Commitments and Contingencies

Commitments

The Company currently has non-cancelable operating leases. The operating leases include property and equipment leases. The equipment leases mostly include office equipment and vehicles leases. These leases are included in cost of sales, selling expenses, and general and administrative expenses on the condensed consolidated statement of operations. The Company has included operating lease expenses of $374,000 and $1.1 million during the three and nine months ended September 30, 2016, respectively, on the condensed consolidated statement of operations. The Company incurred operating lease expenses of $450,000 and $1.6 million during the three and nine months ended September 30, 2015, respectively.

Minimum lease commitments for non-cancelable operating leases for the years ended December 31, are as follows (in thousands):



2016 (remaining portion)	$	368
2017	1,506
2018	1,496
2019	1,490
2020	1,159
Thereafter	8,213
Total non-cancelable leases	$	14,232

The leases for certain of the Company's facilities include rent escalation provisions, which are accounted for on a straight-line basis over the lease terms for purposes of determining rental expense.

Capital Leases

Sale leaseback Agreement

On July 31, 2014, TLC entered into a triple net lease agreement (referred to as the "sales leaseback agreement") with CFI NNN Raiders. The lease is a result of selling three buildings and related property to CFI NNN Raiders, and then subsequently leasing those facilities from CFI NNN Raiders. Upon evaluation of the lease, the lease was deemed to qualify as a capital lease instead of an operating lease as a result of the term of the lease exceeding 75% of the estimated economic life of the property. The assets and related liabilities of the properties sold were removed from the balance sheet. The leased asset is included in 'property under capital leases, net' on the condensed consolidated balance sheets. The asset is amortized over fifteen (15) years - the term of the lease - using the straight-line method. Consequently, the sale of the properties resulted in a gain on sale of assets. The gain has been recognized as a deferred gain which will be recognized over the term of the lease.

The payments under the lease are accounted for as interest and principal payments under the capital lease using a fifteen (15) year amortization. Interest expense recognized for the three months ended September 30, 2016 and 2015 was $559,000 and $560,000, respectively. Amortization expense of $263,000 was recorded in the three months ended September 30, 2016 and 2015 respectively. The gain on sale of real estate amortized over the life of the lease was $42,000 for three months ended September 30, 2016 and September 30, 2015, which is included in gain on sale of assets in the accompanying condensed consolidated statements of operations.

Interest expense recognized for the nine months ended September 30, 2016 and 2015 was $1.7 million. Amortization expense of $790,000 was recorded in the nine months ended September 30, 2016 and 2015 respectively. The gain on sales of real estate amortized over the life of the lease was $126,000 for nine months ended September 30, 2016 and September 30, 2015. On September 30, 2016 and December 31, 2015 the current portion of the lease totaled $134,000 and $73,000, respectively. The current portion of the capital leases are included in 'other current liabilities' on the condensed consolidated balance sheets.

Other Capital Leases

In addition to the sale leaseback agreement, the Company has various other capital leases. These additional leases resulted from the financing of software, hardware, office and warehousing space, and office equipment. Multiple new leases were recognized during the fourth quarter of 2015 in part due to Betterware having numerous capital leases. Amortization expense related to these additional capital leases totaled $53,000 and $161,000 during the three and nine months ended September 30, 2016, respectively. On September 30, 2016 and December 31, 2015 the current portion of the other leases totaled $157,000 and $124,000, respectively.

Minimum lease commitments for our capital leases for the years ended December 31, are as follows (in thousands):



2016, remaining portion	$	645
2017	2,558
2018	2,609
2019	2,643
2020	2,631
Thereafter	25,699
Total minimum lease payments	36,785
Less amount representing interest	(20,551		)
Present value of minimum lease payments	$	16,234

Contingencies

During 2014, Tamala L. Longaberger loaned a total of $1,000,000 to the Company, bearing interest at 10% and maturing in 2015. The Company determined to not service the loans related to Tamala L. Longaberger. In connection with these notes, Ms. Longaberger on August 12, 2015 filed an action in Franklin County Common Pleas Court of Columbus, Ohio (“State Court Action”) seeking re-payment of the notes. However, it is the Company’s position that her claims are inextricably tied to the broader issues related to her terminated employment and the claims asserted against her by the Company and The Longaberger Company, including breach of fiduciary duty, fraud, negligence, conversion, misappropriation of company funds, civil theft, breach of contract, and misappropriation of trade secrets. As a result of her misconduct, the Company claims it is owed damages in amounts that exceed the loan amount and therefore offset Ms. Longaberger’s claims. Therefore, on October 12, 2015, the Company filed a motion to compel arbitration and dismiss claims in the State Court Action. On July 5, 2016, the Court overruled the Company’s motion and on July 26, 2016, Ms. Longaberger filed a motion for judgment on the pleadings against Agel. On August 9, 2016, the Company filed both a memorandum contra of Ms. Longaberger’s motion on the pleadings and its first amended answer, affirmative defenses and counterclaims. On August 17, 2016, the Court eliminated the trial setting and further stated it will issue a new case schedule upon conclusion of the arbitration scheduled for May 15, 2017. On August 18, 2016 Ms. Longaberger withdrew her motion for judgment on the pleadings. As of September 30, 2016, the Company has recorded a liability of $1,000,000 which is included in related party payables on the condensed consolidated balance sheet.

On November 7, 2016, Rachel Longaberger Stuckey (“Plaintiff”) filed a complaint against The Longaberger Company and JRJR33, Inc. (“Defendants”) in the Court of Common Pleas of Franklin County, Ohio. Plaintiff alleges counts of breach of note, breach of guarantee, unjust enrichment, and promissory estoppel in the amount of damages to be determined at trial, but in excess of twenty five thousand ($25,000) per count. The note referenced in Plaintiff’s complaint is a March 14, 2013 Promissory Note in the original amount of four million dollars ($4,000,000) executed by Plaintiff’s sister, Tamala Longaberger as the then President of The Longaberger Company. A formal answer is not yet due in the case, but Defendants intend to use all available legal and equitable means to defend against these allegations. The Clerk of the Franklin County Common Pleas Court has set an original trial assignment of November 20, 2017. As of September 30, 2016, the Company has recorded a liability of $2,750,000 of which $2,330,000 is included in long-term debt and $420,000 is included in current portion of long-term debt on the condensed consolidated balance sheet.

The Company has recorded a payable of $659,000 that transpired from an amended tax increment financing agreement that TLC entered into on April 3, 2007 related to the development of the infrastructure surrounding corporate headquarters. Due to this liability not being disclosed during the due diligence, the Company has filed a complaint against the seller on September 22, 2016. This complaint may potentially result in the reimbursement of or the assumption of this liability by the seller. This contingent asset is not included on the condensed consolidated balance sheet.

The Company is disputing a tax and penalty assessment by the Spanish Taxing Authorities relating to Agel. Prior to the Company's acquisition of the assets of Agel Enterprises LLC, Agel was assessed withholding taxes and income taxes along with penalties by the Spanish Tax Authorities, which asserted that Agel had maintained permanent establishment in Spain for the years 2008 to 2010. As part of the acquisition, the Company agreed to assume this liability. Agel, has vigorously disputed these claims on the basis that Agel believes they did not have permanent establishment, and therefore, any compensation paid to independent representatives should not have been subject to withholding taxes.

Agel filed an appeal in Tribunal Económico-Administrativo Regional de Cataluña. The ultimate resolution of the dispute cannot be determined at this time. Agel paid the income tax due and Agel has paid approximately $269,000 in good faith towards the disputed withholding tax liability to preserve the appeal process.

During the second quarter of 2014, Agel paid $420,000 to the Spanish Taxing Authorities toward its outstanding tax assessment. The Company did not make any payments in the third or fourth quarters of 2014. Although the Company has appealed this assessment by the Spanish Taxing Authorities and are defending the position, this payment was made to prevent the Spanish Taxing Authorities from beginning certain legal proceedings that would have negatively affected Agel’s European operations. Additionally, Agel has been assessed amounts owed for late interest on the withholding and income tax of €10,819 and €1,282, respectively ($11,799 and $1,398, respectively). The amount remains due if the appeal is unsuccessful, otherwise the payments made to date will be refunded to us. As of September 30, 2016 and December 31, 2015 Agel maintained a liability of approximately $500,000, respectively, in accrued liabilities for this disputed amount, which is reflected in the condensed consolidated financial statements.

The Company is occasionally involved in other lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company is not subject to reasonable estimation. However, management believes that the ultimate outcome of any lawsuits will not have a material impact on the Company’s financial position or results of operations. Other than the above, the Company is not aware of any material, active, pending or threatened proceeding against the Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation.

Worker’s Compensation Liability

Certain of the Company’s employees were covered under a self-insured worker’s compensation plan which was replaced by a fully insured plan in December 2014. The Company estimates its remaining self-insured worker’s compensation liability based on past claims experience, and has an accrued liability to cover estimated future costs. The accrued liability was approximately $1.2 million and $1.1 million at September 30, 2016 and December 31, 2015, respectively. There can be no assurance that actual results will not materially differ from the Company's estimates.