Reliv International (RELV) – Reverse Split – $300 Upside

Current Price: $3.60

Offer Price: $3.75

Upside: $300 (for 1999 shares)

Expiration Date: 29th of November

Information Statement

The idea was shared by Sieg.

This is a rather standard reverse/forward split with the aim to deregister and delist. In some ways this transaction is similar but potentially riskier than the recently closed WSTL case. RELV is an illiquid nanocap, however, trading volume improved after the announcement ($50k+ per day).

On the 16th of October, nutritional supplements MLM retailer Reliv International announced intentions to conduct a 1 for 2000 reverse/forward stock split, in order to reduce the number of shareholders below 300, deregister from SEC and delist from Nasdaq afterwards. All fractional shareholders will get cashed out at $3.75/share. 51% of shareholders (including 40% from directors) already gave consent for the transaction, and no further approval is required. The company plans to cash-out c. 20% of all outstanding shares or 40% of minority shareholders. Beneficial owners are expected to be treated in the same way as record holders. The split is scheduled to become effective on or about the 29th of November.

The company expects that the transaction costs should be $1.5m out of which $1.4m is for cashing-out of fractional shareholders and $0.1m for transaction fees. However, as of Q2 the company had $2.7m of cash on hand + $4m from the new loan, which is more than enough to cover any increases in transaction costs and, in fact, buy out all of the minority shareholders, if needed (it is not clear if part of the loan is meant to be used for operation purposes).

Overall, it seems changes are happening in Reliv and that management (mostly founding family) might be interested not only to cut the costs of being a public company but also to buy-out large part of minority shareholders:

• The company is controlled by Montgomery Family (owns 40%) – founder/chairman/ex-CEO Robert L. Montgomery and two of his sons. In 2018 the CEO role had been passed down to Ryan Montgomery. This appeared to be the turning point for the company as the new CEO immediately started looking for new ways to minimize expenses. In 2018, management started looking into potential delisting. In Jan’19 manufacturing operations were outsourced – all machinery and equipment were sold and manufacturing facilities were leased. The road to delisting appeared to be longer than expected due to difficulties in raising funds. However, the loan has already been secured, and this is no longer an issue.
• The business itself has seen revenue declines for many years and has operated just below breakeven on average, however, in some quarters RELV has nevertheless generated positive cashflow. The expected public listing savings ($300/year) should put the operations quite close or above breakeven.
• RELV trades at a significant discount to BV ($6.59/share), which is mostly cash ($2.7m) + inventory ($3m), partially offset by working capital liabilities, as well as depreciated real estate assets ($4.3m). Inventory should be rather liquid and stands at only 20% of annual sales. The manufacturing facility – likely the largest part of RE assets – has now been leased-out until 2026 and generates substantial revenues (about $0.8m/year), so it is quite likely that the value of RE assets is understated on the balance sheet.
• Finally, RELV might be an attractive acquisition target for a larger MLM peer. Top executive salaries alone sum up to $1m annually (vs. $6.5m market cap) and seem to be easy cost savings in merged operations. This would push RELV operations significantly above breakeven.

Risks

The major risk is transaction termination or term amendment. The proxy states that if the transaction costs become too high, the offer might get terminated:

If on the date immediately preceding the Effective Date, we believe that the cash required to pay for the Stock Split exceeds our reasonable estimate of the amount of cash necessary to consummate the Stock Split, the Board reserves the right not to effect the Stock Split.

So far there is no guarantee that insiders are truly ready to buy out all of the minority shareholders (if needed), whereas pile-up of merger arbitrageurs could easily increase transaction costs above the initial $1.5m. The total amount of shares traded in September was only 63k, while in the two weeks since the split announcement 230k shares have switched hands (vs 373k that management expects to cash out) in October alone. This indicates that transactions costs are likely to end up higher than the initial estimates.

RELV also retained the right to amend the split ratio in the range of 1 for 500 to 1 for 3000.

If the transaction gets canceled, the downside to pre-announcement is likely to be around 10% only. A few days before the announcement share price jumped up to $3.94/share, while in the first half of October shares traded at around $3.30/share levels.

However, if the offer goes through at amended terms (lower ratio), the downside could be much higher due to selling pressure from arbitrageurs as well as delisting from NASDAQ

In the middle of November, RELV is expected to post Q3 results. The chances are that these won’t be great (based on Q2 and multi-year performance deterioration) and could result in further share price drop in case the transaction is canceled/amended.

Reliv International

Reliv International is a multi-level marketing retailer of a proprietary line of nutritional supplements (19 products). The business is clearly a melting ice cube and distributors are leaving the ship. Since 2015 till 2019 the number of total distributors went down from 45k to 25k, revenues decreased from $57m to $35m. The most recent Q2 press release states doubts about its ability to continue operations for one more year (which is quite surprising given large net cash balance):

As of June 30, 2020, we had $2,730,672 in cash and cash equivalents which may not be sufficient to fund our planned operations through one year subsequent to the date of the issuance of these condensed financial statements, and accordingly, there is substantial doubt about our ability to continue as a going concern.

The company has first started thinking about going dark in 2018, however, it appeared that its liquidity situation won’t allow them to get a loan without a personal guarantee of certain directors:

In 2019 management also began to explore bank and other financing that may be available to it. After an exhaustive search, the Company determined that it would be unable to secure financing to fund the Stock Split Transaction and other capital needs of the Company without certain officers and other insiders of the Company providing a guarantee of the Company’s obligations to the lender.

This year, it managed to secure a $4m loan from Enterprise Bank, secured by “substantially all of the Company’s assets”. Two directors (including Robert Montgomery) and a certain substantial shareholder have guaranteed a portion of the loan.

COVID-19 hasn’t impacted the business by much so far and Q1 was quite decent with revenues going up 10% YoY, positive operating, and net income. However, the change might have been short-lived. As explained by the CEO in Q1’20 press release:

We recognize a portion of the increase may be due to product supply concerns caused by these uncertain times. We have reassured customers of the continued supply of our products, and in an effort to continue the upward trend in consumer sales, we began offering free enrollments in our Preferred Customer program in April and are continuing this incentive during the month of May.

Q2 went back to the usual track of revenue declines (-3% YoY), operating losses, and negative net income.

Directors own 40% and the split will increase their ownership to 49%.