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, 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, 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

 

 

See notes to financial statements.

 

 

Reliv International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

See notes to financial statements.

 

 

Reliv International, Inc. and Subsidiaries

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

 

 

See notes to financial statements.

 

 

Reliv International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

See notes to financial statements.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

September 30, 2018

 

 

 

 

 

 

 

 

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.

 

 

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 30,
		2018								2017								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	)%

 

 

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

 

		Nine months ended September 30,
		2018								2017								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, 2018								September 30, 2017								% 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.

 

 

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.

 

 

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.

 

 

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	)

 

 

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.

 

 

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.

 

 

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

 

 

Item 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.

  

 

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

 

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