Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2016
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Note 1—
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Accounting Policies
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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, 2015,
filed March 24, 2016 with the Securities and Exchange Commission.
On October 4, 2016, the Company
effected a 1-for-7 reverse stock split of the Company's common stock. Each stockholder's percentage ownership and proportional
voting power remained unchanged as a result of the reverse stock split. All applicable share data, per share amounts, and related
information in these Condensed Consolidated Financial Statements and notes thereto have been adjusted retroactively to give effect
to the 1-for-7 reverse stock split.
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Note 2—
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Basic and Diluted Earnings (Loss) per Share
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Basic earnings (loss) per common share is computed
using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per 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 earnings (loss) per share:
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Three months ended September 30
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Nine months ended September 30
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2016
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2015
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2016
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2015
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Numerator:
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Net income (loss)
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$
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134,478
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$
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(289,001
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)
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$
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(897,346
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)
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$
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(1,018,550
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)
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Denominator:
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Denominator for basic earnings (loss) per share—weighted average shares
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1,846,000
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1,846,000
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1,846,000
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1,836,000
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Dilutive effect of employee stock options and other warrants
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-
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-
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-
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-
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Denominator for diluted earnings (loss) per share—adjusted weighted average shares
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1,846,000
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1,846,000
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1,846,000
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1,836,000
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Basic earnings (loss) per share
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$
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0.07
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$
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(0.16
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)
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$
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(0.49
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)
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$
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(0.55
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)
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Diluted earnings (loss) per share
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$
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0.07
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$
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(0.16
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)
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$
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(0.49
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)
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$
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(0.55
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)
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Options and warrants to purchase
265,001 and 267,184 shares of common stock for the three months and nine months ended September 30, 2016, respectively, were not
included in the denominator for diluted earnings (loss) per share because their effect would be antidilutive or because the shares
were deemed contingently issuable. Options and warrants to purchase 270,958 shares of common stock for the three months and nine
months ended September 30, 2015, respectively, were not included in the denominator for diluted earnings (loss) per share because
their effect would be antidilutive or because the shares were deemed contingently issuable.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2016
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Note 3—
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Fair Value of Financial
Instruments
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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:
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Level 1:
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Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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Level 2:
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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.
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Level 3:
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Unobservable inputs that reflect the reporting entity's own assumptions.
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The carrying amount and fair
value of the Company's financial instruments are approximately as follows:
Description
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Carrying Value
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Fair Value
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Level 1
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Level 2
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Level 3
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September 30, 2016
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Long-term debt
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$
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3,025,616
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$
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3,025,616
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-
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$
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3,025,616
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-
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Note receivable
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1,656,449
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1,900,000
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-
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1,900,000
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-
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Marketable securities
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264,000
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264,000
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$
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264,000
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-
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-
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December 31, 2015
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Long-term debt
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$
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3,941,080
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$
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3,941,080
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-
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$
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3,941,080
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-
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Note receivable
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1,732,982
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1,942,000
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-
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1,942,000
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-
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Marketable securities
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275,000
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275,000
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$
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275,000
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-
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-
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Long-term debt
: The fair
value of the Company's term and revolver loans approximate carrying value as these loans were incurred within the past twelve months
and have variable market-based interest rates which reset every thirty days. The fair value of the Company's obligation for the
acquisition of its lunasin technology license approximates carrying value as this obligation is a zero-interest based obligation
discounted utilizing an interest rate factor comparable to the Company's market-based interest rate for its term and revolver loans.
The fair value of the Company's notes payable obligations approximates carrying value as these obligations were incurred within
the past eighteen months and have variable market-based interest rates which reset every ninety 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 their respective balances.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2016
The interim financial statement
provision (benefit) for income taxes is different from the amounts computed by applying the United States federal statutory income
tax rate of 34%. In summary, the reasons for these differences are as follows:
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Nine months ended September 30
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2016
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2015
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Income taxes (benefit) at U.S. statutory rate
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$
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(293,000
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)
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$
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(439,000
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)
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State income taxes, net of federal benefit
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20,000
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36,000
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Higher / (lower) effective taxes on earnings/losses in certain foreign countries
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(50,000
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)
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39,000
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Foreign corporate income taxes
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66,000
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32,000
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Change in valuation allowance
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363,000
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-
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Other, net
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(71,000
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)
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59,000
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$
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35,000
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$
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(273,000
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)
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During the second quarter of
2016 (and affirmed in the third quarter of 2016), the Company determined that it was more likely than not that federal and various
state net operating losses it expects to generate in 2016 will not be realized based on projections of future taxable income, estimated
reversals of existing taxable timing differences, and other considerations. Accordingly, the income tax provision for the nine
months ended September 30, 2016 includes the impact of recording a total valuation allowance of $363,000 in the second and third
quarters of 2016 against the losses generated from a U.S. tax perspective.
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 is not liable to pay the majority of the alleged tax deficiencies.
As of December 31, 2010, management estimated and reserved approximately $185,000 in taxes and interest for resolution of this
matter and recorded this amount within Selling, General, and Administrative expense in the 2010 Consolidated Statement of Income.
In 2011, the Company made good faith deposits to the local tax authority under the tax agency's administrative judicial resolution
process. As of September 30, 2016 and December 31, 2015, management's estimated reserve (net of deposits) for this matter is approximately
$156,000 and $142,000, respectively. There has been no change in this matter during the first nine months of 2016.
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Note 5—
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Long-Term Incentive Compensation
Plan — 2015
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In July 2010, the Company’s
Reliv Europe subsidiary entered into a long-term performance-based incentive compensation agreement with the subsidiary’s
senior managers. The valuation of the compensation agreement was an EBITDA-based formula derived from the subsidiary’s financial
performance and vested in 20% annual increments which began in April 2011. The amount of the incentive, if any, increased or decreased
each quarter in accordance with a 24-month look-back of the subsidiary’s financial performance and the vesting provisions.
For the three months and nine months ended September 30, 2015, compensation expense associated with this incentive plan was $-0-
and $90,800, respectively. This compensation expense is presented in Selling, General and Administrative in the accompanying condensed
consolidated statements of net income (loss) and comprehensive income (loss).
During the second quarter of
2015, the cumulative incentive amount of $756,800 became 100% vested, and concurrently, each of the subsidiary's senior managers
exercised 100% of his/her put option. In the aggregate, the Company and the managers agreed to settle the incentive obligation
whereby the Company: issued notes payable of approximately $424,000 in April 2015, issued 100,000 shares of Company common stock
(fair value at settlement of $117,000) in July 2015, and made cash payments of approximately $216,000 in July 2015.
The notes payable issued by
the Company to the managers range in length from one to two years with quarterly payments of principal and interest beginning July
2015 and ending April 2017. The notes accrue interest at a floating interest rate based on the three-month pound LIBOR rate plus
3%. At September 30, 2016, the outstanding balance of the notes was approximately $101,000 and the interest rate was 3.49%.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2016
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September 30
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December 31
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2016
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2015
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Term loan
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$
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2,924,541
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$
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3,168,261
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Notes payable
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101,075
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283,455
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Obligation for acquisition of technology license, net
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-
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489,364
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3,025,616
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3,941,080
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Less current portion
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426,035
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781,505
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Total long-term debt
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$
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2,599,581
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$
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3,159,575
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Estimated maturities of debt at September 30, 2016
are as follows:
Twelve months ending September 30,
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2017
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$
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426,035
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2018
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2,599,581
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|
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$
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3,025,616
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Term loan and revolving
line agreements
On September 30, 2015, the Company
entered into a series of lending agreements with a new primary lender which include agreements for a $3.25 million term loan and
a $3.5 million revolving credit facility. These lending agreements replace similar borrowings under agreements with the Company’s
former primary lender.
The $3.25 million term loan
is for a period of three years and requires monthly term loan payments, under a ten-year amortization, consisting of principal
of $27,080 plus interest with a balloon payment for the outstanding balance due and payable on September 30, 2018. The term loan's
interest rate is based on the 30-day LIBOR plus 2.25% and was 2.744% at September 30, 2016.
The $3.5 million revolving line
of credit agreement, dated September 30, 2015, accrues interest at a floating interest rate based on the 30-day LIBOR plus 2.25%
and had an original term of one year. Effective September 30, 2016, the revolving line of credit agreement was extended under similar
terms to April 30, 2018. As of September 30, 2016, there were no outstanding borrowings on the revolving line of credit.
Borrowings under the lending
agreements are secured by all tangible and intangible assets of the Company, a whole life insurance policy on the life of the Company’s
Chief Executive Officer, and by a mortgage on the real estate of the Company’s headquarters.
The original September 30, 2015
lending agreements include a quarterly covenant requiring the Company to maintain net tangible worth of not less than $9.5 million.
The September 30, 2016 revolving line of credit agreement extension adds a quarterly financial covenant under which the Company
will have: i) a quarterly minimum requirement of earnings before interest expense, income tax expense, depreciation, and amortization
("EBITDA") of $200,000 for the quarter ended December 31, 2016; ii) a cumulative minimum EBITDA requirement of $200,000,
$400,000, $600,000, and $800,000 for the fiscal periods ending March 31, 2017, June 30, 2017, September 30, 2017, and December
31, 2017, respectively; and iii) a minimum EBITDA of $200,000 for the quarter ended March 31, 2018.
As defined, EBITDA means the
Company's consolidated net income for such period, before interest expense, income tax expense, depreciation and amortization,
and management fees, and further adjusted to exclude any gain or loss on the sale of assets, other extraordinary gains or losses,
and any one-time adjustment approved by the lender.
At September 30, 2016, the Company
was in compliance with its loan covenant requirements.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2016
Obligation for Acquisition
of Technology License, net
In July 2013, the Company entered
into a Technology License Agreement (TLA) with a privately-held company. The TLA provides the Company the exclusive license for
certain intellectual property related to the nutritional ingredient lunasin and other soy-related peptins and proteins. In consideration
for the TLA, the Company agreed to pay the licensor a purchase price of $2 million; $1.15 million paid in July 2013, with the remaining
obligation paid over the next four years in a series of annual payments ranging from $150,000 to $250,000. Subject to certain minimum
and maximum product sales thresholds, the Company may also have been required to pay the licensor royalties during the remaining
life of the intellectual properties (approximately seventeen years at origination). During the third quarter of 2016, the Company
made a scheduled $250,000 payment on this obligation. In addition, during the third quarter of 2016, the Company and licensor entered
into a letter agreement pursuant to which the Company paid licensor the final $250,000 payment, due in July 2017 per the original
agreement. In consideration for acceleration of the final payment, the licensor transferred all rights, title and interest in the
technology to the Company and terminated any future royalty obligations on the part of the Company.
Notes Payable
A description of the notes payable
is presented in Note 5 — Long-Term Incentive Compensation Plan.
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Note 7—
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Recent Accounting Standards
Pending Adoption
|
In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
, which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The ASU will replace most existing U.S. GAAP revenue recognition guidance and becomes effective for the
Company on January 1, 2018. The new standard permits the use of either the retrospective or modified retrospective transition method.
The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and
related disclosures, as well as its planned transition method.
In November 2015, the FASB issued
ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which requires all deferred income
tax assets and liabilities to be classified as non-current on the balance sheet, rather than being separated into current and non-current
amounts. The new standard is effective for annual reporting periods beginning after December 31, 2016 with early adoption permitted.
The Company is currently evaluating the effect that the new standard will have on its consolidated financial statements and related
disclosures.
In August 2014, the FASB issued
ASU No. 2014-15,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
, which requires management
to assess, at each annual and interim reporting period, the entity's ability to continue as a going concern within one year from
the date the financial statements are issued and provide related disclosures. The new standard will be effective for the Company
for the annual reporting period ending December 31, 2016, with early adoption permitted. This standard is not currently expected
to have a material effect on the Company's financial statement disclosures upon adoption, though the ultimate impact will be dependent
on the Company's financial condition and expected operating outlook at such time.
In February 2016, the FASB issued
ASU No. 2016-2,
Leases (Topic 842)
which supercedes 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 term greater than twelve months on its balance
sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. Upon adoption, the Company
will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years,
with earlier application permitted. The Company is evaluating the effects that the new standard will have on its consolidated financial
statements and related disclosures.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2016
|
Note 7—
|
Recent Accounting Standards
Pending Adoption (continued)
|
In March 2016, the FASB issued
ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
This amendment is intended to simplify several aspects of the accounting for share-based payment transactions, including the income
tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of
cash flows. This update is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal
years, with earlier application permitted. The Company is evaluating the impact of this guidance on its consolidated financial
statements and related disclosures.
|
Note 8—
|
Restructuring Activities
|
In May 2016, the Company implemented
an employee headcount cost reduction program resulting in the reduction of approximately 9% of the Company's worldwide employees.
The total cost of this program, representing severance and benefits, was approximately $275,000, and was included in the company's
operating results for the quarter ended June 30, 2016. The aggregate annual salaries of the affected employees was approximately
$1,100,000.
At September 30, 2016, there
was no remaining reserve for severance and benefits under this program.
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.