UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the |
OR
|
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to_________
Commission File Number
000-19932
RELIV’RELIV’ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware | ||||
(State or other jurisdiction of | incorporation or organization) | (I.R.S. Employer Identification Number) | ||
136 Chesterfield Industrial Boulevard, Chesterfield, Missouri | 63005 | |||
(Address of principal executive offices) | (Zip Code) |
(636) 537-9715
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☑ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 | RELV | NASDAQ Capital Market |
The number of shares outstanding of the Registrant’s common stock as of November 3, 2017May 8, 2020 was 1,845,1601,746,449 (excluding treasury shares).
INDEX
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Item No. 1 | Financial Statements (Unaudited) | 1 | ||
Item No. 2 | Management’s Discussion and Analysis of | |||
Financial Condition and Results of Operations | 18 | |||
Item No. 4 | Controls and Procedures | 27 | ||
Part II – Other Information | ||||
Item No. 6 | Exhibits | 27 |
PART I -- FINANCIAL INFORMATION | |||
Item No. 1 - Financial Statements | |||
Reliv International, Inc. and Subsidiaries | |||
Condensed Consolidated Balance Sheets |
September 30 | December 31 | |||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,465,411 | $ | 3,606,817 | ||||
Accounts receivable, less allowances of $25,800 in 2017 and $26,700 in 2016 | 33,705 | 126,113 | ||||||
Accounts and note due from employees and distributors | 138,684 | 139,931 | ||||||
Inventories | ||||||||
Finished goods | 2,702,561 | 2,629,541 | ||||||
Raw materials | 2,035,138 | 1,728,136 | ||||||
Sales aids and promotional materials | 139,895 | 130,153 | ||||||
Total inventories | 4,877,594 | 4,487,830 | ||||||
Refundable income taxes | 48,247 | 97,194 | ||||||
Prepaid expenses and other current assets | 500,458 | 474,183 | ||||||
Total current assets | 8,064,099 | 8,932,068 | ||||||
Other assets | 335,711 | 305,137 | ||||||
Cash surrender value of life insurance | 3,056,387 | 2,965,981 | ||||||
Note receivable due from distributor | 1,434,739 | 1,521,005 | ||||||
Deferred income taxes | 535,000 | 487,000 | ||||||
Intangible assets, net | 2,230,745 | 2,400,234 | ||||||
Property, plant and equipment: | ||||||||
Land and land improvements | 905,190 | 905,190 | ||||||
Building | 9,943,531 | 9,943,512 | ||||||
Machinery & equipment | 4,707,262 | 4,329,329 | ||||||
Office equipment | 1,181,443 | 1,203,868 | ||||||
Computer equipment & software | 2,250,209 | 2,218,766 | ||||||
18,987,635 | 18,600,665 | |||||||
Less: Accumulated depreciation | 13,189,768 | 12,746,363 | ||||||
Net property, plant and equipment | 5,797,867 | 5,854,302 | ||||||
Total assets | $ | 21,454,548 | $ | 22,465,727 |
March 31 | December 31 | |||||||
2020 | 2019 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,828,639 | $ | 1,630,779 | ||||
Accounts receivable, less allowances of $5,000 in 2020 and 2019 | 215,045 | 107,369 | ||||||
Notes & accounts receivables and deposits - related parties | 1,091,247 | 1,099,228 | ||||||
Inventories | ||||||||
Finished goods | 2,498,333 | 2,275,306 | ||||||
Raw materials | 208,666 | 305,571 | ||||||
Sales aids and promotional materials | 102,830 | 120,811 | ||||||
Total inventories | 2,809,829 | 2,701,688 | ||||||
Refundable income taxes | 245,503 | 22,406 | ||||||
Prepaid expenses and other current assets | 663,535 | 304,048 | ||||||
Total current assets | 7,853,798 | 5,865,518 | ||||||
Notes and accounts receivables - related parties | 2,390,930 | 2,418,921 | ||||||
Operating lease right-to-use assets | 265,936 | 354,440 | ||||||
Intangible assets, net | 1,665,782 | 1,722,277 | ||||||
Equity investment | 505,000 | 505,000 | ||||||
Property, plant and equipment: | ||||||||
Land and land improvements | 905,190 | 905,190 | ||||||
Building | 10,145,645 | 10,145,005 | ||||||
Office & other equipment | 1,230,768 | 1,237,142 | ||||||
Computer equipment & software | 2,197,639 | 2,240,063 | ||||||
14,479,242 | 14,527,400 | |||||||
Less: Accumulated depreciation | 10,119,806 | 10,086,560 | ||||||
Net property, plant and equipment | 4,359,436 | 4,440,840 | ||||||
Total assets | $ | 17,040,882 | $ | 15,306,996 |
See notes to financial statements. |
Reliv International, Inc. and Subsidiaries | ||||||||
Condensed Consolidated Balance Sheets |
September 30 | December 31 | |||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Liabilities and stockholders' equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses: | ||||||||
Trade accounts payable and other accrued expenses | $ | 1,991,902 | $ | 2,352,692 | ||||
Distributors' commissions payable | 1,144,612 | 1,402,370 | ||||||
Sales taxes payable | 175,188 | 234,153 | ||||||
Payroll and payroll taxes payable | 298,017 | 245,090 | ||||||
Total accounts payable and accrued expenses | 3,609,719 | 4,234,305 | ||||||
Income taxes payable | 26,950 | - | ||||||
Current portion of long-term debt | 2,626,661 | 389,096 | ||||||
Total current liabilities | 6,263,330 | 4,623,401 | ||||||
Noncurrent liabilities: | ||||||||
Long-term debt, less current portion | - | 2,518,341 | ||||||
Other noncurrent liabilities | 432,389 | 409,813 | ||||||
Total noncurrent liabilities | 432,389 | 2,928,154 | ||||||
Stockholders' equity: | ||||||||
Preferred stock, par value $.001 per share; 500,000 shares authorized; -0- shares issued and outstanding in 2017 and 2016 | - | - | ||||||
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 | 2,110 | 2,110 | ||||||
Additional paid-in capital | 30,590,476 | 30,565,144 | ||||||
Accumulated deficit | (9,599,292 | ) | (9,284,317 | ) | ||||
Accumulated other comprehensive loss: | ||||||||
Foreign currency translation adjustment | (895,905 | ) | (1,030,205 | ) | ||||
Treasury stock | (5,338,560 | ) | (5,338,560 | ) | ||||
Total stockholders' equity | 14,758,829 | 14,914,172 | ||||||
Total liabilities and stockholders' equity | $ | 21,454,548 | $ | 22,465,727 |
March 31 | December 31 | |||||||
2020 | 2019 | |||||||
(unaudited) | ||||||||
Liabilities and stockholders' equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses: | ||||||||
Trade accounts payable and other accrued expenses | $ | 2,155,345 | $ | 1,565,198 | ||||
Distributors' commissions payable | 1,210,104 | 891,492 | ||||||
Sales taxes payable | 267,909 | 139,542 | ||||||
Payroll and payroll taxes payable | 320,718 | 212,716 | ||||||
Total accounts payable and accrued expenses | 3,954,076 | 2,808,948 | ||||||
Income taxes payable | 161,113 | 121,177 | ||||||
Deferred revenue | 330,763 | 322,261 | ||||||
Operating lease liabilities | 178,463 | 236,771 | ||||||
Revolving line of credit | 500,000 | 500,000 | ||||||
Total current liabilities | 5,124,415 | 3,989,157 | ||||||
Noncurrent liabilities: | ||||||||
Operating lease liabilities | 76,648 | 103,580 | ||||||
Other noncurrent liabilities | 115,451 | 112,616 | ||||||
Total noncurrent liabilities | 192,099 | 216,196 | ||||||
Stockholders' equity: | ||||||||
Preferred stock, par value $.001 per share; 500,000 shares authorized; -0- shares issued and outstanding | - | - | ||||||
Common stock, par value $.001 per share; 5,000,000 authorized; 2,110,013 shares issued and 1,746,449 shares outstanding | 2,110 | 2,110 | ||||||
Additional paid-in capital | 30,643,771 | 30,643,771 | ||||||
Accumulated deficit | (12,093,159 | ) | (12,755,495 | ) | ||||
Accumulated other comprehensive loss: | ||||||||
Foreign currency translation adjustment | (976,931 | ) | (937,320 | ) | ||||
Treasury stock | (5,851,423 | ) | (5,851,423 | ) | ||||
Total stockholders' equity | 11,724,368 | 11,101,643 | ||||||
Total liabilities and stockholders' equity | $ | 17,040,882 | $ | 15,306,996 |
See notes to financial statements. |
Reliv International, Inc. and Subsidiaries |
Condensed Consolidated Statements of Net |
Income |
(unaudited) | Three months ended September 30 | Nine months ended September 30 | Three months ended March 31 | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||
Product sales | $ | 8,385,999 | $ | 9,972,547 | $ | 29,479,924 | $ | 32,181,585 | $ | 9,548,817 | $ | 8,810,997 | ||||||||||||
Handling & freight income | 683,324 | 812,868 | 2,373,809 | 2,693,602 | ||||||||||||||||||||
Freight income | 558,095 | 519,941 | ||||||||||||||||||||||
Other revenue | 175,753 | 158,566 | ||||||||||||||||||||||
Net sales | 9,069,323 | 10,785,415 | 31,853,733 | 34,875,187 | 10,282,665 | 9,489,504 | ||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||||
Cost of products sold | 1,949,670 | 2,214,633 | 7,113,647 | 7,729,508 | ||||||||||||||||||||
Cost of goods sold | 2,654,843 | 2,433,732 | ||||||||||||||||||||||
Distributor royalties and commissions | 3,199,596 | 3,799,791 | 11,252,922 | 12,345,171 | 3,328,455 | 3,117,572 | ||||||||||||||||||
Selling, general and administrative | 4,253,675 | 4,737,305 | 13,811,814 | 15,887,901 | 3,777,682 | 3,739,527 | ||||||||||||||||||
Total costs and expenses | 9,402,941 | 10,751,729 | 32,178,383 | 35,962,580 | 9,760,980 | 9,290,831 | ||||||||||||||||||
Income (loss) from operations | (333,618 | ) | 33,686 | (324,650 | ) | (1,087,393 | ) | |||||||||||||||||
Income from operations | 521,685 | 198,673 | ||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest income | 25,277 | 26,199 | 76,630 | 80,689 | 39,662 | 49,262 | ||||||||||||||||||
Interest expense | (27,183 | ) | (28,982 | ) | (79,472 | ) | (82,161 | ) | (6,105 | ) | (5,412 | ) | ||||||||||||
Other income / (expense) | (4,579 | ) | 41,575 | 40,517 | 226,519 | |||||||||||||||||||
Other income (expense) | (70,906 | ) | (5,428 | ) | ||||||||||||||||||||
Gain on sale of fixed assets | - | 434,549 | ||||||||||||||||||||||
Income (loss) before income taxes | (340,103 | ) | 72,478 | (286,975 | ) | (862,346 | ) | |||||||||||||||||
Income before income taxes | 484,336 | 671,644 | ||||||||||||||||||||||
Provision (benefit) for income taxes | (21,000 | ) | (62,000 | ) | 28,000 | 35,000 | (178,000 | ) | 48,000 | |||||||||||||||
Net income (loss) | $ | (319,103 | ) | $ | 134,478 | $ | (314,975 | ) | $ | (897,346 | ) | |||||||||||||
Net income | $ | 662,336 | $ | 623,644 | ||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation adjustment | 43,666 | (74,503 | ) | 134,300 | (296,116 | ) | (39,611 | ) | 22,211 | |||||||||||||||
Comprehensive income (loss) | $ | (275,437 | ) | $ | 59,975 | $ | (180,675 | ) | $ | (1,193,462 | ) | |||||||||||||
Comprehensive income | $ | 622,725 | $ | 645,855 | ||||||||||||||||||||
Earnings (loss) per common share - Basic | $ | (0.17 | ) | $ | 0.07 | $ | (0.17 | ) | $ | (0.49 | ) | |||||||||||||
Earnings per common share - Basic & Diluted | $ | 0.38 | $ | 0.36 | ||||||||||||||||||||
Weighted average shares | 1,845,000 | 1,846,000 | 1,845,000 | 1,846,000 | 1,746,000 | 1,746,000 | ||||||||||||||||||
Earnings (loss) per common share - Diluted | $ | (0.17 | ) | $ | 0.07 | $ | (0.17 | ) | $ | (0.49 | ) | |||||||||||||
Weighted average shares | 1,845,000 | 1,846,000 | 1,845,000 | 1,846,000 |
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Nine months ended September 30 | ||||||||
2017 | 2016 | |||||||
Operating activities: | ||||||||
Net loss | $ | (314,975 | ) | $ | (897,346 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 653,625 | 734,763 | ||||||
Stock-based compensation | 25,332 | 52,083 | ||||||
Non-cash life insurance policy accretion | (90,406 | ) | (87,732 | ) | ||||
(Gain) loss on sale of property, plant and equipment | (8,906 | ) | - | |||||
Deferred income taxes | (6,000 | ) | 27,000 | |||||
Foreign currency transaction (gain) loss | (29,299 | ) | (191,091 | ) | ||||
(Increase) decrease in accounts receivable and accounts due from employees and distributors | 98,634 | 81,571 | ||||||
(Increase) decrease in inventories | (313,382 | ) | 868,287 | |||||
(Increase) decrease in refundable income taxes | 49,500 | (2,153 | ) | |||||
(Increase) decrease in prepaid expenses and other current assets | (21,418 | ) | (71,431 | ) | ||||
(Increase) decrease in other assets | (30,196 | ) | (4,180 | ) | ||||
Increase (decrease) in income taxes payable | 26,950 | - | ||||||
Increase (decrease) in accounts payable & accrued expenses and other noncurrent liabilities | (632,607 | ) | 253,012 | |||||
Net cash provided by (used in) operating activities | (593,148 | ) | 762,783 | |||||
Investing activities: | ||||||||
Purchase of property, plant and equipment | (430,083 | ) | (18,686 | ) | ||||
Proceeds from the sale of property, plant and equipment | 13,001 | 912 | ||||||
Payments received on distributor note receivable | 81,254 | 76,534 | ||||||
Net cash provided by (used in) investing activities | (335,828 | ) | 58,760 | |||||
Financing activities: | ||||||||
Principal payments on long-term borrowings | (282,496 | ) | (904,461 | ) | ||||
Net cash used in financing activities | (282,496 | ) | (904,461 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 70,066 | (9,337 | ) | |||||
Increase (decrease) in cash and cash equivalents | (1,141,406 | ) | (92,255 | ) | ||||
Cash and cash equivalents at beginning of period | 3,606,817 | 3,262,263 | ||||||
Cash and cash equivalents at end of period | $ | 2,465,411 | $ | 3,170,008 |
See notes to financial statements. |
Reliv International, Inc. and Subsidiaries | |||||||
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Three months ended March 31 | ||||||||
2020 | 2019 | |||||||
Operating activities: | ||||||||
Net income | $ | 662,336 | $ | 623,644 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 143,789 | 144,893 | ||||||
Stock-based compensation | - | 5,306 | ||||||
Non-cash other revenue | - | (86,433 | ) | |||||
Non-cash miscellaneous loss | - | 24,618 | ||||||
(Gain) loss on sale of property, plant and equipment | - | (434,549 | ) | |||||
Foreign currency transaction (gain) loss | 87,162 | 5,925 | ||||||
(Increase) decrease in trade, accounts & notes receivable, and deposits from related parties | (104,389 | ) | (839,989 | ) | ||||
(Increase) decrease in inventories | (189,667 | ) | 705,371 | |||||
(Increase) decrease in refundable income taxes | (223,097 | ) | 1,918 | |||||
(Increase) decrease in prepaid expenses and other current assets | (364,638 | ) | (251,056 | ) | ||||
(Increase) decrease in other assets | - | (49,681 | ) | |||||
Increase (decrease) in income taxes payable | 40,411 | 42,522 | ||||||
Increase (decrease) in accounts payable & accrued expenses, deferred revenue, and other noncurrent liabilities | 1,209,504 | (19,235 | ) | |||||
Net cash provided by (used in) operating activities | 1,261,411 | (126,746 | ) | |||||
Investing activities: | ||||||||
Purchase of property, plant and equipment | (9,207 | ) | (38,890 | ) | ||||
Payments received on notes receivables - related parties | 31,928 | 49,691 | ||||||
Net cash provided by investing activities | 22,721 | 10,801 | ||||||
Financing activities: | ||||||||
Proceeds from line of credit borrowings | - | 500,000 | ||||||
Net cash provided by financing activities | - | 500,000 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (86,272 | ) | 7,058 | |||||
Increase (decrease) in cash and cash equivalents | 1,197,860 | 391,113 | ||||||
Cash and cash equivalents at beginning of period | 1,630,779 | 1,989,974 | ||||||
Cash and cash equivalents at end of period | $ | 2,828,639 | $ | 2,381,087 | ||||
Supplementary disclosure of cash flow information: | ||||||||
Noncash investing & financing transactions (Note 3): |
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Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) | $ | (319,103 | ) | $ | 134,478 | $ | (314,975 | ) | $ | (897,346 | ) | |||||
Denominator: | ||||||||||||||||
Denominator for basic earnings (loss) per share--weighted average shares | 1,845,000 | 1,846,000 | 1,845,000 | 1,846,000 | ||||||||||||
Dilutive effect of employee stock options and other warrants | - | - | - | - | ||||||||||||
Denominator for diluted earnings (loss) per share--adjusted weighted average shares | 1,845,000 | 1,846,000 | 1,845,000 | 1,846,000 | ||||||||||||
Basic earnings (loss) per share | $ | (0.17 | ) | $ | 0.07 | $ | (0.17 | ) | $ | (0.49 | ) | |||||
Diluted earnings (loss) per share | $ | (0.17 | ) | $ | 0.07 | $ | (0.17 | ) | $ | (0.49 | ) |
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Condensed Consolidated Statements of | |||||||
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Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Shares | Amount | Total | |||||||||||||||||||||||||
Balance at December 31, 2019 | 2,110,013 | $ | 2,110 | $ | 30,643,771 | $ | (12,755,495 | ) | $ | (937,320 | ) | 363,564 | $ | (5,851,423 | ) | $ | 11,101,643 | |||||||||||||||
Net income | - | - | - | 662,336 | - | - | - | 662,336 | ||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (39,611 | ) | - | - | (39,611 | ) | ||||||||||||||||||||||
Total comprehensive income | 622,725 | |||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 2,110,013 | $ | 2,110 | $ | 30,643,771 | $ | (12,093,159 | ) | $ | (976,931 | ) | 363,564 | $ | (5,851,423 | ) | $ | 11,724,368 |
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Shares | Amount | Total | |||||||||||||||||||||||||
Balance at December 31, 2018 | 2,110,013 | $ | 2,110 | $ | 30,622,547 | $ | (12,311,138 | ) | $ | (982,095 | ) | 264,853 | $ | (5,338,560 | ) | $ | 11,992,864 | |||||||||||||||
Net income | - | - | - | 623,644 | - | - | - | 623,644 | ||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | 22,211 | - | - | 22,211 | ||||||||||||||||||||||||
Total comprehensive income | 645,855 | |||||||||||||||||||||||||||||||
Treasury stock acquired (Note 2) | - | - | - | - | - | 99,200 | (540,144 | ) | (540,144 | ) | ||||||||||||||||||||||
Other | - | - | - | - | - | (489 | ) | 27,281 | 27,281 | |||||||||||||||||||||||
Stock-based compensation | - | - | 5,306 | - | - | - | - | 5,306 | ||||||||||||||||||||||||
Balance at March 31, 2019 | 2,110,013 | $ | 2,110 | $ | 30,627,853 | $ | (11,687,494 | ) | $ | (959,884 | ) | 363,564 | $ | (5,851,423 | ) | $ | 12,131,162 |
liabilities in markets that are not active.
Level 3:
Unobservable inputs that reflect the reporting entity's own assumptions.
The carrying amount and fair value of the Company's financial instruments are approximately as follows:
Description | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Long-term debt | $ | 2,626,661 | $ | 2,626,661 | - | $ | 2,626,661 | - | ||||||||||||
Note receivable | 1,548,910 | 1,742,000 | - | 1,742,000 | - | |||||||||||||||
Marketable securities | 327,000 | 327,000 | $ | 327,000 | - | - | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Long-term debt | $ | 2,907,437 | $ | 2,907,437 | - | $ | 2,907,437 | - | ||||||||||||
Note receivable | 1,630,164 | 1,812,000 | - | 1,812,000 | - | |||||||||||||||
Marketable securities | 296,000 | 296,000 | $ | 296,000 | - | - |
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Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2020
1. Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments (which primarily include normal recurring accruals) which we believe are necessary to present fairly the financial position, results of operations and cash flows. All significant intercompany accounts and transactions have been eliminated. 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, 2019, filed March 27, 2020 with the Securities and Exchange Commission.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in government authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our distributors, customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees have been working remotely since March 2020.
The ultimate impact of the COVID-19 pandemic on our worldwide operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments may direct resulting in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on our business, financial condition and results of operations.
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under unanticipated conditions or assumptions.
Concentrations of Risk
Effective January 1, 2019, we have entered into outsourcing agreements with Nutracom LLC (“Nutracom”) to manufacture our nutritional and dietary supplements and for warehousing and fulfillment services for the U.S. distribution of our products. Nutracom has also issued promissory notes to us for the acquisition of our manufacturing and fulfillment operations. Any inability of Nutracom to deliver these contracted services or to repay the promissory notes could adversely impact our future operating results and valuation of our Nutracom equity investment. See Note 2 and Note 3 for further discussion of our relationship with Nutracom.
Variable Interest Entities (VIE) - Unconsolidated
Effective January 1, 2019, we have a financial interest in Nutracom. If we are the primary beneficiary of a VIE, we are required to consolidate the VIE in our consolidated financial statements. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our VIE evaluation requires significant assumptions and judgments.
We do not have the power to direct the significant activities of Nutracom, primarily because we do not have governance rights. We also do not participate in the annual profits or losses of Nutracom. Therefore, we do not consolidate the financial results of Nutracom in our consolidated financial statements. We account for our financial interest in Nutracom as an equity investment measured at cost minus impairment, if any. A cost method equity investment is subject to periodic impairment review using the other-than-temporary impairment model, which considers the severity and duration of a decline in fair value below cost and our ability and intent to hold the investment for a sufficient period of time to allow for recovery.
See Note 2 and Note 3 for further information on our financial relationship with Nutracom.
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.Accounting Policies (continued)
New Accounting Pronouncements – Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology may result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual financial periods beginning January 1, 2023, with early adoption permitted. Adoption of this standard must be applied on a modified retrospective basis. We are evaluating the potential impact of this standard on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which adds new guidance for accounting for tax law changes, year-to-date losses in interim periods, and certain franchise-type taxes, as well as other changes to simplify accounting for income taxes. This standard will be effective for our interim and annual financial periods beginning January 1, 2021, with early adoption permitted. The adoption methodologies for this standard vary; subject to the specific provision(s) within the standard being adopted. We are evaluating the potential impact of this standard on our consolidated financial statements and related disclosures.
Going Concern
We have incurred operating losses, declining net sales, and negative net cash flows over our most recent five years. Our management estimates that these unfavorable trends are more likely than not to continue for the foreseeable future, and as a result, we will require additional financial support to fund our operations and execute our business plan. As of March 31, 2020, we had $2,828,639 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.
In the event that we do not generate sufficient liquidity from operations and should we be unable to obtain sufficient additional capital or borrowings, we may have to engage in any or all of the following activities: (i) seek to monetize our headquarters building via traditional bank lending or a sale and leaseback-type transaction; (ii) monetizing the note receivable from a distributor; (iii) modify our distributor promotions, incentives, and other activities; (iv) cease operations in certain geographic regions, and (v) reduce employee compensation and benefits.
These actions may have a material adverse impact on our ability to achieve certain of our planned objectives. Even if we are able to source additional funding, we may be forced to significantly reduce our operations or shut down our operations if our business operating performance does not improve. These condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event we can no longer continue as a going concern.
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
2. Sale of Manufacturing Operations’ Assets
On January 1, 2019, we entered into a Purchase Agreement with Nutracom pursuant to which Nutracom purchased the following assets previously used by us in our manufacturing operations:
● | Inventories (sold at cost of $1.56 million) and, |
● | Machinery and other equipment with a net book value of $565,000 (sold for $1 million; gain on disposal of approximately $435,000). |
Nutracom was formed by our manufacturing operations management which included former officers of the Company. Employees of our manufacturing operations were offered employment by Nutracom.
Prior to its approval of the transaction, our Board of Directors formed a special committee consisting of the Board’s independent directors to review the transaction. To assist in its review, the special committee engaged a qualified third-party expert to render a fairness opinion on the transaction.
Concurrently with the execution of the Purchase Agreement, we entered into several agreements with Nutracom including a product supply agreement for a term of seven years, a fulfillment agreement, and a facility lease agreement whereby Nutracom will lease manufacturing, warehouse, and certain office space of our headquarters building from us for a term of seven years, with a Nutracom option for an additional five-year term. Annual lease amounts range from $193,000 to $410,000 over the seven-year term.
Nutracom provided the following consideration to us for the manufacturing operations and related identified assets and agreements:
● | $1 million secured promissory note, seven year term, fixed interest rate of 5.5%, principal and interest payable monthly. (See June 1, 2019 note modification within this Note 2). |
● | $764,344 unsecured promissory note, seven year term, fixed interest rate of 7.0%, interest only payable for the first two years with monthly payment of principal and interest thereafter under a ten-year amortization schedule. The face value of the unsecured note includes the first year’s rent due under the facility lease agreement. (See October 1, 2019 note modification within this Note 2). |
● | Nutracom management transferred to us its ownership of 99,200 shares of our common stock valued at $540,144. |
● | Nutracom issued to us a non-voting Class B 15% equity membership interest in Nutracom, LLC. The Class B interest does not share in any profits or losses from operations of Nutracom. As defined within the Nutracom Operating Agreement, upon any merger, consolidation, disposition, or liquidation of Nutracom, the Class B equity membership interest converts to a Class A equity membership interest. |
● | Commencing January 1, 2020, our Class B interest is entitled to receive a percentage, (ranging from 1.0% to 1.25%) of Nutracom’s annual revenues (excluding Nutracom’s revenues from sales to us). |
Our non-voting Class B 15% equity membership interest in Nutracom was valued by the aforementioned third-party expert at $505,000. As our non-voting membership interest does not participate in the management of Nutracom, nor do we share in any Nutracom operating profits or losses, we are accounting for our Nutracom equity investment under the cost method.
We accounted for the aforementioned Nutracom transactions in our first quarter 2019 financial results.
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
2. Sale of Manufacturing Operations’ Assets (continued)
Promissory Note Modification – June 1, 2019
On June 1, 2019, we entered into an Agreement with Nutracom to modify the Secured Promissory Note originally issued to us by Nutracom on January 1, 2019, as follows:
● | Effective June 1, 2019, the outstanding balance of the Secured Promissory Note was reduced by $500,000 to $460,583 with a corresponding reduction of $500,000 to our outstanding vendor obligation due Nutracom under our ongoing product supply agreement. |
● | The $460,583 remaining Secured Promissory Note was exchanged with Nutracom for a newly issued June 1, 2019 Nutracom unsecured promissory note for the same amount under the following terms: fixed interest rate of 6.0% with interest only payable monthly through December 2020. Beginning January 1, 2021, principal and interest of $8,904 will be payable monthly for 60 months. |
Promissory Note Modification – October 1, 2019
In December 2019, we entered into an Agreement with Nutracom to modify the Unsecured Promissory Note originally issued to us by Nutracom on January 1, 2019, as follows:
● | Effective October 1, 2019, the outstanding balance of the January 1, 2019 Unsecured Promissory Note of $764,344 was reduced to $711,163. The reduction of $53,181 in the Note’s balance represents Nutracom’s return to us of now-expired inventories originally acquired by Nutracom from us on January 1, 2019. |
● | The $711,163 remaining balance of the January 1, 2019 Unsecured Promissory Note was exchanged with Nutracom for a newly issued October 1, 2019 Nutracom Unsecured Promissory Note for the same amount under the following terms: fixed interest rate of 7.0% with interest only payable monthly through December 2020. Beginning January 1, 2021, principal and interest of $8,257, under a ten-year amortization schedule, will be payable monthly for 60 months, with a balloon payment of all remaining principal and interest due January 1, 2026. |
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
3. Related Parties
The following summarizes our related party activities with Nutracom and a significant distributor of the Company.
March 31 | December 31 | |||||||
Assets and liabilities - related parties | 2020 | 2019 | ||||||
Notes & accounts receivables and deposits - current | ||||||||
Deposits with Nutracom for inventory | $ | 887,887 | $ | 941,154 | ||||
Note receivable - distributor | 132,598 | 130,629 | ||||||
Note receivable - Nutracom unsecured DTD 6/1/2019 | 19,904 | - | ||||||
Note receivable - Nutracom unsecured DTD 10/1/2019 | 12,398 | - | ||||||
Other miscellaneous receivables | 38,460 | 27,445 | ||||||
$ | 1,091,247 | $ | 1,099,228 | |||||
Notes & accounts receivables - non-current | ||||||||
Note receivable - distributor | $ | 1,117,546 | $ | 1,151,443 | ||||
Note receivable - Nutracom unsecured DTD 6/1/2019 | 440,679 | 460,583 | ||||||
Note receivable - Nutracom unsecured DTD 10/1/2019 | 698,765 | 711,163 | ||||||
Unbilled receivables: Straight line rent revenue greater than rental billings | 133,940 | 95,732 | ||||||
$ | 2,390,930 | $ | 2,418,921 | |||||
Equity investment in Nutracom | $ | 505,000 | $ | 505,000 | ||||
Liability captions with Nutracom balances included therein | ||||||||
Trade accounts payable and other accrued expenses | $ | 459,978 | $ | 430,907 |
The following table presents scheduled principal payments to be received on the distributor and Nutracom promissory notes receivable:
Remainder of 2020 | $ | 98,701 | ||
2021 | 271,037 | |||
2022 | 288,294 | |||
2023 | 306,655 | |||
2024 | 326,190 | |||
Thereafter | 1,131,013 | |||
$ | 2,421,890 |
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
3. Related Parties (continued)
Three months ended March 31 | ||||||||
Revenue and expense - related parties | 2020 | 2019 | ||||||
Other revenue | $ | 175,753 | $ | 158,566 | ||||
Selling, general and administrative expense: | ||||||||
Fullfillment & professional fees | 159,984 | 151,102 | ||||||
Interest income on promissory notes | 38,346 | 47,843 | ||||||
Royalty income (other income/expense) | 13,872 | - | ||||||
Gain on sale of fixed assets | - | 434,549 | ||||||
Finished goods inventory purchased from Nutracom | $ | 2,036,600 | $ | 979,900 |
At March 31, 2020, we had $1.01 million in commitments (net of deposits) to purchase finished goods inventory from Nutracom.
Supplementary Disclosure of Cash Flows Information:
We incurred the following noncash investing and financing transactions on January 1, 2019 relating to our transactions with Nutracom:
2019 | ||||
January 1, 2019 | ||||
Sale of fixed assets | $ | 1,000,000 | ||
Sale of inventories | 1,559,488 | |||
First year building rental received in advance | 250,000 | |||
Acquire company common stock for treasury | 540,144 | |||
Acquire equity investment in Nutracom | 505,000 | |||
Secured promissory note received | 1,000,000 | |||
Unsecured promissory note received | 764,344 |
Reliv’ International, Inc. and Subsidiaries |
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September 30 | December 31 | |||||||
2017 | 2016 | |||||||
Term loan | $ | 2,626,661 | $ | 2,843,301 | ||||
Notes payable | - | 64,136 | ||||||
2,626,661 | 2,907,437 | |||||||
Less current portion | 2,626,661 | 389,096 | ||||||
Total long-term debt | $ | - | $ | 2,518,341 |
4.Fair Value of Financial Instruments
Fair value can be measured using valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The carrying amount and fair value of financial instruments were approximately as follows:
Carrying | Fair | |||||||||||||||||||
Description | Amount | Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
March 31, 2020 | ||||||||||||||||||||
Revolving line of credit | $ | 500,000 | $ | 500,000 | - | $ | 500,000 | - | ||||||||||||
Note receivable - distributor | 1,250,144 | 1,372,000 | - | 1,372,000 | - | |||||||||||||||
Notes receivable - Nutracom | 1,171,746 | 1,235,000 | - | - | $ | 1,235,000 | ||||||||||||||
December 31, 2019 | ||||||||||||||||||||
Revolving line of credit | $ | 500,000 | $ | 500,000 | - | $ | 500,000 | - | ||||||||||||
Note receivable - distributor | 1,282,072 | 1,400,000 | - | 1,400,000 | - | |||||||||||||||
Notes receivable - Nutracom | 1,171,746 | 1,169,000 | - | - | $ | 1,169,000 |
Revolving line of credit: The fair value of our revolver loan approximates carrying value as this loan was amended within the past year and has a variable market-based interest rate that resets every thirty days. (Fair value is only disclosed).
Note receivable - distributor: The note receivable - distributor 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. (Fair value is only disclosed)
Notes receivable - Nutracom: The notes receivable - Nutracom represent two fixed rate promissory notes issued by a privately-held entity (PHE). We developed an estimated market discount rate based upon the PHE’s third party incremental variable borrowing rate plus a risk-adjustment factor to estimate the fair value of these notes receivable under a discounted cash flow model. (Fair value is only disclosed).
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
4.Fair Value of Financial Instruments (continued)
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 the respective balances.
5. Debt
On September 30, 2015, we entered into a series of lending agreements with our primary lender which included agreements for a term loan and a revolving credit facility. The term loan was repaid in 2018 and the revolver has been periodically amended and extended.
Effective with a September 11, 2018 amendment, the revolving line of credit’s maximum borrowing amount was $750,000. The revolver’s maturity date was April 29, 2019 and the revolver’s interest rate was based on the 30-day LIBOR plus 2.25%. In January 2019, we borrowed $500,000 under the revolving line of credit.
Effective with a March 25, 2019 amendment, the revolving line of credit’s maturity date was extended to April 28, 2020 and the interest rate was revised to the 30-day LIBOR plus 3.00%. As amended, the revolver’s maximum borrowing amount remains $750,000. At March 31, 2020, outstanding borrowings under the revolving line of credit were $500,000 at an interest rate of 4.36%.
On April 28, 2020, our revolving line of credit agreement was extended six months to October 28, 2020 under the same terms and conditions as the expiring agreement.
Borrowings under the lending agreement continue to be secured by all of our tangible and intangible assets and by a mortgage on the real estate of our headquarters facility. At March 31, 2020, we were in compliance with our loan covenant requirements.
6. Income Taxes
During the fiscal years of 2016 through 2019, we determined that it was more likely than not losses generated in the U.S. and certain foreign jurisdictions will not be realized based on projections of future taxable income, estimated reversals of existing taxable timing differences, and other considerations. In prior years, we recorded a valuation allowance on all of our domestic and foreign deferred tax assets.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became effective in the U.S. Under the CARES Act, U.S. Net Operating Losses (NOLs) arising in our calendar tax years 2018, 2019, and 2020 may be carried back to each of the five tax years preceding the tax year of such loss. Based on this new legislation, at March 31, 2020, we have recorded a $225,000 estimated income tax benefit for NOL carryback.
The effective income tax rate was (36.8)% and 7.1% for the year to date periods ended March 31, 2020 and 2019, respectively. In addition to the CARES Act tax benefit previously described, for each year to date period, the income tax provision amounts include estimated income taxes for one of the Company’s foreign subsidiaries and certain U.S. states.
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
6. Income Taxes (continued)
Tax Audits
One of our foreign subsidiaries had been under local country audit for greater than ten years for alleged deficiencies in various tax types for the years 2004 through 2006. We settled the 2005 and 2006 tax year audits in November 2019. In December 2019, we had an agreement in principle with the local tax authority to settle the tax year 2004 audit. At December 31, 2019, we had an estimated full reserve of approximately $84,000 for resolution of this matter; with such amount remitted to the tax authority in February 2020.
During the third quarter of 2019, the U.S. Internal Revenue Service (IRS) commenced an examination of our 2017 U.S. federal income tax return.
7. Revenue Recognition
We recognize revenue from product sales under a five step process with our independent distributors (including customers) when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Product sales revenue (principally nutritional and dietary supplements) and commission expenses are recorded when control is transferred to the independent distributors, which occurs at the time of shipment. Generally, net sales reflect product sales less the distributor discount of 20 percent to 40 percent of the suggested retail price. We present distributor royalty and commission expense as an operating expense, rather than a reduction to net sales, as these payments are not made to the purchasing distributor. At point of sale, we receive payment by credit card, personal check, or guaranteed funds for contracts from independent distributors and make related commission payments in the following month.
We recognize the performance obligation for membership fees-type revenue over the membership term of generally twelve months. We receive payment for membership fees revenue at the beginning of the membership term and recognize membership fees revenue on a straight-line basis in correlation with the completion of our performance obligation under the membership term. Our remaining unearned membership fees obligation is reported as deferred revenue liability.
We record freight income as a component of net sales and record freight costs as a component of cost of goods sold. Total sales do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting applicable sales taxes.
Other revenue is defined in Note 8 – Lease Revenue.
Actual and estimated sales returns are classified as a reduction of net sales. We estimate and accrue a reserve for product returns based on our return policy and historical experience. Our product returns policy allows for distributors to return product only upon termination of his or her distributorship. Allowable returns are limited to saleable product which was purchased within twelve months of the termination for a refund of 100% of the original purchase price less any distributor royalties and commissions received relating to the original purchase of the returned products. For the year to date periods ending March 31, 2020 and 2019, total returns as a percent of net sales were each 0.04%, respectively.
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
7. Revenue Recognition (continued)
We classify our net sales into three categories of sales products, plus freight income, and other revenue:
Three months ended | ||||||||
March 31 | ||||||||
2020 | 2019 | |||||||
Net sales by product category | ||||||||
Nutritional and dietary supplements | $ | 8,843,151 | $ | 8,497,350 | ||||
Other supplements | 417,229 | - | ||||||
Sales aids, membership fees, and other | 288,437 | 313,647 | ||||||
Freight income | 558,095 | 519,941 | ||||||
Other revenue | 175,753 | 158,566 | ||||||
Total net sales | $ | 10,282,665 | $ | 9,489,504 |
We operate in one reportable segment, a network marketing segment consisting of six operating units that sell nutritional and dietary products to a sales force of independent distributors that sell the products directly to customers. These operating units are based on geographic regions, as follows:
Three months ended | ||||||||
March 31 | ||||||||
2020 | 2019 | |||||||
Net sales by geographic region | ||||||||
United States | $ | 7,842,435 | $ | 7,111,773 | ||||
Australia/New Zealand | 170,122 | 177,048 | ||||||
Canada | 158,661 | 199,399 | ||||||
Mexico | 128,621 | 136,026 | ||||||
Europe (1) | 962,092 | 938,668 | ||||||
Asia (2) | 1,020,734 | 926,590 | ||||||
Total net sales | $ | 10,282,665 | $ | 9,489,504 |
| Europe consists of United Kingdom, Ireland, France, Germany, Austria, and the | ||||||
(2) |
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8. Lease Revenue
Other revenue consists of revenue derived from leasing a portion of our headquarters building to Nutracom effective January 1, 2019. The leased space, encompassing manufacturing, warehouse, and certain office space, is for a term of seven years, with a tenant option for an additional five-year term. Annual lease amounts range from $193,000 to $410,000 over the seven-year term.
We recognize lessor rent revenue on a straight-line basis over the term of the lease. As part of this straight-line methodology, the cumulative rental billings may be greater or less than the financial period’s recognized revenue; such timing differences are recognized on the balance sheet as an accrued other liability or an unbilled rent revenue receivable.
Reliv’ International, Inc. and Subsidiaries
8. Lease Revenue (continued)
Also included in other revenue are billings to the tenant for its share of the facility’s common area costs such as real estate taxes, maintenance, and utilities; totaling approximately $89,000 and $72,000 for the three month periods ending March 31, 2020 and 2019, respectively. These same common area costs plus the tenant’s share of the facilities’ depreciation are recorded as cost of goods sold.
The following table details lessor’s estimated remaining straight-line rent revenue over the seven-year lease term as compared with fixed rent amounts under the lease agreement.
Estimated | ||||||||
Straight-line | Lease Agreement | |||||||
Rent Revenue | Fixed Rent | |||||||
Remainder of 2020 | $ | 259,299 | $ | 144,675 | ||||
2021 | 345,732 | 385,800 | ||||||
2022 | 345,732 | 385,800 | ||||||
2023 | 345,732 | 385,800 | ||||||
2024 | 345,732 | 409,913 | ||||||
Thereafter | 345,733 | 409,912 | ||||||
Total | $ | 1,987,960 | $ | 2,121,900 |
9. Subsequent Events |
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Nine months ended September 30 | ||||||||
2017 | 2016 | |||||||
Income taxes (benefit) at U.S. statutory rate | $ | (98,000 | ) | $ | (293,000 | ) | ||
Change in valuation allowance | 201,000 | 363,000 | ||||||
State income taxes, net of federal benefit | 11,000 | 20,000 | ||||||
Higher / (lower) effective taxes on earnings/losses in certain foreign countries | (103,000 | ) | (50,000 | ) | ||||
Foreign corporate income taxes | 28,000 | 66,000 | ||||||
Other, net | (11,000 | ) | (71,000 | ) | ||||
$ | 28,000 | $ | 35,000 |
As described in Note 5, on April 28, 2020, our revolving line of credit agreement with our primary lender was extended six months to October 28, 2020.
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On May 4, 2020, we executed a promissory note (“SBA Note”) dated April 20, 2020 in the amount of $862,000 with our primary lender under the recently enacted CARES Act Payroll Protection Program (“PPP”). In accordance with the PPP, we will use the loan proceeds of $862,000 primarily for payroll costs. The PPP SBA Note is scheduled to mature April 20, 2022 and has an interest rate of 1.0%. The PPP SBA Note is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.
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FORWARD-LOOKINGFORWARD-LOOKING STATEMENTS
This quarterly report includes both historical and “forward-looking“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 annualquarterly 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. In 2019, we introduced a line of hemp-extract products under the RLV brand name. We sell our products through an international network marketingdirect selling system utilizing independent distributors. Sales in the United States represented approximately 77.8%76.3% of worldwide net sales for the ninethree months ended September 30, 2017 and 78.0% of worldwide net salesMarch 31, 2020 compared to approximately 74.9% for the ninethree months ended September 30, 2016.March 31, 2019. 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, and 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,March 31, 2020, consisted of approximately 34,49013,680 registered customers and 25,550 active 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. Our foreign subsidiaries primarily source their nutritional and dietary inventories in U.S. dollars from our U.S. manufacturer. As a result, exchange rate fluctuations may have an effect on sales and gross margins. U.S. generally accepted accountingAccounting 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.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in government authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our distributors, customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees have been working remotely since March 2020.
The ultimate impact of the COVID-19 pandemic on our worldwide operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments may direct resulting in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material adverse impact on our business, financial condition and results of operations.
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%20% to 40% of suggested retail price, depending on the rank of a particular distributor. Handling and freightFreight income represents the amounts billed to distributors for shipping costs. We record net sales and the related commission expense when the merchandise is shipped. Other revenue included in net sales includes the leasing revenue, plus common area expense billings, on the lease of the manufacturing portion of our building to Nutracom, LLC (“Nutracom”) as of January 1, 2019.
Our primary expenses include cost of products sold, distributor royalties and commissions and selling, general and administrative expenses.
CostOur cost of productsgoods sold primarily consists of expenses related to raw materials, labor, quality control and overhead directly associatedthe purchase price of the products, along 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.where applicable. Cost of productsgoods sold is impacted byalso include 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.costs related to leasing income.
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 suggested 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 decreasedincreased by 15.9%8.4% in the three months ended September 30, 2017March 31, 2020 compared to the same period in 2016.2019. During the thirdfirst quarter of 20172020 (“Q3 2017”Q1 2020”), sales in the United States decreasedincreased by 17.5%,10.3% and international sales decreasedincreased by 9.8%2.6% over the prior-year period. International sales, when reported in U.S. dollars, were positivelynegatively impacted in the aggregate by a weakerstronger U.S. dollar versus most of the currencies of the markets wherein which we doconduct business. Excluding the impact of currency exchange fluctuation, international sales decreasedincreased by 10.6%2.9%.
The following table summarizes net sales by geographic market for the three months ended September 30, 2017March 31, 2020 and 2016.2019.
Three months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | 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 | )% |
Three months ended March 31, | ||||||||||||||||||||||||
2020 | 2019 | Change from prior year | ||||||||||||||||||||||
Amount | % of Net Sales | Amount | % of Net Sales | Amount | % | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
United States | $ | 7,842 | 76.3 | % | $ | 7,112 | 74.9 | % | $ | 730 | 10.3 | % | ||||||||||||
Australia/New Zealand | 170 | 1.6 | 177 | 1.9 | (7 | ) | (4.0 | ) | ||||||||||||||||
Canada | 159 | 1.5 | 199 | 2.1 | (40 | ) | (20.1 | ) | ||||||||||||||||
Mexico | 129 | 1.3 | 136 | 1.4 | (7 | ) | (5.1 | ) | ||||||||||||||||
Europe | 962 | 9.4 | 939 | 9.9 | 23 | 2.4 | ||||||||||||||||||
Asia | 1,021 | 9.9 | 927 | 9.8 | 94 | 10.1 | ||||||||||||||||||
Consolidated total | $ | 10,283 | 100.0 | % | $ | 9,490 | 100.0 | % | $ | 793 | 8.4 | % |
The following table summarizes net sales by geographic market for the nine months ended September 30, 2017 and 2016.
Nine months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | 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 setstables set forth, as of September 30, 2017March 31, 2020 and 2016,2019, the number of our active distributorsRetail Customers/ Preferred Customers/Active Distributors and Master Affiliates and above. The total number of active distributors includes Master Affiliates and above. We define an active retail or preferred customer as one that has placed a product order in the prior twelve months, and we define an active distributor as one that enrolls as a distributor or renews his or her distributorship during the prior twelve months. Many individuals join Reliv as distributors to obtain our products at a discount and may not participate in the Reliv business opportunity. 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, 2017 | September 30, 2016 | % Change | ||||||||||||||||||||||
Active Distributors and Preferred Customers | Master Affiliates and Above | Active Distributors and Preferred Customers | Master Affiliates and Above | Active Distributors and Preferred Customers | Master Affiliates and Above | |||||||||||||||||||
United States | 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 | )% |
Retail and Preferred Customers/Active Distributors/Master Affiliates and Above by Market |
As of 3/31/2020 | ||||||||||||||||||||
Retail Customers | Preferred Customers | Active Distributors | Total Customers and Distributors | Master Affiliates and Above | ||||||||||||||||
United States | 3,580 | 1,450 | 17,460 | 22,490 | 1,860 | |||||||||||||||
Australia/New Zealand | 50 | 210 | 650 | 910 | 80 | |||||||||||||||
Canada | 80 | 30 | 470 | 580 | 60 | |||||||||||||||
Mexico | 20 | 100 | 1,050 | 1,170 | 80 | |||||||||||||||
Europe | 690 | 660 | 1,620 | 2,970 | 260 | |||||||||||||||
Asia | 1,370 | 5,440 | 4,300 | 11,110 | 610 | |||||||||||||||
Consolidated Total | 5,790 | 7,890 | 25,550 | 39,230 | 2,950 |
As of 3/31/2019 | ||||||||||||||||||||
Retail Customers | Preferred Customers | Active Distributors | Total Customers and Distributors | Master Affiliates and Above | ||||||||||||||||
United States | 3,960 | 1,560 | 18,040 | 23,560 | 1,880 | |||||||||||||||
Australia/New Zealand | 40 | 220 | 710 | 970 | 70 | |||||||||||||||
Canada | 100 | 20 | 520 | 640 | 60 | |||||||||||||||
Mexico | 10 | 110 | 1,020 | 1,140 | 80 | |||||||||||||||
Europe | 560 | 1,140 | 1,800 | 3,500 | 300 | |||||||||||||||
Asia | 3,020 | 3,950 | 3,210 | 10,180 | 350 | |||||||||||||||
Consolidated Total | 7,690 | 7,000 | 25,300 | 39,990 | 2,740 |
Change in % | ||||||||||||||||||||
Retail Customers | Preferred Customers | Active Distributors | Total Customers and Distributors | Master Affiliates and Above | ||||||||||||||||
United States | -9.6 | % | -7.1 | % | -3.2 | % | -4.5 | % | -1.1 | % | ||||||||||
Australia/New Zealand | 25.0 | % | -4.5 | % | -8.5 | % | -6.2 | % | 14.3 | % | ||||||||||
Canada | -20.0 | % | 50.0 | % | -9.6 | % | -9.4 | % | 0.0 | % | ||||||||||
Mexico | 100.0 | % | -9.1 | % | 2.9 | % | 2.6 | % | 0.0 | % | ||||||||||
Europe | 23.2 | % | -42.1 | % | -10.0 | % | -15.1 | % | -13.3 | % | ||||||||||
Asia | -54.6 | % | 37.7 | % | 34.0 | % | 9.1 | % | 74.3 | % | ||||||||||
Consolidated Total | -24.7 | % | 12.7 | % | 1.0 | % | -1.9 | % | 7.7 | % |
The following table provides key statistics related to customer and distributor activity by market and should be read in conjunction with the following discussion.
Distributor Activity by Market | International | |||||||||||||||||||||||||||
United States | AUS/NZ | Canada | Mexico | Europe | Asia | -- Total | ||||||||||||||||||||||
Sales in USD (in 000's): | ||||||||||||||||||||||||||||
Quarter ended 3/31/2020 | $ | 7,842 | $ | 170 | $ | 159 | $ | 129 | $ | 962 | $ | 1,021 | $ | 2,441 | ||||||||||||||
Quarter ended 3/31/2019 | $ | 7,112 | $ | 177 | $ | 199 | $ | 136 | $ | 939 | $ | 927 | $ | 2,378 | ||||||||||||||
% change in sales-Q1 2020 vs. Q1 2019: | ||||||||||||||||||||||||||||
in USD | 10.3 | % | -4.0 | % | -20.1 | % | -5.1 | % | 2.4 | % | 10.1 | % | 2.6 | % | ||||||||||||||
due to currency fluctuation | - | -7.7 | % | -0.4 | % | -2.8 | % | -1.8 | % | 3.0 | % | -0.3 | % | |||||||||||||||
Sales in local currency (non-GAAP) | 10.3 | % | 3.7 | % | -19.7 | % | -2.3 | % | 4.2 | % | 7.1 | % | 2.9 | % | ||||||||||||||
# of new Preferred Customers-Q1 2020 | 288 | 12 | 3 | 15 | 87 | 409 | 526 | |||||||||||||||||||||
# of new Preferred Customers-Q1 2019 | 329 | 17 | 6 | 12 | 144 | 1,987 | 2,166 | |||||||||||||||||||||
% change | -12.5 | % | -29.4 | % | -50.0 | % | 25.0 | % | -39.6 | % | -79.4 | % | -75.7 | % | ||||||||||||||
# of new distributors-Q1 2020 | 694 | 10 | 13 | 99 | 127 | 495 | 744 | |||||||||||||||||||||
# of new distributors-Q1 2019 | 573 | 11 | 6 | 239 | 117 | 508 | 881 | |||||||||||||||||||||
% change | 21.1 | % | -9.1 | % | 116.7 | % | -58.6 | % | 8.5 | % | -2.6 | % | -15.6 | % | ||||||||||||||
# of new Master Affiliates-Q1 2020 | 175 | 9 | 10 | 3 | 22 | 99 | 143 | |||||||||||||||||||||
# of new Master Affiliates-Q1 2019 | 140 | 1 | 0 | 8 | 19 | 99 | 127 | |||||||||||||||||||||
% change | 25.0 | % | 800.0 | % | --- | -62.5 | % | 15.8 | % | 0.0 | % | 12.6 | % | |||||||||||||||
# of Product orders-Q1 2020 | 27,467 | 994 | 548 | 966 | 3,119 | 8,532 | 14,159 | |||||||||||||||||||||
# of Product orders-Q1 2019 | 25,758 | 975 | 558 | 975 | 3,031 | 10,663 | 16,202 | |||||||||||||||||||||
% change | 6.6 | % | 1.9 | % | -1.8 | % | -0.9 | % | 2.9 | % | -20.0 | % | -12.6 | % |
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 StatesU.S. dollar, which our local management has no ability to influence. This is a meaningful measurement to management, and we believe this is a useful measurement to provide to shareholders.
The following table provides key statistics related to distributor activity by market and should be read in conjunction with the following discussion. Adjusted results should be considered only in conjunction with results reported according to accounting principles generally accepted in the United States.
Distributor Activity by Market | International | |||||||||||||||||||||||||||
United States | AUS/NZ | Canada | Mexico | Europe | Asia | -- Total | ||||||||||||||||||||||
Sales in USD (in 000's): | ||||||||||||||||||||||||||||
Quarter ended 9/30/2017 | $ | 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 | % |
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United States
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● | Products in the LunaRich line, including Reliv Now® and LunaRich X™, continued to perform well, constituting |
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International Operations
● | The average foreign exchange rate for the U.S. dollar for |
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● | Net sales in Canada decreased in Q1 2020 by 19.7% in local currency as the result of a decrease in most forms of distributor |
● | Net sales in Mexico decreased by |
● | Net sales in Europe |
● | Sales in Asia increased by |
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-monththree-month periods ended September 30, 2017March 31, 2020 and 2016.2019. 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 | ) |
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Income statement data | ||||||||||||||||
(amounts in thousands) | Q1 2020 | Q1 2019 | ||||||||||||||
Amount | % of net sales | Amount | % of net sales | |||||||||||||
Net sales | $ | 10,283 | 100.0 | % | $ | 9,490 | 100.0 | % | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of goods sold | 2,655 | 25.8 | 2,434 | 25.6 | ||||||||||||
Distributor royalties and commissions | 3,328 | 32.4 | 3,118 | 32.9 | ||||||||||||
Selling, general and adminstrative | 3,778 | 36.7 | 3,739 | 39.4 | ||||||||||||
Income from operations | 522 | 5.1 | 199 | 2.1 | ||||||||||||
Interest income | 39 | 0.4 | 49 | 0.6 | ||||||||||||
Interest expense | (6 | ) | (0.1 | ) | (5 | ) | (0.1 | ) | ||||||||
Other expense | (71 | ) | (0.7 | ) | (6 | ) | (0.1 | ) | ||||||||
Gain on sale of fixed assets | - | - | 435 | 4.6 | ||||||||||||
Income before income taxes | 484 | 4.7 | 672 | 7.1 | ||||||||||||
Provision (benefit) for income taxes | (178 | ) | (1.7 | ) | 48 | 0.5 | ||||||||||
Net income | $ | 662 | 6.4 | % | $ | 624 | 6.6 | % | ||||||||
Earnings per common share-Basic & Diluted | $ | 0.38 | $ | 0.36 |
Cost of ProductsGoods Sold:
● | The cost of |
Distributor Royalties and Commissions:
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Selling, General and Administrative Expenses:
● | Selling, general and administrative (“SGA”) expenses |
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● | Sales and marketing expenses, excluding compensation, decreased in the aggregate by |
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o | $14,000 decrease in other sales and marketing expenses, including travel and video production expenses. |
o | Offsetting these decreases is a $38,000 increase in Star Director and other distributor bonuses, credit card fees, and other expenses related to the level of |
● | Other general and administrative expenses |
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Other Income/Expense:
● | The other |
● | Q1 2019 includes $435,000 in income on the sale of our manufacturing equipment as part of the asset sale with Nutracom. |
Income Taxes:
● | We reported an income tax benefit of $178,000 for Q1 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed us to carry our net operating loss that arose in 2018 back five years, generating an income tax benefit of $225,000. The remaining expense |
● | See Note |
Net IncomeIncom/Losse:
● | We reported |
Financial Condition, Liquidity and Capital Resources
During the first ninethree months of 2017, we used $593,0002020, operating activities provided $1.26 million of net cash from operating activities, $336,000and $23,000 of net cash was used inprovided by investing activities, and we used $282,000 in financing activities. This compares to $763,000$127,000 of net cash provided byused in operating activities, $59,000$11,000 provided by investing activities, and $904,000 used in$500,000 provided by financing activities in the same period of 2016.2019. Cash and cash equivalents decreasedincreased by $1.14$1.20 million to $2.47$2.83 million as of September 30, 2017March 31, 2020 compared to December 31, 2016.2019.
Significant changes in working capital items consisted of anan increase in inventory of $313,000,$190,000, an increase in refundable income taxes of $223,000, an increase in prepaid expenses/other current assets of $365,000, and a decreasean increase in accounts payable and accrued expenses and other noncurrent liabilities of $633,000$1.21 million in the first ninethree months of 2017.2020. The increase in inventory is needed to manage the inventory levels in light of the growth in first quarter 2020 net sales, the increase in refundable income taxes is due to the net operating loss carryback that will generate an estimated refund of $225,000, and the increase in prepaid expenses/other current assets primarily represents the annual premium payments made in the first quarter of 2020 on most of the corporate business insurance policies. The increase in accounts payable and accrued expenses is related to higher vendor balances on inventory purchases, financing related to the business insurance renewals, and higher accrued commissions and sales taxes payable as 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 declineincrease in sales in September 2017 and reduced trade payables as of September 30, 2017 comparedMarch 2020 relative to December 31, 2016.2019.
Investing activities during the first ninethree months of 20172020 consisted of an investment of $430,000$9,000 for capital expenditures, offset by payments received on a distributor notenotes receivable with related parties of $81,000 and proceeds from the sale of equipment for $13,000. Financing$32,000. There were no financing activities during the first ninethree months of 2017 consisted of principal payments of $282,000 on long-term borrowings.2020.
Stockholders’ equity decreasedincreased to $14.8$11.72 million at September 30, 2017March 31, 2020 compared to $14.9$11.10 million at December 31, 2016.2019. The decreaseincrease is due to our net lossincome during the first ninethree months of 20172020 of $315,000 offset by a favorable adjustment in foreign currency translation of $134,000.$662,000. Our working capital balance was $1.80$2.73 million at September 30, 2017March 31, 2020 compared to $4.31$1.88 million at December 31, 2016.2019. The current ratio at September 30, 2017March 31, 2020 was 1.291.53 compared to 1.931.47 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.2019.
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 interestEffective with a balloon paymentrenewal agreement as of April 28, 2020, our revolving line of credit with our primary lender was extended for six months with a new maturity date of October 28, 2020 and the outstanding balance due and payable on September 30, 2018. The term loan'sborrowing limit continued at $750,000. As renewed, the revolver’s interest rate iscontinued to be 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, 2018.3.00%. As of September 30, 2017, there were no outstanding borrowings on theMarch 31, 2020, we have borrowed $500,000 under our revolving line of credit. In October 2017, we borrowed $500,000 under the revolving line of credit.
Borrowings under the new lending agreements areagreement continue to be 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 corporate headquarters.
On May 4, 2020, we executed a promissory note (“SBA Note”) dated April 20, 2020 in the amount of $862,000 with our primary lender under the recently enacted CARES Act Payroll Protection Program (“PPP”). In accordance with the PPP, we will use the loan proceeds of $862,000 primarily for payroll costs. The lending agreements include quarterly covenants requiring usPPP SBA Note is scheduled to maintain net tangible worthmature April 20, 2022 and has an interest rate of not less than $9.5 million,1.0%. The PPP SBA Note is subject to the terms 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 adjustedconditions applicable to exclude any gain or loss on the sale of assets, other extraordinary gains or losses, and any one-time adjustment approvedloans administered by the lender. At September 30, 2017, we were in compliance with all applicable covenants.U.S. Small Business Administration under the CARES Act.
We anticipatehave incurred operating losses, declining net sales, and negative net cash flows over our most recent five years. Our management estimates that these unfavorable trends are more likely than not to continue for the foreseeable future, and as a result, we will be ablerequire additional financial support to refinancefund our term loanoperations and renewexecute our revolving linebusiness plan. As of credit with our current lender prior to the respective maturity dates of each agreement; however, there can be no assurance thatMarch 31, 2020, we will be able to do so. Management believes that thehad $2.83 million in 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, willequivalents which may not be sufficient to meetfund our workingplanned 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.
In the event that we do not generate sufficient liquidity from operations and should we be unable to obtain sufficient additional capital requirementsor borrowings, we may have to engage in any or all of the following activities: (i) seek to monetize our headquarters building via traditional bank lending or a sale and debt service requirements forleaseback-type transaction; (ii) monetizing the next twelve months.note receivable from a distributor; (iii) modify our distributor promotions, incentives, and other activities; (iv) cease operations in certain geographic regions, and (v) reduce employee compensation and benefits.
These actions may have a material adverse impact on our ability to achieve certain of our planned objectives. Even if we are able to source additional funding, we may be forced to significantly reduce our operations or shut down our operations if our business operating performance does not improve. These condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event we can no longer continue as a going concern.
Critical Accounting Policies
A summary of our critical accounting policies and estimates is presented in our 20162019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2017.27, 2020. Our critical accounting policies remain unchanged as of September 30, 2017.March 31, 2020.
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.March 31, 2020. 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,March 31, 2020, 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 thirdfirst quarter of 20172020 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II – OTHER INFORMATION
ItemItem No. 6 – ExhibitsExhibits
Exhibit | ||
Number | Document | |
10.1 | ||
31.1 | ||
31.2 | ||
32 | ||
101 | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RELIV’ INTERNATIONAL, INC.
By: | ||
Date: | ||
By: | /s/ Steven D. Albright | |
Steven D. Albright, Chief Financial Officer (and accounting officer) | ||
Date: |
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