RELIV INTERNATIONAL INC - Quarter Report: 2018 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended March 31, 2018

 

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

000-19932

RELIV’ INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware	371172197
(State or other jurisdiction of	(I.R.S. Employer Identification Number)
incorporation or organization)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri	63005
(Address of principal executive offices)	(Zip Code)

 

(636) 537-9715

(Registrant’s telephone number, including area code)

 

 

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 ☑     No ☐

 

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 ☑     No ☐

 

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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐     Accelerated filer ☐      Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☑     Emerging growth company ☐

 

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

 

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

 

The number of shares outstanding of the Registrant’s common stock as of May 7, 2018 was 1,845,160 (excluding treasury shares).

 

 

 

INDEX  

 

 

Part I – Financial Information
Item No. 1	Financial Statements (Unaudited)	1
Item No. 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item No. 4	Controls and Procedures	20
Part II – Other Information
Item No. 6	Exhibits	20

 

 

 

		March 31				December 31
		2018				2017
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	3,676,840			$	3,272,788
Accounts receivable, less allowances of $25,400 in 2018 and $26,300 in 2017			137,843				29,760
Accounts and note due from employees and distributors			136,726				138,497
Inventories
Finished goods			2,533,727				2,762,249
Raw materials			1,500,968				1,653,466
Sales aids and promotional materials			142,558				139,770
Total inventories			4,177,253				4,555,485
Refundable income taxes			23,002				26,552
Prepaid expenses and other current assets			692,955				372,602
Total current assets			8,844,619				8,395,684
Other assets			343,243				337,190
Cash surrender value of life insurance			3,093,138				3,086,522
Note receivable due from distributor			1,375,039				1,405,113
Intangible assets, net			2,117,752				2,174,248
Property, plant and equipment:
Land and land improvements			905,190				905,190
Building			9,954,757				9,950,190
Machinery & equipment			4,760,057				4,755,727
Office equipment			1,162,552				1,183,115
Computer equipment & software			2,264,561				2,261,038
			19,047,117				19,055,260
Less: Accumulated depreciation			13,499,266				13,378,021
Net property, plant and equipment			5,547,851				5,677,239
Total assets		$	21,321,642			$	21,075,996

---

		March 31				December 31
		2018				2017
		(unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses		$	2,114,304			$	1,667,495
Distributors' commissions payable			1,055,736				1,115,649
Sales taxes payable			182,893				154,958
Deferred revenue			356,210				-
Payroll and payroll taxes payable			401,758				261,916
Total accounts payable and accrued expenses			4,110,901				3,200,018
Income taxes payable			23,490				12,616
Revolving line of credit			500,000				500,000
Current portion of long-term debt			2,437,101				2,545,421
Total current liabilities			7,071,492				6,258,055
Noncurrent liabilities:
Other noncurrent liabilities			458,674				453,354
Total noncurrent liabilities			458,674				453,354
Stockholders' equity:
Preferred stock, par value $.001 per share; 500,000 shares authorized; -0- shares issued and outstanding in 2018 and 2017			-				-
Common stock, par value $.001 per share; 5,000,000 authorized; 2,110,013 shares issued and 1,845,160 shares outstanding as of 3/31/2018; 2,110,013 shares issued and 1,845,160 shares outstanding as of 12/31/2017			2,110				2,110
Additional paid-in capital			30,606,454				30,598,920
Accumulated deficit			(10,646,102	)			(10,040,229	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment			(832,426	)			(857,654	)
Treasury stock			(5,338,560	)			(5,338,560	)
Total stockholders' equity			13,791,476				14,364,587
Total liabilities and stockholders' equity		$	21,321,642			$	21,075,996

---

 

(unaudited)		Three months ended March 31
		2018				2017
Product sales		$	9,391,381			$	11,835,116
Handling & freight income			611,858				942,666
Net sales			10,003,239				12,777,782
Costs and expenses:
Cost of products sold			2,349,742				2,835,525
Distributor royalties and commissions			3,391,745				4,498,553
Selling, general and administrative			4,485,895				4,926,279
Total costs and expenses			10,227,382				12,260,357
Income (loss) from operations			(224,143	)			517,425
Other income (expense):
Interest income			23,952				25,526
Interest expense			(31,565	)			(24,841	)
Other income			10,451				32,683
Income (loss) before income taxes			(221,305	)			550,793
Provision for income taxes			17,000				27,000
Net income (loss)		$	(238,305	)		$	523,793
Other comprehensive income (loss):
Foreign currency translation adjustment			25,228				25,472
Comprehensive income (loss)		$	(213,077	)		$	549,265
Earnings (loss) per common share - Basic		$	(0.13	)		$	0.28
Weighted average shares			1,845,000				1,845,000
Earnings (loss) per common share - Diluted		$	(0.13	)		$	0.28
Weighted average shares			1,845,000				1,846,000

---

 

		Three months ended March 31
		2018				2017
Operating activities:
Net income (loss)		$	(238,305	)		$	523,793
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			201,634				217,631
Stock-based compensation			7,535				8,444
Non-cash life insurance policy accretion			(6,617	)			(30,135	)
(Gain) loss on sale of property, plant and equipment			(3,800	)			-
Deferred income taxes			-				5,000
Foreign currency transaction (gain) loss			341				(36,133	)
(Increase) decrease in accounts receivable and accounts due from employees and distributors			(104,767	)			(138,452	)
(Increase) decrease in inventories			393,576				268,776
(Increase) decrease in refundable income taxes			(3,550	)			29,454
(Increase) decrease in prepaid expenses and other current assets			(320,175	)			(353,515	)
(Increase) decrease in other assets			(6,052	)			(1,906	)
Increase (decrease) in income taxes payable			18,664				-
Increase (decrease) in accounts payable & accrued expenses and other noncurrent liabilities			561,297				37,429
Net cash provided by operating activities			499,781				530,386
Investing activities:
Purchase of property, plant and equipment			(15,383	)			(261,550	)
Proceeds from the sale of property, plant and equipment			3,888				-
Payments received on distributor note receivable			28,326				26,680
Net cash provided by (used in) investing activities			16,831				(234,870	)
Financing activities:
Principal payments on long-term borrowings			(108,320	)			(113,743	)
Net cash used in financing activities			(108,320	)			(113,743	)
Effect of exchange rate changes on cash and cash equivalents			(4,240	)			40,703
Increase (decrease) in cash and cash equivalents			404,052				222,476
Cash and cash equivalents at beginning of period			3,272,788				3,606,817
Cash and cash equivalents at end of period		$	3,676,840			$	3,829,293

---

 

1. Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments (which primarily include normal recurring accruals) which management believes are necessary to present fairly the financial position, results of operations and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. Interim results may not necessarily be indicative of results that may be expected for any other interim period or for the year as a whole. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the year ended December 31, 2017, filed March 29, 2018 with the Securities and Exchange Commission.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

New Accounting Pronouncements – Not Yet Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2016-2, Leases (Topic 842) which supersedes the existing lease guidance. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a lease term greater than twelve months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. The Company expects the adoption of this standard to result in the recognition of right-of-use assets and lease liabilities not currently recorded in the Company’s consolidated financial statements. The Company is evaluating its transition method and other effects that the new standard will have on its consolidated financial statements and related disclosures.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Accounting Policies (continued)

 

New Accounting Pronouncements – Adopted January 1, 2018

 

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (including amendments), and applied the new revenue standard to all contracts using the modified retrospective method. Under this method, prior quarters are not restated. Upon adoption, the Company recognized the cumulative effect of applying the new revenue standard as a reduction of $367,568 to the opening retained earnings (accumulated deficit) balance.

 

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption to the Company’s financial position and results from operations are as follows:

 

 

 

The new revenue standard defines a five step process to recognize revenues. Under this new standard, the Company determined that the timeframe for recognizing the revenue performance obligation for membership-fee type revenue would be lengthened to more closely correlate with the distributor and customer membership terms of generally twelve months. Based upon all contracts still in existence as of December 31, 2017, the adoption of the new revenue standard resulted in the recognition of a deferred revenue liability balance of $367,568.

 

Prior to adoption of the new revenue standard, the Company’s primary source of revenue has been from the sale of nutritional products to the Company’s independent distributors whereby revenue is recognized when product is shipped and risk of loss has passed to the customer; and the Company’s nutritional product revenue recognition policy does not change under the new revenue standard.

 

The Company does not anticipate that the adoption of the new standard will be material to net sales and net income on an ongoing basis.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Accounting Policies (continued)

 

New Accounting Pronouncements – Adopted January 1, 2018 (continued)

 

Description of Products and Services by Region and Category

The Company operates in one reportable segment, a network marketing segment consisting of six operating units that sell nutritional and dietary products to a sales force of independent distributors that sell the products directly to customers. These operating units are based on geographic regions, as follows:

 

 

(1)	Europe consists of United Kingdom, Ireland, France, Germany, Austria, and the Netherlands.
(2)	Asia consists of Philippines, Malaysia, Singapore, and Indonesia.

 

The Company classifies its sales into two categories of sales products plus handling & freight income. Net sales by product category, as follows:

 

 

 

2. Basic and Diluted Earnings (Loss) per Share

 

Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed using the weighted average number of common shares and potential dilutive common shares that were outstanding during the period. Potential dilutive common shares consist of outstanding stock options, outstanding stock warrants, and convertible preferred stock.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2. Basic and Diluted Earnings (Loss) per Share (continued)

 

The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

 

Options and warrants to purchase 120,242 shares and 142,013 shares of common stock for the three months ended March 31, 2018 and 2017, respectively, were not included in the denominator for diluted earnings (loss) per share because their effect would be antidilutive or because the shares were deemed contingently issuable.

 

 

3. Fair Value of Financial Instruments

 

Fair value can be measured using valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

  

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Fair Value of Financial Instruments (continued)

 

The carrying amount and fair value of financial instruments were approximately as follows:

 

 

 

Long-term debt: The fair value of the Company’s term and revolver loans approximate carrying value as these loans were incurred within the past year and have variable market-based interest rates that reset every thirty days.

 

Note receivable: The Company’s note receivable is a variable rate residential mortgage-based financial instrument. An average of published interest rate quotes for a fifteen-year residential jumbo mortgage, a comparable financial instrument, was used to estimate fair value of this note receivable under a discounted cash flow model.

 

Marketable securities: The assets (trading securities) of the Company’s Supplemental Executive Retirement Plan are recorded at fair value on a recurring basis, and are presented within Other Assets in the consolidated balance sheets.

 

The carrying value of other financial instruments, including cash, accounts receivable and accounts payable, and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.

 

 

4. Debt

 

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

4. Debt (continued)

 

Effective September 30, 2015, the Company entered into a series of lending agreements with its primary lender which included agreements for a $3.25 million term loan and a $3.5 million revolving credit facility. These lending agreements replaced similar borrowings under agreements with the Company’s former primary lender.

 

The $3.25 million term loan was for an initial period of three years and required monthly term loan payments, under a ten-year amortization, consisting of principal of $27,080 plus interest with a balloon payment for the outstanding balance due and payable on September 30, 2018. Effective with an April 11, 2018 loan agreement amendment, under similar monthly payment and interest rate terms, the term loan’s balloon payment due date has been extended from September 30, 2018 to April 29, 2019. The term loan's interest rate is based on the 30-day LIBOR plus 2.25% and was 3.94% at March 31, 2018.

 

The $3.5 million revolving line of credit agreement, originally dated September 30, 2015, accrues interest at a floating interest rate based on the 30-day LIBOR plus 2.25% and had an original term of one year. Effective September 30, 2016, the revolving line of credit agreement was extended under similar terms to April 30, 2018. Effective with an April 11, 2018 loan amendment, the revolving line of credit’s term has been extended from April 30, 2018 to April 29, 2019 and the revolver’s maximum borrowing amount has been reduced from $3.5 million to $2.0 million. At March 31, 2018, outstanding borrowings under the revolving line of credit are $500,000. The interest rate on revolver borrowings is identical to the term loan.

 

Borrowings under the lending agreements continue to be secured by all tangible and intangible assets of the Company, a whole life insurance policy on the life of the Company's Chief Executive Officer, which was assigned to the lender, and by a mortgage on the real estate of the Company's headquarters.

 

The loan agreements, including the April 2018 loan amendment, include quarterly financial covenants requiring the Company to maintain net tangible worth of not less than $9.5 million, and i) a cumulative minimum EBITDA requirement of $200,000; $400,000; $600,000; and $800,000 for the fiscal periods ending March 31, 2018; June 30, 2018; September 30, 2018; and December 31, 2018; respectively; and ii) a minimum EBITDA of $200,000 for the quarter ended March 31, 2019.

 

As defined, EBITDA equals the Company's consolidated net income for such period, before interest expense, income tax expense, depreciation and amortization, and management fees, and further adjusted to exclude any gain or loss on the sale of assets, other extraordinary gains or losses, and any one-time adjustment approved by the lender.

 

At March 31, 2018, the Company was not in compliance with its quarterly financial loan covenant requirements. On May 4, 2018, the Company’s lender agreed to waive the Company’s non-compliance with the tangible net worth and minimum EBITDA covenants for the March 31, 2018 reporting period; however, the Company cannot provide any assurance that the lender will waive any financial loan covenant non-compliance in any future quarterly reporting periods. Furthermore, the Company is unable to provide reasonable assurance that future operating results will achieve compliance with its quarterly financial loan covenant requirements. Accordingly, the Company has presented its outstanding loan balances as current liabilities in the March 31, 2018 condensed consolidated balance sheets.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

4. Debt (continued)

 

At March 31, 2018, the Company is current on all principal and interest payments due to its lender. Company management believes that the Company’s cash on hand and its ability, if necessary, to borrow a significant portion of or liquidate the cash surrender value of the Company’s key-man life insurance policy, will be sufficient to meet the Company’s working capital requirements and debt service requirements for the next twelve months.

 

 

5. Income Taxes

 

During 2016 and 2017, the Company determined that it was more likely than not that U.S. federal and various state net operating losses primarily generated in 2016 and 2017 will not be realized based on projections of future U.S. taxable income, estimated reversals of existing taxable timing differences, and other considerations.

 

In prior years, the Company recorded a valuation allowance on all of its domestic and foreign deferred tax assets. The effective income tax rate was (7.7)% and 4.9% for the quarter ended March 31, 2018 and 2017, respectively. The income tax provision amount for the quarter ended March 31, 2018 primarily represents estimated income taxes in certain U.S. states and one of the Company’s foreign subsidiaries.

 

The United States Tax Cuts and Jobs Act (TCJA) was enacted in December 2017, which significantly changed U.S. tax law, principally by permanently reducing the U.S. federal statutory rate to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Under the TJCA’s repatriation tax, the Company estimates its cumulative amount of unremitted foreign earnings and related tax is immaterial. The effect of the federal tax rate reduction to 21% is reflected as a reduction in the U.S. deferred tax assets with a corresponding reduction in the valuation allowance.

 

Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance to companies on the reporting of the impacts of TCJA in their financial statements. Under SAB 118, the Company is recording affected items as provisional to allow additional time for clarifying technical guidance from Treasury and analysis of the effect to the Company’s current tax positions.

 

One of the Company’s foreign subsidiaries is presently under local country audit for alleged deficiencies (totaling approximately $800,000 plus interest at 20% per annum) in value-added tax (VAT) and withholding tax for the years 2004 through 2006. The Company, in consultation with its legal counsel, believes that there are strong legal grounds that it should not be liable to pay the majority of the alleged tax deficiencies. In 2011, the Company made good faith deposits of approximately $173,000 to the local tax authority under the tax agency’s administrative judicial resolution process. As of December 31, 2017, management’s estimated reserve (net of deposits) for this matter was approximately $181,000 and remains unchanged in the first quarter of 2018. In May 2018, the Company received a formal notice of denial of one of its appeals under the tax agency’s administrative judicial resolution process; however, management intends to pursue other available legal processes as the Company maintains its position that it is not liable for the majority of the alleged tax deficiencies.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

6. Restructuring Activities – Subsequent Event

 

In April 2018, the Company announced the closing of the operations of its Reliv Indonesia subsidiary. Under this plan, the Company anticipates ceasing all Indonesia operations by the end of the 2018 third quarter. The total cost of this program primarily representing employee severance costs and lease exit costs, is estimated to range from $50,000 to $100,000, and will be included in the Company’s operating results for the quarter ended June 30, 2018.

 

 

 

---

---

---

---

---

---

---

---