze and Betterware.


50



Influencing Factors

Revenue is impacted by a number of factors: changes in product prices; changes in product offerings; changes in consumer demand; changes in independent sales representatives; changes in commission structure; changes in incentive programs; changes in foreign currency exchange rates; changes in economic conditions; and changes geopolitical conditions.


51



Gross profit (in thousands):

During the fiscal year ended December 31, 2016, gross profit decreased by $667,000, or 0.8%, compared to the fiscal year ended December 31, 2015. For the fiscal year ended December 31, 2016, gross profit margins decreased to 54.4% compared to the prior year gross profit margin of 57.2%.
 
 
Fiscal Year Ended
December 31, 2016
 
Fiscal Year Ended
December 31, 2015
 
 
Amount
 
Percent of Revenue
 
Amount
 
Percent of Revenue
Gourmet food
 
$
7,040

 
55.5
%
 
$
10,282

 
56.4
%
Home décor
 
51,644

 
49.1
%
 
43,813

 
49.8
%
Nutritional and wellness
 
19,157

 
75.6
%
 
24,086

 
78.6
%
Other
 
583

 
59.3
%
 
910

 
63.5
%
Gross profit
 
$
78,424

 
54.4
%
 
$
79,091

 
57.2
%

Home Décor

The home décor segment's gross profit improved by $7.8 million, or 17.9%, for the fiscal year ended December 31, 2016 compared to the prior year mostly due to the acquisition of Kleeneze and Betterware. The gross profit margin of 49.1% was consistent with last year.

Nutritional and Wellness

The nutritional-and-wellness segment's gross profit decreased by $4.9 million, or 20.5%, compared to the fiscal year ended December 31, 2015. The gross profit margin decreased to 75.6%, compared to 78.6% for the fiscal year ended December 31, 2015. The decline is a result of year-over-year price increases and a reduction in overall selling prices.

Gourmet Food

The gourmet food segment's gross profit decreased by $3.2 million, or 31.5%, compared to the fiscal year ended December 31, 2015. The gross profit margin stayed relatively stable at 55.5%, compared to 56.4% for the fiscal year ended December 31, 2015.


52



Operating expenses (in thousands):

For the fiscal year ended December 31, 2016, operating expenses increased by $9.9 million, or 10.0%, compared to the prior year. The operating loss increased by $10.6 million for the fiscal year ended December 31, 2016 compared to the prior year.
 
 
Fiscal Year Ended
December 31, 2016
 
Fiscal Year Ended
December 31, 2015
 
 
Amount
 
Percent of Total
 
Amount
 
Percent of Total
Gourmet food
 
$
10,231

 
9.4
%
 
$
12,188

 
12.3
%
Home décor
 
64,435

 
59.3
%
 
55,161

 
55.8
%
Nutritional and wellness
 
28,185

 
25.9
%
 
26,672

 
27.0
%
Other
 
5,900

 
5.4
%
 
4,826

 
4.9
%
Operating Expenses
 
$
108,751

 
100.0
%
 
$
98,847

 
100.0
%

Home Décor

During the fiscal year ended December 31, 2016, the home décor segment's operating expenses increased by $9.3 million, or 16.8%, compared to the prior year in large part due to the acquisitions of Kleeneze and Betterware. $17.7 million of the increase is attributable to the acquisitions. The increase in operating expenses is partially offset by the decrease of expenditures at Longaberger and Uppercase Living of approximately $7.7 million and $700,000, respectively, as a result of cost reduction initiatives.

Nutritional and Wellness

During the fiscal year ended December 31, 2016, the nutritional-and-wellness segment's operating expenses decreased by $1.5 million, or 5.7% compared to the prior year mostly as a result of staff reductions.

Gourmet Food

During the fiscal year ended December 31, 2016, the gourmet food segment's operating expenses decreased by $2.0 million, or 16.1%, compared to the prior year. The change is a result of scaling down the business as a result of the decline in revenue.


53



Other Income and Expenses

Gain/loss on sale of marketable securities
 
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. Realized gains from the sale of marketable securities totaled $12,000 and $189,000 during the fiscal year ended months ended December 31, 2016 and December 31, 2015, respectively. Since the securities are Level 1 securities, they are estimated based on quoted prices in the active markets.

Loss on extinguishment of debt

During the fiscal year ended December 31, 2016, the Company recognized a loss on extinguishment of debt of approximately $1.9 million in connection to the Dominion Capital monthly principle payment adjustment discussed in Part II, Item 8, Note (11), Long-term Debt and Other Financing Arrangements, to the consolidated financial statements included in this report.

Included in extinguishment of debt, are the expenses related to the Dominion Capital share issuances as a result of the Company's failure to timely file the 2015 Form 10-K, the March Form 10-Q, June Form 10-Q, and the September Form 10-Q. During the fiscal year ended December 31, 2016, the Company has recorded expenses related to the share issuances to Dominion Capital totaling approximately $1.3 million. See Part II, Item 8, Note (11), Long-term Debt and Other Financing Arrangements, to the consolidated financial statements included in this report, for further details.

Interest expense, net

During the fiscal year ended months ended December 31, 2016 and December 31, 2015, the interest expense (net) totaled $4.2 million and $2.6 million, respectively. The interest expense increased compared to last year as a result of the debt issued and assumed in connection with the Betterware and Kleeneze acquisitions, and the issuance of the Dominion Capital convertible debt during 2015.

Income tax provision

During the fiscal year ended December 31, 2016 and December 31, 2015, the income tax provision totaled $447,000 and $349,000, respectively. The income tax provision increased by $98,000 for the fiscal year ended December 31, 2016, compared to the prior year. The income tax is a result of having taxable income in connection with foreign operations.

Net loss attributable to non-controlling interest
 
During the fiscal year ended December 31, 2016 and December 31, 2015, the net loss attributable to non-controlling interest totaled $4.0 million and $5.8 million, respectively. The net loss attributable to non-controlling interest decreased by $1.8 million for the fiscal year ended December 31, 2016, compared to the prior year. The decrease is a result of TLC having a smaller loss during the fiscal year ended months ended December 31, 2016, compared to the prior year.


54



Additional Performance Indicators - EBITDA Metrics

The Company believes that having a reliable measure of financial health is invaluable both to the Company and to potential business partners. The Company believes that Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA,") and Adjusted EBITDA, which are not presented in accordance with the accounting principles generally accepted in the United States of America (GAAP.) These non-GAAP financial measures are being presented because management believes that they provide readers with additional insight into the Company’s operational performance on a relative period-to-period basis and relative to its competitors. EBITDA and Adjusted EBITDA are key measures used by the Company and Board of Directors to evaluate its performance and trends. Management believes these metrics are particularly useful for determining the performance of the Company's subsidiary businesses and ongoing corporate expenses absent costs not associated with organic operations such as ongoing acquisition costs. Management considers these measures in addition to operating income to be important to estimate the enterprise and stockholder values of the Company, and for making strategic and operating decisions. In addition, analysts, investors and creditors use these measures when analyzing the Company's operating performance, financial condition, and cash generating ability.

The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. These measures are not defined by GAAP and the discussion of EBITDA and Adjusted EBITDA is not intended to conflict with or change any of the GAAP disclosures described. Neither EBITDA nor Adjusted EBITDA should be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing the Company's consolidated results of operations and financial condition, as EBITDA and Adjusted EBITDA are not defined by GAAP.

The use of EBITDA and Adjusted EBITDA has limitations as an analytical tool, and readers should not consider it in isolation or as a substitute for analysis of the results as reported under GAAP. Some of these limitations are:

EBITDA and Adjusted EBITDA do not reflect the Company's cash expenditures or future requirements for capital expenditures or contractual commitments such as debt or capital lease payments.
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, the Company's working capital needs;
EBITDA and Adjusted EBITDA do not consider the potentially dilutive impact of share-based compensation;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect acquisition-related costs; and
Other companies, including companies in the same or a similar industry, may calculate EBITDA and Adjusted EBITDA differently than the Company does, limiting its usefulness as a comparative measure.

Because of these limitations, readers should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and other GAAP results.

Additional Adjusted EBITDA Adjustments

Capital Market Expenses

Capital market expenses would include the cost of having a printer, stock transfer agent, specific Sarbanes-Oxley Act compliance costs, investor relation costs, as well as any listing or other exchange fees, specific equity offering expenses such as road show fees, security and regulatory adviser retainer and work fees, and fees associated with filings in the period. Capital market expenses don't include auditor fees in connection to the filings, tax advising fees, board advising fees, or D&O insurance carrier charges.
 
M&A Expenses

M&A expenses include specific M&A expenses such as M&A adviser work fees, due diligence costs, M&A retainer fees, engagement fees, finder fees, travel costs related to a potential acquisition, a gain on acquisition, and any other deal related expenses.

M&A Infrastructure Expense
 
These are expenses related to the Company's M&A infrastructure, such as the Company's M&A team and costs associated with supporting their efforts, as well as expenses related to the Reimbursement of Services Agreement with Richmont Holdings. The Company expects these costs to continue as opportunistic acquisition targets are sought and participation in other deal-related activities continue.


55



Other EBITDA Adjustments

Other EBITDA adjustments include stock compensation expenses, non-cash compensation, deferred rent, gains/losses in relation to the sale of an asset, asset impairment costs such as goodwill or other identifiable intangible impairment, asset fair value adjustments, gains/losses in relation to debt forgiveness, and loss on extinguishment of debt. The CODMs believe that these expenses should be included as EBITDA adjustments as they are typically non-cash adjustments and/ or tend to be non-recurring in nature.

Net Loss to Adjusted EBITDA (Losses) Reconciliation

For the fiscal year ended December 31, 2016, EBITDA (losses) increased by $13.5 million, or 99.0%, compared to the fiscal year ended December 31, 2015. For the fiscal year ended December 31, 2016, Adjusted EBITDA (losses) increased by $3.0 million, or 29.0%, compared to the fiscal year ended December 31, 2015.

The following table presents a reconciliation of Net Loss to EBITDA (losses) and Adjusted EBITDA (losses) for each of the periods presented (in thousands):
 
 
Fiscal Year Ended December 31,
 
 
2016
 
2015
Net loss
 
$
(34,934
)
 
$
(18,879
)
Interest, net
 
4,172

 
2,588

Income tax expense
 
447

 
349

Depreciation and amortization
 
3,072

 
2,238

EBITDA (losses)
 
(27,243
)
 
(13,704
)
Capital market expenses
 
445

 
720

M&A expenses
 
1,335

 
290

M&A infrastructure expense
 
2,365

 
2,681

Other EBITDA adjustments
 
9,766

 
(332
)
Adjusted EBITDA (losses)
 
$
(13,332
)
 
$
(10,345
)

A reconciliation of "Other EBITDA adjustments" is presented below (in thousands):
 
 
Fiscal Year Ended December 31,
 
 
2016
 
2015
Share based compensation expense
 
$
147

 
$
(116
)
Loss (gain) on sale of assets
 
464

 
(657
)
Impairment of goodwill and intangibles
 
6,719

 
192

Loss on extinguishment of debt
 
1,904

 

Impairment of assets held for sale
 

 
3,329

Deferred rent amortization
 
95

 
135

Non-cash compensation
 
437

 
410

Gain on acquisition of a business
 
$

 
$
(3,625
)
Total other EBITDA adjustments
 
$
9,766

 
$
(332
)


56



Liquidity and Capital Resources 

The Company's principal sources of liquidity are cash and cash equivalents, marketable securities, cash generated from sales, and debt and equity issuances. The Company will not be eligible to sells securities under a Registration Statement on Form S-3 until one-year from the due date of the latest untimely filing and therefore the Company’s ability to raise money through the equity markets is limited.

Cash and cash equivalents and marketable securities consist primarily of cash on deposit with banks, investments in short-duration fixed income mutual funds, which may include investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. 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 Company also continues the disposal of buildings and land that are not used by the operating companies or core to the business strategy. Land and building sales in 2016 totaled $303,000, which was a contribution of cash to ongoing working capital needs. While the majority of the excess buildings and land has been sold, the Company believes there is still a limited opportunity to generate incremental cash from future disposals of buildings and land.

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. 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 Part II, Item 8, 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:

The Company has entered into an agreement with Rochon Capital Partners to support the Company through October 31, 2018;
The Company is seeking to renegotiate and potentially refinance existing debt;
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;
The Company is aggressively targeting new distributors and looking to expand into new markets with its more successful companies;
The Company is seeking to reduce excess inventory to improve working capital;
The Company is aggressively reducing its operating costs; and
The Company has approached its trade creditors for extended payment terms.


57



Cash Flows

Cash Used in Operating Activities
 
Net cash used in operating activities for the fiscal year ended December 31, 2016, decreased to $6.5 million, as compared to net cash used in operating activities of $8.4 million for the fiscal year ended December 31, 2015. Cash flows from operating activities represent the cash receipts and disbursements related to all of the Company's activities other than investing and financing activities. Operating cash flow is derived by adjusting net losses of $34.9 million for non-cash items of approximately $17.2 million and changes in working capital of approximately $11.3 million. The changes in working capital were primarily due to the liquidation of inventory, increase in other current assets as a result of the restricted cash on the cash collateral loan becoming current, and an increase various liability accounts such as accounts payable, related party payables, deferred revenue, and taxes payable. The increase in liabilities are offset by a decrease in the accrued commissions which is less than last year primarily due to the elimination of the retention bonus at Agel during October of 2016.

Cash Provided by Investing Activities

Net cash provided from investing activities for the fiscal year ended December 31, 2016, totaled $5.1 million, a change of approximately $16.0 million from the net cash used in investing activities of $10.9 million for the fiscal year ended December 31, 2015.

For the fiscal year ended December 31, 2016, the Company generated proceeds of $4.9 million from the net sale of marketable securities compared to uses of $4.3 million from the net purchase of marketable securities during the fiscal year ended December 31, 2015. For the fiscal year ended December 31, 2015, the Company used cash of $2.1 million for the purchase of capital expenditure, $2.9 million as collateral on a loan, and $2.5 million for acquisitions.

Cash Used in Financing Activities

The net cash used in financing activities for the fiscal year ended December 31, 2016, totaled $3.2 million, a change of approximately $27.0 million from the net cash provided from financing activities of $23.8 million for the fiscal year ended December 31, 2015.

During the fiscal year ended December 31, 2016 and December 31, 2015, the Company made payments of approximately $3.2 million and $1.1 million, respectively, on principal payments of debt. During the fiscal year ended December 31, 2015, the Company borrowed approximately $7.1 million to use as proceeds for the acquisition of Kleeneze. Through the issuance of common stock and warrants in a public offering consummated in March 2015, the Company raised net proceeds of approximately $18.4 million. For the fiscal year ended December 31, 2016 and December 31, 2015, the Company raised net proceeds of $0 and $18.4 million.
 
Commitments and Obligations

See Part II, Item 8, Note (12), Commitments and Contingencies, to the consolidated financial statements included in this report, for the details on the Company's commitments and contractual obligations.

Public Offerings
 
See Part II, Item 8, Note (15), Stockholders' Equity and Non-controlling Interest, to the consolidated financial statements included in this report, for the details on the March 4, 2015, equity raise and warrant issuances.


58



Critical Accounting Policies and Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations promulgated by the SEC, the Company makes assumptions, judgments and estimates that can have a significant impact on net income (loss) and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. The Company bases the assumptions, judgments and estimates on historical experience and various other factors that the Company believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, the Company evaluates the used assumptions, judgments and estimates. The Company also discusses critical accounting policies and estimates with the Audit Committee of the Company's Board of Directors. The Company believes that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations, income taxes, and long-lived assets, have the greatest impact on the Company's consolidated financial statements, so the Company considers these to be critical accounting policies. Historically, the Company's assumptions, judgments and estimates relative to the critical accounting policies have not differed materially from actual results.

Significant judgments and estimates used in the preparation of the consolidated financial statements apply to the following critical accounting policies:

Revenue Recognition and Deferred Revenue

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.

Legal Contingencies

The Company is a party to various legal actions. The most significant of these are described in Part II, Item 8, Note (12), Commitments and Contingencies, to the consolidated financial statements included in this report. It is not possible to determine the actual outcome of these matters. The Company recognizes accruals for such actions to the extent that the Company can conclude that a loss is both probable and reasonably estimable. The Company accrues for the best estimate of a loss; however, if no estimate is better than any other, then the Company accrues the minimum amount of the potential loss. If the Company determines that a loss is reasonably possible and the loss can be estimated, the Company discloses the possible loss.

Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of the inherent uncertainty and unpredictability related to these matters, accruals are based on what the Company believes to be the best information available at the time of the assessment, including the legal facts and circumstances of the case, status of the proceedings, applicable laws, and the views of legal counsel. Upon the final resolution of such matters, it is possible that there may be a loss in excess of the amount recorded, and such amounts could have a material adverse effect on the Company’s consolidated results of operations, consolidated cash flows, and financial condition. The Company periodically reassess these matters when additional information becomes available and adjusts the estimates and assumptions when facts and circumstances indicate the need for any changes.

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

59



than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.

The Company and the various U.S. subsidiaries, excluding Longaberger, file a consolidated federal income tax return.

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. The reporting units are aggregated based on similar economic characteristics, nature of products and services offered, nature of production processes, type of customers, and distribution methods. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded.

Indefinite-lived assets are measured for impairment by comparing the fair value of the indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible asset is lower than its carrying value, an impairment charge equal to the difference is recorded.

The Company uses a discounted cash flow model and a market approach to calculate the fair value of intangible assets. The model includes a number of significant assumptions and estimates regarding future cash flows and these estimates could be materially impacted by adverse changes in market conditions. 

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.

Recent Accounting Pronouncements

See Part II, Item 8, Note (2), Summary of Significant Accounting Policies, to the consolidated financial statements included in this report, for the recent accounting pronouncements.

Related Party Transactions

See Part II, Item 8, Note (9), Related Party Transactions, to the consolidated financial statements included in this report, for the related party transactions.

60




Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Contractual Obligations

Because the Company is a small reporting company, it is not required to provide information on contractual obligations.

Commitments and Contingencies

The Company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company is 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 and financial condition. Further details about the Company's commitments and contingencies can be found on Part II, Item 8, Note (12), Commitments and Contingencies, to the consolidated financial statements included in this report.

Inflation

The Company does not believe inflation has had a material impact on the historical operations or profitability.


61



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
The Company conducts business in several countries and continues to seek to grow international operations. Gross revenue, operating loss, and net loss are affected by fluctuations in currency exchange rates and other uncertainties in doing business and selling products in more than one currency. In addition, the Company's operations are exposed to risks associated with changes in social, political, and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where the Company has operations, as well as, to a lesser extent, changes in U.S. laws and regulations relating to international trade and investment.

Foreign Currency Risk

During the year ended December 31, 2016, approximately 80.4% of the Company's revenues were realized outside of the United States in foreign currency. The local currency of each international subsidiary is generally the functional currency. All revenues and expenses are translated at weighted average exchange rates for the periods reported. Therefore, the Company's reported revenue and earnings will be positively impacted by a weakening of the U.S. Dollar and will be negatively impacted by a strengthening of the U.S. Dollar. Currency fluctuations, however, have the opposite effect on expenses incurred outside the U.S. Given the large portion of the business derived from the United Kingdom, any weakening of the British Pounds Sterling will negatively impact reported revenue and positively impact net losses, whereas a strengthening of the British Pounds Sterling will positively impact the Company's reported revenue and negatively impact net losses. Because of the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on the future business, product pricing, consolidated results of operations, and/ or consolidated financial condition. Changes in various currency exchange rates affect the relative prices at which products are sold. The Company regularly monitors foreign currency risks and periodically takes measures to reduce the risk of foreign exchange rate fluctuations on the operating results. The Company does not currently hedge net foreign currency positions to reduce exposure to fluctuation in foreign currency exchange rates. The Company does not use derivative financial instruments for trading or speculative purposes. At December 31, 2016, the Company did not have any derivative instruments.

Following are the average currency exchange rates of U.S. $1 into local currency for each material international market:
 
 
For the year ended December 31, 2016
 
For the year ended December 31, 2015
 
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Australia
 
1.39

 
1.34

 
1.32

 
1.34

 
1.27

 
1.29

 
1.38

 
1.39

Canada
 
1.37

 
1.29

 
1.30

 
1.34

 
1.24

 
1.23

 
1.31

 
1.34

Europe
 
0.91

 
0.89

 
0.90

 
0.93

 
0.89

 
0.90

 
0.90

 
0.91

New Zealand
 
1.51

 
1.45

 
1.38

 
1.41

 
1.33

 
1.37

 
1.54

 
1.50

Russia
 
74.32

 
65.86

 
64.60

 
63.06

 
62.77

 
52.76

 
63.14

 
66.03

Switzerland
 
0.99

 
0.97

 
0.98

 
1.00

 
0.95

 
0.94

 
0.96

 
0.99

Thailand
 
35.65

 
35.26

 
34.84

 
35.40

 
32.65

 
33.25

 
35.23

 
35.83

United Kingdom
 
0.70

 
0.70

 
0.76

 
0.80

 
0.66

 
0.65

 
0.65

 
0.66



62



Item 8. Consolidated Financial Statements and Supplementary Data
 
Index to Consolidated Financial Statements and Supplementary Data
For the fiscal years ended December 31, 2016 and December 31, 2015


63



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of JRjr33, Inc.

We have audited the accompanying consolidated balance sheet of JRjr33, Inc. (the “Company”), as of December 31, 2016, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Whitley Penn LLP
Whitley Penn LLP
Dallas, Texas
October 18, 2017


64



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of JRjr33, Inc.

We have audited the accompanying consolidated balance sheet of JRjr33, Inc. as of December 31, 2015 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the year then ended. These consolidated financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JRjr33, Inc. at December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/BDO USA, LLP
BDO USA, LLP
Dallas, Texas
June 27, 2016


65



JRjr33, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
 
December 31, 2016
 
December 31, 2015
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
2,203

 
$
6,482

Marketable securities
 
389

 
5,306

Accounts receivable, net
 
3,556

 
4,828

Inventory, net
 
15,823

 
20,799

Other current assets
 
3,627

 
2,303

Total current assets
 
25,598

 
39,718

Assets held for sale
 
1,000

 
1,111

Restricted cash
 

 
2,857

Sale leaseback security deposit
 
4,414

 
4,414

Property, plant and equipment, net
 
2,859

 
5,387

Property under capital leases, net
 
13,875

 
14,654

Goodwill
 
1,846

 
5,427

Intangibles, net
 
3,862

 
8,801

Other assets
 
37

 
135

Total assets
 
$
53,491

 
$
82,504

Liabilities and stockholders’ equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
14,018

 
$
15,839

Related party payables
 
5,853

 
1,704

Accrued commissions
 
1,676

 
3,033

Accrued liabilities
 
8,028

 
7,303

Deferred revenue
 
3,706

 
2,307

Taxes payable
 
8,969

 
4,830

Current portion of lease obligation
 
15,856

 
313

Current portion of long-term debt
 
11,703

 
3,048

Other current liabilities
 
666

 
578

Total current liabilities
 
70,475

 
38,955

Deferred tax liability
 
372

 
744

Long-term debt, less current portion
 
1,830

 
12,784

Capital lease obligation, less current portion
 
283

 
16,217

Other long-term liabilities
 
2,765

 
2,864

Total liabilities
 
75,725

 
71,564

Commitments and contingencies (Note 12)
 


 


Stockholders’ equity:
 
 

 
 

Preferred stock, par value $0.001 per share, 500,000 authorized; -0-issued and outstanding
 

 

Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 39,348,214 and 35,718,279 shares issued and outstanding, at December 31, 2016 and December 31, 2015, respectively
 
4

 
4

Additional paid-in capital
 
62,390

 
58,837

Accumulated other comprehensive loss
 
(2,390
)
 
(586
)
Accumulated deficit
 
(76,214
)
 
(45,255
)
Total stockholders’ equity attributable to JRjr33, Inc.
 
(16,210
)
 
13,000

Stockholders’ equity attributable to non-controlling interest
 
(6,024
)
 
(2,060
)
Total stockholders’ equity
 
(22,234
)
 
10,940

Total liabilities and stockholders’ equity
 
$
53,491

 
$
82,504

See accompanying notes.

66



JRjr33, Inc.
Consolidated Statements of Operations
 
 
Fiscal Year Ended December 31,
(in thousands, except share and per common share data)
 
2016
 
2015
Revenue
 
$
144,245

 
$
138,352

Program costs and discounts
 
(24,322
)
 
(21,795
)
Net revenues
 
119,923

 
116,557

Costs of sales
 
41,499

 
37,466

Gross profit
 
78,424

 
79,091

Distributor expense
 
37,384

 
36,696

Selling expense
 
18,682

 
15,944

General and administrative expense
 
40,943

 
41,245

Share based compensation expense
 
147

 
(116
)
Depreciation and amortization
 
2,508

 
2,214

Loss (gain) on sale of assets
 
464

 
(657
)
Impairment of goodwill and intangibles
 
6,719

 
192

Loss on extinguishment of debt
 
1,904

 

Impairment of assets held for sale
 

 
3,329

Operating loss
 
(30,327
)
 
(19,756
)
Gain on sale of marketable securities
 
(12
)
 
(189
)
Gain on acquisition of a business
 

 
(3,625
)
Interest expense, net
 
4,172

 
2,588

Loss before income tax provision
 
(34,487
)
 
(18,530
)
Income tax provision
 
447

 
349

Net loss
 
(34,934
)
 
(18,879
)
Net loss attributable to non-controlling interest
 
3,975

 
5,783

Net loss attributable to JRjr33, Inc.
 
$
(30,959
)
 
$
(13,096
)
Basic and diluted loss per share:
 
 
 
 
Weighted average common shares outstanding
 
36,580,892

 
33,478,601

Loss per common share attributable to JRjr33, Inc., basic and diluted
 
$
(0.85
)
 
$
(0.39
)
See accompanying notes.

67



JRjr33, Inc.
Consolidated Statements of Comprehensive Loss
 
 
Fiscal Year Ended December 31,
(in thousands)
 
2016
 
2015
Net loss before allocation to non-controlling interests
 
$
(34,934
)
 
$
(18,879
)
Other comprehensive gain (loss):
 
 

 
 

Foreign currency translation adjustment loss
 
(1,799
)
 
(706
)
Unrealized gain (loss) on marketable securities
 
 
 
 
Unrealized holding gain arising during the period
 
6

 

Reclassification of other comprehensive income included in net loss
 

 
(199
)
Other comprehensive loss, before tax
 
(1,793
)
 
(905
)
Tax provision (benefit) on other comprehensive income (loss)
 

 

Other comprehensive loss before allocation to non-controlling interests
 
(1,793
)
 
(905
)
 
 
 
 
 
Comprehensive loss before allocation to non-controlling interests
 
(36,727
)
 
(19,784
)
Less: Comprehensive loss attributable to non-controlling interests
 
3,975

 
5,783

Comprehensive loss attributable to JRjr33, Inc.
 
$
(32,752
)
 
$
(14,001
)
See accompanying notes.

68



JRjr33, Inc.
 Consolidated Statements of Stockholders’ Equity (Deficit)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Non-controlling Interest
 
Total Stockholders'
Equity (Deficit)
Balance at December 31, 2014
 
27,599

 
$
3

 
$
37,097

 
$
321

 
$
(32,159
)
 
$
3,721

 
$