Item No. 1 - Financial Statements
Reliv International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
March 31
|
|
|
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,829,293
|
|
|
$
|
3,606,817
|
|
Accounts receivable, less allowances of $26,400 in 2017 and $26,700 in 2016
|
|
|
268,047
|
|
|
|
126,113
|
|
Accounts and note due from employees and distributors
|
|
|
138,081
|
|
|
|
139,931
|
|
Inventories
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
2,409,519
|
|
|
|
2,629,541
|
|
Raw materials
|
|
|
1,694,588
|
|
|
|
1,728,136
|
|
Sales aids and promotional materials
|
|
|
142,313
|
|
|
|
130,153
|
|
Total inventories
|
|
|
4,246,420
|
|
|
|
4,487,830
|
|
|
|
|
|
|
|
|
|
|
Refundable income taxes
|
|
|
67,819
|
|
|
|
97,194
|
|
Prepaid expenses and other current assets
|
|
|
829,110
|
|
|
|
474,183
|
|
Total current assets
|
|
|
9,378,770
|
|
|
|
8,932,068
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
307,028
|
|
|
|
305,137
|
|
Cash surrender value of life insurance
|
|
|
2,996,117
|
|
|
|
2,965,981
|
|
Note receivable due from distributor
|
|
|
1,492,679
|
|
|
|
1,521,005
|
|
Deferred income taxes
|
|
|
488,000
|
|
|
|
487,000
|
|
Intangible assets, net
|
|
|
2,343,737
|
|
|
|
2,400,234
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
905,190
|
|
|
|
905,190
|
|
Building
|
|
|
9,949,863
|
|
|
|
9,943,512
|
|
Machinery & equipment
|
|
|
4,565,858
|
|
|
|
4,329,329
|
|
Office equipment
|
|
|
1,208,890
|
|
|
|
1,203,868
|
|
Computer equipment & software
|
|
|
2,238,330
|
|
|
|
2,218,766
|
|
|
|
|
18,868,131
|
|
|
|
18,600,665
|
|
Less: Accumulated depreciation
|
|
|
12,912,323
|
|
|
|
12,746,363
|
|
Net property, plant and equipment
|
|
|
5,955,808
|
|
|
|
5,854,302
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,962,139
|
|
|
$
|
22,465,727
|
|
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
March 31
|
|
|
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
|
|
|
Trade accounts payable and other accrued expenses
|
|
$
|
2,330,717
|
|
|
$
|
2,352,692
|
|
Distributors' commissions payable
|
|
|
1,360,833
|
|
|
|
1,402,370
|
|
Sales taxes payable
|
|
|
201,928
|
|
|
|
234,153
|
|
Payroll and payroll taxes payable
|
|
|
388,334
|
|
|
|
245,090
|
|
Total accounts payable and accrued expenses
|
|
|
4,281,812
|
|
|
|
4,234,305
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
357,399
|
|
|
|
389,096
|
|
Total current liabilities
|
|
|
4,639,211
|
|
|
|
4,623,401
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
2,437,101
|
|
|
|
2,518,341
|
|
Other noncurrent liabilities
|
|
|
413,946
|
|
|
|
409,813
|
|
Total noncurrent liabilities
|
|
|
2,851,047
|
|
|
|
2,928,154
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.001 per share; 3,000,000
shares authorized; -0- shares issued and outstanding in 2017 and 2016
|
|
|
-
|
|
|
|
-
|
|
Common stock, par value $.001 per share; 30,000,000 authorized; 2,110,013
shares issued and 1,845,160 shares outstanding as of 3/31/2017; 2,110,013 shares issued and 1,845,160 shares outstanding as
of 12/31/2016
|
|
|
2,110
|
|
|
|
2,110
|
|
Additional paid-in capital
|
|
|
30,573,588
|
|
|
|
30,565,144
|
|
Accumulated deficit
|
|
|
(8,760,524
|
)
|
|
|
(9,284,317
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(1,004,733
|
)
|
|
|
(1,030,205
|
)
|
Treasury stock
|
|
|
(5,338,560
|
)
|
|
|
(5,338,560
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
15,471,881
|
|
|
|
14,914,172
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
22,962,139
|
|
|
$
|
22,465,727
|
|
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Condensed Consolidated Statements of Net
Income (Loss) and Comprehensive Income (Loss)
(unaudited)
|
|
Three months ended March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
11,835,116
|
|
|
$
|
12,042,561
|
|
Handling & freight income
|
|
|
942,666
|
|
|
|
993,889
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
12,777,782
|
|
|
|
13,036,450
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
2,835,525
|
|
|
|
2,984,104
|
|
Distributor royalties and commissions
|
|
|
4,498,553
|
|
|
|
4,624,375
|
|
Selling, general and administrative
|
|
|
4,926,279
|
|
|
|
5,609,268
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
12,260,357
|
|
|
|
13,217,747
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
517,425
|
|
|
|
(181,297
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
25,526
|
|
|
|
27,357
|
|
Interest expense
|
|
|
(24,841
|
)
|
|
|
(26,401
|
)
|
Other income
|
|
|
32,683
|
|
|
|
113,681
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
550,793
|
|
|
|
(66,660
|
)
|
Provision (benefit) for income taxes
|
|
|
27,000
|
|
|
|
(23,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
523,793
|
|
|
($
|
43,660
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
25,472
|
|
|
|
(74,551
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
549,265
|
|
|
($
|
118,211
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - Basic
|
|
$
|
0.28
|
|
|
($
|
0.02
|
)
|
Weighted average shares
|
|
|
1,845,000
|
|
|
|
1,846,000
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - Diluted
|
|
$
|
0.28
|
|
|
($
|
0.02
|
)
|
Weighted average shares
|
|
|
1,846,000
|
|
|
|
1,846,000
|
|
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
Three months ended March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
523,793
|
|
|
$
|
(43,660
|
)
|
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
217,631
|
|
|
|
249,892
|
|
Stock-based compensation
|
|
|
8,444
|
|
|
|
18,142
|
|
Non-cash life insurance policy accretion
|
|
|
(30,135
|
)
|
|
|
(29,244
|
)
|
Deferred income taxes
|
|
|
5,000
|
|
|
|
(20,000
|
)
|
Foreign currency transaction (gain)/loss
|
|
|
(36,133
|
)
|
|
|
(100,053
|
)
|
(Increase) decrease in accounts receivable and accounts
due from employees and distributors
|
|
|
(138,452
|
)
|
|
|
67,571
|
|
(Increase) decrease in inventories
|
|
|
268,776
|
|
|
|
316,870
|
|
(Increase) decrease in refundable income taxes
|
|
|
29,454
|
|
|
|
(4,933
|
)
|
(Increase) decrease in prepaid expenses and other
current assets
|
|
|
(353,515
|
)
|
|
|
(605,781
|
)
|
(Increase) decrease in other assets
|
|
|
(1,906
|
)
|
|
|
18,697
|
|
Increase (decrease) in accounts
payable & accrued expenses and other noncurrent liabilities
|
|
|
37,429
|
|
|
|
856,514
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
530,386
|
|
|
|
724,015
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(261,550
|
)
|
|
|
(9,905
|
)
|
Payments received on distributor note receivable
|
|
|
26,680
|
|
|
|
25,131
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(234,870
|
)
|
|
|
15,226
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on long-term borrowings
|
|
|
(113,743
|
)
|
|
|
(143,618
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(113,743
|
)
|
|
|
(143,618
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
40,703
|
|
|
|
35,610
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
222,476
|
|
|
|
631,233
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,606,817
|
|
|
|
3,262,263
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,829,293
|
|
|
$
|
3,893,496
|
|
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2017
|
Note 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, 2016, filed March 28, 2017 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.
|
Note 2—
|
Basic and Diluted
Earnings (Loss) per Share
|
Basic earnings (loss) per common
share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per
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:
|
|
Three months ended March 31
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
523,793
|
|
|
$
|
(43,660
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share—weighted
average shares
|
|
|
1,845,000
|
|
|
|
1,846,000
|
|
Dilutive effect of employee stock
options and other warrants
|
|
|
1,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
(loss) per share—adjusted weighted average shares
|
|
|
1,846,000
|
|
|
|
1,846,000
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.28
|
|
|
$
|
(0.02
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.28
|
|
|
$
|
(0.02
|
)
|
Options and warrants to purchase
142,013 and 267,226 shares of common stock for the three months ended March 31, 2017 and 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.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2017
|
Note 3—
|
Fair
Value of Financial Instruments
|
Fair value can be measured
using valuation techniques such as the market approach (comparable market prices), the income approach (present value of future
income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting
standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those levels:
|
Level 1:
|
Observable
inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
Level 2:
|
Inputs
other than quoted prices that are observable for the asset or liability, either directly
or indirectly. These include quoted prices for similar assets or liabilities in active
markets or similar assets or liabilities in markets that are not active.
|
|
Level 3:
|
Unobservable
inputs that reflect the reporting entity's own assumptions.
|
The carrying amount and fair value of the Company's
financial instruments are approximately as follows:
Description
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,794,500
|
|
|
$
|
2,794,500
|
|
|
|
-
|
|
|
$
|
2,794,500
|
|
|
|
-
|
|
Note receivable
|
|
|
1,603,484
|
|
|
|
1,798,000
|
|
|
|
-
|
|
|
|
1,798,000
|
|
|
|
-
|
|
Marketable securities
|
|
|
299,000
|
|
|
|
299,000
|
|
|
$
|
299,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,907,437
|
|
|
$
|
2,907,437
|
|
|
|
-
|
|
|
$
|
2,907,437
|
|
|
|
-
|
|
Note receivable
|
|
|
1,630,164
|
|
|
|
1,812,000
|
|
|
|
-
|
|
|
|
1,812,000
|
|
|
|
-
|
|
Marketable securities
|
|
|
296,000
|
|
|
|
296,000
|
|
|
$
|
296,000
|
|
|
|
-
|
|
|
|
-
|
|
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 eighteen
months and have variable market-based interest rates which reset every thirty days. The fair value of the Company's notes payable
obligation approximates carrying value as these obligations 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)
March 31, 2017
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:
|
|
Three months ended March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Income taxes (benefit) at U.S. statutory rate
|
|
$
|
187,000
|
|
|
$
|
(23,000
|
)
|
Change in valuation allowance
|
|
|
(152,000
|
)
|
|
|
-
|
|
State income taxes, net of federal benefit
|
|
|
10,000
|
|
|
|
14,000
|
|
Higher / (lower) effective taxes on earnings/losses
in certain foreign countries
|
|
|
(34,000
|
)
|
|
|
(11,000
|
)
|
Foreign corporate income taxes
|
|
|
13,000
|
|
|
|
17,000
|
|
Other, net
|
|
|
3,000
|
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,000
|
|
|
$
|
(23,000
|
)
|
For fiscal year 2016, beginning
in the second quarter, the Company determined that it was more likely than not that 2016 U.S. federal and various state net operating
losses primarily generated in 2016 would not be realized based on projections of future U.S. taxable income, estimated reversals
of existing taxable timing differences, and other considerations. Accordingly, the Company's full year 2016 income tax provision
included the impact of recording a total valuation allowance of $292,000 against all U.S. net deferred tax assets, including the
2016 losses generated, from a U.S. tax perspective.
From a U.S. tax perspective,
the Company's income tax provision for the three months ended March 31, 2017 includes a partial release of valuation allowance
which substantially offsets the federal income tax expense on the Company's pre-tax book income.
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 March 31, 2017 and December 31, 2016, management's estimated reserve (net of deposits) for this matter is approximately
$162,000 and $158,000, respectively. There has been no change in this matter during the first three months of 2017.
Reliv International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2017
|
Note 5—
|
Recent
Accounting Standards
|
Adopted in 2017
In July 2015, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11,
Inventory (Topic 330): Simplifying
the Measurement of Inventory,
which requires inventory within the scope of this update to be measured at the lower of its
cost or net realizable value, with net realizable value being the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation. As required, the Company adopted this new standard
effective January 1, 2017. The Company's adoption of this standard did not have any impact on its consolidated financial statements
and related disclosures.
In March 2016, the FASB issued
ASU No. 2016-09,
Compensation - Stock Compensation (Topic 781): 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 liability, forfeitures, and classification on the statement of
cash flows. As required, the Company adopted this new standard effective January 1, 2017. Concurrently with the adoption of this
new standard, the Company revised its accounting policy to recognize share-based compensation costs based on actual stock option
forfeitures versus previous accounting guidance which required the Company to recognize share-based compensation costs based on
management's estimate of future stock option forfeitures. The Company's adoption of this standard did not have any impact on its
consolidated financial statements and related disclosures.
Not Yet Adopted
In May 2014, the FASB issued
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 will be adopted by the Company, when required, on January 1, 2018. The new standard
permits the use of either the retrospective or modified retrospective transition method. The Company's primary source of revenue
is from the sale of nutritional products to the Company's independent distributors whereby revenue is currently recognized when
product is shipped and risk of loss has passed to the customer. Upon adoption of this new standard, the Company believes that
the timing of revenue recognition related to nutritional products sales will remain materially consistent with its current practice.
Based on the evaluation completed to date, the Company has identified membership fee-type revenue and sales incentive programs
as areas that may be affected by the new standard; and these areas require further evaluation. Overall, the Company continues
to evaluate the adoption of this standard, including the transition method, will have on its consolidated financial statements
and related disclosures.
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. This update
is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application
permitted. The Company expects the adoption of this standard to result in the recognition of right-of-use assets and lease liabilities
not currently recorded in the Company's consolidated financial statements. The Company is evaluating its transition method and
other effects that the new standard will have on its consolidated financial statements and related disclosures.
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 80.3% of worldwide net sales for the three months ended March 31, 2017 and 78.7% of
worldwide net sales for the three months ended March 31, 2016. Our international operations currently generate sales through distributor
networks with facilities in Australia, Canada, Indonesia, 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 March 31, 2017, consisted of approximately 37,280
distributors and preferred customers. 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 2.0% in the three months ended March 31, 2017 compared to the same period in 2016. During the first quarter of 2017 (“Q1
2017”), sales in the United States remained approximately the same and international sales decreased by 9.5% over the prior-year
period. International sales, when reported in U.S. dollars, were negatively impacted by a stronger U.S. dollar versus the British
pound, Philippine peso, and Mexican peso. The U.S. dollar was weaker versus the Australian, New Zealand and Canadian dollars.
Excluding the impact of currency exchange fluctuation, international sales decreased by 1.5%.
The following table summarizes net sales
by geographic market for the three months ended March 31, 2017 and 2016.
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change from
prior year
|
|
|
|
Amount
|
|
|
% of Net Sales
|
|
|
Amount
|
|
|
%
of Net
Sales
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
United States
|
|
$
|
10,259
|
|
|
|
80.3
|
%
|
|
$
|
10,255
|
|
|
|
78.7
|
%
|
|
$
|
4
|
|
|
|
---
|
%
|
Australia/New Zealand
|
|
|
260
|
|
|
|
2.0
|
|
|
|
298
|
|
|
|
2.3
|
|
|
|
(38
|
)
|
|
|
(12.8
|
)
|
Canada
|
|
|
264
|
|
|
|
2.1
|
|
|
|
306
|
|
|
|
2.3
|
|
|
|
(42
|
)
|
|
|
(13.7
|
)
|
Mexico
|
|
|
157
|
|
|
|
1.2
|
|
|
|
163
|
|
|
|
1.3
|
|
|
|
(6
|
)
|
|
|
(3.7
|
)
|
Europe
|
|
|
1,201
|
|
|
|
9.4
|
|
|
|
1,556
|
|
|
|
11.9
|
|
|
|
(355
|
)
|
|
|
(22.8
|
)
|
Asia
|
|
|
637
|
|
|
|
5.0
|
|
|
|
458
|
|
|
|
3.5
|
|
|
|
179
|
|
|
|
39.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
12,778
|
|
|
|
100.0
|
%
|
|
$
|
13,036
|
|
|
|
100.0
|
%
|
|
$
|
(258
|
)
|
|
|
(2.0
|
)%
|
The following table sets forth, as of March
31, 2017 and 2016, 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. In February 2016,
we introduced a formal Preferred Customer program in the United States and Canada. As a result, we are including Preferred Customers
as part of our Active Distributor count. Preferred Customer programs were previously in place in Europe and other foreign markets.
Preferred Customers represent approximately 5,200 and 4,400 of the Active Distributor count as of March 31, 2017 and 2016, respectively.
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
|
%
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
|
|
|
26,110
|
|
|
|
2,610
|
|
|
|
31,910
|
|
|
|
4,130
|
|
|
|
(18.2
|
)%
|
|
|
(36.8
|
)%
|
Australia/New Zealand
|
|
|
1,440
|
|
|
|
110
|
|
|
|
1,690
|
|
|
|
120
|
|
|
|
(14.8
|
)
|
|
|
(8.3
|
)
|
Canada
|
|
|
780
|
|
|
|
90
|
|
|
|
1,120
|
|
|
|
170
|
|
|
|
(30.4
|
)
|
|
|
(47.1
|
)
|
Mexico
|
|
|
880
|
|
|
|
60
|
|
|
|
1,220
|
|
|
|
90
|
|
|
|
(27.9
|
)
|
|
|
(33.3
|
)
|
Europe
|
|
|
4,620
|
|
|
|
410
|
|
|
|
6,000
|
|
|
|
480
|
|
|
|
(23.0
|
)
|
|
|
(14.6
|
)
|
Asia
|
|
|
3,450
|
|
|
|
310
|
|
|
|
3,100
|
|
|
|
310
|
|
|
|
11.3
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
total
|
|
|
37,280
|
|
|
|
3,590
|
|
|
|
45,040
|
|
|
|
5,300
|
|
|
|
(17.2
|
)%
|
|
|
(32.3
|
)%
|
The following table provides key statistics
related to distributor activity by market and should be read in conjunction with the following discussion.
Distributor
Activity by Market
|
United
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
States
|
|
AUS/NZ
|
|
Canada
|
|
Mexico
|
|
Europe
|
|
Asia
|
|
--
Total
|
|
Sales in USD (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 3/31/2017
|
$
|
10,259
|
|
$
|
260
|
|
$
|
264
|
|
$
|
157
|
|
$
|
1,201
|
|
$
|
637
|
|
$
|
2,519
|
|
Quarter ended 3/31/2016
|
$
|
10,255
|
|
$
|
298
|
|
$
|
306
|
|
$
|
163
|
|
$
|
1,556
|
|
$
|
458
|
|
$
|
2,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change in sales-Q1 2017
vs. Q1 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in USD
|
|
0.0%
|
|
|
-12.8%
|
|
|
-13.7%
|
|
|
-3.7%
|
|
|
-22.8%
|
|
|
39.1%
|
|
|
-9.5%
|
|
due to currency
fluctuation
|
|
-
|
|
|
4.4%
|
|
|
3.1%
|
|
|
-12.0%
|
|
|
-12.0%
|
|
|
-7.8%
|
|
|
-8.0%
|
|
Sales in
local currency (non-GAAP)
|
|
0.0%
|
|
|
-17.2%
|
|
|
-16.8%
|
|
|
8.3%
|
|
|
-10.8%
|
|
|
46.9%
|
|
|
-1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
#
of new distributors-Q1 2017
(1)
|
|
1,615
|
|
|
66
|
|
|
44
|
|
|
83
|
|
|
466
|
|
|
701
|
|
|
1,360
|
|
#
of new distributors-Q1 2016
(1)
|
|
1,714
|
|
|
112
|
|
|
44
|
|
|
122
|
|
|
675
|
|
|
514
|
|
|
1,467
|
|
% change
|
|
-5.8%
|
|
|
-41.1%
|
|
|
0.0%
|
|
|
-32.0%
|
|
|
-31.0%
|
|
|
36.4%
|
|
|
-7.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new Master Affiliates-Q1 2017
|
|
154
|
|
|
3
|
|
|
3
|
|
|
7
|
|
|
34
|
|
|
88
|
|
|
135
|
|
# of new Master Affiliates-Q1 2016
|
|
361
|
|
|
14
|
|
|
11
|
|
|
9
|
|
|
49
|
|
|
46
|
|
|
129
|
|
% change
|
|
-57.3%
|
|
|
-78.6%
|
|
|
-72.7%
|
|
|
-22.2%
|
|
|
-30.6%
|
|
|
91.3%
|
|
|
4.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Product orders-Q1 2017
|
|
35,008
|
|
|
1,452
|
|
|
814
|
|
|
1,093
|
|
|
4,704
|
|
|
5,675
|
|
|
13,738
|
|
# of Product orders-Q1 2016
|
|
39,068
|
|
|
1,887
|
|
|
1,069
|
|
|
1,046
|
|
|
6,159
|
|
|
2,836
|
|
|
12,997
|
|
% change
|
|
-10.4%
|
|
|
-23.1%
|
|
|
-23.9%
|
|
|
4.5%
|
|
|
-23.6%
|
|
|
100.1%
|
|
|
5.7%
|
|
(1)
The new distributor totals for Q1 2017 and Q1
2016 include 1,019 and 836, respectively, new worldwide preferred customers.
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 U.S. 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.
United States
|
·
|
Net sales remained
approximately the same in the United States in Q1 2017 compared to the prior-year quarter.
|
|
·
|
On
February 1, 2017, we formally announced the launch of Fit3
™
, a new fitness
and weight loss program created to help people get real fitness and weight loss results.
The Fit3 program consists of three principal components: nutrition coaching, exercise
coaching, and three new Fit3 formulas: Active, Burn and Purify. Active combines a three-protein
blend of whey, casein and non-GMO soy with additional ingredients to support weight loss,
athletic performance and energy. Burn and Purify are capsule products, with Burn as a
targeted fat-burning formula and Purify as a probiotic, liver cleanse and metabolic supporter.
|
|
·
|
Sales of the
Fit3 product line represented 10.1% of net sales in the U.S. in Q1 2017. Products in
the LunaRich line, including Reliv Now® and LunaRich X™, continued to perform
well, constituting 15.9% and 13.1% of net sales in the United States, respectively, in
Q1 2017. Reliv NOW and LunaRich X represented 18.3% and 15.2%, respectively, of net sales
in the United States in the prior-year quarter.
|
|
·
|
Distributor
enrollments and new Master Affiliate qualifications decreased by 5.8% and 57.3%, respectively,
in Q1 2017 compared to the prior year quarter. The reduction in new Master Affiliate
qualifications is in response to the increased business volume requirements to reach
the Master Affiliate level during Q1 2016.
|
|
·
|
Distributor
retention was 65.5% for the twelve month period ended March 31, 2017 compared to 66.9%
for all of 2016. Distributor retention is determined by the percentage of active distributors
from 2016 that renewed their distributorships in 2017.
|
|
·
|
Our average
order size in Q1 2017 increased by 9.9% to $399 at suggested retail value compared to
the prior-year quarter in response to the rollout of the Fit3 product line. However,
the number of product orders decreased by 10.4% in Q1 2017 compared to the prior year
quarter.
|
International Operations
|
·
|
The average
foreign exchange rate for the U.S. dollar for Q1 2017 was stronger versus the British
pound, Philippine peso, and Mexican peso when compared with the average exchange rates
for the same period in 2016. The average exchange rates for the Australian, New Zealand
and Canadian dollars all increased versus the U.S. dollar in Q1 2017.
|
|
·
|
We continue
to review prices and margins in all of our international markets and plan to make adjustments
as needed during 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 Q1 2017 decreased by 17.2% and 16.8%, respectively,
in local currency compared to the prior-year quarter as the result of decreased distributor
activity in the market.
|
|
·
|
Net sales in
Mexico increased by 8.3% in local currency in Q1 2017 compared to the prior-year quarter.
Distributor ordering improved in response to a sales promotion on our leading product
in Mexico, Reliv NOW.
|
|
·
|
Net sales in
Europe decreased by 10.8% in local currency in Q1 2017 compared to the prior-year quarter.
Distributor activity declined both in the form of new distributor and preferred customer
enrollments and in new Master Affiliate qualifications in the region.
|
|
·
|
Sales in Asia
increased by 46.9% in local currency in Q1 2017 compared to the prior-year quarter led
by strong sales growth in the Philippines. Local currency sales in the Philippines improved
66.8% as all measures of distributor activity showed strong increases in the market.
Local sales campaigns involving our NOW for Kids nutritional product have shown good
success.
|
Costs and Expenses
The following table sets forth selected
results of our operations expressed as a percentage of net sales for the three-month periods ended March 31, 2017 and 2016. 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)
|
Q1
2017
|
|
Q1
2016
|
|
|
Amount
|
|
% of
net sales
|
|
Amount
|
|
% of
net sales
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
12,778
|
|
|
100.0%
|
|
$
|
13,036
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
2,836
|
|
|
22.2
|
|
|
2,984
|
|
|
22.9
|
|
Distributor royalties and commissions
|
|
4,499
|
|
|
35.2
|
|
|
4,624
|
|
|
35.5
|
|
Selling, general
and administrative
|
|
4,926
|
|
|
38.6
|
|
|
5,609
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
517
|
|
|
4.0
|
|
|
(181
|
)
|
|
(1.4
|
)
|
Interest income
|
|
26
|
|
|
0.2
|
|
|
27
|
|
|
0.2
|
|
Interest expense
|
|
(25
|
)
|
|
(0.2
|
)
|
|
(27
|
)
|
|
(0.2
|
)
|
Other income
|
|
33
|
|
|
0.3
|
|
|
114
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
551
|
|
|
4.3
|
|
|
(67
|
)
|
|
(0.5
|
)
|
Provision (benefit) for income
taxes
|
|
27
|
|
|
0.2
|
|
|
(23
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
524
|
|
|
4.1%
|
|
$
|
(44
|
)
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share-Basic
(1)
|
$
|
0.28
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
Earnings
(loss) per common share-Diluted
(1)
|
$
|
0.28
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
(1)
The Q1 2016 per share amounts have been adjusted
for the 1-for-7 reverse stock split effective on October 4, 2016.
Cost of Products Sold:
|
·
|
Gross margins
in Q1 2017 improved compared to the prior-year period. Gross margins were improved as
the result of the launch of Fit3, coupled with slightly lower plant expenses in the current
year quarter.
|
Distributor Royalties and Commissions:
|
·
|
Distributor
royalties and commissions as a percentage of net sales for Q1 2017 remained relatively
steady compared to the prior-year period. 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.
|
Selling, General and Administrative Expenses:
|
·
|
Selling, general
and administrative expenses declined by $683,000 in Q1 2017 compared to the prior-year
period.
|
|
·
|
Salaries, other
staffing expenses, benefits, and incentive compensation decreased in the aggregate by
$336,000 in Q1 2017, compared to the prior-year period. Total compensation expense decreased
as the result of continued headcount reductions in the United States through attrition
and a worldwide workforce reduction that took place in May 2016.
|
|
·
|
Other general
and administrative expenses decreased by $290,000 in Q1 2017 versus the prior-year period.
|
|
o
|
Research
& development expenses, along with other foreign product compliance requirements
decreased by $118,000 in Q1 2017 compared to the prior-year period.
|
|
o
|
Other
decreases from Q1 2017 vs. Q1 2016 include:
|
|
§
|
Consulting
fees decreased by $35,000.
|
|
§
|
Computer software
maintenance expenses decreased by $22,000.
|
|
§
|
Directors’
fees decreased by $17,500.
|
|
§
|
Corporate
travel expenses decreased by $20,000.
|
|
·
|
Sales and marketing
expenses decreased by $37,000 in Q1 2017 vs. 2016.
|
Other Income/Expense:
|
·
|
The other income
in Q1 2017 and Q1 2016 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 $27,000 for Q1 2017, an effective rate of 4.9%.
|
|
·
|
See Note 4
of the Condensed Consolidated Financial Statements for additional detail regarding income
taxes, including a reconciliation of the income tax expense/benefit to the U.S. statutory
rate for each period.
|
Net Income:
|
·
|
We reported
net income of $524,000 in Q1 2017 compared to a net loss of $44,000 in the prior-year
quarter. Although net sales decreased by 2.0% in Q1 2017 vs. Q1 2016, our profitability
improved as the result of the continuing impact of the reduction in selling, general
and administrative expenses from last year’s cost reduction initiative.
|
Financial Condition, Liquidity and Capital Resources
During the first three months of 2017,
we generated $530,000 of net cash from operating activities, $235,000 was used in investing activities, and we used $114,000 in
financing activities. This compares to $724,000 of net cash provided by operating activities, $15,000 provided by investing activities,
and $144,000 used in financing activities in the same period of 2016. Cash and cash equivalents increased by $222,000 to $3.83 million
as of March 31, 2017 compared to December 31, 2016.
Significant changes in working capital
items consisted of a decrease in inventory of $269,000, and an increase in prepaid expenses/other current assets of $354,000 in
the first three months of 2017. The decrease in inventory is the result of strong sales of the new Fit3 product line, and the
increase in prepaid expenses/other current assets represents the annual premium payments made in the first quarter of 2017 on
most of the corporate business insurance policies.
Investing activities during the first three
months of 2017 consisted of an investment of $262,000 for capital expenditures, offset by payments received on a distributor note
receivable of $27,000. Financing activities during the first three months of 2017 consisted of principal payments of $114,000
on long-term borrowings.
Stockholders’ equity increased to
$15.5 million at March 31, 2017 compared to $14.9 million at December 31, 2016. The increase is due to our net income
during the first three months of 2017 of $524,000 coupled with a favorable adjustment in foreign currency translation of $25,000.
Our working capital balance was $4.74 million at March 31, 2017 compared to $4.31 million at December 31, 2016. The current
ratio at March 31, 2017 was 2.02 compared to 1.93 at December 31, 2016.
Our $3.25 million term loan has a term
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 3.03% at March 31, 2017.
Our $3.5 million revolving line of credit
agreement accrues interest at a floating interest rate based on the 30-day LIBOR plus 2.25% and has a maturity date of April 30,
2018. As of March 31, 2017, there were no outstanding borrowings on the revolving line of credit.
Borrowings under the new lending agreements
are secured by all our tangible and intangible assets, a whole life insurance policy on the life of our Chief Executive Officer,
and by a mortgage on the real estate of our headquarters.
The lending agreements include quarterly
covenants requiring us to maintain net tangible worth of not less than $9.5 million, and i) a cumulative minimum EBITDA requirement
of $200,000, $400,000, $600,000, and $800,000 for the fiscal periods ending March 31, 2017, June 30, 2017, September 30, 2017,
and December 31, 2017, respectively; and ii) a minimum EBITDA of $200,000 for the quarter ended March 31, 2018.
As defined, EBITDA means our consolidated
net income for such period, before interest expense, income tax expense, depreciation and amortization, and management fees, and
further adjusted to exclude any gain or loss on the sale of assets, other extraordinary gains or losses, and any one-time adjustment
approved by the lender.
At March 31, 2017, we were in compliance
with all applicable covenants.
Management believes that our cash on hand,
internally generated funds, and revolving line of credit extension will be sufficient to meet working capital requirements and
our debt service requirements for the next twelve months.
Critical Accounting Policies
A summary of our critical
accounting policies and estimates is presented in our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 28, 2017. Our critical accounting policies remain unchanged as of March 31, 2017.