PART I -- FINANCIAL INFORMATION
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Item No. 1 - Financial Statements
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Reliv International, Inc. and Subsidiaries
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Condensed Consolidated Balance Sheets
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September 30
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December 31
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2017
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2016
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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2,465,411
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$
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3,606,817
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Accounts receivable, less allowances of
$25,800 in 2017 and $26,700 in 2016
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33,705
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126,113
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Accounts and note due from employees and distributors
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138,684
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139,931
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Inventories
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Finished goods
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2,702,561
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2,629,541
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Raw materials
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2,035,138
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1,728,136
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Sales aids and promotional materials
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139,895
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130,153
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Total inventories
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4,877,594
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4,487,830
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Refundable income taxes
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48,247
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97,194
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Prepaid expenses and other current assets
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500,458
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474,183
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Total current assets
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8,064,099
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8,932,068
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Other assets
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335,711
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305,137
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Cash surrender value of life insurance
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3,056,387
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2,965,981
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Note receivable due from distributor
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1,434,739
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1,521,005
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Deferred income taxes
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535,000
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487,000
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Intangible assets, net
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2,230,745
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2,400,234
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Property, plant and equipment:
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Land and land improvements
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905,190
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905,190
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Building
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9,943,531
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9,943,512
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Machinery & equipment
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4,707,262
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4,329,329
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Office equipment
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1,181,443
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1,203,868
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Computer equipment & software
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2,250,209
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2,218,766
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18,987,635
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18,600,665
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Less: Accumulated depreciation
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13,189,768
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12,746,363
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Net property, plant and equipment
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5,797,867
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5,854,302
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Total assets
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$
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21,454,548
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$
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22,465,727
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See notes to financial statements.
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Reliv International, Inc. and Subsidiaries
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Condensed Consolidated Balance Sheets
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September 30
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December 31
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2017
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2016
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(unaudited)
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Liabilities and stockholders' equity
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Current liabilities:
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Accounts payable and accrued expenses:
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Trade accounts payable and other accrued expenses
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$
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1,991,902
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$
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2,352,692
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Distributors' commissions payable
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1,144,612
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1,402,370
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Sales taxes payable
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175,188
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234,153
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Payroll and payroll taxes payable
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298,017
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245,090
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Total accounts payable and accrued expenses
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3,609,719
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4,234,305
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Income taxes payable
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26,950
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-
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Current portion of long-term debt
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2,626,661
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389,096
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Total current liabilities
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6,263,330
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4,623,401
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Noncurrent liabilities:
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Long-term debt, less current portion
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-
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2,518,341
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Other noncurrent liabilities
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432,389
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409,813
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Total noncurrent liabilities
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432,389
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2,928,154
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Stockholders' equity:
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Preferred stock, par value $.001 per share; 500,000
shares authorized; -0- shares issued and outstanding
in 2017 and 2016
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-
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-
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Common stock, par value $.001 per share; 5,000,000
authorized; 2,110,013 shares issued and 1,845,160
shares outstanding as of 9/30/2017; 2,110,013 shares
issued and 1,845,160 shares outstanding as of 12/31/2016
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2,110
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2,110
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Additional paid-in capital
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30,590,476
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30,565,144
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Accumulated deficit
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(9,599,292
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(9,284,317
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Accumulated other comprehensive loss:
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Foreign currency translation adjustment
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(895,905
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(1,030,205
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Treasury stock
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(5,338,560
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(5,338,560
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Total stockholders' equity
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14,758,829
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14,914,172
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Total liabilities and stockholders' equity
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$
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21,454,548
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$
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22,465,727
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See notes to financial statements.
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Reliv International, Inc. and Subsidiaries
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Condensed Consolidated Statements of Net
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Income (Loss) and Comprehensive Income (Loss)
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(unaudited)
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Three months ended September 30
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Nine months ended September 30
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2017
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2016
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2017
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2016
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Product sales
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$
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8,385,999
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$
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9,972,547
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$
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29,479,924
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$
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32,181,585
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Handling & freight income
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683,324
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812,868
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2,373,809
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2,693,602
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Net sales
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9,069,323
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10,785,415
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31,853,733
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34,875,187
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Costs and expenses:
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Cost of products sold
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1,949,670
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2,214,633
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7,113,647
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7,729,508
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Distributor royalties and commissions
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3,199,596
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3,799,791
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11,252,922
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12,345,171
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Selling, general and administrative
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4,253,675
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4,737,305
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13,811,814
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15,887,901
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Total costs and expenses
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9,402,941
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10,751,729
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32,178,383
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35,962,580
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Income (loss) from operations
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(333,618
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)
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33,686
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(324,650
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(1,087,393
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Other income (expense):
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Interest income
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25,277
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26,199
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76,630
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80,689
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Interest expense
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(27,183
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(28,982
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(79,472
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)
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(82,161
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Other income / (expense)
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(4,579
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)
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41,575
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40,517
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226,519
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Income (loss) before income taxes
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(340,103
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72,478
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(286,975
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)
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(862,346
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Provision (benefit) for income taxes
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(21,000
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)
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(62,000
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)
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28,000
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35,000
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Net income (loss)
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$
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(319,103
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)
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$
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134,478
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$
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(314,975
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)
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$
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(897,346
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Other comprehensive income (loss):
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Foreign currency translation adjustment
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43,666
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(74,503
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)
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134,300
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(296,116
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)
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Comprehensive income (loss)
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$
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(275,437
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$
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59,975
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$
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(180,675
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)
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$
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(1,193,462
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)
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Earnings (loss) per common share - Basic
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$
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(0.17
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$
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0.07
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$
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(0.17
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$
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(0.49
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)
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Weighted average shares
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1,845,000
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1,846,000
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1,845,000
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1,846,000
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Earnings (loss) per common share - Diluted
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$
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(0.17
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$
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0.07
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$
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(0.17
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$
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(0.49
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Weighted average shares
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1,845,000
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1,846,000
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1,845,000
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1,846,000
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See notes to financial statements.
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Reliv International, Inc. and Subsidiaries
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Condensed Consolidated Statements of Cash Flows
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(unaudited)
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Nine months ended September 30
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2017
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2016
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Operating activities:
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Net loss
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$
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(314,975
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)
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$
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(897,346
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)
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Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
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Depreciation and amortization
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653,625
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734,763
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Stock-based compensation
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25,332
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52,083
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Non-cash life insurance policy accretion
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(90,406
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)
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(87,732
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)
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(Gain) loss on sale of property, plant and equipment
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(8,906
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)
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-
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Deferred income taxes
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(6,000
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)
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27,000
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Foreign currency transaction (gain) loss
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(29,299
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)
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(191,091
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)
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(Increase) decrease in accounts receivable and accounts due
from employees and distributors
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98,634
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81,571
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(Increase) decrease in inventories
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(313,382
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)
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868,287
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(Increase) decrease in refundable income taxes
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49,500
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(2,153
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)
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(Increase) decrease in prepaid expenses
and other current assets
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(21,418
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)
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(71,431
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)
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(Increase) decrease in other assets
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(30,196
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)
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(4,180
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)
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Increase (decrease) in income taxes payable
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|
26,950
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|
|
|
-
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Increase (decrease) in accounts payable & accrued expenses
and other noncurrent liabilities
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(632,607
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)
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253,012
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Net cash provided by (used in) operating activities
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(593,148
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)
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762,783
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|
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Investing activities:
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Purchase of property, plant and equipment
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(430,083
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)
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(18,686
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)
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Proceeds from the sale of property, plant and equipment
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|
13,001
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|
|
|
912
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Payments received on distributor note receivable
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81,254
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|
|
|
76,534
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|
|
|
|
|
|
|
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Net cash provided by (used in) investing activities
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|
(335,828
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)
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58,760
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|
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Financing activities:
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|
|
|
|
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Principal payments on long-term borrowings
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(282,496
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)
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(904,461
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)
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Net cash used in financing activities
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(282,496
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)
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(904,461
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)
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Effect of exchange rate changes on cash and cash equivalents
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70,066
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|
|
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(9,337
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)
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|
|
|
|
|
|
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Increase (decrease) in cash and cash equivalents
|
|
|
(1,141,406
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)
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|
|
(92,255
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)
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|
|
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Cash and cash equivalents at beginning of period
|
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|
3,606,817
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|
|
|
3,262,263
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|
|
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|
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|
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Cash and cash equivalents at end of period
|
|
$
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2,465,411
|
|
|
$
|
3,170,008
|
|
See notes to financial statements.
|
|
|
|
Reliv International, Inc. and Subsidiaries
|
|
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
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|
|
|
|
Note
1
--
|
Accounting Policies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Presentation
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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.
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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.
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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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2017
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2016
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2017
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2016
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Numerator:
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Net income (loss)
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$
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(319,103
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)
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$
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134,478
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$
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(314,975
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)
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$
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(897,346
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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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1,845,000
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1,846,000
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1,845,000
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1,846,000
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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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1,845,000
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1,846,000
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1,845,000
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1,846,000
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Basic earnings (loss) per share
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$
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(0.17
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)
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$
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0.07
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$
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(0.17
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)
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$
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(0.49
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)
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Diluted earnings (loss) per share
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$
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(0.17
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)
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$
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0.07
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$
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(0.17
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)
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$
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(0.49
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Options and warrants to purchase
146,715
shares of common stock for the
three
months and
nine
months ended
September 30, 2017,
respectively, were
not
included in the denominator for diluted earnings (loss) per share because their effect would be antidilutive or because the shares were deemed contingently issuable.
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.
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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.
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These include quoted prices for similar assets or liabilities in active markets or similar assets or
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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:
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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, 2017
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Long-term debt
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$
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2,626,661
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$
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2,626,661
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-
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$
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2,626,661
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-
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Note receivable
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1,548,910
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1,742,000
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-
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1,742,000
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-
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Marketable securities
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327,000
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327,000
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$
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327,000
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-
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-
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December 31, 2016
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Long-term debt
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$
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2,907,437
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$
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2,907,437
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-
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$
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2,907,437
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-
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Note receivable
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1,630,164
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1,812,000
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-
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1,812,000
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-
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Marketable securities
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296,000
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296,000
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$
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296,000
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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
two
years and have variable market-based interest rates which reset every
thirty
days.
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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.
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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.
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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.
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September 30
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December 31
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2017
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2016
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Term loan
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$
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2,626,661
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$
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2,843,301
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Notes payable
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-
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64,136
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2,626,661
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2,907,437
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Less current portion
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2,626,661
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389,096
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Total long-term debt
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$
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-
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$
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2,518,341
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Effective
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 replaced similar borrowings under agreements with the Company’s former primary lender.
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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.
Accordingly, the outstanding term loan balance is presented as a current liability in the
September 30, 2017
consolidated balance sheet. The term loan's interest rate is based on the
30
-day LIBOR plus
2.25%
and was
3.48%
at
September 30, 2017.
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The
$3.5
million revolving line of credit agreement, originally dated
September 30, 2015,
accrues interest at a floating interest rate based on the
30
-day LIBOR plus
2.25%
and had an original term of
one
year.
Effective
September 30, 2016,
the revolving line of credit agreement was extended under similar terms to
April 30, 2018.
As of
September 30, 2017,
there were
no
outstanding borrowings on the revolving line of credit. In
October 2017,
the Company borrowed
$500,000
under the revolving line of credit.
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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.
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The lending agreements include quarterly financial covenants requiring the Company to maintain net tangible worth of
not
less than
$9.5
million, and
i) a cumulative minimum EBITDA requirement of
$600,000
and
$800,000
for the fiscal periods ending
September 30, 2017
and
December 31, 2017,
respectively; and ii) a minimum EBITDA of
$200,000
for the quarter ended
March 31, 2018.
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As defined, EBITDA equals the Company's consolidated net income for such period, before interest expense, income tax expense, depreciation and amortization, and management fees, and further adjusted to exclude any gain or loss on the sale of assets, other extraordinary gains or losses, and any
one
-time adjustment approved by the lender.
At
September 30, 2017,
the Company was in compliance with its loan covenant requirements.
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The Company anticipates it will be able to refinance its term loan and renew its revolving line of credit with its current lender prior to the respective maturity dates of each agreement; however, there can be
no
assurance that the Company will be successful in refinancing its outstanding loan balances prior to maturity.
Company management believes that the Company's cash on hand and its ability, if necessary, to borrow a significant portion of or liquidate the cash surrender value of the Company's key-man life insurance policy, will be sufficient to meet the Company's working capital requirements and debt service requirements for the next
twelve
months.
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Note
5
--
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Taxes
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The interim financial statement provision (benefit) for income taxes is different from the amounts computed by applying the
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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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2017
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2016
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Income taxes (benefit) at U.S. statutory rate
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$
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(98,000
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)
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$
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(293,000
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)
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Change in valuation allowance
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201,000
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363,000
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State income taxes, net of federal benefit
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11,000
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20,000
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Higher / (lower) effective taxes on earnings/losses
in certain foreign countries
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(103,000
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)
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(50,000
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)
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Foreign corporate income taxes
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28,000
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66,000
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Other, net
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(11,000
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(71,000
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$
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28,000
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$
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35,000
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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.
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From a U.S. tax perspective, for the
nine
months ended
September 30, 2017,
the Company increased its valuation allowance for the portion of federal and state net operating losses it estimates to generate in
2017.
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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, 2017
and
December 31, 2016,
management's estimated reserve (net of deposits) for this matter is approximately
$171,000
and
$158,000,
respectively. There has been
no
change in this matter during the
first
nine
months of
2017.
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Note
6
--
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Restructuring Activities -
2016
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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.
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At
June 30, 2016,
the remaining reserve for severance and benefits under this program was approximately
$47,000,
and was paid out in the
third
quarter of
2016.
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Note
7
--
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Recent Accounting Standards
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Adopted in
2017
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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.
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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.
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Not
Yet Adopted
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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 anticipates selecting the modified retrospective 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 as an area that will be affected by the new standard resulting in, upon adoption on
January 1, 2018,
an estimated reduction to retained earnings ranging from
$350,000
to
$400,000;
(with such amount subject to final
2017
fiscal year balances). Overall, the Company continues to finalize its evaluation of the standard's adoption will have on its consolidated financial statements and related disclosures.
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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 on its consolidated financial statements and related disclosures.
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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 77.8% of worldwide net sales for the nine months ended September 30, 2017 and 78.0% of worldwide net sales for the nine months ended September 30, 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 September 30, 2017, consisted of approximately 34,490 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 15.9% in the three months ended September 30, 2017 compared to the same period in 2016. During the third quarter of 2017 (“Q3 2017”), sales in the United States decreased by 17.5%, and international sales decreased by 9.8% over the prior-year period. International sales, when reported in U.S. dollars, were positively impacted by a weaker 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 10.6%.
The following table summarizes net sales by geographic market for the three months ended September 30, 2017 and 2016.
|
|
Three months ended
September
3
0
,
|
|
|
|
|
|
|
|
|
|
|
|
20
1
7
|
|
|
20
1
6
|
|
|
Change from prior year
|
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,082
|
|
|
|
78.1
|
%
|
|
$
|
8,581
|
|
|
|
79.6
|
%
|
|
$
|
(1,499
|
)
|
|
|
(17.5
|
)%
|
Australia/New Zealand
|
|
|
224
|
|
|
|
2.5
|
|
|
|
242
|
|
|
|
2.2
|
|
|
|
(18
|
)
|
|
|
(7.4
|
)
|
Canada
|
|
|
200
|
|
|
|
2.2
|
|
|
|
250
|
|
|
|
2.3
|
|
|
|
(50
|
)
|
|
|
(20.0
|
)
|
Mexico
|
|
|
105
|
|
|
|
1.2
|
|
|
|
119
|
|
|
|
1.1
|
|
|
|
(14
|
)
|
|
|
(11.8
|
)
|
Europe
|
|
|
891
|
|
|
|
9.8
|
|
|
|
1,166
|
|
|
|
10.8
|
|
|
|
(275
|
)
|
|
|
(23.6
|
)
|
Asia
|
|
|
567
|
|
|
|
6.2
|
|
|
|
427
|
|
|
|
4.0
|
|
|
|
140
|
|
|
|
32.8
|
|
Consolidated total
|
|
$
|
9,069
|
|
|
|
100.0
|
%
|
|
$
|
10,785
|
|
|
|
100.0
|
%
|
|
$
|
(1,716
|
)
|
|
|
(15.9
|
)%
|
The following table summarizes net sales by geographic market for the nine months ended September 30, 2017 and 2016.
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
201
7
|
|
|
201
6
|
|
|
Change from prior year
|
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
24,791
|
|
|
|
77.8
|
%
|
|
$
|
27,191
|
|
|
|
78.0
|
%
|
|
$
|
(2,400
|
)
|
|
|
(8.8
|
)%
|
Australia/New Zealand
|
|
|
711
|
|
|
|
2.2
|
|
|
|
825
|
|
|
|
2.4
|
|
|
|
(114
|
)
|
|
|
(13.8
|
)
|
Canada
|
|
|
681
|
|
|
|
2.2
|
|
|
|
799
|
|
|
|
2.3
|
|
|
|
(118
|
)
|
|
|
(14.8
|
)
|
Mexico
|
|
|
352
|
|
|
|
1.1
|
|
|
|
419
|
|
|
|
1.2
|
|
|
|
(67
|
)
|
|
|
(16.0
|
)
|
Europe
|
|
|
3,399
|
|
|
|
10.7
|
|
|
|
4,344
|
|
|
|
12.4
|
|
|
|
(945
|
)
|
|
|
(21.8
|
)
|
Asia
|
|
|
1,920
|
|
|
|
6.0
|
|
|
|
1,297
|
|
|
|
3.7
|
|
|
|
623
|
|
|
|
48.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
31,854
|
|
|
|
100.0
|
%
|
|
$
|
34,875
|
|
|
|
100.0
|
%
|
|
$
|
(3,021
|
)
|
|
|
(8.7
|
)%
|
The following table sets forth, as of
September 30, 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 5,010 and 4,720 of the Active Distributor count as of September 30, 2017 and 2016, respectively.
|
|
September
30, 201
7
|
|
|
September
30, 201
6
|
|
|
% 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
|
|
|
23,860
|
|
|
|
2,750
|
|
|
|
28,700
|
|
|
|
4,110
|
|
|
|
(16.9
|
)%
|
|
|
(33.1
|
)%
|
Australia/New Zealand
|
|
|
1,180
|
|
|
|
110
|
|
|
|
1,580
|
|
|
|
130
|
|
|
|
(25.3
|
)
|
|
|
(15.4
|
)
|
Canada
|
|
|
710
|
|
|
|
80
|
|
|
|
890
|
|
|
|
140
|
|
|
|
(20.2
|
)
|
|
|
(42.9
|
)
|
Mexico
|
|
|
730
|
|
|
|
60
|
|
|
|
1,010
|
|
|
|
90
|
|
|
|
(27.7
|
)
|
|
|
(33.3
|
)
|
Europe
|
|
|
3,940
|
|
|
|
440
|
|
|
|
5,230
|
|
|
|
520
|
|
|
|
(24.7
|
)
|
|
|
(15.4
|
)
|
Asia
|
|
|
4,070
|
|
|
|
370
|
|
|
|
3,040
|
|
|
|
330
|
|
|
|
33.9
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
34,490
|
|
|
|
3,810
|
|
|
|
40,450
|
|
|
|
5,320
|
|
|
|
(14.7
|
)%
|
|
|
(28.4
|
)%
|
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 conjunctio
n 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 9/30/2017
|
|
$
|
7,082
|
|
|
$
|
224
|
|
|
$
|
200
|
|
|
$
|
105
|
|
|
$
|
891
|
|
|
$
|
567
|
|
|
$
|
1,987
|
|
Quarter ended 9/30/2016
|
|
$
|
8,581
|
|
|
$
|
242
|
|
|
$
|
250
|
|
|
$
|
119
|
|
|
$
|
1,166
|
|
|
$
|
427
|
|
|
$
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change in sales-Q3 2017 vs. Q3 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in USD
|
|
|
-17.5
|
%
|
|
|
-7.4
|
%
|
|
|
-20.0
|
%
|
|
|
-11.8
|
%
|
|
|
-23.6
|
%
|
|
|
32.8
|
%
|
|
|
-9.8
|
%
|
due to currency fluctuation
|
|
|
-
|
|
|
|
3.1
|
%
|
|
|
3.8
|
%
|
|
|
6.7
|
%
|
|
|
3.1
|
%
|
|
|
-10.2
|
%
|
|
|
0.8
|
%
|
Sales in local currency (non-GAAP)
|
|
|
-17.5
|
%
|
|
|
-10.5
|
%
|
|
|
-23.8
|
%
|
|
|
-18.5
|
%
|
|
|
-26.7
|
%
|
|
|
43.0
|
%
|
|
|
-10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new distributors-Q3 2017
(1)
|
|
|
1,066
|
|
|
|
33
|
|
|
|
32
|
|
|
|
66
|
|
|
|
313
|
|
|
|
722
|
|
|
|
1,166
|
|
# of new distributors-Q3 2016
(1)
|
|
|
1,437
|
|
|
|
66
|
|
|
|
34
|
|
|
|
94
|
|
|
|
394
|
|
|
|
377
|
|
|
|
965
|
|
% change
|
|
|
-25.8
|
%
|
|
|
-50.0
|
%
|
|
|
-5.9
|
%
|
|
|
-29.8
|
%
|
|
|
-20.6
|
%
|
|
|
91.5
|
%
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new Master Affiliates-Q3 2017
|
|
|
112
|
|
|
|
1
|
|
|
|
3
|
|
|
|
5
|
|
|
|
18
|
|
|
|
26
|
|
|
|
53
|
|
# of new Master Affiliates-Q3 2016
|
|
|
129
|
|
|
|
6
|
|
|
|
5
|
|
|
|
3
|
|
|
|
26
|
|
|
|
17
|
|
|
|
57
|
|
% change
|
|
|
-13.2
|
%
|
|
|
-83.3
|
%
|
|
|
-40.0
|
%
|
|
|
66.7
|
%
|
|
|
-30.8
|
%
|
|
|
52.9
|
%
|
|
|
-7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Product orders-Q3 2017
|
|
|
30,681
|
|
|
|
1,375
|
|
|
|
693
|
|
|
|
766
|
|
|
|
3,079
|
|
|
|
6,810
|
|
|
|
12,723
|
|
# of Product orders-Q3 2016
|
|
|
35,824
|
|
|
|
1,557
|
|
|
|
891
|
|
|
|
868
|
|
|
|
4,480
|
|
|
|
3,334
|
|
|
|
11,130
|
|
% change
|
|
|
-14.4
|
%
|
|
|
-11.7
|
%
|
|
|
-22.2
|
%
|
|
|
-11.8
|
%
|
|
|
-31.3
|
%
|
|
|
104.3
|
%
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
United States
|
|
|
AUS/NZ
|
|
|
Canada
|
|
|
Mexico
|
|
|
Europe
|
|
|
Asia
|
|
|
-- Total
|
|
Sales in USD (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD ended 9/30/2017
|
|
$
|
24,791
|
|
|
$
|
711
|
|
|
$
|
681
|
|
|
$
|
352
|
|
|
$
|
3,399
|
|
|
$
|
1,920
|
|
|
$
|
7,063
|
|
YTD ended 9/30/2016
|
|
$
|
27,191
|
|
|
$
|
825
|
|
|
$
|
799
|
|
|
$
|
419
|
|
|
$
|
4,344
|
|
|
$
|
1,297
|
|
|
$
|
7,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change in sales-YTD 2017 vs. YTD 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in USD
|
|
|
-8.8
|
%
|
|
|
-13.8
|
%
|
|
|
-14.8
|
%
|
|
|
-16.0
|
%
|
|
|
-21.8
|
%
|
|
|
48.0
|
%
|
|
|
-8.1
|
%
|
due to currency fluctuation
|
|
|
-
|
|
|
|
2.8
|
%
|
|
|
0.8
|
%
|
|
|
-2.2
|
%
|
|
|
-7.2
|
%
|
|
|
-10.1
|
%
|
|
|
-5.5
|
%
|
Sales in local currency (non-GAAP)
|
|
|
-8.8
|
%
|
|
|
-16.6
|
%
|
|
|
-15.6
|
%
|
|
|
-13.8
|
%
|
|
|
-14.6
|
%
|
|
|
58.1
|
%
|
|
|
-2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new distributors-YTD 2017
(2)
|
|
|
3,661
|
|
|
|
138
|
|
|
|
117
|
|
|
|
205
|
|
|
|
1,308
|
|
|
|
2,111
|
|
|
|
3,879
|
|
# of new distributors-YTD 2016
|
|
|
4,442
|
|
|
|
266
|
|
|
|
111
|
|
|
|
321
|
|
|
|
1,639
|
|
|
|
1,240
|
|
|
|
3,577
|
|
% change
|
|
|
-17.6
|
%
|
|
|
-48.1
|
%
|
|
|
5.4
|
%
|
|
|
-36.1
|
%
|
|
|
-20.2
|
%
|
|
|
70.2
|
%
|
|
|
8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new Master Affiliates-YTD 2017
|
|
|
406
|
|
|
|
6
|
|
|
|
8
|
|
|
|
13
|
|
|
|
92
|
|
|
|
184
|
|
|
|
303
|
|
# of new Master Affiliates-YTD 2016
|
|
|
626
|
|
|
|
27
|
|
|
|
18
|
|
|
|
16
|
|
|
|
122
|
|
|
|
97
|
|
|
|
280
|
|
% change
|
|
|
-35.1
|
%
|
|
|
-77.8
|
%
|
|
|
-55.6
|
%
|
|
|
-18.8
|
%
|
|
|
-24.6
|
%
|
|
|
89.7
|
%
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Product orders-YTD 2017
|
|
|
97,413
|
|
|
|
4,266
|
|
|
|
2,334
|
|
|
|
2,561
|
|
|
|
12,359
|
|
|
|
19,692
|
|
|
|
41,212
|
|
# of Product orders-YTD 2016
|
|
|
110,871
|
|
|
|
5,253
|
|
|
|
2,827
|
|
|
|
2,863
|
|
|
|
16,304
|
|
|
|
9,064
|
|
|
|
36,311
|
|
% change
|
|
|
-12.1
|
%
|
|
|
-18.8
|
%
|
|
|
-17.4
|
%
|
|
|
-10.5
|
%
|
|
|
-24.2
|
%
|
|
|
117.3
|
%
|
|
|
13.5
|
%
|
(1)
|
The new distributor totals for Q3 2017 and Q3 2016 include 815 and 810, respectively, of new worldwide preferred customers.
|
(2)
|
The new distributor totals for YTD 2017 and YTD 2016 include 2,798 and 2,573, respectively, of new worldwide preferred customers.
|
United States
|
●
|
Net sales declined in the United States in Q
3 2017 compared to the prior-year quarter, as new distributor/preferred customer enrollments declined. Additionally, net sales of the new Fit3 products declined in Q3 2017 compared to the net sales when launched in the first quarter of 2017 (“Q1 2017”).
|
|
●
|
In
February 2017, we launched Fit3
TM
, a new fitness and weight loss program. Net sales of the Fit3 product line represented 10.1% of net U.S. sales in Q1 2017; however, net sales have declined and only represented 4.3% of net sales in the U.S. in Q3 2017.
|
|
●
|
Products in the LunaRich line, including Reliv Now® and LunaRich X™, continued to perform well, constituting 1
6.8% and 13.9% of net sales in the United States, respectively, in Q3 2017. Reliv NOW and LunaRich X represented 17.7% and 15.6%, respectively, of net sales in the United States in the prior-year quarter.
|
|
●
|
For the
nine months ended September 30, 2017 (“YTD 2017”), net sales in the U.S. declined by 8.8% for the same reasons as the decline in the Q3 2017 sales.
|
|
●
|
S
ales of Reliv Now and LunaRich X represented 16.4% and 13.5%, respectively, of YTD 2017 net sales in the United States. Sales of the Fit3 product line represented 6.9% of net sales in the United States for the YTD 2017 period.
|
|
●
|
Distributor
/preferred customer enrollments decreased by 25.8% and new Master Affiliate qualifications decreased by 13.2% in Q3 2017 compared to the prior year quarter.
|
|
●
|
Distributor retention was
70.0% for the twelve month period ended September 30, 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 Q
3 2017 decreased by 5.1% to $312 at suggested retail value compared to the prior-year quarter. The number of product orders decreased by 14.4% in Q3 2017 compared to the prior year quarter for the same reasons as the overall decrease in sales.
|
International Operations
|
●
|
The average foreign exchange rate for the U.S. dollar for YTD 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 increased versus the U.S. dollar in YTD 2017.
|
|
●
|
We continue to review prices and margins in all of our international markets and
have increased prices in nearly all foreign markets 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 Q
3 2017 decreased by 10.5% and 23.8%, respectively, in local currency compared to the prior-year quarter as the result of decreased distributor activity in the market.
|
|
●
|
Net sales in Mexico
decreased by 18.5% in local currency in Q3 2017 compared to the prior-year quarter. Sales decreased as new distributor enrollments and the number of product orders in Q3 2017 declined by 29.8% and 11.8%, respectively.
|
|
●
|
Net sales in Europe decreased by
26.7% in local currency in Q3 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
43.0% in local currency in Q3 2017 compared to the prior-year quarter led by strong sales growth in the Philippines. Local currency sales in the Philippines improved 48.8% in Q3 2017 as all measures of distributor activity showed strong increases in the market. Regional incentive promotions and local sales campaigns involving our NOW for Kids nutritional product continue to show 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- and nine-month periods ended September 30, 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)
|
|
Three months ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,069
|
|
|
|
100.0
|
%
|
|
$
|
10,785
|
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
1,950
|
|
|
|
21.5
|
|
|
|
2,215
|
|
|
|
20.5
|
|
Distributor royalties and commissions
|
|
|
3,199
|
|
|
|
35.3
|
|
|
|
3,800
|
|
|
|
35.3
|
|
Selling, general and administrative
|
|
|
4,254
|
|
|
|
46.9
|
|
|
|
4,737
|
|
|
|
43.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(334
|
)
|
|
|
(3.7
|
)
|
|
|
33
|
|
|
|
0.3
|
|
Interest income
|
|
|
25
|
|
|
|
0.3
|
|
|
|
26
|
|
|
|
0.2
|
|
Interest expense
|
|
|
(27
|
)
|
|
|
(0.3
|
)
|
|
|
(29
|
)
|
|
|
(0.3
|
)
|
Other income (expense)
|
|
|
(4
|
)
|
|
|
(0.1
|
)
|
|
|
42
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(340
|
)
|
|
|
(3.8
|
)
|
|
|
72
|
|
|
|
0.6
|
|
Benefit for income taxes
|
|
|
(21
|
)
|
|
|
(0.3
|
)
|
|
|
(62
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(319
|
)
|
|
|
(3.5
|
)%
|
|
$
|
134
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share- Basic and Diluted
(1)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
31,854
|
|
|
|
100.0
|
%
|
|
$
|
34,875
|
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
7,114
|
|
|
|
22.3
|
|
|
|
7,729
|
|
|
|
22.2
|
|
Distributor royalties and commissions
|
|
|
11,253
|
|
|
|
35.3
|
|
|
|
12,345
|
|
|
|
35.4
|
|
Selling, general and administrative
|
|
|
13,812
|
|
|
|
43.4
|
|
|
|
15,888
|
|
|
|
45.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(325
|
)
|
|
|
(1.0
|
)
|
|
|
(1,087
|
)
|
|
|
(3.1
|
)
|
Interest income
|
|
|
77
|
|
|
|
0.2
|
|
|
|
81
|
|
|
|
0.2
|
|
Interest expense
|
|
|
(79
|
)
|
|
|
(0.2
|
)
|
|
|
(82
|
)
|
|
|
(0.2
|
)
|
Other income
|
|
|
40
|
|
|
|
0.1
|
|
|
|
226
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(287
|
)
|
|
|
(0.9
|
)
|
|
|
(862
|
)
|
|
|
(2.5
|
)
|
Provision for income taxes
|
|
|
28
|
|
|
|
0.1
|
|
|
|
35
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(315
|
)
|
|
|
(1.0
|
)%
|
|
$
|
(897
|
)
|
|
|
(2.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share- Basic and Diluted
(1)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
$
|
(0.49
|
)
|
|
|
|
|
(1)
|
The three- and nine-month per share amounts for 2016 have been adjusted for the 1-for-7 reverse stock split effective on October 4, 2016.
|
Cost of Products Sold:
|
●
|
The cost of products sold as a percentage of net sales in Q
3 2017 increased by 1.0% compared to the prior-year period, and for YTD 2017, the percentage increased very slightly compared to the prior-year period. For Q3 2017, the cost of products sold was negatively impacted by a free shipping promotion in the U.S. and by slightly lower plant utilization.
|
Distributor Royalties and Commissions:
|
●
|
D
istributor royalties and commissions as a percentage of net sales for Q3 2017 and YTD 2017 remained relatively steady compared to the prior-year periods. 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 $
484,000 in Q3 2017 and declined by $2.08 million in YTD 2017 compared to the prior-year periods.
|
|
●
|
Salaries, other staffing expenses, benefits, and incentive compensation decreased in the aggregate by $
887,000 in YTD 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.
|
|
●
|
Sales and marketing expenses
decreased by $624,000 in YTD 2017 vs. the prior-year period. Significant components of decrease include:
|
|
o
|
Conference and other corporate-sponsored distributor meeting expenses decreased by $2
80,000 as we have reduced the quantity of corporate-sponsored events and the cost of our major distributor conference.
|
|
o
|
Star Director and other distributor bonuses, credit card fees, and other expenses related to the level of sales decreased by $
308,000.
|
|
●
|
Other general and administrative expenses decreased by $
543,000 in YTD 2017 versus the prior-year period.
|
|
o
|
Research & development expenses, along with other foreign product compliance requirements decreased by $
241,000 in YTD 2017 compared to the prior-year period.
|
|
o
|
Other
significant decreases from YTD 2017 vs. YTD 2016 include:
|
|
■
|
Consulting
, legal, and accounting fees decreased by $119,000.
|
|
■
|
Utility expenses decreased by $33,000.
|
|
■
|
Computer software maintenance expenses decreased by $
55,000.
|
|
■
|
Share
holder communication and other SEC-related expenses decreased by $62,000.
|
|
o
|
Offsetting increases include an increase in directors
’ fees of $52,000.
|
Other Income/Expense:
|
●
|
The other income in YTD
2017 and YTD 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 $28,000 for YTD 2017.
|
|
●
|
See Note
5 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
/Loss
:
|
●
|
We reported
a net loss of $319,000 in Q3 2017 compared to net income of $134,000 in the prior-year quarter. For YTD 2017, we reported a net loss of $315,000 compared to a net loss of $897,000 in the prior year-to-date period. The results from operations were significantly impacted by the decrease in net sales of 15.9% in Q3 2017 vs. Q3 2016, partially offset by lower expenses as the result of the continuing impact of the reduction in selling, general and administrative expenses from last year’s cost reduction initiative.
|
Liquidity and Capital Resources
During the first nine months of 2017, we used $593,000 of net cash from operating activities, $336,000 was used in investing activities, and we used $282,000 in financing activities. This compares to $763,000 of net cash provided by operating activities, $59,000 provided by investing activities, and $904,000 used in financing activities in the same period of 2016. Cash and cash equivalents decreased by $1.14 million to $2.47 million as of September 30, 2017 compared to December 31, 2016.
Significant changes in working capital items consisted of a
n increase in inventory of $313,000, and a decrease in accounts payable, accrued expenses, and other noncurrent liabilities of $633,000 in the first nine months of 2017. The increase in inventory is the result of the timing of production and shortfall of sales compared to forecast, and the decrease in accounts payable/accrued expenses is the result of reduced accrued distributor commissions related to the decline in sales in September 2017 and reduced trade payables as of September 30, 2017 compared to December 31, 2016.
Investing activities during the first
nine months of 2017 consisted of an investment of $430,000 for capital expenditures, offset by payments received on a distributor note receivable of $81,000 and proceeds from the sale of equipment for $13,000. Financing activities during the first nine months of 2017 consisted of principal payments of $282,000 on long-term borrowings.
Stockholders’ equity decreased to $14.8 million at September 30, 2017 compared to $14.9 million at December 31, 2016. The decrease is due to our net loss during the first nine months of 2017 of $315,000 offset by a favorable adjustment in foreign currency translation of $134,000. Our working capital balance was $1.80 million at September 30, 2017 compared to $4.31 million at December 31, 2016. The current ratio at September 30, 2017 was 1.29 compared to 1.93 at December 31, 2016. The decrease in our working capital is primarily due to the classification of our long-term debt as a current liability as the maturity of the term loan is within one year.
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 3.48% at September 30, 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 September 30, 2017, there were no outstanding borrowings on the revolving line of credit. In October 2017, we borrowed $500,000 under 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 covenant
s requiring us to maintain net tangible worth of not less than $9.5 million, and i) a cumulative minimum EBITDA requirement of $600,000 and $800,000 for the fiscal periods ending 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 September 30, 2017, we were in compliance with all applicable covenants.
We anticipate that we will be able to refinance our term loan and renew our revolving line of credit with our current lender prior to the respective maturity dates of each agreement; however, there can be no assurance that we will be able to do so. Management believes
that the cash on hand and our ability, if necessary, to borrow a significant portion of or liquidate the cash surrender value of our key-man life insurance policy, will be sufficient to meet our working capital requirements and 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 September 30, 2017.
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, 2017. 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, 2017, 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 2017 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II
– OTHER INFORMATION
I
tem No. 6
–
Exhibits