UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
Amendment No. 1

ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015
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.
(formerly CVSL 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)

CVSL Inc.
2400 North Dallas Parkway, Suite 230, Plano, Texas 75093
(Former name, former address and former fiscal year if changed since last report)
 
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 preceding 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  ý No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo ý

As of May 11, 2015, 34,367,095 shares of the common stock, $0.0001 par value per share, of the registrant were issued and outstanding. 



CVSL Inc.
 
Table of Contents
 

 
 
Page
Explanatory Note
 
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 



EXPLANATORY NOTE

Restatement of Consolidated Financial Statements

JRjr33, Inc. (formerly known as CVSL Inc.) (the “Company”) has prepared this Amendment No. 1 (this “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (the “Original Form 10-Q”), which was originally filed with the Securities and Exchange Commission (the “SEC”) on May 11, 2015 to reflect restatements of the Company’s Condensed Consolidated Balance Sheet as of March 31, 2015, the related Condensed Consolidated Statements of Income for the three month period ended March 31, 2015 and condensed Consolidated Statements of Cash Flows for the three month period ended March 31, 2015, and the notes related thereto.  The restatements reflect certain year-end audit adjustments identified in connection with the audit of the financial statements as of December 31, 2015 and for the year then ended that have a material impact on the quarter ended March 31, 2015. In analyzing the adjustments the Company concluded that the respective quarterly impact of the adjustments is material and should be reflected in the quarters impacted. Additionally, in connection with the restatement process, the Company reviewed, corrected and modified, where appropriate, certain disclosure in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the selected financial data as applicable.  For a description of the changes made in connection with the restatement, see Note 2, “Restatement of Condensed Consolidated Financial Statements,” to the accompanying interim consolidated financial statements contained in this report.
 
Additionally, effective as of March 7, 2016, the Company changed its name from CVSL Inc. to JRjr33, Inc.  The Company’s new name is reflected in this document.

To assist in your review of this filing, this Amendment sets forth the Original Form 10-Q in its entirety.  However, this Amendment only amends and restates Item 1, Item 2 of Part I and Item 1A of Part II, and Item 4, in each case as a result of, and to reflect, the Restatement and related matters.  No other information in the Original Form 10-Q is amended hereby, except for the Company’s name change.  The foregoing items have not been updated to reflect other events occurring after the filing of the Original Form 10-Q or to modify or update those disclosures affected by subsequent events.  In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Form 10-Q has been amended to include currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing amended information, this Amendment continues to speak as of the date of the Original Form 10-Q and the Company has not updated the disclosure contained herein to reflect events that occurred as of a later date.  Other events occurring after the filing of the Original Form 10-Q or other disclosures necessary to reflect subsequent events have been or will be addressed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, which will be filed after the filing of this Form 10-Q/A, and any reports filed with the SEC subsequent to the date of this filing.
 
The Company has not amended and does not intend to amend its previously filed Annual Report on Form 10-K for the year ended December 31, 2015 and intends to amend its Quarterly Reports on Form 10-Q for the quarter ended June 30, 2015.
Internal Control Over Financial Reporting
Management assessed its evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2015 in connection with its annual audit for the year ended December 31, 2015 which concluded, that a number of deficiencies in the design and operating effectiveness of the Company internal controls, collectively, represent material weaknesses in the Company internal control over financial reporting and, therefore, that the Company did not maintain effective internal control over financial reporting for the year ended December 31, 2015. Since this restatement resulted from adjustments made during the year ended December 31, 2015, management's assessment is that the same material weaknesses disclosed in the Company's Annual Report for the year ended December 31, 2015 apply for the period covered by this Amendment. For a description of the material weaknesses identified by management and management’s plan to remediate those material weaknesses as disclosed in Form 10-K for the year ended December 31, 2015, see “Part I, Item 4 - Controls and Procedures.”





PART I.    Financial Information
Item 1.    Financial Statements

4


JRjr33, Inc.
Condensed Consolidated Balance Sheets

 
 
(Unaudited)
 
(Audited)
 
 
March 31,
2015
 
December 31,
2014
(in thousands)  
 
(As Restated, See Note 2)
 
 
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
5,132

 
$
2,606

Marketable securities, at fair value
 
9,682

 
991

Accounts receivable, net
 
3,902

 
450

Inventory, net
 
20,239

 
14,759

Other current assets
 
3,380

 
2,482

Total current assets
 
42,335

 
21,288

Restricted cash
 
3,000

 

Sale leaseback security deposit
 
4,414

 
4,414

Property, plant and equipment, net
 
8,774

 
8,191

Leased property, net
 
15,098

 
15,361

Goodwill
 
5,364

 
4,095

Intangibles, net
 
3,722

 
3,558

Other assets
 
342

 
400

Total assets
 
$
83,049

 
$
57,307

 
 
 
 
 
Liabilities and stockholders' equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
14,355

 
$
8,541

Related party payables
 
1,317

 
152

Accrued commissions
 
4,050

 
3,319

Accrued liabilities
 
5,976

 
4,612

Deferred revenue
 
1,306

 
2,982

Current portion of long-term debt
 
905

 
941

Accrued taxes payable
 
4,550

 
2,693

Other current liabilities
 
2,887

 
1,412

Total current liabilities
 
35,346

 
24,652

Deferred tax liability
 

 
167

Long-term debt, net of current portion
 
7,081

 
4,316

Lease liability, net of current portion
 
15,774

 
15,774

Other long-term liabilities
 
2,320

 
3,415

Total liabilities
 
60,521

 
48,324

Contingencies (Note 10)
 


 


Stockholders' equity:
 
 

 
 

Preferred stock, par value $0.001 per share, 500,000 authorized
 

 

Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 34,367,095 and 27,599,012 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
4

 
3

Additional paid-in capital
 
55,452

 
37,097

Accumulated other comprehensive income
 
301

 
321

Accumulated deficit
 
(36,282
)
 
(32,159
)
Total stockholders' equity attributable to JRjr33, Inc.
 
19,475

 
5,262

Stockholders' equity attributable to non-controlling interest
 
3,053

 
3,721

Total stockholders' equity
 
22,528

 
8,983

Total liabilities and stockholders' equity
 
$
83,049

 
$
57,307

  
See notes to unaudited condensed consolidated financial statements.

5


JRjr33, Inc.
Condensed Consolidated Statements of Operations
 (Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
(in thousands, except share and per share data)
 
(As Restated, See Note 2)
 
 
Revenue
 
$
19,878

 
$
26,671

Program costs and discounts
 
(3,251
)
 
(4,976
)
Net revenue
 
16,627

 
21,695

Costs of sales
 
5,230

 
8,016

Gross profit
 
11,397

 
13,679

Commissions and incentives
 
5,820

 
6,973

Gain on sale of assets
 
(43
)
 
(266
)
Selling, general and administrative
 
10,703

 
9,353

Depreciation and amortization
 
279

 
269

Share based compensation expense
 
(1,167
)
 
87

Operating loss
 
(4,195
)
 
(2,737
)
Loss (gain) on marketable securities
 
(192
)
 
494

Interest expense, net
 
599

 
266

Loss from operations before income tax provision
 
(4,602
)
 
(3,497
)
Income tax provision
 
191

 
279

Net loss
 
(4,793
)
 
(3,776
)
Net loss attributable to non-controlling interest
 
670

 
640

Net loss attributable to JRjr33, Inc.
 
$
(4,123
)
 
$
(3,136
)
Basic and diluted loss per share:
 
 
 
 
Weighted average common shares outstanding
 
29,668,069

 
24,385,616

Loss per common share attributable to common stockholders, basic and diluted
 
$
(0.14
)
 
$
(0.13
)
  

See notes to unaudited condensed consolidated financial statements.

6


JRjr33, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
(in thousands)
 
(As Restated, See Note 2)
 
 
Net loss
 
$
(4,793
)
 
$
(3,776
)
Other comprehensive gain, net of tax:
 
 
 
 
Unrealized gain (loss) on marketable securities
 
 
 
 
Unrealized holding gain arising during the period
 
7

 
469

Reclassification of other comprehensive income included in net loss
 
(199
)
 

Foreign currency translation adjustment gain (loss)
 
174

 
(9
)
Other comprehensive gain (loss)
 
(18
)
 
460

Comprehensive loss
 
(4,811
)
 
(3,316
)
Comprehensive loss attributable to non-controlling interests
 
670

 
640

Comprehensive loss attributable to JRjr33, Inc.
 
$
(4,141
)
 
$
(2,676
)
   

See notes to unaudited condensed consolidated financial statements.

7


JRjr33, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
(in thousands)
 
(As Restated, See Note 2)
 
 
Operating activities:
 
 

 
 

Net loss
 
$
(4,793
)
 
$
(3,776
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities net of effect of acquisitions
 
 

 
 

Depreciation and amortization
 
420

 
562

Loss (gain) on sale of marketable securities
 
(192
)
 
494

Interest expense
 

 
200

Share-based compensation
 
(1,167
)
 
87

Provision for doubtful accounts
 
11

 
63

Provision for obsolete inventory
 

 
41

Gain on sales of assets
 
(43
)
 
(266
)
Deferred income tax
 
34

 
45

Non-cash compensation
 
101

 

Stock issued for purchase of subsidiaries
 

 
484

Changes in certain assets and liabilities:
 
 
 
 

Accounts receivable
 
(467
)
 
(269
)
Inventory
 
588

 
1,266

Other current assets
 
303

 
182

Accounts payable
 
725

 
(1,312
)
Related party payables, net
 
1,164

 
(132
)
Accrued commissions
 
734

 
636

Accrued liabilities
 
129

 
(343
)
Deferred revenue
 
(876
)
 
1,205

Accrued Taxes payable
 
150

 
342

Other liabilities
 
(500
)
 
(549
)
Net cash used in operating activities
 
(3,679
)
 
(1,040
)
Investing activities:
 
 

 
 

Capital expenditures
 
(316
)
 
(335
)
Proceeds from the sale of property, plant and equipment
 
28

 
1,334

Purchase of investments available for sale
 
(18,876
)
 

Sale of marketable securities
 
10,185

 
3,418

Cash held as collateral
 
(3,000
)
 

Acquisitions, net of cash purchased
 
(3,135
)
 

Net cash (used in) provided by investing activities
 
(15,114
)
 
4,417

Financing activities:
 
 

 
 

Net borrowings (payments) on long-term debt and revolving credit facility
 
2,978

 
(1,430
)
Payments on debt
 
(247
)
 
(614
)
Stock issuances
 
18,360

 

Net cash (used in) provided by financing activities
 
21,091

 
(2,044
)
Effect of exchange rate changes on cash
 
228

 
(10
)
Increase in cash and cash equivalents
 
2,526

 
1,323

Cash and cash equivalents at beginning of period
 
2,606

 
3,877

Cash and cash equivalents at end of period
 
$
5,132

 
$
5,200

Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid during the period for:
 
 

 
 

Interest
 
$
595

 
$
65

Income taxes
 

 
122

See notes to unaudited condensed consolidated financial statements.

8


JRjr33, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited as restated)

 

9


(1) General
 
Interim Financial Information
 
The accompanying unaudited interim condensed consolidated financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods on a consistent basis with the annual audited statements. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or that of a full year. Certain information, accounting policies and footnote disclosures normally included in condensed consolidated financial prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K/A filed by JRjr33, Inc. (formerly known as CVSL Inc.) ("JRjr" or "the Company," and together with the Company's consolidated subsidiaries, "we", "us" and "our"), for the year ended December 31, 2014, filed with the SEC on March 23, 2015 ("Form 10-K/A").

Significant Accounting Policies
 
There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2015, as compared with those disclosed in the Company’s consolidated financial statements in the Annual Report on Form 10-K/A for the year ended December 31, 2014.

Reclassifications

Prior period financial statement amounts have been reclassified to conform to the current period presentation.

Use of Estimates
 
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the consolidated financial statements. Actual results could differ significantly from those estimates.
 
Accounts Receivable
 
The carrying value of our accounts receivable, net of allowance for doubtful accounts, represents their estimated net realizable value. We estimate the allowance for doubtful accounts based on type of customer, age of outstanding receivable, historical collection trends, and existing economic conditions. If events or changes in circumstances indicate that a specific receivable balance may be unrealizable, further consideration is given to the collectability of those balances, and the allowance is adjusted accordingly. Receivable balances deemed uncollectible are written off against the allowance. We have recorded an allowance for doubtful accounts of $137,000 and $170,000 at March 31, 2015 and December 31, 2014, respectively.

Income Taxes
 
JRJR and its U.S. subsidiaries (excluding TLC) file a consolidated Federal income tax return. Deferred income taxes are provided for temporary differences between financial statement and tax bases of asset and liabilities. Benefits from tax credits are reflected currently in earnings. We record income tax positions based on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.
 
Translation of Foreign Currencies
 
The functional currency of our foreign subsidiaries is the local currency of their country of domicile. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollar amounts at period-end exchange rates. Revenue and expense accounts are translated at the weighted-average rates for the quarterly accounting period to which they relate. Equity accounts are translated at historical rates. Foreign currency translation adjustments are accumulated as a component of other comprehensive income.

Revenue Recognition and Deferred Revenue
 

10


In the ordinary course of business we receive 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 revenues net of any taxes collected from customers which are remitted to governmental authorities. Payments received for undelivered products are recorded as deferred revenue and are included in current liabilities on the Company’s consolidated balance sheets. Certain incentives offered on the sale of our products, including sales discounts, are classified as program costs and discounts. A provision for product returns and allowances is recorded and is founded on historical experience and is classified as a reduction of revenues. At March 31, 2015 and 2014, our allowance for sales returns totaled $86,000 and $257,000, respectively.

Recent Accounting Pronouncements
 
In January 2015 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-01 (ASU 2015-01), Income Statement - Extraordinary Items and Unusual Items. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2015-01 eliminates the concept of extraordinary items from GAAP. We are in the process of assessing the effects of the application of the new guidance on our financial statements.
 
In February 2015 the FASB issued Accounting Standards Update 2015-02 (ASU 2015-02), Amendments to the Consolidation Analysis. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new consolidation standard changes the criteria a reporting enterprise uses to evaluate if certain legal entities, such as limited partnerships and similar entities, should be consolidated. We are in the process of assessing the effects of the application of the new guidance on our financial statements.
 
In April 2015 the FASB issued Accounting Standards Update 2015-03 (ASU 2015-03), Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The ASU is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new standard requires debt issuance costs to be classified as reductions to the face value of the related debt. We do not expect ASU 2015-03 to materially affect our financial position until we issue new debt.

(2) Restatement of Condensed Consolidated Financial Statements

Correction of Accounting Errors

Subsequent to the filing of our Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, management identified certain year end accounting adjustments. Management evaluated these adjustments and their effects on the Company's 2015 previously-filed quarterly financial statements and determined restated consolidated financial statements should be filed to correct errors within our originally reported financial statements as of and for the three months ended March 31, 2015.

The most significant errors found in the annual that affected the three month period ended March 31, 2015 include the following:

The correction of errors related to the recognition of revenue, accounts receivable and deferred revenue. The Company did not have the adequate accounting procedures to appropriately recognize and record revenues, accounts receivable and deferred revenue appropriately during Fiscal 2015.

The correction of errors related to the appropriate recognition of share-based compensation expense. The Company did not appropriately account for certain share-based compensation plans, which required adjustments to the quarterly financial statements.

The correction of errors related to the appropriate recognition of commissions expense on a quarterly basis. The Company did not appropriately calculate commissions expense related to the sales on a quarterly basis, which required an adjustment to the quarterly financial statements.

The Company did not appropriately account for certain expenses attributable to acquisitions costs, but were incorrectly recorded as related party accounts receivable, which required an adjustment to the quarterly financial statements.


11


Other Restatement and Reclassification Adjustments

In addition to correcting the accounting errors discussed above, the restated condensed consolidated financial statements for the three months ended March 31, 2015 include adjustments for certain other accounting errors and reclassifications that were discovered subsequent to the issuance of the originally reported financial statements for the three months ended March 31, 2015. This adjustments include the following:

Correcting the classification of revenues, program costs and discounts and commissions expense for certain of the subsidiaries.

Other adjustments to correct for differences related to the recording accounts payable, interest expense, accrued commissions and accounts receivable write-offs.

12


JRjr33, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
March 31, 2015
(in thousands)
 
As Previously Reported
 
Restatement Adjustments
 
Reclassification Adjustments
 
As Restated
Assets
 
 
 
 
 
 
 
 

Current assets:
 
 
 
 
 
 
 
 

Cash and cash equivalents
 
$
5,633

 
$
(501
)
 
$

 
$
5,132

Marketable securities, at fair value
 
9,682

 

 

 
9,682

Accounts receivable, net
 
3,488

 
368

 
46

 
3,902

Inventory, net
 
20,331

 
(93
)
 
1

 
20,239

Other current assets
 
3,420

 
(112
)
 
72

 
3,380

Total current assets
 
42,554

 
(338
)
 
119

 
42,335

Restricted cash
 
3,000

 

 

 
3,000

Sale leaseback security deposit
 
4,414

 

 

 
4,414

Property, plant and equipment, net
 
8,775

 

 
(1
)
 
8,774

Leased property, net
 
15,098

 

 

 
15,098

Goodwill
 
5,367

 
(4
)
 
1

 
5,364

Intangibles, net
 
3,510

 
213

 
(1
)
 
3,722

Other assets
 
543

 
(85
)
 
(116
)
 
342

Total assets
 
$
83,261

 
$
(214
)
 
$
2

 
$
83,049

 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity
 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

Accounts payable
 
$
13,924

 
$
(655
)
 
$
1,086

 
$
14,355

Related party payables
 
531

 
761

 
25

 
1,317

Line of credit
 
112

 


 
(112
)
 

Accrued commissions
 
3,907

 
(457
)
 
600

 
4,050

Accrued liabilities
 

 
213

 
5,763

 
5,976

Deferred revenue
 
3,582

 
(2,322
)
 
46

 
1,306

Current portion of long-term debt
 
905

 

 

 
905

Accrued taxes payable
 

 
576

 
3,974

 
4,550

Other current liabilities
 
12,889

 
816

 
(10,818
)
 
2,887

Total current liabilities
 
35,850

 
(1,068
)
 
564

 
35,346

Deferred tax liability
 

 

 

 

Long-term debt, net of current portion
 
7,081

 

 

 
7,081

Lease liability, net of current portion
 
15,800

 
(26
)
 

 
15,774

Other long-term liabilities
 
1,905

 
977

 
(562
)
 
2,320

Total liabilities
 
60,636

 
(117
)
 
2

 
60,521

Commitments & contingencies (Note 9)
 


 


 


 


Stockholders' equity:
 
 

 
 

 
 

 
 

Preferred stock, par value $0.001 per share, 500,000 authorized
 

 

 

 

Common stock, par value $0.0001 per share, 250,000,000 shares authorized; 34,367,095 outstanding as of March 31, 2015
 
4

 

 

 
4

Additional paid-in capital
 
55,452

 

 

 
55,452

Accumulated other comprehensive income
 
637

 
(336
)
 

 
301

Accumulated deficit
 
(37,024
)
 
742

 

 
(36,282
)
Total stockholders' equity attributable to JRjr33, Inc.
 
19,069

 
406

 

 
19,475

Stockholders' equity attributable to non-controlling interest
 
3,556

 
(503
)
 

 
3,053

Total stockholders' equity
 
22,625

 
(97
)
 

 
22,528

Total liabilities and stockholders' equity
 
$
83,261

 
$
(214
)
 
$
2

 
$
83,049

  



13


JRjr33, Inc.
Condensed Consolidated Statements of Operations
 (Unaudited)
 
 
Three Months Ended March 31, 2015
(in thousands, except share and per share data)
 
As Previously Reported
 
Restatement Adjustments
 
Reclassification Adjustments
 
As Restated
Revenue
 
$
19,219

 
$
511

 
$
148

 
$
19,878

Program costs and discounts
 
(2,161
)
 
(864
)
 
(226
)
 
(3,251
)
Net revenue
 
17,058

 
(353
)
 
(78
)
 
16,627

Costs of sales
 
5,411

 
(68
)
 
(113
)
 
5,230

Gross profit
 
11,647

 
(285
)
 
35

 
11,397

Commissions and incentives
 
5,865

 
32

 
(77
)
 
5,820

Gain on sale of assets
 
(43
)
 

 

 
(43
)
Selling, general and administrative
 
9,440

 
1,151

 
112

 
10,703

Depreciation and amortization
 
618

 
(339
)
 

 
279

Share based compensation expense
 

 
(1,167
)
 

 
(1,167
)
Impairment of goodwill
 

 

 

 

Operating loss
 
(4,233
)
 
38

 

 
(4,195
)
Loss (gain) on sale of marketable securities
 
7

 
(199
)
 

 
(192
)
Interest expense, net
 
597

 
2

 

 
599

Loss from operations before income tax provision
 
(4,837
)
 
235

 

 
(4,602
)
Income tax provision
 
195

 
(4
)
 

 
191

Net income (loss)
 
(5,032
)
 
239

 

 
(4,793
)
Net loss attributable to non-controlling interest
 
166

 
504

 

 
670

Net income (loss) attributable to JRjr33, Inc.
 
$
(4,866
)
 
$
743

 
$

 
$
(4,123
)
Basic and diluted loss per share:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
29,668,069

 

 

 
29,668,069

Income (loss) per common share attributable to common stockholders, basic and diluted
 
$
(0.16
)
 
$
0.02

 
$

 
$
(0.14
)

14


JRjr33, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
 
Three Months Ended March 31, 2015
(in thousands)
 
As Previously Reported
 
Restatement Adjustments
 
Reclassification Adjustments
 
As Restated
Net loss
 
$
(5,032
)
 
$
239

 
$

 
$
(4,793
)
Other comprehensive gain (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
 
 
 
 
 
 
 
 
Unrealized holding gain arising during the period
 
17

 
(10
)
 

 
7

Reclassification of other comprehensive income included in net loss
 

 
(199
)
 

 
(199
)
Foreign currency translation adjustment gain (loss)
 
310

 
(136
)
 

 
174

Other comprehensive gain (loss)
 
327

 
(345
)
 

 
(18
)
Comprehensive loss
 
(4,705
)
 
(106
)
 

 
(4,811
)
Comprehensive loss attributable to non-controlling interests
 
166

 
504

 

 
670

Comprehensive gain (loss) attributable to JRjr33, Inc.
 
$
(4,539
)
 
$
398

 
$

 
$
(4,141
)

15


JRjr33, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

16


 
 
Three Months Ended March 31, 2015
(in thousands)
 
As Previously Reported
 
Prior Period Cash Flow Errors (1)
 
Restatement Adjustments
 
Reclassification Adjustments
 
As Restated
Operating activities:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(5,032
)
 
$

 
$
239

 
$

 
$
(4,793
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities net of effect of acquisitions
 
 
 
 
 
 
 
 
 
 

Depreciation and amortization
 
629

 
3

 
(212
)
 

 
420

Loss (gain) on sale of marketable securities
 
7

 

 
(199
)
 

 
(192
)
Share-based compensation
 

 

 
(1,167
)
 


 
(1,167
)
Provision for doubtful accounts
 
(7
)
 
3

 
15

 

 
11

Provision for obsolete inventory
 

 

 

 

 

Gain on sales of assets
 
(43
)
 

 

 

 
(43
)
Deferred income tax
 

 

 
34

 

 
34

Non-cash compensation
 

 

 
101

 

 
101

Changes in certain assets and liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
(21
)
 
94

 
(540
)
 

 
(467
)
Inventory
 
858

 
(363
)
 
93

 

 
588

Other current assets
 
210

 
80

 
13

 

 
303

Accounts payable
 
1,864

 
(1,646
)
 
507

 

 
725

Related party payables, net
 
404

 
(25
)
 
785

 

 
1,164

Accrued commissions
 
588

 
3

 
143

 

 
734

Accrued liabilities
 

 

 
129

 

 
129

Deferred revenue
 
600

 
(1,346
)
 
(130
)
 

 
(876
)
Taxes payable
 

 

 
150

 

 
150

Other liabilities
 
(1,670
)
 
1,648

 
(478
)
 

 
(500
)
Net cash used in operating activities
 
(1,613
)
 
(1,549
)
 
(517
)
 

 
(3,679
)
Investing activities:
 
 
 
 
 
 
 
 
 
 

Capital expenditures
 
(347
)
 
31

 

 

 
(316
)
Proceeds from the sale of property, plant and equipment
 
113

 
(85
)
 

 

 
28

Purchase of investments available for sale
 
(18,876
)
 

 

 

 
(18,876
)
Sale of marketable securities
 
8,901

 
1,284

 

 

 
10,185

Cash held as collateral
 
(3,000
)
 

 

 

 
(3,000
)
Acquisitions, net of cash purchased
 
(3,567
)
 
432

 

 

 
(3,135
)
Net cash provided by (used in) investing activities
 
(16,776
)
 
1,662

 

 

 
(15,114
)
Financing activities:
 
 
 
 
 
 
 
 
 
 

Net borrowings (payments) on long-term debt and revolving credit facility
 
2,984

 
(6
)
 

 

 
2,978

Payments on debt
 
(247
)
 

 

 

 
(247
)
Stock issuances
 
18,369

 
(9
)
 

 

 
18,360

Net cash provided by (used in) financing activities
 
21,106

 
(15
)
 

 

 
21,091

Effect of exchange rate changes on cash
 
310

 
(98
)
 
16

 

 
228

Increase in cash and cash equivalents
 
3,027

 

 
(501
)
 

 
2,526

Cash and cash equivalents at beginning of period
 
2,606

 

 

 

 
2,606

Cash and cash equivalents at end of period
 
$
5,633

 
$

 
$
(501
)
 
$

 
$
5,132

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
 
 
 

Cash paid during the period for:
 
 
 
 
 
 
 
 
 
 

Interest
 
$
595

 
$

 
$

 
$

 
$
595

Income taxes
 

 

 

 

 

(1) The cash flow in the previously issued March 31, 2015 Form 10-Q contains calculation errors which are presented in the 'prior period cash flow errors' column.


17


(3) Acquisitions, Dispositions and Other Transactions
 
Kleeneze
 
On March 24, 2015, we completed the acquisition of Kleeneze Limited (“Kleeneze”), a direct-to-consumer business based in the United Kingdom. Pursuant to the terms of a Share Purchase Agreement with Findel plc (“Findel”), the Company purchased 100% of the shares of Kleeneze from Findel for total consideration of $5.1 million. The consideration included $3.0 million of senior secured debt provided by HSBC Bank PLC, which has a term of two years and an interest rate per annum of 0.60% over the Bank of England Base Rate as published from time to time (an interest rate of approximately 1.1% at the time of the purchase). The remainder was funded by a net cash contribution by the Company of approximately $100,000 after deducting $2.0 million in cash that remained on the books of Kleeneze at closing.

Opening balance sheet for Kleeneze acquisition on March 24, 2015
 
The following summary represents the fair value of Kleeneze as of the acquisition date and is subject to change following management’s final evaluation of the fair value assumptions.
 
(in thousand)
 
Kleeneze
Assets
 
 

Current assets:
 
 

Cash and cash equivalents
 
$
1,964

Accounts receivable
 
2,986

Inventory
 
6,283

Other current assets
 
931

Total current assets
 
12,164

Property, plant and equipment
 
619

Goodwill
 
1,347

Total assets
 
$
14,130

 
 
 

Liabilities and stockholders’ equity
 
 

Current liabilities:
 
 

Accounts payable-trade
 
$
3,635

Other current liabilities
 
5,395

Total current liabilities
 
9,030

Other long-term liabilities
 

Total liabilities
 
9,030

Stockholders’ equity
 
5,100

Total liabilities and stockholders’ equity
 
$
14,130


18



Pro forma Consolidated Statement of Operations for the quarter ended March 31, 2015.

The following summary presents the pro forma results of operations for the current year up to the date of March 31, 2015 as though the companies had combined at the beginning of the reported period. 
  
 
 
 
 
 
Pro Forma
 
 
 
Pro Forma
 
 
JRJR
 
Kleeneze
 
Adjustments
 
Note
 
JRJR
Revenue
 
$
19,878

 
$
12,812

 
$

 
 
 
$
32,690

Program costs and discounts
 
(3,251
)
 
(2,971
)
 

 
 
 
(6,222
)
Net revenue
 
16,627

 
9,841

 

 
 
 
26,468

Costs of sales
 
5,230

 
5,054

 

 
 
 
10,284

Gross profit
 
11,397

 
4,787

 

 
 
 
16,184

Commissions and incentives
 
5,820

 
1,941

 

 
 
 
7,761

Gain on sale of assets
 
(43
)
 

 

 
 
 
(43
)
Selling, general and administrative
 
10,703

 
3,132

 
(113
)
 
A
 
13,722

Depreciation and amortization
 
279

 

 

 
 
 
279

Share based compensation expense
 
(1,167
)
 

 

 
 
 
(1,167
)
Operating loss
 
(4,195
)
 
(286
)
 
113

 
 
 
(4,368
)
Loss (gain) on marketable securities
 
(192
)
 

 

 
 
 
(192
)
Interest expense, net
 
599

 
(106
)
 

 
 
 
493

Loss from operations before income tax provision
 
(4,602
)
 
(180
)
 
113

 
 
 
(4,669
)
Income tax provision
 
191

 

 

 
 
 
191

Loss before extraordinary item
 
(4,793
)
 
(180
)
 
113

 
 
 
(4,860
)
Extraordinary item, net of tax
 

 
33,638

 
(33,638
)
 
B
 

Net income (loss)
 
(4,793
)
 
(33,818
)
 
33,751

 
 
 
(4,860
)
Net loss attributable to non-controlling interest
 
670

 

 

 
 
 
670

Net income (loss) attributable to JRjr33, Inc.
 
$
(4,123
)
 
$
(33,818
)
 
$
33,751

 
 
 
$
(4,190
)
 
 
 

 
 

 
 

 
 
 
 

Basic and diluted loss per share:
 
 

 
 

 
 

 
 
 
 

Weighted average common shares outstanding
 
29,668,069

 
29,668,069

 
29,668,069

 
 
 
29,668,069

Gain (loss) per common share attributable to common stockholders, basic and diluted
 
$
(0.14
)
 
$
(1.14
)
 
$
1.14

 
 
 
$
(0.14
)
 
Notes to Pro Forma Unaudited Condensed Consolidated Financial Statement
 
A.
Transaction fees related to the acquisition of Kleeneze were removed in the pro forma adjustments.

B.
Losses were incurred as a result of the write down of intercompany receivables that were forgiven prior to and in accordance with the transaction. As these losses were direct and one-time events related specifically to the acquisition, we have excluded these items from the pro forma income statement shown below.


19


Uppercase Living
 
On March 14, 2014, Uppercase Acquisition Inc. (“UAI”), a wholly-owned subsidiary of the Company, acquired substantially all the assets of Uppercase Living, LLC, a direct seller of an extensive line of customizable vinyl expressions for display on walls. UAI assumed certain liabilities and agreed to issue 254,490 shares of our common stock, par value $0.0001 ("Common Stock") to the seller at a fair value of $96,706 on the acquisition date. The Company also agreed to deliver 323,897 shares of its common stock at a fair value of $123,081 to an escrow account for up to 24 months that will be issued to the seller upon remediation of certain close conditions. Since the Company did not deliver the shares of our Common Stock until April 2014, we recorded a payable as of the acquisition date totaling $219,787. The Company also agreed to pay the seller three subsequent contingent payments equal to 10% of Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") for each of the years ending 2014 to 2016 which is recorded in other long-term liabilities in the opening balance sheet. Goodwill arising from the transaction totaled $469,065.
 
Possible Issuance of Additional Common Stock under Share Exchange Agreement
 
Under the Share Exchange Agreement, Rochon Capital purchased and has the right to an additional 25,240,676 shares of common stock (the “Additional Shares”). The second closing of the transactions and the issuance of the Additional Shares contemplated by the Share Exchange Agreement (the “Second Tranche Closing”) was to occur on the date that was the later of: (i) the 20th  calendar day following the date on which we first mailed an Information Statement to our shareholders; (ii) the date the Financial Industry Regulatory Authority (“FINRA”) approved the Amendment; or (iii) the first business day following the satisfaction or waiver of all other conditions and obligations of the parties to consummate the transactions contemplated by the Share Exchange Agreement, or on such other date and at such other time as the parties may mutually determine.
 
On October 10, 2014, the Company entered into a second amendment to that certain Share Exchange Agreement, as amended, with Rochon Capital (as further amended, the "Amended Share Exchange Agreement"), which became effective on December 1, 2014, which limits Rochon Capital's right or the right of a Permitted Transferee (as defined below) to be issued the 25,240,676 shares of our common stock which it is currently entitled to receive under the Share Exchange Agreement, as amended (the "Second Tranche Parent Stock") based solely upon the public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below), or upon the commencement or announcement of a tender or exchange offer which would result in any person or group becoming an Acquiring Person. In such event, the Second Tranche Parent Stock will be issued to Rochon Capital, or a Permitted Transferee to whom the right has been transferred, within ten (10) days of its written request, which request shall be in its sole discretion. A person or group of affiliated or associated persons becomes an "Acquiring Person," thus triggering the issuance of the Second Tranche Parent Stock to Rochon Capital, or a Permitted Transferee to whom the right has been transferred, upon acquiring, subsequent to the date of the Amended Share Exchange Agreement, beneficial ownership of 15% or more of the shares of our common stock then outstanding. The term "Acquiring Person" shall not include (1) any person who acquires 15% or more of our shares of common stock in a transaction approved by John P. Rochon, (2) any affiliates of John P. Rochon or (3) any family members of John P. Rochon.
 
In addition, Rochon Capital has agreed to irrevocably waive its right to, and has agreed that it will not (i) sell, pledge, convey or otherwise transfer all or any part of the Second Tranche Parent Stock or the right to receive the Second Tranche Parent Stock to any person or entity other than to (x) John P. Rochon or his wife, or both, or John Rochon, Jr. (each a "Permitted Transferee") or (y) the Company, as set forth below, and (ii) be entitled to receive any cash dividends or cash distributions of any kind with respect to the Second Tranche Parent Stock, except as specifically provided below. Rochon Capital further agreed that the Second Tranche Parent Stock shall be redeemed by the Company upon receipt of a cash payment by Rochon Capital from the Company of One Million Dollars ($1,000,000) if any of the following events occur: (i) our liquidation or dissolution; (ii) our merger with or into another entity where the holders of its common stock prior to the merger do not own a majority of its common stock immediately after the merger (while specifically excluding the Second Tranche Parent Stock from such calculation); (iii) the sale of all or substantially all of our assets; (iv) the death of John P. Rochon, in which case the redemption shall be limited to Second Tranche Parent Stock that has not been transferred by Rochon Capital; (v) a change of control of Rochon Capital such that a majority of the equity of Rochon Capital is not owned by John P. Rochon or immediate family members of John P. Rochon; and (vi) John P. Rochon having been found guilty or having pled guilty or nolo contendere to any act of embezzlement, fraud, larceny or theft on or from the Company. Rochon Capital has also agreed that the Second Tranche Parent Stock will be automatically redeemed by the Company for nominal consideration if any of the following events should occur: (i) the Company commences a voluntary case under Title 11 of the United States Code or the corresponding provisions of any successor laws; (ii) an involuntary case against the Company is commenced under Title 11 of the United States Code or the corresponding provisions of any successor laws and either (A) the case is not dismissed by midnight at the end of the 90th day after commencement or (B) the court before which the case is pending issues an order for relief or similar order approving the case; or (iii) a court of competent jurisdiction appoints, or the Company makes an assignment of all or substantially all of its assets to, a custodian (as that term is defined in Title 11 of the United States Code or the corresponding provisions of any successor laws) for the Company or all or substantially all of its assets.

20


 
Rochon Capital has agreed to irrevocably authorize and direct our transfer agent to place a permanent stop order on the Second Tranche Parent Stock and to add a corresponding restrictive legend on the certificate or certificates representing the Second Tranche Parent Stock.

Dispositions
 
On July 31, 2014, JRjr and our subsidiary TLC and CFI NNN Raiders, LLC. ("CFI"), entered into a Sale Leaseback Agreement (the "Sale Leaseback Agreement") pursuant to which TLC agreed to sell to CFI certain real estate owned by TLC and used by TLC in its manufacturing, distribution and showroom activities. The real estate described in the Sale Leaseback Agreement was purchased by CFI, for an aggregate purchase price of $15.8 million. A gain on sale of approximately $2.5 million was recorded associated with the sale. Because the transaction was part of a Sale Leaseback agreement that is being accounted for as a capital lease, the gain has been deferred and will be recognized over the fifteen (15) year life of the Sale Leaseback Agreement. 

Public Offering
 
On March 4, 2015 the Company closed an underwritten public offering of 6,667,000 shares of common stock and warrants to purchase up to an aggregate of 6,667,000 shares of common stock at a combined offering price of $3.00. JRjr granted the underwriters a 45-day option to purchase up to an additional 1,000,050 shares of common stock and/or warrants to purchase up to an aggregate of 1,000,050 shares of common stock to cover additional over-allotments and the underwriters. On March 4, 2015, the underwriters exercised a portion of the over-allotment option with respect to 113,200 warrants. No options were exercised as it relates to shares of common stock. The over-allotment option has expired and no additional shares of common stock or warrants were exercised. In addition, warrants for an additional 166,675 shares with the same terms mentioned previously were issued to JRjr’s underwriters per the terms of the Underwriting Agreement.

(4) Marketable Securities
 
Our marketable securities as of March 31, 2015 include fixed income investments classified as available for sale. At March 31, 2015, the fair value of the fixed income securities totaled $9.7 million. At December 31, 2014, the fair value of the fixed income securities totaled approximately $1.0 million. The net cost of marketable securities purchases during the three months ended March 31, 2015 and 2014 totaled $10.2 million and $3.4 million, respectively. Unrealized gains on the investments included in consolidated statements of other comprehensive income were $7,000 and $469,000 for the quarters ended March 31, 2015 and 2014, respectively. Our realized losses from the sale of our marketable securities totaled $(192,000) and $494,000 for the quarters ended March 31, 2015 and 2014, respectively. The unrealized loss has been in that position for less than one year. Accordingly, management does not believe that the investments have experienced any other than temporary losses.
 
(5) Inventory
 
Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory consisted of the following (in thousands):
 
 
March 31,
2015
 
December 31,
2014
Raw material and supplies
 
$
3,088

 
$
3,052

Work in process
 
484

 
931

Finished goods
 
20,930

 
14,852

 
 
24,502

 
18,835

Inventory reserve
 
(4,263
)
 
(4,076
)
 Inventory, net
 
$
20,239

 
$
14,759

 
(6) Property, Plant and Equipment
 
Property, plant and equipment consisted of the following (in thousands):
 
 
March 31,
2015
 
December 31,
2014
Land and improvements
 
$
498

 
$
699

Buildings and improvements
 
6,423

 
6,351

Equipment
 
4,010

 
2,978

Construction in progress
 

 
10

 
 
10,931

 
10,038

Less accumulated depreciation and amortization
 
(2,157
)
 
(1,847
)
Property, plant and equipment, net
 
$
8,774

 
$
8,191


Depreciation expense was $317,000 for the three months ended March 31, 2015, which relates solely to property plant, and equipment depreciation. Depreciation expense was $518,000 for the three months ended March 31, 2014, which includes and $249,000 of depreciation related to property, plant and equipment in cost of goods sold.

21



(7) Long-term Debt and Other Financing Arrangements
 
The Company's long-term borrowing consisted of the following (in thousands, except for interest rates):
 
Description
 
Interest
rate
 
March 31,
2015
 
December 31, 2014
Senior secured debt – HSBC Bank PLC
 
1.10
%
 
$
2,977

 
$

Promissory note—Payable to Former Shareholder of TLC
 
2.63
%
 
3,281

 
3,373

Promissory note—Lega Enterprises, LLC (formerly Agel Enterprises, LLC)
 
5.00
%
 
1,261

 
1,367

Other miscellaneous notes
 
4.00
%
 
467

 
516

Total debt
 
 

 
7,986

 
5,256

Less current maturities
 
 

 
(905
)
 
(940
)
Long-term debt
 
 

 
$
7,081

 
$
4,316


Senior Secured debt – HSBC Bank PLC
 
On March 24, 2015, the Company secured $3.0 million in senior secured debt from HSBC Bank PLC, with a term of two years and an annual interest rate of 0.60% over the Bank of England Base Rate as published from time to time.
 
Promissory Note—Payable to Former Shareholder of TLC
 
On March 14, 2013, we issued a $4.0 million promissory note in connection with the purchase of TLC. The Promissory Note bears interest at 2.63% per annum, has a ten-year maturity, and is payable in equal monthly installments of outstanding principal and interest.
 
Promissory Note—Lega Enterprises, LLC
 
On October 22, 2013, we issued a $1.7 million promissory note to Lega Enterprises, LLC (formerly Agel Enterprises, LLC) in connection with AEI's acquisition of assets from Agel Enterprises LLC. The promissory note bears interest at 5% per annum, and is payable in equal monthly installments of outstanding principal and interest and matures on October 22, 2018.
 
Promissory Note – Other Miscellaneous
 
On December 4, 2014, we issued a $0.5 million promissory note in connection with a settlement agreement. The promissory note bears interest at 4% per annum, and is payable in equal monthly installments of outstanding principal and interest.
 
Capital Lease
 
On July 31, 2014, TLC entered into the Sale Leaseback Agreement with CFI. The lease was deemed to qualify as a capital lease and the transaction is being accounted for as a sales leaseback arrangement. The gain arising from the sale of the three buildings and related property was deferred and is being recognized using the full accrual method over the term of the lease. The lease has been classified as a capital lease since the condition was met whereby the term of the lease is greater than 75% of the estimated economic life of the property. TLC has recorded the sale and removed the properties sold and related liabilities from the balance sheet. Since the lease is a capital lease, a leased asset will be recorded and depreciated over 15 years using the straight-line method.
 
The payment under the lease will be accounted for as interest and payments under capital lease using 15 year amortization. Interest expense of $552,000 associated with the lease payments was recognized in the three months ended March 31, 2015. Depreciation expense of $263,000 was recorded in the three months ended March 31, 2015, of which $141,000 was included in cost of goods sold. The gain on sales of real estate was $42,000, which represents three months of the gain amortized over the life of the lease.


22


Outstanding Warrants
 
On March 4, 2015 the Company raised proceeds of $20 million though the sale of 6,667,000 shares of its common stock and warrants to purchase up to an aggregate of 6,667,000 shares of its common stock at a combined offering price of $3.00 in an underwritten public offering (“Offering”). The warrants have a per share exercise price of $3.75, are exercisable immediately and will expire five years from the date of issuance. The Company granted the underwriters a 45-day option to purchase up to an additional 1,000,050 shares of common stock and/or warrants to purchase up to an aggregate of 1,000,050 shares of common stock to cover additional over-allotments, if any. On March 4, 2015, the underwriters exercised a portion of their over-allotment option with respect to 113,200 warrants. In addition, 166,675 warrants were issued to the underwriters. The over-allotment option has expired as of the date of this filing.

The gross proceeds to the Company, including the underwriters' partial exercise of their over-allotment option, were approximately $20,000,000 before deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company. Assuming the exercise of all 6,667,000 warrants at the exercise price of $3.75 each, and assuming the Company maintains the conditions necessary for a cash exercise, the total additional gross aggregate proceeds to JRjr would be $25,001,250. However, there can be no assurance that any warrants will be exercised.

On May 6, 2014, the Company issued warrants to purchase up to 12,500 and 6,250 shares of its Common Stock in connection with exclusivity agreements. The warrants were exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a cashless exercise basis at an exercise price of $11.00 per share, representing the average closing price of our common stock for the ten days preceding the issuance. In addition, the warrants provide for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation,. The fair value of the warrants on the date of issuance approximated $116,000.
 
On July 2, 2014, the Company issued a warrant exercisable for 50,000 shares of our common stock at an exercise price of $12.80 per share in consideration of a two-year consulting agreement with an individual with direct selling industry experience. The warrant is exercisable for a five day period commencing 720 days after issuance, however, the warrant expires without an opportunity to exercise it on July 1, 2015, unless the term is extended for an additional year if on July 1, 2015 the shares of common stock underlying the warrant are subject to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") or our common stock is listed on the Nasdaq National Market or the NYSE MKT. In addition, the warrant provides for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation.

(8) Accumulated Other Comprehensive Income
 
Accumulated other comprehensive loss , net of taxes, is comprised of the following (in thousands):
 
 
 
Foreign
Currency
Translation
 
Unrealized Gain
(Loss) on
Available-for-
Sale Securities
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2014
 
$
128

 
$
193

 
$
321

Other comprehensive income before reclassifications
 
174

 
7

 
181

Amount reclassified from AOCI
 

 
(199
)
 
(199
)
Net other comprehensive income at March 31, 2015
 
$
300

 
$
1

 
$
301


Components of AOCI
Amounts
reclassified
from AOCI
Realized gain/(loss) on sale of marketable securities
$
199

Income tax (expense) benefit
0

Net of income taxes
$
199


(9) Fair Value
 
We established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
 
Level 1—Unadjusted quoted prices in active markets for identical assets and liabilities;
 
Level 2—Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and
 
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
 
The carrying values of cash and cash equivalents, accounts receivable, accounts payable trade and related party, and line of credit payable are considered to be representative of their respective fair values due to the immediate or short-term nature or maturity of these financial instruments. Our available for sale securities (Level 1) was $9.7 million and (Level 2) $0 at March 31, 2015. Our available for sale securities (Level 1) was $129,000 and (Level 2) $862,000 at December 31, 2014. We do not have other assets or intangible assets measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014.

(10) 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 remote. As such, management believes that the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations.
 
Worker’s Compensation Liability
 
Certain of the Company’s employees were covered under a self-insured worker’s compensation plan which was replaced by a fully insured plan in December, 2014. The Company estimates its remaining self-insured worker’s compensation liability based on past claims experience, and has an accrued liability to cover estimated future costs. At March 31, 2015 and December 31, 2014, the accrued liability was approximately $1.0 million. There can be no assurance that the Company’s estimates are accurate, and any differences could be material.

(11) Income Taxes
 
As of December 31, 2014, the Company lacked a history of earnings that would allow it to record any of its net deferred tax assets without a corresponding valuation allowance. Using the same methodology, and updating the earnings history based on first quarter 2015 actual earnings, the Company is unable to reduce its valuation allowance. Therefore, no net deferred tax asset is reflected as of March 31, 2015. Additionally, due to some of its historical acquisitions which included intangibles with an indefinite life, the Company continues to accumulate a deferred tax liability which is recorded outside the net deferred tax asset and valuation allowance. Deferred tax expense for the quarter ended March 31, 2015 was $34,000. The Company records no current income tax expense related to its domestic activities due to historical or current net operating losses. Current tax expense of $157,000 has been recorded in the first quarter of 2015 based on the Company’s activities in certain foreign jurisdictions which are currently profitable and no loss carryover is available to offset the income.

(12) Share-Based Compensation Plans
 
The Company has two share-based compensation plans, the 2013 Director Smart Bonus Unit Plan and 2013 Smart Bonus Unit Award Plan. These plans provide for the issuance of a cash bonus for stock appreciation. A Committee comprised of members of the Board of Directors approves all awards that are granted under our share-based compensation plan. We classify the awards as a liability as the value of the award will be settled in cash, notes, or stock. The Stock Appreciation Rights, (“SARs”) vest over a period of three years and have a contractual term of five years. The liability related to these awards is included in other long-term liabilities on our consolidated balance sheets. Share-based compensation expense for the quarter ended March 31, 2015 and 2014 is $(1.2) million and $87,000, respectively. As of March 31, 2015, total unrecognized compensation cost related to unvested share-based compensation was $1.2 million, which is expected to be recognized over a three-year period.


23


(13) Loss Per Share Attributable to JRjr
 
Outstanding warrants were excluded from the fully diluted loss per share because inclusion of the warrants in the loss per share computation would be anti-dilutive.
 
(14) Segment Information
 
The Company operates in a single reporting segment as a direct selling company that sells a wide range of products sold primarily by independent sales force across many countries around the world. For the three months ended March 31, 2015 and March 31, 2014, respectively approximately $9.1 million or 47% and $10.8 million or 40% of our revenues were generated in international markets. We do not view any product groups as segments but have grouped similar products into the following five categories for disclosure purposes only: gourmet foods, nutritional and wellness, home décor, publishing and printing and other. For the three months ended March 31, 2015 and March 31, 2014, approximately $2.5 million or 13% and $1.0 million or 4% of our revenues, respectively, were derived from the sales of gourmet food products, $6.8 million or 35% and $10.2 million or 38% of our revenues, respectively, were derived from the sale of nutritional and wellness products, $10.2 million or 52% and $15.0 million or 56% of our revenues, respectively, were derived from the sale of home décor products, $233,000 or 1% and $294,000 or 1% of our revenues, respectively, were derived from the sale of our publishing and printing services and products and for the three months ended March 31, 2015 and March 31, 2014 $152,000 or 1% and $191,000 or 1% of our revenues, respectively, were derived from the sale of our other products. Substantially all of our long-lived assets are located in the US. Our chief operating decision-maker is our Chief Executive Officer who reviews financial information presented on a consolidated basis. Accordingly, we have determined that we operate in one reportable business segment.

Revenues by product groups for the three months ended March 31, 2015 and March 31, 2014 are shown in the table below (dollars in thousands):
 
 
March 31,
2015
 
March 31,
2014
Gourmet Food Products
 
$
2,545

 
$
963

Home Décor
 
10,171

 
15,021

Nutritionals and Wellness
 
6,777

 
10,202

Publishing & Printing
 
233

 
294

Other
 
152

 
191


(15) Related Party Transactions
 
During the fourth quarter of 2013, we renewed a Reimbursement of Services Agreement for a minimum of one year with Richmont Holdings. JRjr has begun to establish an infrastructure of personnel and resources necessary to identify, analyze, negotiate and conduct due diligence on direct-selling acquisition candidates. However, we continue to need advice and assistance in areas related to identification, analysis, financing, due diligence, negotiations and other strategic planning, accounting, tax and legal matters associated with such potential acquisitions. Richmont Holdings and its affiliates have experience in the above areas and we wish to draw upon such experience. In addition, Richmont Holdings had already developed a strategy of acquisitions in the direct-selling industry and has assigned and transferred to us the opportunities it has previously analyzed and pursued. JRjr has agreed to pay Richmont Holdings a reimbursement fee (the “Reimbursement Fee”) each month and we agreed to reimburse or pay the substantial due diligence, financial analysis, legal, travel and other costs Richmont Holdings incurred in identifying, analyzing, performing due diligence, structuring and negotiating potential transactions. During the three months ended March 31, 2015 and 2014, we recorded $504,000 and $480,000, respectively in Reimbursement Fees that were included in selling, general and administrative expense in the consolidated statements of operations.
 
On February 26, 2015 we received a loan from Richmont Capital Partners V (“RCP V”) in the amount of $425,000. This amount is included in related-party payables within current liabilities.

See Note (2), Restatement of Condensed Consolidated Financial Statements, for further details on related party transaction during the three months ended March 31, 2015.
 
(16) Subsequent Events
 
On April 28, 2015, the Company received notice from Tamala Longaberger that she was resigning from her position as Chief Executive Officer of The Longaberger Company, effective thirty days from the date of the notice.


24


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and notes as presented in Part I - Item 1 of this report and in conjunction with our Form 10-K/A.

Restatement of Financial Statements
 
We have restated our Condensed Consolidated Balance Sheet as of March 31, 2015, the related Condensed Consolidated Statements of Income for the three month period ended March 31, 2015, Condensed Consolidated Statement of Comprehensive Income, and Condensed Consolidated Statements of Cash Flows for the three month period ended March 31, 2015, and the notes related thereto. Additionally, in connection with the restatement process, the Company reviewed, corrected and modified, where appropriate, certain disclosure in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the selected financial data as applicable. 

All of the numbers impacted by the restatement in this section are as restated.

For further information on the nature and impact of the restatement, see Note 2. Restatement of Financial Statements in the notes to our consolidated financial statements included in this Amendment.

Business Overview
 
We operate a multi-brand direct selling/micro-enterprise company that employs innovative operational, marketing, social networking and e-commerce strategies to drive a high-growth global business. We are engaged in a long-term strategy to develop a large, global, diverse, company that combines the entrepreneurship, innovation and relationship-based commerce of micro-enterprise with the infrastructure and operational excellence of a large scale public company.
 
We seek to acquire companies primarily in the direct selling (micro-enterprise) business and companies potentially engaging in a business related to micro-enterprise and to build within this sector an interconnected “network of networks,” in which social connections aided by the power of social media will be combined with relationship-based commerce (that is commerce conducted between friends, neighbors, relatives and colleagues). Our goal is to form a virtual, online economy with the sellers and customers, from the businesses we acquire, which will offer its members a myriad of benefits and advantages. Our acquisitions form the platform for this growing online economy.
 
We have grown at a rapid pace as a result of our acquisitions through March 31, 2015. With each acquisition we have expanded our product base and our base of independent sales representatives and potential customers. In this respect, we believe we have something valuable that social media companies wish they had. Social media companies help people stay connected, but have been unable to fully translate these connections directly into commerce. In contrast, our companies’ virtual communities of sellers and customers are already conducting commerce, much of it using our online business tools, such as personalized web sites. This convergence of personal relationships, social media and relationship-based commerce is what gives us our unique blend of attributes for growth. As we scale up through additional acquisitions and organic growth, we expect these attributes will be magnified.
 
We expect that our revenue will increase as we continue to acquire companies, including our recently closed acquisition of Kleeneze, and we expect to continue to integrate them with our existing companies. We believe that our visibility in the direct selling industry continues to increase, as news circulates through the industry and increasing numbers of people in the industry became more familiar with our strategy and progress. We also believe that this visibility has made us more attractive to potential acquisition targets. At the same time, however, the costs of growth through acquisition, such as legal costs and other due diligence-related costs, the costs associated with our recent up-listing to the NYSE MKT, systems implementation and other transitional operating costs have been significant and have affected our profitability. In addition, conditions affecting each individual company have posed challenges to our company as a whole. We anticipate that our operating losses and net losses will decrease over time as we are able to implement certain operating and administrative efficiencies for the acquired companies as a whole.
 
However, our results are impacted by economic, political, demographic and business trends and conditions in the United States as well as globally. A rise or fall in economic conditions, including such factors as inflation, economic confidence, recession and disposable income can affect the direct selling industry, as the independent sales representatives who comprise the sales forces of our various companies make decisions based, at times, on those economic factors. A weak economy historically has been favorable to micro-enterprise/direct selling companies, because in times of economic distress, increasing numbers of individuals look for ways to supplement or replace their income and becoming an independent sales representative can provide supplemental income. Similarly, when jobs are lost, many are forced to seek independent means of earning a living or supplementing family income.

25


However, economic distress can reduce customers' disposable income, making it more difficult to convince a customer to buy a non-essential product or service from a direct seller and therefore negatively impacting our revenue.

Acquisitions

Our disciplined acquisition strategy is derived from the industry knowledge and operating expertise of our management team, which we believe allows us to identify, evaluate and integrate direct-to-consumer companies that can benefit from our company’s resources, while contributing to our overall growth strategy. We have grown at a rapid pace as a result of our recent acquisitions and intend to continue to opportunistically pursue additional acquisitions while improving the fundamental strength of our existing businesses. As of the date of this filing, our platform of direct-to-consumer brands is comprised of the following eight businesses:

Business
 
Date of
Acquisition
 
Number of
Countries with
Sales Presence
 
Product Categories
The Longaberger Company
 
March 18, 2013
 
2
 
Home Décor
Your Inspiration at Home
 
August 22, 2013
 
3
 
Gourmet Foods and Spices
Project Home
 
October 1, 2013
 
1
 
Home Improvement and Home Security
Agel
 
October 22, 2013
 
40
 
Nutritional Supplements and Skin Care
My Secret Kitchen
 
December 20, 2013
 
1
 
Gourmet Foods and Spices
Paperly
 
December 31, 2013
 
1
 
 Stationery
Uppercase Living
 
March 13, 2014
 
2
 
Home Décor
Kleeneze
 
March 24, 2015
 
2
 
Home Décor and Cleaning

Through a series of eight acquisitions of direct-to-consumer companies that offer a diverse product mix, we have expanded our product offerings as well as our base of sales representatives and customers. We completed the acquisition of the assets or stock of the following seven companies in 2013 and 2014: The Longaberger Company (“TLC”) (a direct-to-consumer brand selling premium hand-crafted baskets and a line of products for the home), Your Inspiration at Home, Ltd. (“YIAH”) (a direct-to-consumer brand selling hand-crafted spices from around the world), Tomboy Tools, Inc. ("Project Home”) (a direct-to-consumer brand selling a line of tools designed for women as well as home security monitoring services), Agel Enterprises, LLC (“Agel”) (a direct-to-consumer brand selling nutritional supplements and skin care products), My Secret Kitchen Limited (“MSK”) (a direct-to-consumer brand selling a unique line of gourmet food products), Paperly, LLC (“Paperly”) (a direct-to-consumer brand selling custom stationery and paper products), and Uppercase Living, LLC (“Uppercase”) (a direct-to-consumer brand selling customizable vinyl expressions for display on walls).
 
During the first quarter of 2015, we completed the acquisition of our eighth direct-to-consumer company, Kleeneze Limited (“Kleeneze”), which is based in the United Kingdom. With this acquisition, we have gained a large presence in an already strong United Kingdom market. Kleeneze is one of the United Kingdom’s longest-operating, largest and best-known direct-to-consumer businesses. Founded in 1923, Kleeneze has grown into a community of more than 7,000 independent distributorships, offering a wide variety of several thousand cleaning, health, beauty, home, outdoor and other products to customers across the U.K. and Ireland. Last, since Kleeneze currently operates in the United Kingdom and Ireland, opportunities to leverage our platform to enter into other markets exists. With the addition of Kleeneze our portfolio expands to eight companies. Each company we acquire maintains its own unique product line, independent sales representatives and culture. Our objective with each acquisition is to maintain these unique elements, while reducing the cost of operations and goods for each acquired company through economies of scale, operating efficiencies.
 
Overview of Companies

Happenings Communications Group
 
On September 25, 2012, we acquired 100% of HCG as part of the Share Exchange Agreement. HCG publishes a monthly magazine, Happenings Magazine that highlights events and attractions, entertainment and recreation, and people and community in Northeast Pennsylvania. HCG also provides marketing and creative services to various companies, and can provide such services to direct selling businesses. Services HCG provides may include creating brochures, sales materials, websites and other communications for independent sales representatives and ultimate customers. As a result, HCG is available to serve as an"in-house" resource for providing marketing and creative services to the direct selling companies that we have acquired and hope to acquire in the future.
 

26


The Longaberger Company
 
In March 2013, we acquired a 51.7% controlling interest in TLC. TLC is a direct selling business based in Newark, Ohio which sells premium hand-crafted baskets and a line of products for the home, including pottery, cookware, wrought iron and other home décor products, through a nationwide network of independent sales representatives. TLC also has showrooms in various states, which offer merchandise and serve as support centers for independent sales representatives. We acquired, in two separate transactions, a total of 1,616 shares of TLC's Class A common stock ("TLC Class A Common Stock"), representing 64.6% of the issued and outstanding TLC Class A Common Stock, which class has sole voting rights at TLC, and acquired 968 shares of TLC's Class B common stock, which are non-voting shares ("TLC Class B Common Stock" and, together with the TLC Class A Common Stock, the "TLC Stock"). Together, the two transactions resulted in the Company acquiring 51.7% of all issued and outstanding TLC Stock. As consideration, we issued to a trust of which Tamala Longaberger is the trustee (the "Trust"), a Convertible Subordinated Unsecured Promissory Note, dated March 15, 2013, in the original principal amount of $6.5 million (the "Convertible Note"), and, to TLC, we issued a ten year, $4.0 million unsecured promissory note, dated March 14, 2013, payable in monthly installments. On June 14, 2013, the Convertible Note was converted into 1,625,000 shares of our common stock. At the time of the acquisition, TLC had $22.9 million in liabilities, which after the transaction were reflected in our financial statements in addition to the additional debt incurred as a result of the issuance of the notes to the Trust and TLC.
 
Along with its well-respected brand, its hand-crafted products and its loyal sales force, one of the many aspects of TLC's operation that was attractive to us was its abundance of assets. We have also worked with TLC to reduce its excess inventory. Another challenge we have faced with TLC is bringing its costs and selling, general and administrative expenses under control. We believe the sale of excess inventory will help us to generate cash, which will help us to reduce our liabilities and fund our operations.
 
Another characteristic of TLC which we found attractive was the variety of fixed assets and real estate that were being underutilized in TLC's operations. We intend to make use of these assets at our other companies (including those we own now and those we will acquire in the future). For example, YIAH has begun operations in North America, operating out of TLC's Ohio distribution center and Project Home has shifted inventory and distribution to TLC's Ohio facilities, as well. While we intend to find new uses for certain under-utilized assets, other assets owned by TLC are non-core assets which can be sold to further reduce our liabilities and generate positive cash.
 
Your Inspiration At Home
 
In August 2013, we formed Your Inspiration At Home, Pty. Ltd., an Australian corporation, which acquired substantially all of the assets of YIAH. YIAH is an innovative and award-winning direct seller of hand-crafted spices from around the world. YIAH originated in Australia and has expanded its operations to North America during the third quarter of 2013. We acquired substantially all the assets of YIAH in exchange for total consideration of 225,649 shares of our common stock and the assumption of liabilities of $140,647 in connection with the acquisition.
 
Project Home
 
In October 2013, we formed CVSL TBT, LLC, a Texas limited liability company, which acquired substantially all of the assets of Tomboy Tools, Inc., ("TBT") a direct seller of a line of tools designed for women as well as home security systems. We acquired substantially all the assets of Tomboy Tools, Inc. in exchange for total consideration of 88,349 shares of our common stock and the assumption of liabilities of $471,477 in connection with the acquisition.
 
Agel Enterprises
 
In October 2013, we formed Agel Enterprises, Inc., a Delaware corporation which acquired substantially all of the assets of Agel Enterprises, LLC. Agel is a direct selling business based in Utah that sells nutritional supplements and skin care products through a worldwide network of independent sales representatives. Agel's products are sold in over 40 countries. Agel acquired substantially all the assets of Agel Enterprises, LLC in exchange for total consideration of 372,330 shares of our common stock (of which 28,628 shares were issued in January 2014), the delivery of a purchase money note, dated the closing date, in the original principal amount of $1.7 million and the assumption of $9.1 million in liabilities, which after the transaction were reflected in our financial statements in addition to the additional $1.7 million purchase money note.
 
Paperly
 
In December 2013, we formed Paperly, Inc., a Delaware corporation, which acquired substantially all of the assets of Paperly, a direct seller that allows its independent sales representatives to work with customers to design and create custom stationery through home parties, events and individual appointments. We acquired substantially all the assets of Paperly in exchange for total

27


consideration of 7,797 shares of our common stock and payment of an earn out of 10% of earnings before interest, taxes, depreciation and amortization ("EBITDA") from 2014 to 2016. The shares of our common stock for this acquisition were issued in 2014. We assumed liabilities of $110,022 in connection with the acquisition.
 
My Secret Kitchen
 
In December 2013, we formed CVSL A.G., a Switzerland company, which acquired a 90% controlling interest of MSK, an award-winning United Kingdom-based direct seller of a unique line of food products. We acquired substantially all the stock of MSK in exchange for total consideration of 15,891 shares of our common stock and payment of an earn-out of 5% of MSK's EBITDA from 2014 to 2016. The shares of our common stock for this acquisition were issued in January 2014. At the time of the acquisition, MSK had $168,515 in liabilities, which after the transaction were reflected in our financial statements.
 
Uppercase Living
 
In March 2014, we formed Uppercase Acquisition, Inc. a Delaware corporation which acquired substantially all the assets of Uppercase Living, a direct seller of customizable vinyl expressions for display on walls. Consideration consisted of 28,920 shares of our common stock and payment of an earn out equal to 10% of the EBITDA of the subsidiary that acquired the assets for the years ended December 31, 2014, 2015 and 2016 payable in cash or shares of our common stock at our discretion. The shares of common stock for this acquisition were issued in April and June 2014. We assumed liabilities of $471,445 in connection with the acquisition.
 
Kleeneze
 
In March 2015, we completed the acquisition of Kleeneze Limited (“Kleeneze”), a direct-to-consumer business based in the United Kingdom. Pursuant to the terms of a Share Purchase Agreement (the “SPA”) with Findel plc (“Findel”), the Company purchased 100% of the shares of Kleeneze from Findel for total consideration of $5.1 million. The consideration included $3.0 million of senior secured debt provided by HSBC Bank PLC, which debt has a term of two years and an interest rate per annum of 0.60% over the Bank of England Base Rate as published from time to time (an interest rate of 1.1% at the time of the purchase). The remainder was funded by a net cash contribution by the Company of approximately $785,000 after deducting $1.3 million that remained on the books of Kleeneze at closing.

Our Results of Operations for the Three Months Ended March 31, 2015 and 2014

 
 
Three Months Ended March 31,
 
 
2015
 
2014
(in thousands)
 
(restated)
 
 
Revenue
 
$
19,878

 
$
26,671

Program costs and discounts
 
(3,251
)
 
(4,976
)
Net revenue
 
16,627

 
21,695

Costs of sales
 
5,230

 
8,016

Gross profit
 
11,397

 
13,679

Commissions and incentives
 
5,820

 
6,973

Gain on sale of assets
 
(43
)
 
(266
)
Selling, general and administrative
 
10,703

 
9,353

Depreciation and amortization
 
279

 
269

Share based compensation expense
 
$
(1,167
)
 
$
87

Operating loss
 
$
(4,195
)
 
$
(2,737
)
 
Revenue
 
Total revenue for the quarter ended March 31, 2015, decreased $6.8 million, or approximately 26%, primarily due to the short-term impact of turnaround actions taken at TLC such as narrowing product lines, focusing on quality products, taking steps to close the company’s discount outlet stores and reducing overall program discounts. We expected these changes to have a short-term negative effect on revenue but believe that it is in the long-term best interest of TLC to focus on its core direct selling party-plan business. In addition to the changes at TLC, we acquired our eighth direct selling company, Kleeneze, at the end of this

28


reporting period and only had the benefit of a few days of its revenue for the full quarter. Therefore, we believe that our pro forma revenue is a better indication of our current revenue run-rate. We also believe that some of our subsidiaries, primarily those that relay in part on product sourced from international markets that arrive into the U.S. through West Coast ports could have been affected by delays in product shipments as a result of the labor strikes in the first quarter of 2015. This may have had a negative impact on our ability to meet customer demand in the quarter and, in turn, affected revenue.
 
For the three months ended March 31, 2015 and March 31, 2014, respectively, approximately $9.1 million or 47% and $10.8 million or 40% of our revenues were generated in international markets. We do not view any product groups as segments but have grouped similar products into the following five categories for disclosure purposes only: gourmet foods, nutritional and wellness, home décor, publishing and printing and other. For the three months ended March 31, 2015 and March 31, 2014, approximately $2.5 million or 13% and $1.0 million or 4% of our revenues, respectively, were derived from the sales of gourmet food products, $6.8 million or 35% and $10.2 million or 38% of our revenues, respectively, were derived from the sale of nutritional and wellness products, $10.2 million or 52% and $15.0 million or 56% of our revenues, respectively, were derived from the sale of home décor products, $233,000 or 1% and $294,000 or 1% or our revenues, respectively, were derived from the sale of our publishing and printing services and products and for the three months ended March 31, 2015 and March 31, 2014 $152,000 or 1% and $191,000 or 1% of our revenues, respectively, were derived from the sale of our other products.
 
Operating Losses
 
Operating losses increased by $1.5 million in the period ended March 31, 2015 compared to the same period in 2014. These results are in line with our expectations at this stage in the execution of our strategy. We are focusing on the turnaround aspect of our business now. In the last two years we have purchased eight direct-to-consumer companies, up-listed to the NYSE MKT and executed a $20.0 million equity raise. We are now poised for the next stage of our growth having built our current platform. We believe our strategy will continue to have benefits from scale and will continue to aggressively pursue accretive acquisition targets to improve our operating results.
 
Operating Expenses
 
Commissions and Incentives
 
Total commissions and incentives decreased $1.2 million, but increased as a percentage of revenue to 29% from 26% for the period ended March 31, 2015 and 2014, respectively.
 
Selling, General and Administrative
 
Selling, general and administrative expenses incurred during the three months ended March 31, 2015, increased $1.4 million compared with the selling, general and administrative expenses for the three months ended March 31, 2014.

Gain/Loss on Marketable Securities
 
Our marketable securities as of March 31, 2015 include fixed income investments classified as available for sale. At March 31, 2015, the fair value of the fixed income securities totaled $9.7 million and at December 31, 2014, the value of the fixed income securities totaled approximately $1.0 million. The net cost of marketable securities purchases during the three months ended March 31, 2015 and 2014 totaled $10.2 million and $3.4 million, respectively. Unrealized gains (losses) on the investments included in condensed consolidated statements of other comprehensive income were $(192,000) and $469,000 for the quarters ended March 31, 2015 and 2014, respectively. Our realized losses from the sale of our marketable securities totaled $(192,000) and $494,000 for the quarters ended March 31, 2015 and 2014, respectively. The unrealized loss has been in that position for less than one year. Accordingly, management does not believe that the investments have experienced any other than temporary losses.
 
Non-controlling Interest
 
Non-controlling interest had losses of approximately $670,000 and $640,000 for the three months ended March 31, 2015 and 2014, respectively, primarily due to the short-term impact of turnaround actions taken at TLC.
 
Additional Performance Indicators - EBITDA and Adjusted EBITDA
 
We believe that having a reliable measure of our company's financial health is invaluable both to us and to potential business partners and we believe that Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA can be useful performance indicators over time.

29


 
We have included EBITDA and Adjusted EBITDA in this Quarterly Report on Form 10-Q/A because they are a key metrics used by our management and board of directors to measure operating performance and trends in our business. In particular, the exclusion of certain specific expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.
 
These measures are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and Adjusted EBITDA is not intended to conflict with or change any of the GAAP disclosures described above. 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 our operating performance, financial condition and cash generating ability. 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 our operating performance of financial position, as EBITDA and Adjusted EBITDA are not defined by GAAP. .
 
The following table presents a reconciliation of net loss to EBITDA and Adjusted EBITDA containing the applicable restated information as discussed in Note 2 for each of the periods presented:
 
Net Loss to EBITDA (Losses) and Adjusted EBITDA (Losses) Reconciliation (in thousands)

 
 
Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
Net loss
 
$
(4,793
)
 
$
(3,776
)
Interest, net
 
599

 
266

Income tax expense
 
191

 
279

Depreciation and amortization
 
420

 
518

EBITDA (losses)
 
(3,583
)
 
(2,713
)
One-time capital market expense
 
374

 

One-time M&A expense
 
115

 
32

M&A infrastructure expense
 
529

 
1,183

Adjusted EBITDA (losses)
 
$
(2,565
)
 
$
(1,498
)
 
One-Time Capital Market Expense
 
One-time capital market expense includes non-recurring expenses related to initial NYSE MKT listing fees, road show and other expenses related to out recent offering, and fees associated with our S-3 filing that were expensed in the current quarter.
 
One-Time M&A Expense
 
Specific expenses related to certain legal and due diligence costs for potential acquisition targets.

M&A Infrastructure Expense 

These are expenses related to our M&A infrastructure, such as our M&A team and costs associated with supporting their efforts, as well as expenses related to our Reimbursement of Services Agreement with Richmont Holdings. We expect these costs to continue as we look for opportunistic acquisition targets and participate in other deal-related activities.
 
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;

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Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does 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 our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
 
Liquidity and Capital Resources
 
Cash Flows
 
Cash used in operating activities for the quarter ended March 31, 2015 was $3.7 million, as compared to net cash used in operating activities of $1.0 million for the quarter ended March 31, 2014. Our principal uses of cash have included accounts receivable, deferred revenue, accrued taxes payable, and other liabilities. Operating activities that provided cash include inventory, other current assets, accounts payable, related party payables, accrued commissions, and accrued liabilities.
 
Net cash used in investing activities for the quarter ended March 31, 2015 was $15.1 million, as compared to a net cash provided by investing activities of $4.4 million for the quarter ended March 31, 2014. The Company used $18.9 million to buy marketable securities and had proceeds of $10.2 million from the sale of marketable securities. $0.3 million was used to upgrade the IT infrastructure. The cash outflows included a deposit of $3.0 million held as collateral.
 
Net cash provided by financing activities was $21.1 million for the quarter ended March 31, 2015 compared to net cash used of $2.0 million for the quarter ended March 31, 2014. Through the issuance of common stock and warrants, we raised net proceeds of $18.4 million.
 
Outstanding Warrants
 
On March 4, 2015 we raised proceeds of approximately $20 million through the sale of 6,667,000 shares of our common stock and warrants to purchase up to an aggregate of 6,667,000 shares of our common stock at a combined offering price of $3.00 in an underwritten public offering. The warrants have a per share exercise price of $3.75, are exercisable immediately and will expire five years from the date of issuance. We granted the underwriters a 45-day option to purchase up to an additional 1,000,050 shares of common stock and/or warrants to purchase up to an aggregate of 1,000,050 shares of common stock to cover additional over-allotments, if any. On March 4, 2015, the underwriters exercised a portion of their over-allotment option with respect to 113,200 warrants. In addition, 166,675 warrants were issued to the underwriters. The over-allotment option has expired as of the date of this filing.
 
The gross proceeds to us, including the underwriters' partial exercise of their over-allotment option, were approximately $20.0 million before deducting underwriting discounts and commissions and other estimated offering expenses payable by us. Assuming the exercise of all 6,667,000 warrants at the exercise price of $3.75 each, and assuming we maintain the conditions necessary for a cash exercise, the total additional gross aggregate proceeds to JRjr would be $25,001,250. However, there can be no assurance that any warrants will be exercised.
 
On May 6, 2014, we issued warrants to purchase up to 12,500 and 6,250 shares of our Common Stock, respectively, in connection with exclusivity agreements. The warrants will be exercisable commencing 75 days after their date of issuance, in whole or in part, until one year from the date of issuance for cash and/or on a cashless exercise basis at an exercise price of $11.00 per share, representing the average closing price of our common stock for the ten days preceding the issuance. In addition, the warrants provide for piggyback registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. The fair value of the warrants on the date of issuance approximated $116,000.

On July 2, 2014, we issued a warrant exercisable for 50,000 shares of our common stock at an exercise price of $12.80 per share in consideration of a two-year consulting agreement with an individual with direct selling industry experience. The warrant is exercisable for a 5 day period commencing 720 days after issuance, however, the warrant expires without an opportunity to exercise it on July 1, 2015, unless the term is extended for an additional year if on July 1, 2015 the shares of common stock underlying the warrant are subject to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") or our common stock is listed on the Nasdaq National Market or the NYSE MKT. In addition, the warrant provides for piggyback
registration rights upon request, in certain cases. The exercise price and number of shares issuable upon exercise of the warrants is subject to adjustment in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation.
 
Contractual Obligations
 
See Footnote (7) “Long-term debt and other financing arrangements” of our accompanying unaudited condensed consolidated financial statements for a full description of the Company’s contractual obligations.

Critical Accounting Policies and Estimates
 
In preparing our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (“SEC”), we make assumptions, judgments and estimates that can have a significant impact on our net income/(loss) and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, income taxes, and long-lived assets, have the greatest impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
 
There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2015, as compared to the critical accounting policies and estimates disclosed in Items 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K/A for the year ended December 31, 2014, which was filed with the SEC on March 23, 2015.
 
Recent Accounting Pronouncements
 
See footnote (1) of our accompanying unaudited consolidated financial statements for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Item 3.    Quantitative and Qualitative Disclosures about Market Risks
 
Market Risk Sensitive Instruments

The market risk inherent in our market-risk-sensitive instruments and positions is the potential loss arising from adverse changes in investment market prices, foreign currency exchange-rates and interest rates.

Investment Market Price Risk
We had short-term investments of $1.8 million at March 31, 2015. Those short-term investments consisted of time deposits. Time deposits are short-term in nature and are accordingly valued at cost plus accrued interest, which approximates fair value.

Foreign Currency Exchange Risk

Revenue from customers outside of the United States represented approximately 47% and 40% of our total revenue for the three months ended March 31, 2015 and 2014, respectively. We expect that revenue from foreign customers will continue to represent an increasingly large percentage of our revenue.
 
Interest rate risk

Due to our financing, investing and cash-management activities, we are subject to market risk from exposure to changes in interest rates.

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We entered into a Credit Facility with HSBC Bank as of March 24, 2015 for the approximated amount of $3.0 million.  The Credit Facility bears a variable interest rate based on the Bank of England base rate plus 0.6%, and on June 30, 2015, the weighted average interest rate of the Credit Facility, including borrowings under the Term Loan, was 2.91%. The Credit Facility matures on August 15, 2019, unless earlier repurchased. Since our Credit Facility is based on variable interest rates, and as we have not entered into any new interest swap arrangements, if interest rates were to increase or decrease by 1.0% for the year, and our borrowing amounts stayed constant on our Credit Facility, our annual interest expense would increase or decrease by approximately $8.8 million.
 
Item 4. Controls and Procedures

This Amended Quarterly Report on Form 10-Q/A includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

As a result of the material adjustments related to the annual audit for the year ended December 31, 2015, management identified material weaknesses in the internal control over financial reporting. Those weaknesses identified were in existence during the quarterly report for March 31, 2015.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls were not effective because of the material weaknesses in our internal controls over financial reporting described below.

Management has identified material weaknesses in the internal control over financial reporting relating to the following:

Overall Control Environment
The Company has not maintained an effective control environment to provide reasonable assurance regarding achievement of relating to operations, reporting and compliance. The Company has not complied with the requirement of the 2013 COSO Framework.

Sufficient Accounting Personnel
The Company has not maintained sufficient accounting personnel with the appropriate level of knowledge, experience and training commensurate with maintaining an effective control environment to meet the financial reporting requirements of a publicly traded company with international operations. The result of the lack of sufficient accounting personnel has led to the following issues related to internal control over financial reporting:
Management estimates were not performed with the structure and rigor necessary to result in quality estimate that need for fairly presented financial information.
Management missed a required Form 8-K/A filing requirement related to the acquisition of Kleeneze. Subsequently, the filing was made 8 months later.
Management has made significant adjustments for material errors resulting from the review of the quarterly financial statements.
Management has made significant adjustments for material errors resulting from the audit of the annual financial statements.
Management has made significant disclosure remediation and adjustments to the financial statements resulting from the quarterly review and annual audits.
The Company has incurred substantial delays in completing its audit and filing with the SEC of its 2015 Form 10-K, this Quarterly Report, and its June Form 10-Q.
The Company has incurred breaches to covenants to its debt agreements due to the delays in missing its filing requirements.

Consolidation Process
The Company does not have effective controls to ensure the consolidation of all its subsidiaries is performed correctly. The consolidation is performed and reviewed by one employee. There are no controls to ensure all financial data of the subsidiaries are being compiled correctly, no review to ensure the employee is consolidating correctly and no controls to ensure all accounts being appropriately converted and consolidated in the financial statements.

Account Reconciliation
The Company did not maintain effective controls over the reconciliation of many of its accounts and the timely preparation and review of the financial statements or information. The has resulted in a significant amount of reconciliations being performed as part of the audit process. These reconciliations have resulted in significant audit adjustments. Additionally, there is no formal review and approval of reconciliations performed by the accounting personnel.

Deferred Revenue and Revenue
The Company did not maintain control over its recording of deferred revenue and revenue in its sales process. This has resulted in significant adjustments to the financial statements.

Inventory Management
Certain companies within the Company accepts its inventory upon the shipment of products (FOB Shipping Point). However, the Company does not account for the receipt of inventory until it has been received. Accordingly, the Company does not maintain appropriate controls around its inventory management system.


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Journal Entry Support
The Company did not maintain effective controls over the approval, recording and retention of journal entries and their supporting detail. The Company did not maintain effective monitoring controls to ensure that journal entries were being properly prepared with sufficient supporting documentation or were reviewed and approved to ensure accuracy and completeness of the journal entries.

Complex Accounting Issues
The Company did not design an effective control environment to address complex accounting issues. The lack of qualified accounting personnel led to deficiencies in identifying complex accounting issues and resulting in material adjustments to the financial statement in both the quarterly and year-end filings.

Segregation of Duties
The Company has not maintained appropriate segregation of duties throughout the internal control over financial reporting process. The Company has numerous instances where review an approval is performed by the same employee negating any monitoring or approval controls.

IT System Conversion Controls
The Company did not develop a process to appropriately control the ERP system conversion at one of its subsidiaries.

IT Control Environment
The Company does not maintain the appropriate level of controls over the ability to access its ERP systems. The lack of control could result in the in inappropriate approval of journal entries, inappropriate approval of expenditures, and inappropriate access to the general ledger.

During the fiscal quarter ended March 31, 2015, The Longaberger Company implemented a new ERP system. This conversion resulted in financial reporting deficiencies that materially affected our internal control over financial reporting. No other changes changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) took place during the fiscal quarter ended March 31, 2015, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Remediation Initiatives

Management emphasizes that our stated growth strategy is to acquire companies. In some cases, the companies acquired may not have invested in adequate systems or staffing to meet public company financial reporting standards. The Company reviews the financial reporting and other systems that each company has and, in many cases, especially in the case of private companies, the financial systems that are in place may not be as robust as needed. In addition, the rapid pace of our acquisitions means the Company has acquired companies that currently operate on a variety of systems, which makes standardization more difficult. Because of this, the Company purchased and plan the implementation of a common enterprise resource planning system across all our companies. The Company believes this will allow for a common set of processes and controls to enable accurate financial information, easier comparison across companies and quicker consolidations. TLC, in February of 2015, was the first company to transition on to the new platform.

In addition, our objective is to centralize accounting and treasury, rather than having such activities performed at each subsidiary. This will provide a current and long-term benefit of having the required internal controls performed in a centralized controlled location, so that review and remediation can occur quickly. This effort means that the Company must continue to hire sufficient accounting personnel to properly process and control transactions and timely prepare our financial statements.

Finally, the Company seeks to build out a more traditional financial and accounting hierarchy which will be key to the centralization and streamlining of accounting and treasury functions. The Company expects to continue to improve on this goal and that when combined with the other initiatives, should result in a robust control environment in financial reporting, a financial reporting process that is capable of providing management with timely and accurate information and in-turn be able to comply timely with SEC filing requirements.

Limitations of the Effectiveness

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must

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be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.


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PART II. Other Information 

Item 1.    Legal Proceedings
 
There have been no significant changes to our legal proceedings from those included in Part I Item 3. Legal Proceedings in our Annual Report on Form 10-K/A for the year ended December 31, 2014, which was filed with the SEC on March 23, 2015.

Item 1A. Risk Factors
 
You should carefully consider the following risks in evaluating our Company and 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. You should also refer to the other information set forth in this report, 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.
 
Risks Relating To Our Business
 
We have suffered operating losses since inception and we may not be able to achieve profitability.
 
We had an accumulated deficit of $(36.3) million as of March 31, 2015 and $(32.2) million as of December 31, 2014 and we expect to continue to incur increasing expenses in the foreseeable future related to our long-term growth strategy to develop a large, diverse global company in the micro-enterprise sector. As a result, we are sustaining operating and net losses, and it is possible that we will never be able to achieve or sustain the revenue levels necessary to attain profitability.
 
Because we have recently acquired a large number of businesses, it is difficult to predict if we will continue to generate our current level of revenue.
 
Prior to March 2013, our primary business was publishing a monthly magazine, Happenings Magazine, and prior to September 2012, we were engaged in the development and commercialization of medical devices. Between March of 2013 and the end of the first quarter of 2015, we completed eight business acquisitions, changing our business focus away from that of the publishing business and medical devices business towards the direct selling business. It is too early to predict whether consumers will accept, and continue to use, on a regular basis, the products generated by the companies we acquired in these recent acquisitions or the direct selling companies we hope to acquire in the future. We have had a very limited operating history as a combined entity and the impact of our recent acquisitions is difficult to assess. Therefore, our ability to sustain our current revenue is uncertain and there can be no assurance that we will continue to be able to generate significant revenue or be profitable.
 
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.
 
The adequacy of our cash resources to continue to meet our future operational needs depends, in large part, on our ability to increase product sales and/or reduce operating costs. If we are unsuccessful in generating positive cash flow from operations, we could exhaust our available cash resources and be required to secure additional funding through a debt or equity financing such as the Offering, significantly scale back our operations, and/or discontinue many of our activities which could negatively affect our business and prospects. Additional funding may not be available or may only be available on unfavorable terms.

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.

Our ability to satisfy our debt obligations and repay or refinance our maturing indebtedness will depend principally upon our future operating performance. We are required to make monthly payments under our promissory notes that mature on February 14, 2023 and October 22, 2018 that have principal balances of $3.28 million and $1.26 million, respectively as of March 31, 2015. We also are required to make monthly interest payments on senior secured debt owed to HSBC Bank PLC as part of our acquisition of Kleeneze. The debt owed to HSBC had a balance of $3.0 million as of March 31, 2015 and is fully secured by cash shown on our consolidated balance sheet under the restricted cash line as part of non-current assets. In addition, we are obligated to repay the aggregate principal amount of $1.0 million owed under three notes together with accrued interest in July 2015 and miscellaneous debt of $0.5 million due in 2016. As a result, prevailing economic conditions and financial, business, legislative, regulatory and

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other factors, many of which are beyond our control, will affect our ability to make payments on and to refinance our debt. If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, incurring additional debt, issuing equity or convertible securities, reducing discretionary expenditures and selling certain assets (or combinations thereof). Our ability to execute such alternative financing plans will depend on the capital markets and our financial condition at such time. In addition, our ability to execute such alternative financing plans may be subject to certain restrictions under our existing indebtedness. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants compared to those associated with any debt that is being refinanced, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or our inability to refinance our debt obligations on commercially reasonable terms or at all, would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.

Our investments in marketable securities are subject to market risks, which may result in losses.
 
As of March 31, 2015 and December 31, 2014, we had approximately $9.7 million and $1.0 million in marketable securities, respectively, invested primarily in a diversified portfolio of liquid bonds. At neither March 31, 2015 nor December 31, 2014 did we have any investments in equity securities. However, we have from time to time and may in the future invest in equity securities. During the three months ended March 31, 2015, we realized a gain on marketable securities of approximately $192,000. These investments are subject to general credit, liquidity, market and interest rate risks that could have a negative impact on our results of operations.
 
We may be unsuccessful in integrating the business operations of our recently acquired subsidiary Kleeneze with ours, which, if it were to occur, would negatively impact our growth strategy.
 
There can be no assurance that we will be able to successfully complete the integration of Kleeneze’s business operations following our recent acquisition acquisition, the failure of which could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. Our primary growth strategy is based on increasing our acquisitions of, or entering into strategic transactions with direct selling companies, and potentially companies engaged in other direct selling related businesses. The integration of the Kleeneze transaction may include the following challenges:
 
assimilating Kleeneze’s business operations, products and personnel with our existing operations, products and personnel;
estimating the capital, personnel and equipment required for Kleeneze’s 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 Kleeneze’s products and services;
entering a market in which we have limited prior experience; and
coordinating our efforts throughout various distant localities and time zones, such as the United Kingdom where Kleeneze is based.
  
Our growth strategy, as well as the business of Kleeneze, 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. In light of the stage of our development, no assurance can be given that we will be able to consummate our business strategy and plans, that our 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 our plans.
 
Our business is difficult to evaluate because we have recently expanded, and intend to continue to expand, our product offerings and customer base.
 
Although our business has grown rapidly, we are still in the early stages of the implementation of our primary growth strategy, which is to increase our acquisitions of, and our number of strategic transactions with, other direct selling companies, such as the recent Kleeneze acquisition and potentially companies engaged in other direct selling related businesses. As such, it may be difficult for investors to analyze our results of operations, to identify historical trends or even to make quarter-to-quarter comparisons because we have operated many of these newly-acquired businesses for a relatively limited time and intend to continue to expand our product offerings. Our growth strategy, as well as each business we acquire, is 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. In light of the stage of our development, no assurance can be given that we will be able to consummate our business strategy and plans, as described herein, that our activities will be successful or

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that financial, technological, market, or other limitations will not force us to modify, alter, significantly delay, or significantly impede the implementation of our plans.


We may be unsuccessful in identifying suitable acquisition candidates which may negatively impact our growth strategy.
 
There can be no assurance that we will be able to identify additional suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms. Our failure to successfully identify suitable acquisition candidates or consummate future acquisitions or strategic transactions on acceptable terms could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price as our primary growth strategy is based on increasing our acquisitions of, or entering into strategic transactions with direct selling companies, and potentially companies engaged in other direct selling related businesses. We are continually evaluating acquisition opportunities available to us that we believe will fit our acquisition strategy, namely companies that can increase the size and geographic scope of our operations or otherwise offer us 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 our shareholders, result in an increase in our indebtedness, or both. The issuance of our common stock in the Offering resulted in dilution to existing shareholders and the issuance of additional shares of common stock and/or Warrants pursuant to the Underwriter’s over-allotment option as well as the exercise of any Warrants issued in the Offering will result in additional dilution to current shareholders. In addition, an acquisition or other strategic transaction could adversely impact our cash flows and/or operating results, and dilute shareholder interests, for a number of reasons, including:
  
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 holders of our common stock.

We may be unable to successfully integrate the businesses we have recently acquired and may acquire in the future with our current management and structure.
 
Our failure to successfully complete the integration of the businesses we acquire could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. The larger the business we acquire, the larger we believe our integration challenge will be. Integration challenges may include the following:

assimilating the acquired business’ operations products and personnel with our existing operations, products and personnel;
estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience of management with the businesses they are familiar with;
minimizing potential adverse effects on existing business relationships with other suppliers and customers;
successfully developing and marketing the new products and services;
entering markets in which we have limited or no prior experience; and
coordinating our efforts throughout various distant localities and time zones, such as Italy, the United Kingdom and Australia, currently.

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 our existing businesses as a result of its efforts in evaluating and negotiating new acquisitions and strategic transactions, the prospects, business activities, cash flow, financial condition and results of operations of our existing businesses may suffer. We also may 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, including our recently acquired subsidiary Kleeneze, we have and will rely upon the representations and warranties and indemnities made by the sellers with respect to each such acquisition as well as our own due diligence investigation. We cannot assure you that such representations and warranties will be true and correct or that our due diligence will uncover all materially adverse facts relating to the operations and financial condition of the acquired

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companies or their customers. To the extent that we are required to pay the debt obligations of an acquired company, or if material misrepresentations exist, we may not realize the expected benefit from such acquisition and we will have overpaid in cash and/or stock for the value received in that acquisition.
 
We may have difficulty managing future growth.
 
Since we commenced operations in the direct selling business, our business has grown significantly. This growth has placed substantial strain on our management, operational, financial and other resources. 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 our company or that any conflicts will be resolved in a manner favorable to the other shareholders of our 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 our common stock. See “Certain Relationships and Related Transactions, and Director Independence.” Upon the issuance of the shares sold in the Offering completed on March 4, 2015, John P. Rochon, together with John Rochon, Jr., control approximately 58.2% of the voting power of our outstanding securities. In the event that the Second Tranche Stock is issued, John P. Rochon, together with John Rochon, Jr., will control approximately 75.9% of the voting power of our outstanding securities.

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 our common stock would increase to in excess of 60,000,000, with approximately 190,000,000 shares of our common stock available for issuance and John P. Rochon, together with John Rochon, Jr., would beneficially own approximately 75.9% of our 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 our common stock to decline.
 
We depend heavily on John P. Rochon, and we may be unable to find a suitable replacement for Mr. Rochon if we were to lose his services.
 
We are heavily dependent upon John P. Rochon, our Chief Executive Officer and Chairman of our Board. The loss or unavailability of Mr. Rochon could have a material adverse effect on our prospects, business activities, cash flow, financial condition, results from operations and stock price.
 
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.
 
We utilize 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 administrative services to us. the Company has entered into an agreement with Richmont Holdings to reimburse Richmont Holdings for certain expenses incurred by us in connection with our use of its office space, access to its office equipment, access to certain of its personnel, financial analysis personnel, strategy assistance, marketing advice and assorted other services related to our day-to-day operations and our efforts to acquire direct-selling companies. We continue 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 we can successfully develop the necessary expertise and infrastructure on our own without the assistance of these affiliated entities.
 
Certain of our subsidiaries are dependent on their key personnel.
 
The loss of the key executive officers of certain of our subsidiaries would have a significant adverse effect on the operations of the affected subsidiary and its prospects, business activities, cash flow, financial condition and 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. Agel is particularly dependent upon its Co-Chief Executive Officers, Jeff Higginson and Jeremiah Bradley, who represent the Agel brand to their sales force and likewise YIAH is dependent upon Colleen Walters, its Chief Executive Officer and founder. The loss of any of these individuals could have a negative impact on sales field recruiting and sales, which ultimately would impact our revenue. We believe it is critical to retain key leaders of certain of the businesses we acquire, however there can be no assurance that any business or company acquired by us will be successful in attracting and retaining its key personnel.
 

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We experience a high level of competition for qualified representatives in the direct selling industry and the loss of key high-level independent sales representatives could negatively impact our growth and our revenue.
 
As of December 31, 2014, we had over 47,000 active independent sales representatives, of which more than 600 were at the highest level under our various compensation plans. These independent sales leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level independent sales representative or a group of leading representatives could negatively impact our growth and our revenue.
 
In the direct selling industry, sales are made to the ultimate consumer principally through independent sales representatives. Generally, there can be a high rate of turnover among a direct selling company’s independent sales representatives. Our independent sales representatives may terminate their service at any time.

Our ability to remain competitive and maintain and expand our business depends, in significant part, on the success of our 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 selling model. We cannot ensure that our strategies for soliciting and retaining the representatives of our subsidiaries or any direct selling company we acquire in the future will be successful, and if they are not, our prospects, business activities, cash flow, financial condition, results of operations and stock price could be harmed.
 
Several factors affect our ability to attract and retain independent sales representatives, including:
 
on-going motivation of our independent sales representatives;
general economic conditions;
significant changes in the amount of commissions paid;
public perception and acceptance of the industry, our business and our products;
our ability to provide proprietary quality-driven products that the market demands; and
competition in recruiting and retaining independent sales representatives.

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 our most significant expenses. We closely monitor the amount of the commissions and incentives we pay as a percentage of net revenues, and may periodically adjust our compensation plan to better manage these costs.
 
We modify components of our 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 our business;
conform to local regulations; and
address other business needs.

Because of the size of our sales force and the complexity of our 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 our independent sales representatives or cause us to lose some of our existing independent sales representatives. There can be no assurance that changes to our 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 our earnings.
 
Our business operates in an industry with intense competition.
 
Our business operates in an industry with numerous manufacturers, distributors and retailers of consumer goods. The market for our products is intensely competitive. Many of our competitors, such as Avon Products Inc., Tupperware Brands Corp. and others are significantly larger, have greater financial resources, and have better name recognition than we do. We also rely on our independent sales representatives to market and sell our products through direct marketing techniques. Our ability to compete with other direct marketing companies depends greatly on our ability to attract and retain qualified independent sales representatives. In addition, we currently do not have significant patent or other proprietary protection, and our competitors may introduce products

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with the same or similar ingredients that we use in our products. As a result, we may have difficulty differentiating our products from our competitors’ products and other competing products that enter the market. There can be no assurance that our 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.
 
Our principal business is conducted worldwide in one channel, the direct selling channel. Products and services of direct selling 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 our control. Our subsidiaries 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 selling company’s products, or reducing purchases from representatives or buying products in channels other than direct selling, such as retail, could reduce our sales, impact our ability to execute our business strategy or have a material adverse effect on our prospects, business activities, cash flow, financial condition, and results of operations.
 
Direct selling companies are subject to numerous laws.
 
The direct selling industry is subject to a number of federal and state regulations administered by the Federal Trade Commission (the “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, 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 selling programs involve a high level of subjectivity and are subject to judicial interpretation. We and our subsidiaries are 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 that we own or we acquire 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 our business in these markets and harm our prospects, business activities, cash flow, financial condition, results of operations and stock price. We are aware of pending judicial actions and investigations against other companies in the direct selling industry. Adverse decisions in these cases could impact our business if direct selling 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 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 our business model, our prospects, business activities, cash flows, financial condition and results of operations may be materially adversely affected.
 
We are subject to numerous government regulations.
 
Our 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 “FDA”), 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 we operate. Government authorities regulate advertising and product claims regarding the efficacy and benefits of our 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 that we undertake to support our claims will be deemed adequate for any particular product or claim. If we are unable to show adequate and reliable scientific substantiation for our product claims, or our marketing materials or the marketing materials of our sales force make claims that exceed the scope of allowed claims for spices, dietary supplements or skin care products that we offer, the FDA or other regulatory authorities could take enforcement action requiring us to revise our marketing materials, amend our claims or stop selling certain products, which could harm our business.
 
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 our research and development focus on skin care products and dietary supplements, there is a risk that we could receive a warning letter, be required to modify our product claims or take other actions to satisfy the FDA if the FDA determines any of our marketing materials include improper structure/function claims for our cosmetic products. In addition,

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plaintiffs’ lawyers have filed class action lawsuits against some of our competitors after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to governmental actions or class action lawsuits, which could harm our 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, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between us and our 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.
 
Because the representatives that market and sell our products and services are independent contractors, and not employees, we and our subsidiaries have limited control over their actions. In the United States, the direct selling industry and regulatory authorities have generally relied on the implementation of a company’s rules and policies governing its direct sellers, designed to promote retail sales, protect consumers, prevent inappropriate activities and distinguish between legitimate direct selling plans and unlawful pyramid schemes, to compel compliance with applicable laws. We maintain formal compliance measures to identify specific complaints against our representatives and to remedy any violations through appropriate sanctions, including warnings, suspensions and, when necessary, terminations. Because of the significant number of representatives our subsidiaries have, it is not feasible for our subsidiaries to monitor the representatives’ day-to-day business activities. We and our subsidiaries must maintain the “independent contractor” status of our representatives and, therefore, have limited control over their business activities. As a result, we cannot insure that our representatives will comply with all applicable rules and regulations, domestically or globally. Violations by our representatives of applicable laws or of our policies and procedures in dealing with customers could reflect negatively on our prospects, business activities, cash flow, financial condition and results of operations, including our business reputation, and could subject us to fines and penalties. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability because of the actions of our representatives.
 
Although the physical labeling of our products is not within the control of our representatives, our representatives must nevertheless advertise our 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.
 
Our 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 our products. The treatment or cure of disease, for example, is not a permitted claim for these products. While we train our independent sales representatives and attempt to monitor our sales representatives’ marketing materials, we cannot ensure that all such materials comply with applicable regulations, including bans on therapeutic claims. If our independent sales representatives fail to comply with these restrictions, then we and our independent sales representatives could be subjected to claims, financial penalties, mandatory product recalls or relabeling requirements, which could harm our financial condition and operating results. Although we expect that our responsibility for the actions of our independent sales representatives in such an instance would be dependent on a determination that we either controlled or condoned a noncompliant advertising practice, there can be no assurance that we could not be held vicariously liable for the actions of our independent sales representatives.
 
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 us and our vendors to maintain good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping. The ingredient identification requirement, which requires us to confirm the levels, identity and potency of ingredients listed on our product labels within a narrow range, is particularly burdensome and difficult for us with respect to our cosmetic products which contains many different ingredients. We are also required to report serious adverse events associated with consumer use of our products. Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are not in compliance with these regulations or public reporting of adverse events harms our reputation for quality and safety. A finding of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling certain products. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance.


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Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies could harm our prospects, business activities, cash flow, financial condition and results of operations.
 
Our number of representatives and the results of our operations may be affected significantly by the public’s perception of our subsidiaries and of similar companies. This perception is dependent upon opinions concerning:
 
the safety and quality of our products, components and ingredients, as applicable;
the safety and quality of similar products, components and ingredients, as applicable, distributed by other companies’ representatives;
our marketing program; and
the business of direct-to-consumer companies generally.

Adverse publicity concerning any actual or purported failure of our subsidiaries or of their representatives to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the regulation of our marketing program, the licensing of our products for sale in our target markets or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse effect on our goodwill and could negatively affect the ability to attract, motivate and retain representatives, which would negatively impact our 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.
 
Our continued success depends on our ability to anticipate, gauge, and react in a timely and effective manner to changes in consumer spending patterns and preferences. We must continually work to discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. A critical component of our business is our ability to develop new products that create enthusiasm among our independent sales representatives and ultimate customers. If we are unable to introduce new products, our 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 our results of operations. Factors that could affect our 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 our 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 we sell our products, including any recession in one or more of our geographic regions, or the current global macro-economic pressures, could adversely affect our business and our access to liquidity and capital. We 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 our liquidity and capital resources, including our 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 our 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 our products. We could face continued economic challenges in the current fiscal 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 we offer are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Other nutritional supplements we offer contain innovative ingredients. Although we believe that all of our 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. We conduct research and test the formulation and production of our products, but we have not performed or sponsored any clinical studies. Furthermore, because we are highly dependent on consumers’ perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other companies, we could be adversely affected in the event that these products prove or are asserted to be ineffective or harmful to consumers or

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in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers’ use or misuse of our products or similar products of our 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.
 
We depend on outside suppliers for raw materials and finished goods. We also may use outside manufacturers to make all or part of our products. Our profit margins and timely product delivery may be dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our contract manufacturers acquire all of the raw materials for manufacturing our products from third-party suppliers. We do not believe we are materially dependent on any single supplier for raw materials or finished goods, with the exception of Innovative FlexPak, LLC, which produces a substantial portion of Agel’s finished goods. We believe that there are other suppliers who could produce these products for Agel, if necessary; however, transitioning to other suppliers could result in delays or additional expense. In order to mitigate this risk, Agel has developed relationships with two additional suppliers and has begun diversifying the source of its finished goods. In the event we were to lose any significant suppliers and experience delays in identifying or transitioning to alternative suppliers, we could experience product shortages or product back orders, which could harm our business. There can be no assurance that suppliers will be able to provide our contract manufacturers the raw materials or finished goods in the quantities and at the appropriate level of quality that we request or at a price that we are willing to pay. We are 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. Our ability to enter new markets and sustain satisfactory levels of sales in each market may depend on the ability of our outside suppliers and manufacturers to provide required levels of ingredients and products and to comply with all applicable regulations.
 
We are dependent upon the uninterrupted and efficient operation of our 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 our facilities would not have a material adverse effect on our business, financial condition, or results of operations.
 
Disruptions to transportation channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those markets.
 
We may experience disruptions to the transportation channels used to distribute our products, including increased airport and shipping port congestion, a lack of transportation capacity, increased fuel expenses, and a shortage of manpower. Disruptions in our container shipments may result in increased costs, including the additional use of airfreight to meet demand. Although we have not recently experienced significant shipping disruptions, we continue 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 our profitability.
 
A failure of our information technology systems would harm our business.
 
Our 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 we have adopted and implemented 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 our business and the results of our operations.
 
Our business is subject to online security risks, including security breaches.
 
Our businesses involve the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this 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, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or our customers’ proprietary information, cause interruption in our operations, damage our computers or those of our customers, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

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Our 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 our websites unavailable for periods of time. We 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 we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our users’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
 
Our web customers, as well as those of other prominent companies, may be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate passwords, credit card numbers, or other personal information or to introduce viruses or other malware through “trojan horse” programs to our customers’ computers. These emails appear to be legitimate emails sent by us, but they may direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” emails remain a serious problem that may damage our brands, discourage use of our websites, and increase our costs.
 
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
 
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to risks associated with our international operations, including:
 
the possibility that a foreign government might ban or severely restrict our business method of direct selling, or that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
the lack of well-established or reliable legal systems in certain areas where we operate;
the presence of high inflation in the economies of international markets in which we operate;
the possibility that a government authority might impose legal, tax or other financial burdens on us or our sales force, due, for example, to the structure of our operations in various markets;
the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.

Currency exchange rate fluctuations could reduce our overall profits.
 
During the three months ended March 31, 2015, 47% of our revenues were derived from markets outside of the United States. In 2014, 40% of our revenues were derived from markets outside of the United States. In preparing our 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 our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.

Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.
 
As a multinational corporation, in many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany 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 we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our 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 our worldwide earnings and such change could be significant to our financial results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.
 
Non-compliance with anti-corruption laws could harm our business.
 

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Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the “FCPA”). Any allegations that we are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any determination that our 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 we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are aware that one of our competitors is 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 our industry, our 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 our products may depend significantly upon the value associated with product innovations and our 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 infringers 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 selling 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. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire 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, cash flow, financial condition and results of operations.
 
As a direct selling company we may face financial liability from product liability claims if the use of our products results in significant loss or injury. A substantial product liability claim could exceed the amount of our insurance coverage or could be excluded under the terms of our existing insurance policy, which could adversely affect our prospects, business activities, cash flow, financial condition and 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. We may need to recall some of our products if they become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our business results and the value of our brands. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image.

If we fail to protect our trademarks and tradenames, then our ability to compete could be negatively affected, which would harm our financial condition and operating results.
 
The market for our products depends upon the goodwill associated with our trademarks and tradenames. We own, or have licenses to use, the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our products in the majority of the markets where those products are sold. Therefore, trademark and trade name protection is important to our business. Although most of our trademarks are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The loss or infringement of our trademarks or tradenames could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
 
We permit the limited use of our trademarks by our representatives to assist them in the marketing of our products. It is possible that doing so may increase the risk of unauthorized use or misuse of our trademarks in markets where their registration status differs from that asserted by our 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 our further use of these marks.

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Our business is subject to intellectual property risks.
 
Many of our products are not 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, we enter into confidentiality agreements with certain of our employees in our research and development activities, our independent sales representatives, suppliers, directors, officers and consultants to help protect our intellectual property, investment in research and development activities and trade secrets. There can be no assurance that our efforts to protect our intellectual property and trademarks will be successful, nor can there be any assurance that third parties will not assert claims against us for infringement of intellectual property rights, which could result in our business being required to obtain licenses for such rights, to pay royalties or to terminate our manufacturing of infringing products, all of which could have a material negative impact on our financial position, results of operations or cash flows.
 
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.
 
See Item 4, Controls and Procedures, for the identification of material weaknesses in internal controls.

We may be held responsible for certain taxes or assessments relating to the activities of our independent sales representatives, which could harm our financial condition and operating results.
 
Our independent sales representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our representatives. In the event that local laws and regulations require us to treat our independent sales representatives as employees, or if our representatives are deemed by local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.
 
Several of our directors and officers have other business interests.

Several of our directors have other business interests, including Mr. Rochon, who controls Richmont Holdings. Those other interests may come into conflict with our interests and the interests of our shareholders. Mr. Rochon and several of our other directors serve on the boards of directors of several other companies and, as a result of their business experience, may be asked to serve on the boards of other companies. We 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 our 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.
 
We will test our goodwill and intangible assets for impairment during the fourth quarter of the current fiscal year and in future fiscal years, and on an interim basis, if indicators of impairment exist. Factors which influence the evaluation of impairment of our goodwill and intangible assets include the price of our 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, we potentially could incur material impairment charges. For the year ended December 31, 2014, we have included an impairment charge of $0.5 million as a result of this testing. Although we believe these charges are non-cash in nature and do not affect our operations or cash flow, these charges reduce shareholders’ equity and reported results of operations in the period charged.
 
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 our common stock on the NYSE MKT. We cannot predict how liquid the market for our common stock may become. We believe the listing of our common stock on the NYSE MKT is beneficial to us and our

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shareholders. However, while we believe that the NYSE MKT listing has improved the liquidity of our common stock, reduced trading volume and increased volatility may affect our 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 our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using our common stock as consideration.
 
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 our common stock is listed on the NYSE MKT, our 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.
 
Our failure to meet the continued listing requirements of the NYSE MKT could result in a de-listing of our common stock.
 
Our shares of common stock are currently listed on the NYSE MKT. If we fail to satisfy the continued listing requirements of the NYSE MKT, such as the corporate governance requirements or the minimum stockholder’s equity requirement, the NYSE MKT may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair our shareholders’ ability to sell or purchase our common stock when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the NYSE MKT’s listing requirements, but we can provide no assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our common stock.
 
The limited trading volume of our common stock may cause volatility in our share price.
 
Our stock has in the past been thinly traded due to the limited number of shares available for trading on the NYSE MKT 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. Our recent Offering, which closed on March 4, 2015, may increase the number of shares available for trading but our stock price may nevertheless be volatile. If our 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 our common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our shareholders could suffer losses or be unable to liquidate their holdings.
 
Market prices for our 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 us or our competitors;
the acquisition of new direct selling businesses;
changes in interest rates;
significant dilution caused by the anti-dilutive clauses in our 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 our company;
the depth and liquidity of the market for our shares of common stock;
sales of large blocks of our common stock, including sales by Rochon Capital, any executive officers or directors appointed in the future, or by other significant shareholders;
investor perceptions of our company and the direct selling segment generally; and
general economic and other national and international conditions.

Market price fluctuations may negatively affect the ability of investors to sell our 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

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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 our common stock become available for resale under Rule 144, the market price for our common stock will likely be impacted.
 
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.
 
Securities research analysts, including those affiliated with our underwriters, establish and publish their own periodic projections for our business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business or if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could decline. While we expect securities research analyst coverage, if no securities or industry analysts begin to cover us, the trading price for our 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. Our common stock has experienced substantial price volatility in the past. This may be a result of, among other things, variations in our results of operations and announcements by us and our competitors, as well as general economic conditions. Our stock price may continue to experience substantial volatility. Accordingly, we 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 our 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, shareholders could experience significant dilution. The issuance of our common stock in the Offering 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 Offering will result in additional dilution to current shareholders. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. The issuance of shares of our common stock upon the exercise of options, which we may grant in the future, may result in dilution to our shareholders. In addition, the issuance of shares of our common stock pursuant to the terms of the At-the-Market Issuance Sales Agreement, may result in dilution to our shareholders. Our articles of incorporation currently authorize us 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 our common stock would increase to in excess of 60,000,000 with approximately 190,000,000 shares of our common stock available for issuance. The future issuance of our common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We 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 our shareholders, and might have an adverse effect on any trading market for our common stock.

We have not paid and do not anticipate paying any dividends on our common stock.
 
We have not paid any dividends on our common stock to date and it is not anticipated that any dividends will be paid to holders of our common stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of our businesses, it is currently anticipated that any earnings will be retained to finance our future expansion and for the implementation of our business strategy. Our shareholders will not realize a return on their investment in us unless and until they sell shares after the trading price of our common stock appreciates from the price at which a shareholder purchased shares of our common stock. As an investor, you should consider that a lack of a dividend can further affect the market value of our common stock and could significantly affect the value of any investment in our company.
 
Complying with federal securities laws as a publicly traded company is expensive. Any deficiencies in our financial reporting or internal controls could adversely affect our financial condition, ability to issue our shares in acquisitions and the trading price of our common stock.
 

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Companies listed on the NYSE MKT, such as our company, 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 MKT. We file quarterly and annual reports containing our financial statements with the SEC. We may experience difficulty in meeting the SEC’s reporting requirements. Any failure by us to timely file our periodic reports with the SEC could harm our reputation, reduce the trading price of our common stock and cause sanctions or other actions to be taken by the SEC against us. A failure to timely file our periodic reports with the SEC could cause additional harm, such as a default under an indenture or loan covenant that we may enter into from time to time. In addition, our failure to timely file periodic reports with the SEC could result in our failure to meet the conditions that would require a cash exercise of the Warrants issued in the Offering. We will incur significant legal, accounting and other expenses related to compliance with applicable securities laws.
 
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.
 
Our articles of incorporation, bylaws and Florida law contain provisions which could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial to our shareholders. We are authorized to issue up to 500,000 shares of preferred stock. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our 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 our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.
 
Provisions of our 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 our shareholders to replace or remove our management. 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 our 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, including the Offering, could result in resales of our common stock by our current stockholders concerned about the potential dilution of their holdings. In turn, these resales could have the effect of depressing the market price for our common stock.

There is no public market for the Warrants to purchase shares of our common stock that were sold in the Offering.
 
There is no established public trading market for the Warrants, and we do not expect a market to develop. In addition, we do not intend to apply to list the Warrants on any national securities exchange or other nationally recognized trading system, including the NYSE MKT. Without an active market, the liquidity of the Warrants will be limited.
 
Due to the speculative nature of warrants, there is no guarantee that it will ever be profitable for holders of the Warrants to exercise the Warrants.
 
The Warrants that were issued in the Offering do not confer any rights of share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire our common stock at a fixed price for a limited period of time. Holders of Warrants may exercise their right to acquire the common stock underlying the Warrants at any time after the date of issuance by paying an exercise price of $3.75 per share, prior to their expiration on the date that is five years from the date of issuance, after which date any unexercised warrants will expire and have no further value. There can be no assurance that the market price of our common stock will ever equal or exceed the exercise price of the Warrants, and, consequently, whether it will ever be profitable for investors to exercise their Warrants.

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Item 2.    Unregistered Sales of Unregistered Securities and Use of Proceeds
 
On July 22, 2015 we issued a warrant exercisable for 50,000 shares of common stock in exchange for a previously-issued warrant exercisable for 50,000 shares of common stock. The new warrant has an extended exercise period. The new warrant was issued in reliance upon Section 3(a)(9) of the Securities Act of 1933, as amended, as the exchange was with an existing security holder exclusively and no commissioner remuneration was paid or given in the exchange.
 
Item 3.    Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.    Mine Safety Disclosures
 
Not applicable
 
Item 5.    Other Information
 
Not applicable.
 
Item 6. Exhibits
 
Exhibits required by Item 601 of Regulation S-K:

Exhibit No.
 
Description
 
 
 
4.1
 
Form of Warrant Issued to Investors (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015)
 
 
 
4.2
 
Form of Representative’s Warrant Agreement (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015)
 
 
 
31.1
 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 
 
 
31.2
 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 
 
 
32.1
 
Certification pursuant to 18 U.S.C. Section 1350.**
 
 
 
32.2
 
Certification pursuant to 18 U.S.C. Section 1350.**
 
 
 
101.INS
 
Instance Document.**
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.**
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.**
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.**
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.**
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.**

** Filed herewith

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.
 
 
 
JRjr33, Inc.
 
 
 
(Registrant)
 
 
 
 
 
Date:
October 13, 2016
By:
/s/ John P. Rochon
 
 
 
 
 
 
 
John P. Rochon
 
 
 
Chief Executive Officer, President and Chairman
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
October 13, 2016
By:
/s/ Christopher L. Brooks
 
 
 
 
 
 
 
Christopher L. Brooks
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer and
 
 
 
Principal Accounting Officer)


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INDEX TO EXHIBITS 
Exhibit No.
 
Description
 
 
 
4.1
 
Form of Warrant Issued to Investors (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015)
 
 
 
4.2
 
Form of Representative’s Warrant Agreement (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K (File No. 001-36755) filed with the Commission on March 2, 2015)
 
 
 
31.1
 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 
 
 
31.2
 
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.**
 
 
 
32.1
 
Certification pursuant to 18 U.S.C. Section 1350.**
 
 
 
32.2
 
Certification pursuant to 18 U.S.C. Section 1350.**
 
 
 
101.INS
 
Instance Document.**
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.**
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.**
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.**
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.**
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.**

** Filed herewith


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