RELIV INTERNATIONAL INC - Quarter Report: 2020 March (Form 10-Q)

 

 

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 March 31, 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	371172197
(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 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 May 8, 2020 was 1,746,449 (excluding treasury shares).

 

 

 

 

		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

		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

 

(unaudited)		Three months ended March 31
		2020				2019
Product sales		$	9,548,817			$	8,810,997
Freight income			558,095				519,941
Other revenue			175,753				158,566
Net sales			10,282,665				9,489,504
Costs and expenses:
Cost of goods sold			2,654,843				2,433,732
Distributor royalties and commissions			3,328,455				3,117,572
Selling, general and administrative			3,777,682				3,739,527
Total costs and expenses			9,760,980				9,290,831
Income from operations			521,685				198,673
Other income (expense):
Interest income			39,662				49,262
Interest expense			(6,105	)			(5,412	)
Other income (expense)			(70,906	)			(5,428	)
Gain on sale of fixed assets			-				434,549
Income before income taxes			484,336				671,644
Provision (benefit) for income taxes			(178,000	)			48,000
Net income		$	662,336			$	623,644
Other comprehensive income (loss):
Foreign currency translation adjustment			(39,611	)			22,211
Comprehensive income		$	622,725			$	645,855
Earnings per common share - Basic & Diluted		$	0.38			$	0.36
Weighted average shares			1,746,000				1,746,000

 

		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):

 

																		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

 

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.

 

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.

 

3. Related Parties

 

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

 

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

 

 

 

Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

 

3. Related Parties (continued)

 

 

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:

 

 

 

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:

 

 

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:

 

 

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:

 

 

	(1)	Europe consists of United Kingdom, Ireland, France, Germany, Austria, and the Netherlands.
	(2)	Asia consists of Philippines and Malaysia.

 

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
Notes to Consolidated Financial Statements
(Unaudited)

 

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.

 

 

 

9. Subsequent Events

 

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.

 

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.