Commitments and Contingencies

Commitments

The Company utilizes both property and equipment operating leases during the normal course of business. The equipment leases mostly include office equipment and vehicles leases. These leases are included in "Costs of sales," "Selling expense," and "General and administrative expense" on the consolidated statements of operations. The leases entered into by the Company include both cancelable and non-cancelable operating leases. The Company has included operating lease expenses of $1.2 million and $2.1 million during the fiscal year ended months ended December 31, 2016 and December 31, 2015, respectively.

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



2017	$	1,492
2018	1,537
2019	1,500
2020	1,343
2021	1,347
Thereafter	5,125
Total non-cancelable leases	$	12,344

The leases for certain of the Company's facilities include rent escalation provisions, which are accounted for on a straight-line basis over the lease terms for purposes of determining rental expense. The amounts listed above includes the remaining portion of the rent for the Utah lease that was vacated on March 17, 2017.

Capital Leases

Sale leaseback Agreement

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

The payments under the lease are accounted for as interest and principal payments under the capital lease using a fifteen (15) year amortization. Interest expense recognized for the fiscal year ended December 31, 2016 and 2015, was $2.2 million. Amortization expense of $1.1 million was recorded in the fiscal year ended December 31, 2016 and 2015 respectively. The gain on the sale of real estate, which is amortized over the life of the lease, totaled approximately $168,000 for fiscal year ended December 31, 2016 and December 31, 2015 - which is included in "Loss (gain) on sale of assets" in the accompanying consolidated statements of operations. As of December 31, 2016 and December 31, 2015, the current portion of the capital lease included in "Current portion of lease obligation" on the consolidated balance sheets, totaled $15.7 million and $73,000, respectively. The non-current portion of the capital lease, included in Capital lease obligation, less current portion " on the consolidated balance sheets, totaled $0 and $15.7 million as of December 31, 2016 and December 31, 2015, respectively.

On March 31, 2017, CFI sent a Demand for Payment Letter in connection to the Company's failure to meet the terms negotiated under the sale leaseback agreement made on July 31, 2014, between CFI and JRjr33, Inc. CFI is demanding $102,000 for real estate tax assessed against the leased premises, $151,000 for unpaid basic rent, $8,000 for late charges incurred, $103,000 for real estate taxes paid by CFI, $15,681,000 for the remaining portion of the unpaid basic balance, and interest at the default rate on the sums due from the date due to the date when paid. CFI is in possession of a $4.4 million security deposit, as of December 31, 2016, that was initially retained by CFI when TLC entered into the sales leaseback agreement. The Company's last payment on the lease was a partial payment on the January 2017 basic rent, which is due on the first month of each quarter.

On June 26, 2017, CFI filed a complaint against the Company in connection to The Longaberger Company's failure to meet the terms negotiated under the triple net lease agreement executed on July 31, 2014, between CFI and the Company. In the action, CFI is seeking restitution of the premises and costs associated with its recovery of the same. The legal proceeding does not currently have a set date for a hearing, however, CFI and the Company have come to an understanding that the entire property would be sold and that The Longaberger Company would either vacate the premises or in the alternative would lease an appropriate amount of space from the new owner at a market rate. The sale process is underway as of September 27, 2017.

Other Capital Leases

In addition to the sale leaseback agreement, the Company has various other capital leases ("Other Capital Leases"). These additional leases resulted from the financing of software, hardware, office and warehousing space, and office equipment. Multiple new leases were recognized during 2015 in part due to Betterware having numerous capital leases. Amortization expense related to the Other Capital Leases totaled $202,000 and $(462,000) during the fiscal year ended months ended December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016 and December 31, 2015, the current portion of the Other Capital Leases totaled $146,000 and $240,000, respectively. The non-current portion of the Other Capital Leases totaled $283,000 and $507,000 as of December 31, 2016 and December 31, 2015, respectively.

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



2017	$	18,106
2018	2,368
2019	2,244
2020	2,117
2021	2,014
Thereafter	9,260
Total minimum lease payments	36,109
Less amount representing interest	(19,970		)
Present value of minimum lease payments	$	16,139

Contingencies

Tamala L. Longaberger

During the fiscal year 2014, Longaberger and Agel received promissory notes in the combined principal amount of $1,000,000 from Tamala L. Longaberger. The notes bear interest at the rate of 10% per annum, matured during the fiscal year 2015, and are guaranteed by the parent company, JRjr33, Inc. As of December 31, 2016, the principal and accrued interest of $251,000 related to the loans has been included in "Related party payables" within current liabilities on the consolidated balance sheets.

The Company determined not to make payment on the notes due to Tamala L. Longaberger pursuant to the contractual agreements. As a result, in connection with these notes, Ms. Longaberger filed a State Court Action seeking re-payment of the notes on August 12, 2015. On August 17, 2016, the Court eliminated the trial setting and further stated it will issue a new case schedule upon conclusion of the arbitration scheduled for the week of December 4, 2017. The Company’s position is that Ms. Longaberger's claims are inextricably tied to the broader issues related to her terminated employment and the claims asserted against Ms. Longaberger by the Company and The Longaberger Company. The Company is claiming Ms. Longaberger was in breach of fiduciary duty, fraud, negligence, conversion, misappropriation of company funds, civil theft, breach of contract, and misappropriation of trade secrets, in an arbitration action in Columbus, Ohio. Therefore, as a result of Ms. Longaberger's misconduct, the Company believes it is owed more in damages than the amounts owed on the loans.

The Company has recorded a payable of approximately $715,000 as a result of an amended tax increment financing agreement between TLC and Licking County entered into on April 3, 2007. The agreement relates to the development of the infrastructure and local improvements near the corporate headquarters of TLC. The liability was not disclosed during the due diligence process by the seller and as a result, the Company filed a complaint against the seller on September 22, 2016. The complaint may potentially result in the reimbursement of or the assumption of the liability by the seller. A contingent asset, related to the filed complaint, is not included on the consolidated balance sheet.

Rachel Longaberger-Stuckey

On November 7, 2016, Rachel Longaberger-Stuckey filed a complaint against The Longaberger Company and JRjr33, Inc. in the Court of Common Pleas of Franklin County, Ohio. Ms. Stuckey alleges counts of breach of note, breach of guarantee, unjust enrichment, and promissory estoppel in the amount of damages to be determined at trial, but in excess of $25,000 per count. The note referenced in Ms. Stuckey’s complaint is a March 14, 2013 Promissory Note in the original amount of $4,000,000 executed by Ms. Stuckey’s sister, Tamala L. Longaberger as the then President of The Longaberger Company. The note referenced in Ms. Stuckey's complaint is also guaranteed by Tamala L. Longaberger in a guarantee agreement. A formal answer was filed by the Company on February 8, 2017. The Clerk of the Franklin County Common Pleas Court has set a trial assignment of December 11, 2017. As of December 31, 2016, the Company has a liability of $2,750,000 in relation to unpaid principle balance, all of which is included in "Current portion of long-term debt" on the consolidated balance sheets.

Licking County

On April 5, 2017, Licking County Ohio filed an action in foreclosure to collect $715,000 of delinquent real estate taxes, assessments, interests, and penalties due and/ or owing on the former Longaberger headquarters. The Company timely filed its answer to the action. A non-oral hearing occurred on October 16, 2017 in which no decisions were rendered. The County may direct the sale of the property to collect from the proceeds of the sale if the amount is not paid in full. The Company currently has a book value of $1.0 million for the property mentioned in this lawsuit. The Company is currently engaged in discussions with the County in hopes of resolving the matter upon the sale of the former Longaberger headquarters.

Spanish Taxing Authorities

The Company is disputing an income tax assessments and withholding tax assessment, along with the related interest and penalties, assessed by the Spanish Taxing Authorities. The Spanish Taxing Authorities have asserted that Agel had maintained permanent establishment in Spain for the years 2008 to 2010 and as such, are liable for income and withholding taxes incurred during that time. The Company assumed these liabilities as part of the acquisition of Agel. Agel has vigorously disputed these claims on the basis that Agel believes it did not have a permanent establishment during the years 2008 to 2010, and therefore, any compensation paid to independent representatives should not have been subject to income and withholding taxes. As of December 31, 2016 and December 31, 2015, Agel maintained a liability of approximately $500,000, respectively, in accrued liabilities for the disputed amount, which is reflected in the consolidated financial statements. The amount remains due, along with the penalties and interest, if the appeal is unsuccessful, otherwise the payments made to date will be refunded to Agel.

In regards to the income tax assessment, during the fiscal year 2014, Agel filed an appeal in Tribunal Económico-Administrativo Regional de Cataluña. The ultimate resolution of the dispute cannot be determined at this time. Agel paid income tax of approximately $269,000 (at the time of payment) during the fiscal year 2014, in good faith towards the disputed withholding tax liability to preserve the appeal process. Additionally, Agel has been assessed amounts owed for late interest and penalties of €1,282 ($1,348 as of December 31, 2016) on the income tax.

In regards to the withholding tax assessment, during the fiscal year 2014, Agel paid $420,000 (at the time of payment) to the Spanish Taxing Authorities toward its outstanding withholding tax assessment. Although the Company has appealed the assessment by the Spanish Taxing Authorities and are defending the position, the payment was made to prevent the Spanish Taxing Authorities from beginning certain legal proceedings that would have negatively affected Agel’s European operations. Additionally, Agel has been assessed amounts owed for late interest and penalties of €10,819 ($11,381 as of December 31, 2016) on the withholding tax.

The Company is occasionally involved in other lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company is not subject to reasonable estimation. The Company makes no assumptions on the materiality of any dispute and its impact on the Company’s consolidated results of operations, consolidated cash flows, and financial condition. Other than the above, the Company is not aware of any, active, pending or threatened proceeding against the Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation.

Worker’s Compensation Liability

Certain of the Company’s employees were covered under a self-insured worker’s compensation plan which was replaced by a fully insured plan in December 2014. This fully insured plan lapsed on January 1, 2017. The Company estimates its remaining self-insured worker’s compensation liability based on past claims experience, and has an accrued liability to cover estimated future costs. The accrued liability was approximately $1.2 million and $1.1 million at December 31, 2016 and December 31, 2015, respectively. There can be no assurance that actual results will not materially differ from the Company's estimates.