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 September 30, 201 8

 

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, smaller reporting company, or a emerging growth 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 November 6, 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

12

Item No. 4

Controls and Procedures

20

 

 

 

Part II – Other Information

 

 

 

 

Item No. 6

Exhibits

20

 

 

 

 

 

PART I -- FINANCIAL INFORMATION

 

Item No. 1 - Financial Statements

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

   

September 30

   

December 31

 
   

2018

   

2017

 
   

(unaudited)

         

Assets

               
                 

Current assets:

               

Cash and cash equivalents

  $ 2,372,837     $ 3,272,788  

Accounts receivable, less allowances of $25,000 in 2018 and $26,300 in 2017

    326,572       29,760  

Accounts and note due from employees and distributors

    140,562       138,497  

Inventories

               

Finished goods

    2,263,325       2,762,249  

Raw materials

    2,092,336       1,653,466  

Sales aids and promotional materials

    122,126       139,770  

Total inventories

    4,477,787       4,555,485  
                 

Refundable income taxes

    23,179       26,552  

Prepaid expenses and other current assets

    573,918       372,602  

Total current assets

    7,914,855       8,395,684  
                 

Other assets

    400,493       337,190  

Cash surrender value of life insurance

    -       3,086,522  

Note receivable due from distributor

    1,313,526       1,405,113  

Intangible assets, net

    2,004,759       2,174,248  
                 

Property, plant and equipment:

               

Land and land improvements

    905,190       905,190  

Building

    9,945,344       9,950,190  

Machinery & equipment

    4,790,063       4,755,727  

Office equipment

    1,159,362       1,183,115  

Computer equipment & software

    2,243,587       2,261,038  
      19,043,546       19,055,260  

Less: Accumulated depreciation

    13,710,855       13,378,021  

Net property, plant and equipment

    5,332,691       5,677,239  
                 

Total assets

  $ 16,966,324     $ 21,075,996  

 

See notes to financial statements.

 

1

 

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

   

September 30

   

December 31

 
   

2018

   

2017

 
   

(unaudited)

         

Liabilities and stockholders' equity

               
                 

Current liabilities:

               

Accounts payable and accrued expenses:

               

Trade accounts payable and other accrued expenses

  $ 2,434,298     $ 1,667,495  

Distributors' commissions payable

    975,083       1,115,649  

Sales taxes payable

    129,542       154,958  

Deferred revenue

    345,929       -  

Payroll and payroll taxes payable

    348,706       261,916  

Total accounts payable and accrued expenses

    4,233,558       3,200,018  
                 

Income taxes payable

    6,131       12,616  

Revolving line of credit

    -       500,000  

Current portion of long-term debt

    -       2,545,421  

Total current liabilities

    4,239,689       6,258,055  
                 

Noncurrent liabilities:

               

Other noncurrent liabilities

    518,180       453,354  

Total noncurrent liabilities

    518,180       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 9/30/2018; 2,110,013 shares issued and 1,845,160 shares outstanding as of 12/31/2017

    2,110       2,110  

Additional paid-in capital

    30,621,523       30,598,920  

Accumulated deficit

    (12,166,358 )     (10,040,229 )

Accumulated other comprehensive loss:

               

Foreign currency translation adjustment

    (910,260 )     (857,654 )

Treasury stock

    (5,338,560 )     (5,338,560 )
                 

Total stockholders' equity

    12,208,455       14,364,587  
                 

Total liabilities and stockholders' equity

  $ 16,966,324     $ 21,075,996  

 

See notes to financial statements.

 

2

 

 

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

 

(unaudited)

 

Three months ended September 30

   

Nine months ended September 30

 
   

2018

   

2017

   

2018

   

2017

 
                                 
                                 
                                 

Product sales

  $ 7,817,526     $ 8,385,999     $ 25,129,503     $ 29,479,924  

Handling & freight income

    519,519       683,324       1,670,522       2,373,809  
                                 

Net sales

    8,337,045       9,069,323       26,800,025       31,853,733  
                                 

Costs and expenses:

                               

Cost of products sold

    2,383,942       1,949,670       7,089,958       7,113,647  

Distributor royalties and commissions

    2,639,863       3,199,596       8,858,965       11,252,922  

Selling, general and administrative

    3,845,304       4,253,675       12,546,840       13,811,814  
                                 

Total costs and expenses

    8,869,109       9,402,941       28,495,763       32,178,383  
                                 

Loss from operations

    (532,064 )     (333,618 )     (1,695,738 )     (324,650 )
                                 

Other income (expense):

                               

Interest income

    22,633       25,277       70,132       76,630  

Interest expense

    (16,408 )     (27,183 )     (93,195 )     (79,472 )

Other income (expense)

    (8,462 )     (4,579 )     8,241       40,517  
                                 

Loss before income taxes

    (534,301 )     (340,103 )     (1,710,560 )     (286,975 )

Provision (benefit) for income taxes

    8,000       (21,000 )     48,000       28,000  
                                 

Net loss

  $ (542,301 )   $ (319,103 )   $ (1,758,560 )   $ (314,975 )
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment

    757       43,666       (52,606 )     134,300  
                                 

Comprehensive loss

  $ (541,544 )   $ (275,437 )   $ (1,811,166 )   $ (180,675 )
                                 
                                 

Loss per common share - Basic

  $ (0.29 )   $ (0.17 )   $ (0.95 )   $ (0.17 )

Weighted average shares

    1,845,000       1,845,000       1,845,000       1,845,000  
                                 

Loss per common share - Diluted

  $ (0.29 )   $ (0.17 )   $ (0.95 )   $ (0.17 )

Weighted average shares

    1,845,000       1,845,000       1,845,000       1,845,000  

 

See notes to financial statements.

 

3

 

 

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   

Nine months ended September 30

 
   

2018

   

2017

 
                 

Operating activities:

               

Net loss

  $ (1,758,560 )   $ (314,975 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    601,194       653,625  

Stock-based compensation

    22,604       25,332  

Non-cash life insurance policy reduction / (accretion)

    20,329       (90,406 )

(Gain) loss on sale of property, plant and equipment

    2,574       (8,906 )

Deferred income taxes

    -       (6,000 )

Foreign currency transaction (gain) loss

    8,983       (29,299 )

(Increase) decrease in accounts receivable and accounts due from employees and distributors

    (295,226 )     98,634  

(Increase) decrease in inventories

    31,270       (313,382 )

(Increase) decrease in refundable income taxes

    3,373       49,500  

(Increase) decrease in prepaid expenses and other current assets

    (212,124 )     (21,418 )

(Increase) decrease in other assets

    (63,302 )     (30,196 )

Increase (decrease) in income taxes payable

    (5,711 )     26,950  

Increase (decrease) in accounts payable & accrued expenses and other noncurrent liabilities

    794,727       (632,607 )
                 

Net cash used in operating activities

    (849,869 )     (593,148 )
                 

Investing activities:

               

Purchase of property, plant and equipment

    (96,700 )     (430,083 )

Proceeds from the sale of property, plant and equipment

    5,270       13,001  

Proceeds from redemption of life insurance policy

    3,066,193       -  

Payments received on distributor note receivable

    86,266       81,254  
                 

Net cash provided by (used in) investing activities

    3,061,029       (335,828 )
                 

Financing activities:

               

Principal payments on long-term borrowings

    (3,045,421 )     (282,496 )
                 

Net cash used in financing activities

    (3,045,421 )     (282,496 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (65,690 )     70,066  
                 

Increase (decrease) in cash and cash equivalents

    (899,951 )     (1,141,406 )
                 

Cash and cash equivalents at beginning of period

    3,272,788       3,606,817  
                 

Cash and cash equivalents at end of period

  $ 2,372,837     $ 2,465,411  

 

See notes to financial statements.

 

4

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

September 30 , 2018

 

 

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. 2016-02, 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. Subsequent to ASU No. 2016-02, the FASB issued related ASU’s, including ASU No. 2018-11, Leases (Topic 842) : Targeted Improvements , which provides for another transition method in addition to the modified retrospective approach originally required by ASU No. 2016-02. This option under ASU No. 2018-11 allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

 

As required, the Company will adopt ASU 2016-02 on January 1, 2019. The Company expects to apply certain practical expedients permitted in the standard, as well as the prospective transition method. 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 continues to evaluate the amounts and other effects that the new standard will have on its consolidated financial statements and related disclosures.

 

5

 

 

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 (with zero net tax effect) 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:

 

   

Balance at

   

Adjustments

   

Balance at

 
   

December 31

   

Due to

   

January 1

 
   

2017

   

ASU 2014-09

   

2018

 

Liabilities and stockholders' equity

                       

Accumulated deficit

  $ (10,040,229 )   $ (367,568 )   $ (10,407,797 )

Deferred revenue

    -       367,568       367,568  

 

   

Three Months Ended September 30, 2018

 
           

Without

   

Effect of

 
           

Adoption of

   

Change

 
   

As Reported

   

ASU 2014-09

   

Higher/(Lower)

 

Operating results

                       

Net sales

  $ 8,337,045     $ 8,327,054     $ 9,991  

Net income (loss)

    (542,301 )     (552,292 )     9,991  

 

   

Nine Months Ended September 30, 2018

 
           

Without

   

Effect of

 
           

Adoption of

   

Change

 
   

As Reported

   

ASU 2014-09

   

Higher/(Lower)

 

Operating results

                       

Net sales

  $ 26,800,025     $ 26,779,055     $ 20,970  

Net income (loss)

    (1,758,560 )     (1,779,530 )     20,970  

 

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.

 

6

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Accounting Policies (continued)

 

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

 

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.

 

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:

 

   

Three months ended

   

Nine months ended

 
   

September 30

   

September 30

 
   

2018

   

2017

   

2018

   

2017

 

Net sales to external customers

                               

United States

  $ 6,498,778     $ 7,082,540     $ 20,505,226     $ 24,791,337  

Australia/New Zealand

    155,663       224,419       565,126       710,877  

Canada

    153,189       199,877       556,866       681,265  

Mexico

    127,859       105,021       347,641       351,559  

Europe (1)

    807,097       890,783       3,002,528       3,398,941  

Asia (2)

    594,459       566,683       1,822,638       1,919,754  

Total net sales

  $ 8,337,045     $ 9,069,323     $ 26,800,025     $ 31,853,733  

 

(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:

 

   

Three months ended

   

Nine months ended

 
   

September 30

   

September 30

 
   

2018

   

2017

   

2018

   

2017

 

Net sales by product category

                               

Nutritional and dietary supplements

  $ 7,514,349     $ 8,032,308     $ 24,190,379     $ 28,369,246  

Sales aids and other

    303,177       353,691       939,124       1,110,678  

Handling & freight income

    519,519       683,324       1,670,522       2,373,809  

Total net sales

  $ 8,337,045     $ 9,069,323     $ 26,800,025     $ 31,853,733  

 

7

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

2. Basic and Diluted Loss per Share

 

Basic loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted 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.

 

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

 

   

Three months ended

   

Nine months ended

 
   

September 30

   

September 30

 
   

2018

   

2017

   

2018

   

2017

 

Numerator:

                               

Net loss

  $ (542,301 )   $ (319,103 )   $ (1,758,560 )   $ (314,975 )

Denominator:

                               

Denominator for basic loss per share – weighted average shares

    1,845,000       1,845,000       1,845,000       1,845,000  
                                 

Dilutive effect of employee stock options and other warrants

    -       -       -       -  
                                 

Denominator for diluted loss per share – adjusted weighted average shares

    1,845,000       1,845,000       1,845,000       1,845,000  
                                 

Basic loss per share

  $ (0.29 )   $ (0.17 )   $ (0.95 )   $ (0.17 )

Diluted loss per share

  $ (0.29 )   $ (0.17 )   $ (0.95 )   $ (0.17 )

 

Options and warrants to purchase 120,242 shares of common stock for the three months and nine months ended September 30, 2018, respectively, were not included in the denominator for diluted loss per share because their effect would be antidilutive or because the shares were deemed contingently issuable. Options and warrants to purchase 146,715 shares of common stock for the three months and nine months ended September 30, 2017, respectively, were not included in the denominator for diluted 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.

 

8

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Fair Value of Financial Instruments (continued)

 

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.

 

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

 

   

Carrying

   

Fair

                         

Description

 

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 
                                         

September 30, 2018

                                       

Long-term debt

  $ -     $ -       -     $ -       -  

Note receivable

    1,434,739       1,536,000       -       1,536,000       -  

Marketable securities

    400,000       400,000     $ 400,000       -       -  
                                         

December 31, 2017

                                       

Long-term debt

  $ 3,045,421     $ 3,045,421       -     $ 3,045,421       -  

Note receivable

    1,521,005       1,684,000       -       1,684,000       -  

Marketable securities

    330,000       330,000     $ 330,000       -       -  

 

 

Long-term debt : The fair value of the Company’s term and revolver loans approximated 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.

 

9

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

4. Debt    

 

   

September 30

   

June 30

   

December 31

 
   

2018

   

2018

   

2017

 
                         

Term loan

  $ -     $ 2,355,861     $ 2,545,421  

Revolving line of credit

    -       500,000       500,000  
      -       2,855,861       3,045,421  

Less current portion

    -       2,855,861       3,045,421  

Total long-term debt

  $ -     $ -     $ -  

 

 

At June 30, 2018, the Company was current on all principal and interest payments due to its lender. In July 2018, management voluntarily elected to redeem the cash surrender value (CSV) of the Company’s whole life insurance policy maintained on the life of the Company’s Board of Directors’ Chairman and former Chief Executive Officer. Upon redemption and related receipt of the $3.07 million CSV proceeds, the Company simultaneously remitted to its lender $2.86 million of the CSV proceeds to be applied towards the full reduction of its outstanding term loan and revolver loan balances. Following this series of July 2018 transactions, the balances of the Company’s term loan, revolver loan, and life insurance policy balances were zero.

 

Effective with a September 11, 2018 loan amendment, the revolving line of credit’s maximum borrowing amount has been reduced from $2.0 million to $750,000. The revolver’s maturity date remains April 29, 2019 and the revolver's interest rate continues to be based on the 30-day LIBOR plus 2.25%. As of September 30, 2018, there were no outstanding borrowings on the revolving line of credit.

 

Borrowings under the lending agreement continue to be secured by all tangible and intangible assets of the Company and by a mortgage on the real estate of the Company's headquarters.

 

 

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 (2.8)% and (9.8)% for the nine months ended September 30, 2018 and 2017, respectively. The income tax provision amounts for the nine months ended September 30, 2018 and 2017, respectively, primarily represent 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.

 

10

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

5. Income Taxes (continued)    

 

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 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 continues 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.

 

 

6 . Restructuring Activities

 

In April 2018, the Company announced the June 30, 2018 closing of the operations of its Reliv Indonesia subsidiary. The total cost of this program, primarily representing employee severance costs, facility exit costs, and a write-down of inventory to its net realizable value, was approximately $77,000, and was included in the company’s operating results for the second quarter ended June 30, 2018.

 

At September 30, 2018, the remaining reserve for Indonesia closing activities is approximately $11,000. Management estimates that the Indonesia closing reserve will be paid out by the completion of fiscal 2018.

 

11

 
 

 

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our opinions or expectations.

 

Item No. 2 - Management s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10- Q . The following discussion and analysis discusses the financial condition and results of our operations on a consolidated basis, unless otherwise indicated.

 

Overview

 

We are a developer, manufacturer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. We sell our products through an international network marketing system utilizing independent distributors. Sales in the United States represented approximately 76.5% of worldwide net sales for the nine months ended September 30, 2018 and 77.8% of worldwide net sales for the nine months ended September 30, 2017. Our international operations currently generate sales through distributor networks with facilities in Australia, Canada, Malaysia, Mexico, the Philippines, and the United Kingdom. We also operate in Ireland, France, Germany, Austria and the Netherlands from our United Kingdom distribution center, in New Zealand from our Australia office, and in Singapore from our Malaysia office.

 

We derive our revenues principally through product sales made by our global independent distributor base, which, as of September 30, 2018, consisted of approximately 30,550 distributors. Our sales can be affected by several factors, including our ability to attract new distributors and retain our existing distributor base, our ability to properly train and motivate our distributor base and our ability to develop new products and successfully maintain our current product line.

 

All of our sales to distributors outside the United States are made in the respective local currency; therefore, our earnings and cash flows are subject to fluctuations due to changes in foreign currency rates as compared to the U.S. dollar. As a result, exchange rate fluctuations may have an effect on sales and gross margins. U.S. generally accepted accounting practices require that our results from operations be converted to U.S. dollars for reporting purposes. Consequently, our reported earnings may be significantly affected by fluctuations in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products manufactured by us for sale to our foreign subsidiaries are transacted in U.S. dollars. From time to time, we enter into foreign exchange forward contracts to mitigate our foreign currency exchange risk.

 

Components of Net Sales and Expense

 

Product sales represent the actual product purchase price typically paid by our distributors, after giving effect to distributor allowances, which can range from 10% to 40% of suggested retail price, depending on the rank of a particular distributor. Handling and freight income represents the amounts billed to distributors for shipping costs. We record net sales and the related commission expense when the merchandise is shipped.

 

Our primary expenses include cost of products sold, distributor royalties and commissions and selling, general and administrative expenses.

 

12

 

 

Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead directly associated with production of our products and sales materials, as well as shipping costs relating to the shipment of products to distributors, and duties and taxes associated with product exports. Cost of products sold is impacted by the cost of the ingredients used in our products, the cost of shipping distributors’ orders, along with our efficiency in managing the production of our products.

 

Distributor royalties and commissions are monthly payments made to distributors based on products sold in their downline organization. Based on our distributor agreements, these expenses have typically approximated 23% of sales at suggested retail. Wholesale pricing discounts on distributor orders are based on the retail value of the product. Distributor royalties and commissions are paid on an amount referred to as the business value (“BV”), which typically ranges between 80% and 90% of the retail price of each product. Also, we include other sales leadership bonuses, such as Ambassador bonuses, within this caption. Overall, distributor royalties and commissions remain directly related to the level of our sales and should continue at comparable levels as a percentage of net sales going forward.

 

Selling, general and administrative expenses include the compensation and benefits paid to our employees, except for those in manufacturing, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, non-manufacturing depreciation and amortization, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits; the amount we decide to invest in distributor training and motivational initiatives; and the cost of regulatory compliance.

 

 

 

Results of Operations  

  

Net Sales. Overall net sales decreased by 8.1% in the three months ended September 30, 2018 compared to the same period in 2017. During the third quarter of 2018 (“Q3 2018”), sales in the United States decreased by 8.2%, and international sales decreased by 7.5% over the prior-year period. International sales, when reported in U.S. dollars, were negatively impacted by a stronger U.S. dollar versus most of the currencies of the markets where we do business. Excluding the impact of currency exchange fluctuation, international sales decreased by 3.3%.

 

          The following table summarizes net sales by geographic market for the three months ended September 30, 2018 and 2017.

 

   

Three months ended September 3 0 ,

                 
   

20 1 8

   

20 1 7

   

Change from prior year

 
   

Amount

   

% of Net

Sales

   

Amount

   

% of Net

Sales

   

Amount

   

%

 
   

(dollars in thousands)

                 

United States

  $ 6,499       78.0

%

  $ 7,082       78.1

%

  $ (583

)

    (8.2

)%

Australia/New Zealand

    156       1.9       224       2.5       (68

)

    (30.4

)

Canada

    153       1.8       200       2.2       (47

)

    (23.5

)

Mexico

    128       1.5       105       1.2       23       21.9  

Europe

    807       9.7       891       9.8       (84

)

    (9.4

)

Asia

    594       7.1       567       6.2       27       4.8  

Consolidated total

  $ 8,337       100.0

%

  $ 9,069       100.0

%

  $ (732

)

    (8.1

)%

 

13

 

 

The following table summarizes net sales by geographic market for the nine months ended September 30, 2018 and 2017.

 

   

Nine months ended September 30,

                 
   

201 8

   

201 7

   

Change from prior year

 
   

Amount

   

% of Net

Sales

   

Amount

   

% of Net

Sales

   

Amount

   

%

 
   

(dollars in thousands)

                 

United States

  $ 20,505       76.5

%

  $ 24,791       77.8

%

  $ (4,286

)

    (17.3

)%

Australia/New Zealand

    565       2.1       711       2.2       (146

)

    (20.5

)

Canada

    557       2.1       681       2.2       (124

)

    (18.2

)

Mexico

    348       1.3       352       1.1       (4

)

    (1.1

)

Europe

    3,002       11.2       3,399       10.7       (397

)

    (11.7

)

Asia

    1,823       6.8       1,920       6.0       (97

)

    (5.1

)

Consolidated total

  $ 26,800       100.0

%

  $ 31,854       100.0

%

  $ (5,054

)

    (15.9

)%

 

 

The following table sets forth, as of September 30, 2018 and 2017, the number of our active distributors and Master Affiliates and above. The total number of active distributors includes Master Affiliates and above. We define an active distributor as one that enrolls as a distributor or renews his or her distributorship during the prior twelve months. Master Affiliates and above are distributors that have attained the highest level of discount and are eligible for royalties generated by Master Affiliate groups in their downline organization. We include Preferred Customers as part of our Active Distributor count, and Preferred Customers represent approximately 4,840 and 5,010 of the Active Distributor count as of September 30, 2018 and 2017, respectively.

 

   

September 30, 201 8

   

September 30, 201 7

   

% Change

 
   

Active

Distributors

and Preferred

Customers

   

Master

Affiliates and

Above

   

Active

Distributors

and Preferred

Customers

   

Master

Affiliates and

Above

   

Active

Distributors

and Preferred

Customers

   

Master

Affiliates and

Above

 
                                                 

United States

    20,390       2,290       23,860       2,750       (14.5

)%

    (16.7

)%

Australia/New Zealand

    1,010       80       1,180       110       (14.4

)

    (27.3

)

Canada

    570       80       710       80       (19.7

)

    ---  

Mexico

    850       80       730       60       16.4       33.3  

Europe

    3,210       380       3,940       440       (18.5

)

    (13.6

)

Asia

    4,520       340       4,070       370       11.1       (8.1

)

Consolidated total

    30,550       3,250       34,490       3,810       (11.4

)%

    (14.7

)%

 

 


Use of Non-GAAP Financial Information

 

Net sales expressed in local currency or net sales adjusted for the impact of foreign currency fluctuation are non-GAAP financial measures. We use these measurements to assess the level of business activity in a foreign market, absent the impact of foreign currency fluctuation relative to the United States dollar, which our local management has no ability to influence. This is a meaningful measurement to management, and we believe this is a useful measurement to provide to shareholders.

 

14

 

 

The following table provides key statistics related to distributor activity by market and should be read in conjunction with the following discussion. Adjusted results should be considered only in conjunction with results reported according to accounting principles generally accepted in the United States.

 

Distributor Activity by Market

 

                                           

International

 
   

United States

   

AUS/NZ

   

Canada

   

Mexico

   

Europe

   

Asia

   

-- Total

 

Sales in USD (in 000's):

                                                       

Quarter ended 9/30/2018

  $ 6,499     $ 156     $ 153     $ 128     $ 807     $ 594     $ 1,838  

Quarter ended 9/30/2017

  $ 7,082     $ 224     $ 200     $ 105     $ 891     $ 567     $ 1,987  
                                                         

% change in sales-Q3 2018 vs. Q3 2017:

                                                 

in USD

    -8.2 %     -30.4 %     -23.5 %     21.9 %     -9.4 %     4.8 %     -7.5 %

due to currency fluctuation

    -       -6.8 %     -4.8 %     -7.0 %     -2.2 %     -5.5 %     -4.2 %

Sales in local currency (non-GAAP)

    -8.2 %     -23.6 %     -18.7 %     28.9 %     -7.2 %     10.3 %     -3.3 %
                                                         

# of new distributors-Q3 2018 (1)

    892       42       22       139       253       763       1,219  

# of new distributors-Q3 2017 (1)

    1,066       33       32       66       313       722       1,166  

% change

    -16.3 %     27.3 %     -31.3 %     110.6 %     -19.2 %     5.7 %     4.5 %
                                                         

# of new Master Affiliates-Q3 2018

    60       1       1       14       7       31       54  

# of new Master Affiliates-Q3 2017

    112       1       3       5       18       26       53  

% change

    -46.4 %     0.0 %     -66.7 %     180.0 %     -61.1 %     19.2 %     1.9 %
                                                         

# of Product orders-Q3 2018

    25,354       1,093       538       956       2,909       7,645       13,141  

# of Product orders-Q3 2017

    30,681       1,375       693       766       3,079       6,810       12,723  

% change

    -17.4 %     -20.5 %     -22.4 %     24.8 %     -5.5 %     12.3 %     3.3 %

 

                                                   

International

 
   

United States

   

AUS/NZ

   

Canada

   

Mexico

   

Europe

   

Asia

   

-- Total

 

Sales in USD (in 000's):

                                                       

YTD ended 9/30/2018

  $ 20,505     $ 565     $ 557     $ 348     $ 3,002     $ 1,823     $ 6,295  

YTD ended 9/30/2017

  $ 24,791     $ 711     $ 681     $ 352     $ 3,399     $ 1,920     $ 7,063  
                                                         

% change in sales-YTD 2018 vs. YTD 2017:

                                                 

in USD

    -17.3 %     -20.5 %     -18.2 %     -1.1 %     -11.7 %     -5.1 %     -10.9 %

due to currency fluctuation

    -       -1.1 %     1.2 %     -1.1 %     4.9 %     -3.6 %     1.3 %

Sales in local currency (non-GAAP)

    -17.3 %     -19.4 %     -19.4 %     0.0 %     -16.6 %     -1.5 %     -12.2 %
                                                         

# of new distributors-YTD 2018 (2)

    2,849       120       80       362       968       1,966       3,496  

# of new distributors-YTD 2017 (2)

    3,661       138       117       205       1,308       2,111       3,879  

% change

    -22.2 %     -13.0 %     -31.6 %     76.6 %     -26.0 %     -6.9 %     -9.9 %
                                                         

# of new Master Affiliates-YTD 2018

    244       7       11       39       68       112       237  

# of new Master Affiliates-YTD 2017

    406       6       8       13       92       184       303  

% change

    -39.9 %     16.7 %     37.5 %     200.0 %     -26.1 %     -39.1 %     -21.8 %
                                                         

# of Product orders-YTD 2018

    78,083       3,390       1,773       2,594       9,863       21,311       38,931  

# of Product orders-YTD 2017

    97,413       4,266       2,334       2,561       12,359       19,692       41,212  

% change

    -19.8 %     -20.5 %     -24.0 %     1.3 %     -20.2 %     8.2 %     -5.5 %

 

___________________________

 

(1) The new distributor totals for Q3 2018 and Q3 2017 include 874 and 815, respectively, new worldwide preferred customers.

(2) The new distributor totals for YTD 2018 and YTD 2017 include 2,599 and 2,798, respectively, new worldwide preferred customers.

 

15

 

 

United States  

 

 

Net sales in the United States declined by 8.2% in Q3 2018 compared to the prior-year period as all measurements of distributor activity declined. Q3 2018 net sales in the United States included $500,000 in contract manufacturing sales as we have begun to utilize our manufacturing facility for third-party production, beginning in mid-2018.

 

In May 2018, we launched Reliv NOW ® with Whey to provide our cornerstone NOW product in an alternative protein source. In Q3 2018, NOW with Whey represented 3.0% of network marketing net sales in the United States.

 

Products in the LunaRich line, including Reliv NOW® and LunaRich X™, continued to perform well, constituting 14.9% and 12.4% of net sales in the United States, respectively, in Q3 2018. Reliv NOW and LunaRich X represented 16.8% and 13.9%, respectively, of net sales in the United States in the prior-year quarter. Sales of the Fit3 product line represented 2.4% of net sales in the U.S. in Q3 2018 compared to 4.3% of sales in the prior-year quarter.

 

Distributor enrollments and new Master Affiliate qualifications decreased by 16.3% and 46.4%, respectively, in Q3 2018 compared to the prior year quarter.

 

Distributor retention was 73.1% for the twelve month period ended September 30, 2018 compared to 71.5% for all of 2017. Distributor retention is determined by the percentage of active distributors from 2017 that renewed their distributorships in 2018.

 

Our average order size in Q3 2018 increased by 3.6% to $324 at suggested retail value compared to the prior-year quarter; however, the number of product orders decreased by 17.4% in Q3 2018 compared to the prior year quarter.

 

 

International Operations

 

 

The average foreign exchange rate for the U.S. dollar for YTD 2018 was stronger against most of the currencies in which we conduct business, except for the British pound and Euro, when compared to the average foreign exchange rates for the nine months ended September 30, 2017.

 

We continue to review prices and margins in all of our international markets and plan to make adjustments as needed, as we increased prices in most of our markets in 2017. We are also reviewing sales by product to phase out products with lower sales levels and gross margins as strategically appropriate.

 

Australia/New Zealand and Canadian net sales in Q3 2018 decreased by 23.6% and 18.7%, respectively, in local currency compared to the prior-year quarter as the result of decreased distributor activity in the market. We terminated our sales manager in AUS/NZ during Q2 2018.

 

Net sales in Mexico increased by 28.9% in local currency in Q3 2018 compared to the prior-year quarter. Sales in Mexico have begun to rebound as we have installed new promotions in the market and supported it with additional corporate-sponsored events. We have recently retained a sales consultant with experience in another network marketing company in Mexico.

 

Net sales in Europe decreased by 7.2% in local currency in Q3 2018 compared to the prior-year quarter. Distributor activity declined both in the form of new distributor and preferred customer enrollments and number of product orders placed in the region.

 

Sales in Asia increased by 10.3% in local currency in Q3 2018 compared to the prior-year quarter. Local currency sales in the Philippines, our largest market in the region, increased by 17.1% in Q3 2018 compared to the prior-year quarter.

 

16

 

 

Costs and Expenses

 

The following table sets forth selected results of our operations expressed as a percentage of net sales for the three- and nine-month periods ended September 30, 2018 and 2017. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.

 

Income statement data

                               

(amounts in thousands)

 

Three months ended

 
   

September 30, 2018

   

September 30, 2017

 
   

Amount

   

% of net sales

   

Amount

   

% of net sales

 
                                 

Net sales

  $ 8,337       100.0

%

  $ 9,069       100.0

%

Costs and expenses:

                               

Cost of products sold

    2,384       28.6       1,950       21.5  

Distributor royalties and commissions

    2,640       31.7       3,199       35.3  

Selling, general and administrative

    3,845       46.1       4,254       46.9  
                                 

Loss from operations

    (532 )     (6.4 )     (334 )     (3.7 )

Interest income

    23       0.3       25       0.3  

Interest expense

    (16 )     (0.2 )     (27 )     (0.3 )

Other expense

    (9 )     (0.1 )     (4 )     (0.1 )
                                 

Loss before income taxes

    (534 )     (6.4 )     (340 )     (3.8 )

Provision (benefit) for income taxes

    8       0.1       (21 )     (0.3 )
                                 

Net loss

  $ (542 )     (6.5 %)   $ (319 )     (3.5 %)
                                 

Loss per common share-Basic and Diluted

  $ (0.29 )           $ (0.17 )        

 

   

Nine months ended

 
   

September 30, 2018

   

September 30, 2017

 
   

Amount

   

% of net sales

   

Amount

   

% of net sales

 
                                 

Net sales

  $ 26,800       100.0

%

  $ 31,854       100.0

%

Costs and expenses:

                               

Cost of products sold

    7,090       26.4       7,114       22.3  

Distributor royalties and commissions

    8,859       33.1       11,253       35.3  

Selling, general and administrative

    12,547       46.8       13,812       43.4  
                                 

Loss from operations

    (1,696 )     (6.3 )     (325 )     (1.0 )

Interest income

    70       0.3       77       0.2  

Interest expense

    (93 )     (0.4 )     (79 )     (0.2 )

Other income

    8       -       40       0.1  
                                 

Loss before income taxes

    (1,711 )     (6.4 )     (287 )     (0.9 )

Provision for income taxes

    48       0.2       28       0.1  
                                 

Net loss

  $ (1,759 )     (6.6 %)   $ (315 )     (1.0 %)
                                 

Loss per common share-Basic and Diluted

  $ (0.95 )           $ (0.17 )        

 

17

 

 

Cost of Products Sold:  

 

The cost of products sold as a percentage of net sales in Q3 2018 and YTD 2018 increased compared to the prior-year periods. The cost of products sold as a percentage of net sales in Q3 2018 was impacted by the contract manufacturing business, which has a lower margin than the network marketing sales. Cost of product sold as a percentage of net sales was also negatively impacted by promotions in the United States that reduced our handling and freight income.

 

 

Distributor Royalties and Commissions:

 

Distributor royalties and commissions as a percentage of net sales for Q3 2018 and YTD 2018 decreased as a percentage net sales when compared to the prior-year periods. Over the course of 2017, we increased the prices of our products in most of our markets, with prices increased in the U.S. and Canada effective November 1, 2017. As part of the price increase, we did not increase the BV of the products. The BV represents the amount per commissionable product that is paid in distributor royalties and commissions. This accounts for the slight decrease in royalties and commissions expense as a percentage of net sales. Net sales from contract manufacturing also slightly reduced this percentage as commissions are not paid on these sales.

 

Selling, General and Administrative Expenses:

 

Selling, general and administrative expenses declined by $408,000 in Q3 2018 and declined by $1.27 million in YTD 2018 compared to the prior-year periods.

 

Salaries, other staffing expenses, benefits, and incentive compensation decreased in the aggregate by $495,000 in YTD 2018, compared to the prior-year period.

 

Sales and marketing expenses decreased by $795,000 in YTD 2018 compared to the prior-year period. Components of the decrease include:

 

o

$340,000 decrease in Star Director and other distributor bonuses, credit card fees, and other expenses related to the level of sales.

 

o

$72,000 decrease in video production and other sales development expense in YTD 2018 compared to the prior-year period. The decrease relates to Fit3 new product launch expenses incurred in Q1 2017.

 

o

$167,000 decrease in distributor conferences and meeting expenses as we are holding two smaller spring and fall conferences in the U.S. in 2018 versus one major conference.

 

o

$82,000 decrease in promotions expense as we have reduced such activities in 2018 relative to the level of sales.

 

Other general and administrative expenses decreased by $1,000 in YTD 2018 versus the prior-year period.

 

General and administrative expenses in Indonesia for YTD 2018 included $77,000 of severance and other expenses related to the closing of the office and operations in that country as of September 30, 2018.

 

Other Income/Expense:

 

The other income in YTD 2018 and YTD 2017 is primarily the result of foreign currency exchange gains on intercompany debt denominated in U.S. dollars in certain of our subsidiaries.

 

Income Taxes :

 

We reported an income tax expense of $48,000 for YTD 2018 related to income taxes on our earnings in our Philippine entity and minimum U.S. state income tax expense. No tax benefits have been recorded for the U.S. Federal or other tax jurisdictions due to our loss position and full valuation allowance.

 

See Note 5 of the Condensed Consolidated Financial Statements for additional detail regarding income taxes.

 

Net Income :

 

We reported a net loss of $542,000 in Q3 2018 compared to a net loss of $319,000 in the prior-year quarter and a net loss of $1.76 million in YTD 2018 compared to a net loss of $315,000 in YTD 2017. The losses are primarily the result of the decrease in net sales in the United States.

 

18

 

 

Liquidity and Capital Resources  

 

During the first nine months of 2018, we used $850,000 of net cash in operating activities, $3.06 million was provided by investing activities, and we used $3.05 million in financing activities. This compares to $593,000 of net cash used in operating activities, $336,000 used in investing activities, and $282,000 used in financing activities in the same period of 2017. Cash and cash equivalents decreased by $900,000 to $2.37 million as of September 30, 2018 compared to December 31, 2017.

 

Significant changes in working capital items consisted of an increase in accounts receivable of $295,000, a decrease in inventory of $31,000, an increase in prepaid expenses/other current assets of $212,000, and an increase of $795,000 in accounts payable and accrued expenses in the first nine months of 2018. The increase in accounts receivable is the result of trade receivables from contract manufacturing customers during the third quarter of 2018. The decrease in inventory is the result of a decrease in production to correspond to the level of sales, and the increase in prepaid expenses/other current assets primarily represents the annual premium payments made in the first quarter of 2018 on most of the corporate business insurance policies. The increase in accounts payable and accrued expenses is result of a financing arrangement for our annual corporate insurance policy renewals, coupled with an increase in trade payables related to the contract manufacturing work and the annual accruals for property taxes and other expenses that cycle on a calendar year basis.

 

Investing activities during the first nine months of 2018 consisted of $3.07 million in proceeds provided by the redemption of a life insurance policy and payments received on a distributor note receivable of $86,000, offset by a net investment of $91,000 for capital expenditures. Financing activities during the first nine months of 2018 consisted of principal payments of $3.05 million on long-term borrowings.

 

Stockholders’ equity decreased to $12.21 million at September 30, 2018 compared to $14.36 million at December 31, 2017. The decrease is primarily due to our net loss during the first nine months of 2018 of $1.76 million and a reduction of $368,000 due to the recognition of deferred revenue under ASU No. 2014-09. Our working capital balance was $3.68 million at September 30, 2018 compared to $2.14 million at December 31, 2017. The current ratio at September 30, 2018 was 1.87 compared to 1.34 at December 31, 2017.

 

In July 2018, management voluntarily elected to redeem the cash surrender value (CSV) of our whole life insurance policy maintained on the life of our Board of Directors’ Chairman and former Chief Executive Officer. Upon redemption and related receipt of the $3.07 million CSV proceeds, we simultaneously remitted to our lender $2.86 million of the CSV proceeds to be applied towards the full reduction of our outstanding term loan and revolver loan balances. Following this series of July 2018 transactions, the balances of our term loan, revolver loan, and life insurance policy balances were zero.

 

Effective with a September 11, 2018 loan amendment, the revolving line of credit’s maximum borrowing amount has been reduced from $2.0 million to $750,000. The revolver’s maturity date remains April 29, 2019 and the revolver's interest rate continues to be based on the 30-day LIBOR plus 2.25%. As of September 30, 2018, there were no outstanding borrowings on the revolving line of credit.

 

Borrowings under the lending agreement continue to be secured by all our tangible and intangible assets and by a mortgage on the real estate of our corporate headquarters.

 

Although our borrowing capacity under the line of credit expires in April 2019, we believe we would be able to renew under similar terms which would extend the maturity beyond 12 months. Therefore, we believe our cash on hand and borrowing capacity and renewal of the line of credit will be sufficient to meet liquidity needs for the next 12 months.

 

19

 

 

Critical Accounting Policies  

 

A summary of our critical accounting policies and estimates is presented in our 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2018. Except for the required adoption of ASU No. 2014-09, our critical accounting policies remain unchanged as of September 30, 2018.

 

 

Item No. 4 - Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of September 30, 2018, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the third quarter of 2018 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

 

 

 

PART II – OTHER INFORMATION

 

 

I tem No. 6 Exhibits

 

Exhibit

Number  

Document
   

10.1

Third Amendment to Loan Agreement and dated September 11, 2018 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (filed herewith).

 

10.2

Change in Terms Agreement (revolving credit facility) dated September 11, 2018 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (filed herewith).

   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
   
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

101

Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Net Loss and Comprehensive Loss, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

  

20

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RELIV’ INTERNATIONAL, INC.

 

 

 

 

 

 

 

By:

/s/ Ryan A. Montgomery

 

 

Ryan A. Montgomery, Chief Executive Officer

 

 

 

 

 

Date:  November 14, 2018

 

 

 

 

 

 

 

By:

/s/ Steven D. Albright

 

 

Steven D. Albright, Chief Financial Officer (and accounting officer)

 

 

 

 

Date:  November 14, 2018

 

 

 

21

Exhibit 10.1

 

 

 

 

 

 

 

 

Exhibit 10.2

 

 

 

 

 

 

 

 

Exhibit 31.1

 

CERTIFICATION

 

 

 

I, Ryan A. Montgomery, certify that:

     
 

1.

I have reviewed this quarterly report on Form 10-Q of Reliv International, Inc.;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 14, 2018

 

 

/s/ R yan A . Montgomery                            

Ryan A. Montgomery

Chief Executive Officer

 

Exhibit 31.2

 

CERTIFICATION

 

 

  I, Steven D. Albright, certify that:
     
 

1.

I have reviewed this quarterly report on Form 10-Q of Reliv International, Inc.;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 14, 2018

 

 

/s/ Steven D. Albright                   

Steven D. Albright

Chief Financial Officer

 

 

Exhibit 32

 

CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

 

AS ADOPTED PURSUANT TO

 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Reliv’ International, Inc. (the “Company”) for the quarterly period ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ryan A. Montgomery, as Chief Executive Officer of the Company, and Steven D. Albright, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ R yan A . Montgomery                     

Ryan A. Montgomery

Chief Executive Officer

 

Date: November 14, 2018

 

/s/ Steven D. Albright                         

Steven D. Albright

Chief Financial Officer

 

Date: November 14, 2018

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-Q or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.