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EX-31.1 - EXHIBIT 31.1 - RELIV INTERNATIONAL INCex_198177.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended June 30, 2020

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 INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

371172197

(I.R.S. Employer Identification Number)

   

136 Chesterfield Industrial Boulevard,    Chesterfield, Missouri

(Address of principal executive offices)

63005

(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 every Interactive Data File required to be submitted 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 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 ☐    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 August 7, 2020 was 1,746,449 (excluding treasury shares).

 

 

 

 

INDEX    

 

 

Part I – Financial Information  
     
Item No. 1 Financial Statements (Unaudited) 1
Item No. 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item No. 4 Controls and Procedures 28
     
Part II – Other Information  
     
Item No. 6 Exhibits 28

 

 

 
 

 

PART I -- FINANCIAL INFORMATION

 

Item No. 1 - Financial Statements

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

   

June 30

   

December 31

 
   

2020

   

2019

 
   

(unaudited)

         

Assets

               
                 

Current assets:

               

Cash and cash equivalents

  $ 2,730,672     $ 1,630,779  

Accounts receivable, less allowances of $5,000 in 2020 and 2019

    279,920       107,369  

Notes & accounts receivables and deposits - related parties

    889,022       1,099,228  

Inventories

               

Finished goods

    2,816,982       2,275,306  

Raw materials

    114,023       305,571  

Sales aids and promotional materials

    97,026       120,811  

Total inventories

    3,028,031       2,701,688  
                 

Refundable income taxes

    249,959       22,406  

Prepaid expenses and other current assets

    605,782       304,048  

Total current assets

    7,783,386       5,865,518  
                 

Notes and accounts receivables - related parties

    2,361,910       2,418,921  

Operating lease right-to-use assets

    317,099       354,440  

Intangible assets, net

    1,609,285       1,722,277  

Equity investment

    505,000       505,000  
                 

Property, plant and equipment:

               

Land and land improvements

    905,190       905,190  

Building

    10,147,386       10,145,005  

Office & other equipment

    1,241,860       1,237,142  

Computer equipment & software

    2,202,627       2,240,063  
      14,497,063       14,527,400  

Less: Accumulated depreciation

    10,215,740       10,086,560  

Net property, plant and equipment

    4,281,323       4,440,840  
                 

Total assets

  $ 16,858,003     $ 15,306,996  

 

See notes to financial statements.

 

1

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

   

June 30

   

December 31

 
   

2020

   

2019

 
   

(unaudited)

         

Liabilities and stockholders' equity

               
                 

Current liabilities:

               

Accounts payable and accrued expenses:

               

Trade accounts payable and other accrued expenses

  $ 1,819,772     $ 1,565,198  

Distributors' commissions payable

    971,449       891,492  

Sales taxes payable

    181,184       139,542  

Payroll and payroll taxes payable

    198,747       212,716  

Total accounts payable and accrued expenses

    3,171,152       2,808,948  
                 

Income taxes payable

    50,955       121,177  

Deferred revenue

    317,630       322,261  

Operating lease liabilities

    201,980       236,771  

Revolving line of credit

    500,000       500,000  

Current portion of long-term debt

    333,649       -  

Total current liabilities

    4,575,366       3,989,157  
                 

Noncurrent liabilities:

               

Operating lease liabilities

    102,260       103,580  

Long-term debt, less current portion

    528,351       -  

Other noncurrent liabilities

    140,511       112,616  

Total noncurrent liabilities

    771,122       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

    (12,292,216 )     (12,755,495 )

Accumulated other comprehensive loss:

               

Foreign currency translation adjustment

    (990,727 )     (937,320 )

Treasury stock

    (5,851,423 )     (5,851,423 )
                 

Total stockholders' equity

    11,511,515       11,101,643  
                 

Total liabilities and stockholders' equity

  $ 16,858,003     $ 15,306,996  

 

See notes to financial statements.

 

2

 

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)

 

(unaudited)

 

Three months ended June 30

   

Six months ended June 30

 
   

2020

   

2019

   

2020

   

2019

 
                                 
                                 
                                 

Product sales

  $ 7,371,162     $ 7,603,041     $ 16,919,979     $ 16,414,038  

Freight income

    446,707       479,881       1,004,802       999,822  

Other revenue

    198,691       174,091       374,444       332,657  
                                 

Net sales

    8,016,560       8,257,013       18,299,225       17,746,517  
                                 

Costs and expenses:

                               

Cost of goods sold

    2,202,488       2,268,992       4,857,331       4,702,723  

Distributor royalties and commissions

    2,590,078       2,665,093       5,918,533       5,782,665  

Selling, general and administrative

    3,501,104       3,688,944       7,278,786       7,428,472  
                                 

Total costs and expenses

    8,293,670       8,623,029       18,054,650       17,913,860  
                                 

Income (loss) from operations

    (277,110 )     (366,016 )     244,575       (167,343 )
                                 

Other income (expense):

                               

Interest income

    39,048       46,218       78,710       95,480  

Interest expense

    (7,933 )     (10,075 )     (14,038 )     (15,487 )

Other income (expense)

    100,938       4,768       30,032       (660 )

Gain on sale of fixed assets

    -       -       -       434,549  
                                 

Income (loss) before income taxes

    (145,057 )     (325,105 )     339,279       346,539  

Provision (benefit) for income taxes

    54,000       63,000       (124,000 )     111,000  
                                 

Net income (loss)

  $ (199,057 )   $ (388,105 )   $ 463,279     $ 235,539  
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment

    (13,796 )     (10,458 )     (53,407 )     11,753  
                                 

Comprehensive income (loss)

  $ (212,853 )   $ (398,563 )   $ 409,872     $ 247,292  
                                 
                                 

Earnings (loss) per common share - Basic & Diluted

  $ (0.11 )   $ (0.22 )   $ 0.27     $ 0.13  

Weighted average shares

    1,746,000       1,746,000       1,746,000       1,746,000  

 

See notes to financial statements.

 

3

 

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

 

(unaudited)

               
   

Six months ended June 30

 
   

2020

   

2019

 
                 

Operating activities:

               

Net income

  $ 463,279     $ 235,539  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    288,273       292,842  

Stock-based compensation

    -       10,612  

Non-cash other revenue

    -       (172,866 )

Non-cash miscellaneous loss

    -       24,618  

(Gain) loss on sale of property, plant and equipment

    -       (434,549 )

Foreign currency transaction (gain) loss

    21,694       1,149  

(Increase) decrease in trade, accounts & notes receivable, and deposits from related parties

    30,349       (715,018 )

(Increase) decrease in inventories

    (380,827 )     758,798  

(Increase) decrease in refundable income taxes

    (227,553 )     (3,295 )

(Increase) decrease in prepaid expenses and other current assets

    (304,407 )     (295,925 )

(Increase) decrease in other assets

    -       (68,807 )

Increase (decrease) in income taxes payable

    (71,132 )     16,148  

Increase (decrease) in accounts payable & accrued expenses, deferred revenue, and other noncurrent liabilities

    402,018       (293,111 )
                 

Net cash provided by (used in) operating activities

    221,694       (643,865 )
                 

Investing activities:

               

Purchase of property, plant and equipment

    (17,363 )     (50,180 )

Payments received on notes receivables - related parties

    64,337       109,984  
                 

Net cash provided by investing activities

    46,974       59,804  
                 

Financing activities:

               

Proceeds from line of credit borrowings

    -       500,000  

Proceeds from long-term borrowings

    862,000       -  
                 

Net cash provided by financing activities

    862,000       500,000  
                 

Effect of exchange rate changes on cash and cash equivalents

    (30,775 )     12,808  
                 

Increase (decrease) in cash and cash equivalents

    1,099,893       (71,253 )
                 

Cash and cash equivalents at beginning of period

    1,630,779       1,989,974  
                 

Cash and cash equivalents at end of period

  $ 2,730,672     $ 1,918,721  
                 

Supplementary disclosure of cash flow information:

               

Noncash investing & financing transactions (Note 3):

               

 

See notes to financial statements.

 

4

 

 

Reliv International, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Stockholders' Equity

 

(unaudited)

                                                               
                                   

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  

Net loss

    -       -       -       (199,057 )     -       -       -       (199,057 )

Other comprehensive income (loss):

                                                               

Foreign currency translation adjustment

    -       -       -       -       (13,796 )     -       -       (13,796 )

Total comprehensive loss

                                                            (212,853 )
                                                                 

Balance at June 30, 2020

    2,110,013     $ 2,110     $ 30,643,771     $ (12,292,216 )   $ (990,727 )     363,564     $ (5,851,423 )   $ 11,511,515  

 

 

                                   

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  

Net loss

    -       -       -       (388,105 )     -       -       -       (388,105 )

Other comprehensive income (loss):

                                                               

Foreign currency translation adjustment

    -       -       -       -       (10,458 )     -       -       (10,458 )

Total comprehensive loss

                                                            (398,563 )

Stock-based compensation

    -       -       5,306       -       -       -       -       5,306  

Balance at June 30, 2019

    2,110,013     $ 2,110     $ 30,633,159     $ (12,075,599 )   $ (970,342 )     363,564     $ (5,851,423 )   $ 11,737,905  

 

 

See notes to financial statements.

 

5

 

June 30, 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.

 

6

 

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.

 

7

 

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

 

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.

 

8

 

 

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. (In June 2020, Nutracom increased its total equity membership interests; reducing our Nutracom equity membership interest from 15% to 5%).

 

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 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.

 

9

 

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.

 

10

 

 

3. Related Parties

 

The following summarizes our related party activities with Nutracom and a significant distributor of the Company.

 

   

June 30

   

December 31

 

Assets and liabilities - related parties

 

2020

   

2019

 
                 

Notes & accounts receivables and deposits - current

               

Deposits with Nutracom for inventory

  $ 657,087     $ 941,154  

Note receivable - distributor

    134,597       130,629  

Note receivable - Nutracom unsecured DTD 6/1/2019

    40,107       -  

Note receivable - Nutracom unsecured DTD 10/1/2019

    25,015       -  

Other miscellaneous receivables

    32,216       27,445  
    $ 889,022     $ 1,099,228  
                 
                 

Notes & accounts receivables - non-current

               

Note receivable - distributor

  $ 1,083,138     $ 1,151,443  

Note receivable - Nutracom unsecured DTD 6/1/2019

    420,476       460,583  

Note receivable - Nutracom unsecured DTD 10/1/2019

    686,148       711,163  

Unbilled receivables: Straight line rent revenue greater than rental billings

    172,148       95,732  
    $ 2,361,910     $ 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

  $ 278,385     $ 430,907  

 

The following table presents scheduled principal payments to be received on the distributor and Nutracom promissory notes receivable: 

 

Remainder of 2020

  $ 66,292  

2021

    271,037  

2022

    288,294  

2023

    306,655  

2024

    326,190  

Thereafter

    1,131,013  
    $ 2,389,481  

 

11

 

3. Related Parties (continued)

 

   

Six months ended June 30

 

Revenue and expense - related parties

 

2020

   

2019

 
                 

Other revenue

  $ 374,444     $ 332,657  
                 

Selling, general and administrative expense:

               

Fullfillment & professional fees

    316,910       305,910  
                 

Interest income on promissory notes

    76,210       92,668  

Royalty income (other income/expense)

    30,504       -  

Gain on sale of fixed assets

    -       434,549  
                 

Finished goods inventory purchased from Nutracom

  $ 3,768,800     $ 2,763,000  

 

At June 30, 2020, we had $1.27 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  
         

June 1, 2019

       

Secured promissory note receivable balance decreased; applied as reduction to outstanding trade accounts payable

    500,000  

Unsecured promissory note received in exchange for remaining secured promissory note balance and other considerations

    460,583  

 

12

 

 

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

 
                                         

June 30, 2020

                                       

Revolving line of credit

  $ 500,000     $ 500,000       -     $ 500,000       -  

PPP SBA note

    862,000       862,000     $ 862,000       -       -  

Note receivable - distributor

    1,217,735       1,348,000       -       1,348,000       -  

Notes receivable - Nutracom

    1,171,746       1,231,000       -       -     $ 1,231,000  
                                         
                                         

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).

 

PPP SBA note: The fair value of our PPP SBA note approximates carrying value as the lending terms of this promissory note payable continue to be offered by the SBA under the CARES Act as of this financial report date. (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).

 

13

 

4. Fair Value of Financial Instruments (continued)

 

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).

 

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

 

   

June

   

December 31

 
   

2020

   

2019

 
                 

Revolving line of credit

  $ 500,000     $ 500,000  

PPP SBA note

    862,000       -  
      1,362,000       500,000  

Less current portion

    833,649       500,000  

Total long-term debt

  $ 528,351     $ -  

 

Revolving Line of Credit

 

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.

 

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. At June 30, 2020, outstanding borrowings under the revolving line of credit were $500,000 at an interest rate of 3.18%.

 

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 June 30, 2020, we were in compliance with our loan covenant requirements.

 

14

 

5. Debt (continued)

 

PPP SBA Note

 

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 March 2020 U.S enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act Payroll Protection Program (“PPP”). In accordance with the PPP, we used 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 which include:

 

 

A deferral of principal repayment and interest for six months from loan origination, and

 

The opportunity to apply for possible loan forgiveness for some or all of the loan amount.

 

Our PPP SBA loan forgiveness accounting policy is to recognize, if applicable, any loan forgiveness amounts only when we have applied for loan forgiveness, forgiveness realization is probable, and the forgiveness amount is reasonably determinable. At June 30, 2020 we have not applied for PPP SBA loan forgiveness.

 

 

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.

 

Under the March 2020 U.S. 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, in the first quarter ended March 31, 2020, we have recorded a $225,000 income tax benefit for NOL carryback. In July 2020, we have received our requested NOL carryback refund from the Internal Revenue Service.

 

The effective income tax rate was (36.5)% and 32.0% for the year to date periods ended June 30, 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.

 

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.

 

15

 

 

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 June 30, 2020 and 2019, total returns as a percent of net sales were 0.05% and 0.07%, respectively.

 

16

 

7. Revenue Recognition (continued)

 

We classify our net sales into three categories of sales products, plus freight income, and other revenue:

 

   

Three months ended

   

Six months ended

 
   

June 30

   

June 30

 
   

2020

   

2019

   

2020

   

2019

 

Net sales by product category

                               

Nutritional and dietary supplements

  $ 6,814,003     $ 7,144,604     $ 15,657,153     $ 15,641,954  

Other supplements

    266,013       140,293       683,242       140,293  

Sales aids, membership fees, and other

    291,146       318,144       579,584       631,791  

Freight income

    446,707       479,881       1,004,802       999,822  

Other revenue

    198,691       174,091       374,444       332,657  

Total net sales

  $ 8,016,560     $ 8,257,013     $ 18,299,225     $ 17,746,517  

 

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

   

Six months ended

 
   

June 30

   

June 30

 
   

2020

   

2019

   

2020

   

2019

 

Net sales by geographic region

                               

United States

  $ 6,087,586     $ 5,904,605     $ 13,930,021     $ 13,016,378  

Australia/New Zealand

    118,749       132,330       288,871       309,377  

Canada

    125,996       140,029       284,657       339,428  

Mexico

    124,554       152,569       253,175       288,595  

Europe (1)

    602,533       756,264       1,564,625       1,694,933  

Asia (2)

    957,142       1,171,216       1,977,876       2,097,806  

Total net sales

  $ 8,016,560     $ 8,257,013     $ 18,299,225     $ 17,746,517  

 

 

(1)

Europe consists of United Kingdom, Ireland, France, Germany, Austria, and the Netherlands.

 

(2)

Asia consists of Philippines and Malaysia.

 

17

 

 

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.

 

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 $201,600 and $159,800 for the six month periods ending June 30, 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

  $ 172,866     $ 96,450  

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

  $ 1,901,527     $ 2,073,675  

 

18

 

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.

 

Item No. 2 - Managements 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 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 direct selling system utilizing independent distributors. Sales in the United States represented approximately 76.1% of worldwide net sales for the six months ended June 30, 2020 compared to approximately 73.4% for the six months ended June 30, 2019. Our international operations currently generate sales through distributor networks with facilities in Australia, Canada, 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.

 

We derive our revenues principally through product sales made by our global independent distributor base, which, as of June 30, 2020, consisted of approximately 13,020 registered customers and 25,490 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. Accounting practices require that our results from operations be converted to U.S. dollars for reporting purposes. Consequently, our reported earnings may be significantly affected by fluctuations in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. 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.

 

19

 

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 20% to 40% of suggested retail price, depending on the rank of a particular distributor. Freight income represents the amounts billed to distributors for shipping costs. We record net sales and the related commission expense when the merchandise is shipped. 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.

 

Our cost of goods sold consists of the purchase price of the products, along with shipping costs, and duties and taxes where applicable. Cost of goods sold also include the 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, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, 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.

 

20

 

Results of Operations  

  

Net Sales. Overall net sales decreased by 2.9% in the three months ended June 30, 2020 compared to the same period in 2019. During the second quarter of 2020 (“Q2 2020”), sales in the United States increased by 3.1%, and international sales decreased by 18.0% over the prior-year period. International sales, when reported in U.S. dollars, were negatively impacted by a stronger U.S. dollar versus most of the currencies of the markets where we do business. Excluding the impact of currency exchange fluctuation, international sales decreased by 16.5%.

 

          The following table summarizes net sales by geographic market for the three months ended June 30, 2020 and 2019.

 

   

Three months ended June 30,

                 
   

2020

   

2019

   

Change from prior year

 
   

Amount

   

% of Net

Sales

   

Amount

   

% of Net

Sales

   

Amount

   

%

 
   

(dollars in thousands)

                 

United States

  $ 6,088       75.9

%

  $ 5,905       71.5

%

  $ 183       3.1

%

Australia/New Zealand

    119       1.5       132       1.6       (13

)

    (9.8

)

Canada

    126       1.6       140       1.7       (14

)

    (10.0

)

Mexico

    125       1.6       153       1.8       (28

)

    (18.3

)

Europe

    602       7.5       756       9.2       (154

)

    (20.4

)

Asia

    957       11.9       1,171       14.2       (214

)

    (18.3

)

Consolidated total

  $ 8,017       100.0

%

  $ 8,257       100.0

%

  $ (240

)

    (2.9

)%

 

The following table summarizes net sales by geographic market for the six months ended June 30, 2020 and 2019.

 

   

Six months ended June 30,

                 
   

2020

   

2019

   

Change from prior year

 
   

Amount

   

% of Net

Sales

   

Amount

   

% of Net

Sales

   

Amount

   

%

 
   

(dollars in thousands)

                 

United States

  $ 13,930       76.1

%

  $ 13,016       73.4

%

  $ 914       7.0

%

Australia/New Zealand

    289       1.6       309       1.7       (20

)

    (6.5

)

Canada

    285       1.6       340       1.9       (55

)

    (16.2

)

Mexico

    253       1.4       289       1.6       (36

)

    (12.5

)

Europe

    1,564       8.5       1,695       9.6       (131

)

    (7.7

)

Asia

    1,978       10.8       2,098       11.8       (120

)

    (5.7

)

Consolidated total

  $ 18,299       100.0

%

  $ 17,747       100.0

%

  $ 552       3.1

%

 

21

 

The following tables set forth, as of June 30, 2020 and 2019, the number of our Retail 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. We believe the actual number of customers is much higher as many distributors (approximately 74% in the U.S.) join Reliv to purchase our products at a discount and do not participate in the business opportunity. The following tables also do not include those customers that buy product directly from distributors rather than from us. 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.

 

Retail and Preferred Customers/Active Distributors/Master Affiliates and Above by Market

 

   

As of 6/30/2020

 
   

Retail

Customers

   

Preferred

Customers

   

Active

Distributors

   

Total Customers

and Distributors

   

Master

Affiliates and

Above

 
                                         
                                         

United States

    3,650       1,740       17,370       22,760       1,950  

Australia/New Zealand

    50       240       660       950       80  

Canada

    90       20       450       560       70  

Mexico

    30       110       1,110       1,250       80  

Europe

    710       580       1,610       2,900       270  

Asia

    1,050       4,750       4,290       10,090       700  
                                         

Consolidated Total

    5,580       7,440       25,490       38,510       3,150  

 

   

As of 6/30/2019

 
   

Retail

Customers

   

Preferred

Customers

   

Active

Distributors

   

Total Customers

and Distributors

   

Master

Affiliates and

Above

 
                                         
                                         

United States

    3,730       1,540       17,750       23,020       1,980  

Australia/New Zealand

    40       230       680       950       70  

Canada

    90       30       500       620       60  

Mexico

    10       90       1,100       1,200       100  

Europe

    810       820       1,710       3,340       300  

Asia

    2,690       4,810       3,610       11,110       470  
                                         

Consolidated Total

    7,370       7,520       25,350       40,240       2,980  

 

   

Change in %

 
   

Retail

Customers

   

Preferred

Customers

   

Active

Distributors

   

Total Customers

and Distributors

   

Master

Affiliates and

Above

 
                                         
                                         

United States

    -2.1 %     13.0 %     -2.1 %     -1.1 %     -1.5 %

Australia/New Zealand

    25.0 %     4.3 %     -2.9 %     0.0 %     14.3 %

Canada

    0.0 %     -33.3 %     -10.0 %     -9.7 %     16.7 %

Mexico

    200.0 %     22.2 %     0.9 %     4.2 %     -20.0 %

Europe

    -12.3 %     -29.3 %     -5.8 %     -13.2 %     -10.0 %

Asia

    -61.0 %     -1.2 %     18.8 %     -9.2 %     48.9 %
                                         

Consolidated Total

    -24.3 %     -1.1 %     0.6 %     -4.3 %     5.7 %

 

22

 

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 6/30/2020

  $ 6,088     $ 119     $ 126     $ 125     $ 602     $ 957     $ 1,929  

Quarter ended 6/30/2019

  $ 5,905     $ 132     $ 140     $ 153     $ 756     $ 1,171     $ 2,352  
                                                         

% change in sales-Q2 2020 vs. Q2 2019:

                                                       

in USD

    3.1 %     -9.8 %     -10.0 %     -18.3 %     -20.4 %     -18.3 %     -18.0 %

due to currency fluctuation

    -       -5.4 %     -3.5 %     -16.6 %     -3.4 %     2.3 %     -1.5 %

Sales in local currency (non-GAAP)

    3.1 %     -4.4 %     -6.5 %     -1.7 %     -17.0 %     -20.6 %     -16.5 %
                                                         

# of new Preferred Customers-Q2 2020

    556       58       7       33       90       537       725  

# of new Preferred Customers-Q2 2019

    314       25       9       26       139       1,056       1,255  

% change

    77.1 %     132.0 %     -22.2 %     26.9 %     -35.3 %     -49.1 %     -42.2 %
                                                         

# of new distributors-Q2 2020

    796       11       15       235       129       551       941  

# of new distributors-Q2 2019

    747       10       13       167       123       663       976  

% change

    6.6 %     10.0 %     15.4 %     40.7 %     4.9 %     -16.9 %     -3.6 %
                                                         

# of new Master Affiliates-Q2 2020

    132       5       5       8       13       135       166  

# of new Master Affiliates-Q2 2019

    124       2       2       14       14       118       150  

% change

    6.5 %     150.0 %     150.0 %     -42.9 %     -7.1 %     14.4 %     10.7 %
                                                         

# of Product orders-Q2 2020

    25,716       836       496       1,120       2,556       7,016       12,024  

# of Product orders-Q2 2019

    24,900       916       558       1,100       2,715       10,512       15,801  

% change

    3.3 %     -8.7 %     -11.1 %     1.8 %     -5.9 %     -33.3 %     -23.9 %

 

                                                   

International

 
   

United States

   

AUS/NZ

   

Canada

   

Mexico

   

Europe

   

Asia

   

-- Total

 

Sales in USD (in 000's):

                                                       

YTD ended 6/30/2020

  $ 13,930     $ 289     $ 285     $ 253     $ 1,564     $ 1,978     $ 4,369  

YTD ended 6/30/2019

  $ 13,016     $ 309     $ 340     $ 289     $ 1,695     $ 2,098     $ 4,731  
                                                         

% change in sales-YTD 2020 vs. YTD 2019:

                                                       

in USD

    7.0 %     -6.5 %     -16.2 %     -12.5 %     -7.7 %     -5.7 %     -7.6 %

due to currency fluctuation

    -       -6.8 %     -2.0 %     -10.6 %     -2.5 %     2.6 %     -0.9 %

Sales in local currency (non-GAAP)

    7.0 %     0.3 %     -14.2 %     -1.9 %     -5.2 %     -8.3 %     -6.7 %
                                                         

# of new Preferred Customers-YTD 2020

    844       70       10       48       177       946       1,251  

# of new Preferred Customers-YTD 2019

    643       42       15       38       283       3,043       3,421  

% change

    31.3 %     66.7 %     -33.3 %     26.3 %     -37.5 %     -68.9 %     -63.4 %
                                                         

# of new distributors-YTD 2020

    1,494       21       28       334       256       1,046       1,685  

# of new distributors-YTD 2019

    1,320       21       19       406       240       1,171       1,857  

% change

    13.2 %     0.0 %     47.4 %     -17.7 %     6.7 %     -10.7 %     -9.3 %
                                                         

# of new Master Affiliates-YTD 2020

    306       14       15       11       35       234       309  

# of new Master Affiliates-YTD 2019

    264       3       2       22       33       217       277  

% change

    15.9 %     366.7 %     650.0 %     -50.0 %     6.1 %     7.8 %     11.6 %
                                                         

# of Product orders-YTD 2020

    53,183       1,830       1,044       2,086       5,675       15,548       26,183  

# of Product orders-YTD 2019

    50,658       1,891       1,116       2,075       5,746       21,175       32,003  

% change

    5.0 %     -3.2 %     -6.5 %     0.5 %     -1.2 %     -26.6 %     -18.2 %

 

23

 

Use of Non-GAAP Financial Information

 

Net sales expressed in local currency or net sales adjusted for the impact of foreign currency fluctuation are non-GAAP financial measures. We use these measurements to assess the level of business activity in a foreign market, absent the impact of foreign currency fluctuation relative to the U.S. dollar, which our local management has no ability to influence. This is a meaningful measurement to management, and we believe this is a useful measurement to provide to shareholders.

 

United States

 

 

Net sales in the United States increased by 3.1% in Q2 2020 compared to the prior-year quarter, and net sales increased by 7.0% in YTD 2020 compared to the prior-year period. All measurements of distributor activity increased in Q2 and YTD 2020 compared to the prior-year periods. Sales activity declined in April 2020 due to COVID-19 related business downturn but gradually improved in successive months as distributor activity and corporate training programs shifted to an online model.

 

Products in the LunaRich line, including Reliv Now® and LunaRich X™, continued to perform well, constituting 14.1% and 11.1% of net sales in the United States, respectively, in Q2 2020. Reliv NOW and LunaRich X represented 14.9% and 11.9%, respectively, of net sales in the United States in the prior-year quarter.

 

Sales of our RLV line of hemp-extract products, introduced in June 2019, represented 4.5% of net sales in the United States in Q2 2020. Initially, the RLV line included three liquid tinctures and one balm, and a new sleep-aid tincture with melatonin was introduced in Q1 2020. All of the RLV products are derived from organically-grown, non-GMO hemp. The RLV line represented 4.9% of net sales in United States in 2019.

 

New distributor enrollments and new Master Affiliate qualifications increased by 6.6% and 6.5%, respectively, in Q2 2020 compared to the prior-year quarter.

 

Distributor retention remained steady at 80.9% for the twelve-month period ended June 30, 2020 as compared to all of 2019. Distributor retention is determined by the percentage of active distributors from 2019 that renewed their distributorships in 2020.

 

Our average order size in Q2 2020 decreased by 0.7% to $315 at suggested retail value compared to the prior-year quarter. However, the number of product orders increased by 3.3% in Q2 2020 compared to the prior-year quarter.

 

 

International Operations 

 

 

The average foreign exchange rate for the U.S. dollar for Q2 2020 was stronger against all of the currencies in which we conduct business except for the Philippine peso. Activity in certain markets has been severely impacted by more restrictive COVID-19 guidelines. Sales have gradually improved in the foreign markets overall as the restrictions have been eased.

 

Australia/New Zealand net sales in Q2 2020 decreased by 4.4% in local currency compared to the prior-year quarter as the result of an 8.7% decrease in product orders.

 

Net sales in Canada decreased in Q2 2020 by 6.5% in local currency as the result of a decrease in most forms of distributor activity.

 

Net sales in Mexico decreased by 1.7% in local currency in Q2 2020 compared to the prior-year quarter. Distributor activity was mixed during the quarter as new Preferred Customer and distributor enrollments were up, along with a slight increase in product orders. However, average order size and new Master Affiliate qualifications both showed decreases.

 

Net sales in Europe decreased by 17.0% in local currency in Q2 2020 compared to the prior-year quarter, with most distributor activity measurements showing decreases in the current-year quarter.

 

Sales in Asia decreased by 20.6% in local currency in Q2 2020 compared to the prior-year quarter. Activity in the region is driven primarily by the Philippines, our largest market in the region. However, the COVID-19 guidelines implemented in the Philippines were extremely restrictive and has severely impaired our sales and distributor activity in the market since mid-March. Restrictions were gradually lifted, allowing for improved activity in June 2020.

 

24

 

Costs and Expenses

 

The following table sets forth selected results of our operations expressed as a percentage of net sales for the three- and six-month periods ended June 30, 2020 and 2019. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.

 

Statement of Operations data

                               

(amounts in thousands)

 

Three months ended

 
   

June 30, 2020

   

June 30, 2019

 
   

Amount

   

% of net sales

   

Amount

   

% of net sales

 
                                 

Net sales

  $ 8,017       100.0

%

  $ 8,257       100.0

%

Costs and expenses:

                               

Cost of goods sold

    2,203       27.5       2,269       27.5  

Distributor royalties and commissions

    2,590       32.3       2,665       32.3  

Selling, general and administrative

    3,501       43.7       3,689       44.6  
                                 

Loss from operations

    (277 )     (3.5 )     (366 )     (4.4 )

Interest income

    39       0.5       46       0.5  

Interest expense

    (8 )     (0.1 )     (10 )     (0.1 )

Other income

    101       1.3       5       0.1  
                                 

Loss before income taxes

    (145 )     (1.8 )     (325 )     (3.9 )

Provision for income taxes

    54       0.7       63       0.8  
                                 

Net loss

  $ (199 )     (2.5

)%

  $ (388 )     (4.7

)%

                                 

Loss per common share-Basic and Diluted

  $ (0.11 )           $ (0.22 )        

 

   

Six months ended

 
   

June 30, 2020

   

June 30, 2019

 
   

Amount

   

% of net sales

   

Amount

   

% of net sales

 
                                 

Net sales

  $ 18,299       100.0

%

  $ 17,747       100.0

%

Costs and expenses:

                               

Cost of goods sold

    4,857       26.6       4,703       26.5  

Distributor royalties and commissions

    5,919       32.3       5,783       32.6  

Selling, general and administrative

    7,279       39.8       7,428       41.8  
                                 

Income (loss) from operations

    244       1.3       (167 )     (0.9 )

Interest income

    79       0.4       95       0.5  

Interest expense

    (14 )     (0.1 )     (15 )     (0.1 )

Other income (loss)

    30       0.2       (1 )     -  

Gain on sale of fixed assets

    -       -       435       2.4  
                                 

Income before income taxes

    339       1.8       347       1.9  

Provision (benefit) for income taxes

    (124 )     (0.7 )     111       0.6  
                                 

Net income

  $ 463       2.5

%

  $ 236       1.3

%

                                 

Earnings per common share-Basic and Diluted

  $ 0.27             $ 0.13          

 

25

 

Cost of Goods Sold:    

 

The cost of goods sold as a percentage of net sales in Q2 2020 remained constant at 27.5% compared to the prior-year period. On a six-month YTD basis, the percentage increased by 0.1% in 2020, as the cost of goods sold was negatively impacted by promotions in the United States that reduced our freight income and increases in shipping rates by our primary outbound shipping vendor.

 

Distributor Royalties and Commissions:

 

Distributor royalties and commissions as a percentage of net sales for Q2 2020 remained at 32.3% when compared to the prior-year period. On a six-month YTD basis, the percentage decreased by 0.3% in 2020. This decrease is due to price increases in the United States and other markets in the latter half of 2019 in which distributor commissions were not increased.

 

Selling, General and Administrative Expenses:

 

Selling, general and administrative (“SGA”) expenses decreased by $188,000 in Q2 2020 compared to the prior-year period. On a six-month YTD basis, SGA expenses decreased by $150,000.

 

SGA salaries, other staffing expenses, benefits, and incentive compensation decreased in the aggregate by $59,000 in YTD 2020, compared to the prior-year period.

 

Sales and marketing expenses, excluding compensation, decreased in the aggregate by $130,000 in YTD 2020 compared to the prior-year period. Sales and marketing expenses decreased overall as travel and in-person distributor events have been halted during the pandemic. Components of the decrease include:

 

$98,000 decrease in distributor conferences and meeting expenses.

 

$39,000 decrease in promotion expenses

 

$9,000 decrease in other sales and marketing expenses, including travel and video production expenses.

 

Offsetting these decreases is a $16,000 increase in Star Director and other distributor bonuses, credit card fees, and other expenses related to the level of sales.

 

Other general and administrative expenses increased by $40,000 in YTD 2020 versus the prior-year period.

 

Other Income/Expense:

 

The other income in Q2 2020 is primarily the result of foreign currency exchange gains on intercompany debt denominated in U.S. dollars in certain of our subsidiaries. On a year-to-date basis in 2020, the other income is primarily the result of the royalty income from Nutracom.

 

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 income tax expense of $54,000 for Q2 2020 and an income tax benefit of $124,000 for YTD 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 in Q1 2020. The remaining expense is related to income taxes on our earnings in our Philippine entity and minimum U.S. state income tax expense.

 

See Note 6 of the Condensed Consolidated Financial Statements for additional detail regarding income taxes.

 

Net Income:

 

We reported a net loss of $199,000 in Q2 2020 compared to a net loss of $388,000 in the prior-year quarter. On a six-month YTD basis, we reported net income of $463,000 compared to $236,000 in the prior-year period. On a YTD basis, profitability is improved as the result of improved sales and lower SGA expenses in the period, coupled with the income tax benefit recognized under the CARES Act.

 

26

 

Financial Condition, Liquidity and Capital Resources 

 

During the first six months of 2020, operating activities provided $222,000 of net cash, $47,000 of net cash provided by investing activities, and $862,000 was provided by financing activities. This compares to $644,000 of net cash used in operating activities, $60,000 provided by investing activities, and $500,000 provided by financing activities in the same period of 2019. Cash and cash equivalents increased by $1.10 million to $2.73 million as of June 30, 2020 compared to December 31, 2019.

 

Significant changes in working capital items consisted of an increase in inventory of $381,000, an increase in refundable income taxes of $228,000, an increase in prepaid expenses/other current assets of $304,000, and an increase in accounts payable and accrued expenses of $402,000 in the first six months of 2020. The increase in inventory is the result of an increased safety stock as a precaution to potential pandemic-related supply chain delays, 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 increase in sales in June 2020 relative to December 2019.

 

Investing activities during the first six months of 2020 consisted of an investment of $17,000 for capital expenditures, offset by payments received on notes receivable with related parties of $64,000. Financing activities during the first six months of 2020 consist of a loan of $862,000 with our primary lender under the CARES Act Payroll Protection Program (“PPP”), the details of which are described later in this section.

 

Stockholders’ equity increased to $11.51 million at June 30, 2020 compared to $11.10 million at December 31, 2019. The increase is due to our net income during the first six months of 2020 of $463,000. Our working capital balance was $3.21 million at June 30, 2020 compared to $1.88 million at December 31, 2019. The current ratio at June 30, 2020 was 1.70 compared to 1.47 at December 31, 2019.

 

Effective with a renewal 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 borrowing limit continued at $750,000. As renewed, the revolver’s interest rate continued to be based on the 30-day LIBOR plus 3.00%. As of June 30, 2020, we have borrowed $500,000 under our revolving line of credit. Borrowings under the lending agreement continue to be secured by all our tangible and intangible assets 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 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.

 

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 June 30, 2020, we had $2.73 million 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.

 

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Critical Accounting Policies

 

A summary of our critical accounting policies and estimates is presented in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2020. Our critical accounting policies remain unchanged as of June 30, 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 June 30, 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 June 30, 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 second quarter of 2020 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

 

PART II – OTHER INFORMATION

  

 

Item No. 6 Exhibits

 

Exhibit

Number

Document

 

10.1

Promissory Note between Enterprise Bank and Trust and Reliv International, Inc. dated April 20, 2020 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed May 6, 2020).

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

 

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

 

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

101

Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Stockholders’ Equity, and (v) the Notes to Condensed Consolidated Financial Statements.

  

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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:

/s/ Ryan A. Montgomery

 

 

Ryan A. Montgomery, Chief Executive Officer

 

 

Date: August 14, 2020

 

 

By:

/s/ Steven D. Albright

 

 

Steven D. Albright, Chief Financial Officer (and accounting officer)

 

 

Date: August 14, 2020

 

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