This quarterly report includes
both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results.
Words such as “may,” “should,” “could,” “would,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,”
or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these
words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from
the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any
forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our
opinions or expectations.
Item No. 2 - Management’s Discussion
and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with our financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis discusses the financial condition
and results of our operations on a consolidated basis, unless otherwise indicated.
Overview
We are a developer, manufacturer and marketer
of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports
nutrition. We sell our products through an international network marketing system utilizing independent distributors. Sales in
the United States represented approximately 77.7% of worldwide net sales for the six months ended June 30, 2017 and 77.3% of worldwide
net sales for the six months ended June 30, 2016. Our international operations currently generate sales through distributor networks
with facilities in Australia, Canada, Indonesia, Malaysia, Mexico, the Philippines, and the United Kingdom. We also operate
in Ireland, France, Germany, Austria and the Netherlands from our United Kingdom distribution center, in New Zealand from our Australia
office, and in Singapore from our Malaysia office.
We derive our revenues principally through product
sales made by our global independent distributor base, which, as of June 30, 2017, consisted of approximately 35,110 distributors.
Our sales can be affected by several factors, including our ability to attract new distributors and retain our existing distributor
base, our ability to properly train and motivate our distributor base and our ability to develop new products and successfully
maintain our current product line.
All of our sales to distributors outside the
United States are made in the respective local currency; therefore, our earnings and cash flows are subject to fluctuations
due to changes in foreign currency rates as compared to the U.S. dollar. As a result, exchange rate fluctuations may have
an effect on sales and gross margins. U.S. generally accepted accounting practices require that our results from operations be
converted to U.S. dollars for reporting purposes. Consequently, our reported earnings may be significantly affected by fluctuations
in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar.
Products manufactured by us for sale to our foreign subsidiaries are transacted in U.S. dollars. From time to time, we enter
into foreign exchange forward contracts to mitigate our foreign currency exchange risk.
Components of Net Sales and Expense
Product sales represent the actual product purchase
price typically paid by our distributors, after giving effect to distributor allowances, which can range from 10% to 40% of suggested
retail price, depending on the rank of a particular distributor. Handling and freight income represents the amounts billed to distributors
for shipping costs. We record net sales and the related commission expense when the merchandise is shipped.
Our primary expenses include cost of products
sold, distributor royalties and commissions and selling, general and administrative expenses.
Cost of products sold primarily consists of
expenses related to raw materials, labor, quality control and overhead directly associated with production of our products and
sales materials, as well as shipping costs relating to the shipment of products to distributors, and duties and taxes associated
with product exports. Cost of products sold is impacted by the cost of the ingredients used in our products, the cost of shipping
distributors’ orders, along with our efficiency in managing the production of our products.
Distributor royalties and commissions are monthly
payments made to distributors based on products sold in their downline organization. Based on our distributor agreements, these
expenses have typically approximated 23% of sales at suggested retail. Wholesale pricing discounts on distributor orders are based
on the retail value of the product. Distributor royalties and commissions are paid on an amount referred to as the business value
(“BV”), which typically ranges between 80% and 90% of the retail price of each product. Also, we include other sales
leadership bonuses, such as Ambassador bonuses, within this caption. Overall, distributor royalties and commissions remain directly
related to the level of our sales and should continue at comparable levels as a percentage of net sales going forward.
Selling, general and administrative expenses
include the compensation and benefits paid to our employees, except for those in manufacturing, all other selling expenses, marketing,
promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include
professional fees, non-manufacturing depreciation and amortization, occupancy costs, communication costs and other similar operating
expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the
cost of providing competitive salaries and benefits; the amount we decide to invest in distributor training and motivational initiatives;
and the cost of regulatory compliance.
Results of Operations
Net Sales.
Overall net sales decreased
by 9.5% in the three months ended June 30, 2017 compared to the same period in 2016. During the second quarter of 2017 (“Q2
2017”), sales in the United States decreased by 10.8%, and international sales decreased by 5.2% 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 increased by 2.8%.
The following table
summarizes net sales by geographic market for the three months ended June 30, 2017 and 2016.
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change from prior year
|
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
United States
|
|
$
|
7,450
|
|
|
|
74.4
|
%
|
|
$
|
8,356
|
|
|
|
75.6
|
%
|
|
$
|
(906
|
)
|
|
|
(10.8
|
)%
|
Australia/New Zealand
|
|
|
227
|
|
|
|
2.3
|
|
|
|
286
|
|
|
|
2.6
|
|
|
|
(59
|
)
|
|
|
(20.6
|
)
|
Canada
|
|
|
217
|
|
|
|
2.2
|
|
|
|
242
|
|
|
|
2.2
|
|
|
|
(25
|
)
|
|
|
(10.3
|
)
|
Mexico
|
|
|
89
|
|
|
|
0.9
|
|
|
|
137
|
|
|
|
1.2
|
|
|
|
(48
|
)
|
|
|
(35.0
|
)
|
Europe
|
|
|
1,308
|
|
|
|
13.1
|
|
|
|
1,621
|
|
|
|
14.7
|
|
|
|
(313
|
)
|
|
|
(19.3
|
)
|
Asia
|
|
|
716
|
|
|
|
7.1
|
|
|
|
411
|
|
|
|
3.7
|
|
|
|
305
|
|
|
|
74.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
10,007
|
|
|
|
100.0
|
%
|
|
$
|
11,053
|
|
|
|
100.0
|
%
|
|
$
|
(1,046
|
)
|
|
|
(9.5
|
)%
|
The following table summarizes net sales by
geographic market for the six months ended June 30, 2017 and 2016.
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change from prior year
|
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
United States
|
|
$
|
17,709
|
|
|
|
77.7
|
%
|
|
$
|
18,610
|
|
|
|
77.3
|
%
|
|
$
|
(901
|
)
|
|
|
(4.8
|
)%
|
Australia/New Zealand
|
|
|
486
|
|
|
|
2.1
|
|
|
|
584
|
|
|
|
2.4
|
|
|
|
(98
|
)
|
|
|
(16.8
|
)
|
Canada
|
|
|
481
|
|
|
|
2.1
|
|
|
|
549
|
|
|
|
2.3
|
|
|
|
(68
|
)
|
|
|
(12.4
|
)
|
Mexico
|
|
|
247
|
|
|
|
1.1
|
|
|
|
300
|
|
|
|
1.2
|
|
|
|
(53
|
)
|
|
|
(17.7
|
)
|
Europe
|
|
|
2,508
|
|
|
|
11.0
|
|
|
|
3,177
|
|
|
|
13.2
|
|
|
|
(669
|
)
|
|
|
(21.1
|
)
|
Asia
|
|
|
1,353
|
|
|
|
6.0
|
|
|
|
870
|
|
|
|
3.6
|
|
|
|
483
|
|
|
|
55.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
22,784
|
|
|
|
100.0
|
%
|
|
$
|
24,090
|
|
|
|
100.0
|
%
|
|
$
|
(1,306
|
)
|
|
|
(5.4
|
)%
|
The following table sets forth, as of June 30,
2017 and 2016, the number of our active distributors and Master Affiliates and above. The total number of active distributors includes
Master Affiliates and above. We define an active distributor as one that enrolls as a distributor or renews his or her distributorship
during the prior twelve months. Master Affiliates and above are distributors that have attained the highest level of discount and
are eligible for royalties generated by Master Affiliate groups in their downline organization. In February 2016, we introduced
a formal Preferred Customer program in the United States and Canada. As a result, we are including Preferred Customers as part
of our Active Distributor count. Preferred Customer programs were previously in place in Europe and other foreign markets. Preferred
Customers represent approximately 4,960 and 4,490 of the Active Distributor count as of June 30, 2017 and 2016, respectively.
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
% Change
|
|
|
|
Active
Distributors
and Preferred
Customers
|
|
|
Master
Affiliates and
Above
|
|
|
Active
Distributors
and Preferred
Customers
|
|
|
Master
Affiliates and
Above
|
|
|
Active
Distributors
and Preferred
Customers
|
|
|
Master
Affiliates and
Above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
24,670
|
|
|
|
2,690
|
|
|
|
30,080
|
|
|
|
4,110
|
|
|
|
(18.0
|
)%
|
|
|
(34.5
|
)%
|
Australia/New Zealand
|
|
|
1,240
|
|
|
|
110
|
|
|
|
1,660
|
|
|
|
130
|
|
|
|
(25.3
|
)
|
|
|
(15.4
|
)
|
Canada
|
|
|
740
|
|
|
|
90
|
|
|
|
970
|
|
|
|
150
|
|
|
|
(23.7
|
)
|
|
|
(40.0
|
)
|
Mexico
|
|
|
770
|
|
|
|
60
|
|
|
|
1,130
|
|
|
|
90
|
|
|
|
(31.9
|
)
|
|
|
(33.3
|
)
|
Europe
|
|
|
4,130
|
|
|
|
430
|
|
|
|
5,630
|
|
|
|
510
|
|
|
|
(26.6
|
)
|
|
|
(15.7
|
)
|
Asia
|
|
|
3,560
|
|
|
|
350
|
|
|
|
3,030
|
|
|
|
320
|
|
|
|
17.5
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
35,110
|
|
|
|
3,730
|
|
|
|
42,500
|
|
|
|
5,310
|
|
|
|
(17.4
|
)%
|
|
|
(29.8
|
)%
|
Use of Non-GAAP Financial Information
Net sales expressed
in local currency or net sales adjusted for the impact of foreign currency fluctuation are non-GAAP financial measures. We use
these measurements to assess the level of business activity in a foreign market, absent the impact of foreign currency fluctuation
relative to the United States dollar, which our local management has no ability to influence. This is a meaningful measurement
to management, and we believe this is a useful measurement to provide to shareholders.
The following table
provides key statistics related to distributor activity by market and should be read in conjunction with the following discussion.
Adjusted results should be considered only in conjunction with results reported according to accounting principles generally accepted
in the United States.
Distributor Activity by Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
United States
|
|
|
AUS/NZ
|
|
|
Canada
|
|
|
Mexico
|
|
|
Europe
|
|
|
Asia
|
|
|
– Total
|
|
Sales in USD (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 6/30/2017
|
|
$
|
7,450
|
|
|
$
|
227
|
|
|
$
|
217
|
|
|
$
|
89
|
|
|
$
|
1,308
|
|
|
$
|
716
|
|
|
$
|
2,557
|
|
Quarter ended 6/30/2016
|
|
$
|
8,356
|
|
|
$
|
286
|
|
|
$
|
242
|
|
|
$
|
137
|
|
|
$
|
1,621
|
|
|
$
|
411
|
|
|
$
|
2,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change in sales-Q2 2017 vs. Q2 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in USD
|
|
|
-10.8
|
%
|
|
|
-20.6
|
%
|
|
|
-10.3
|
%
|
|
|
-35.0
|
%
|
|
|
-19.3
|
%
|
|
|
74.2
|
%
|
|
|
-5.2
|
%
|
due to currency fluctuation
|
|
|
-
|
|
|
|
0.5
|
%
|
|
|
-4.6
|
%
|
|
|
1.0
|
%
|
|
|
-9.8
|
%
|
|
|
-12.0
|
%
|
|
|
-8.0
|
%
|
Sales in local currency (non-GAAP)
|
|
|
-10.8
|
%
|
|
|
-21.1
|
%
|
|
|
-5.7
|
%
|
|
|
-36.0
|
%
|
|
|
-9.5
|
%
|
|
|
86.2
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new distributors-Q2 2017
(1)
|
|
|
981
|
|
|
|
39
|
|
|
|
42
|
|
|
|
56
|
|
|
|
528
|
|
|
|
684
|
|
|
|
1,349
|
|
# of new distributors-Q2 2016
(1)
|
|
|
1,291
|
|
|
|
88
|
|
|
|
33
|
|
|
|
105
|
|
|
|
570
|
|
|
|
349
|
|
|
|
1,145
|
|
% change
|
|
|
-24.0
|
%
|
|
|
-55.7
|
%
|
|
|
27.3
|
%
|
|
|
-46.7
|
%
|
|
|
-7.4
|
%
|
|
|
96.0
|
%
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new Master Affiliates-Q2 2017
|
|
|
139
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
39
|
|
|
|
70
|
|
|
|
114
|
|
# of new Master Affiliates-Q2 2016
|
|
|
136
|
|
|
|
7
|
|
|
|
2
|
|
|
|
4
|
|
|
|
47
|
|
|
|
34
|
|
|
|
94
|
|
% change
|
|
|
2.2
|
%
|
|
|
-71.4
|
%
|
|
|
0.0
|
%
|
|
|
-75.0
|
%
|
|
|
-17.0
|
%
|
|
|
105.9
|
%
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Product orders-Q2 2017
|
|
|
31,724
|
|
|
|
1,439
|
|
|
|
827
|
|
|
|
702
|
|
|
|
4,576
|
|
|
|
7,207
|
|
|
|
14,751
|
|
# of Product orders-Q2 2016
|
|
|
35,979
|
|
|
|
1,809
|
|
|
|
867
|
|
|
|
949
|
|
|
|
5,665
|
|
|
|
2,894
|
|
|
|
12,184
|
|
% change
|
|
|
-11.8
|
%
|
|
|
-20.5
|
%
|
|
|
-4.6
|
%
|
|
|
-26.0
|
%
|
|
|
-19.2
|
%
|
|
|
149.0
|
%
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
United States
|
|
|
AUS/NZ
|
|
|
Canada
|
|
|
Mexico
|
|
|
Europe
|
|
|
Asia
|
|
|
–
Total
|
|
Sales in USD (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD ended 6/30/2017
|
|
$
|
17,709
|
|
|
$
|
486
|
|
|
$
|
481
|
|
|
$
|
247
|
|
|
$
|
2,508
|
|
|
$
|
1,353
|
|
|
$
|
5,075
|
|
YTD ended 6/30/2016
|
|
$
|
18,610
|
|
|
$
|
584
|
|
|
$
|
549
|
|
|
$
|
300
|
|
|
$
|
3,177
|
|
|
$
|
870
|
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change in sales-YTD 2017 vs. YTD 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in USD
|
|
|
-4.8
|
%
|
|
|
-16.8
|
%
|
|
|
-12.4
|
%
|
|
|
-17.7
|
%
|
|
|
-21.1
|
%
|
|
|
55.5
|
%
|
|
|
-7.4
|
%
|
due to currency fluctuation
|
|
|
-
|
|
|
|
2.3
|
%
|
|
|
-0.5
|
%
|
|
|
-5.8
|
%
|
|
|
-11.0
|
%
|
|
|
-10.0
|
%
|
|
|
-8.1
|
%
|
Sales in local currency (non-GAAP)
|
|
|
-4.8
|
%
|
|
|
-19.1
|
%
|
|
|
-11.9
|
%
|
|
|
-11.9
|
%
|
|
|
-10.1
|
%
|
|
|
65.5
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new distributors-YTD 2017
(2)
|
|
|
2,594
|
|
|
|
105
|
|
|
|
86
|
|
|
|
139
|
|
|
|
994
|
|
|
|
1,387
|
|
|
|
2,711
|
|
# of new distributors-YTD 2016
|
|
|
3,005
|
|
|
|
200
|
|
|
|
77
|
|
|
|
227
|
|
|
|
1,245
|
|
|
|
863
|
|
|
|
2,612
|
|
% change
|
|
|
-13.7
|
%
|
|
|
-47.5
|
%
|
|
|
11.7
|
%
|
|
|
-38.8
|
%
|
|
|
-20.2
|
%
|
|
|
60.7
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of new Master Affiliates-YTD 2017
|
|
|
294
|
|
|
|
5
|
|
|
|
5
|
|
|
|
8
|
|
|
|
73
|
|
|
|
158
|
|
|
|
249
|
|
# of new Master Affiliates-YTD 2016
|
|
|
497
|
|
|
|
21
|
|
|
|
13
|
|
|
|
13
|
|
|
|
96
|
|
|
|
80
|
|
|
|
223
|
|
% change
|
|
|
-40.8
|
%
|
|
|
-76.2
|
%
|
|
|
-61.5
|
%
|
|
|
-38.5
|
%
|
|
|
-24.0
|
%
|
|
|
97.5
|
%
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Product orders-YTD 2017
|
|
|
66,732
|
|
|
|
2,891
|
|
|
|
1,641
|
|
|
|
1,795
|
|
|
|
9,280
|
|
|
|
12,882
|
|
|
|
28,489
|
|
# of Product orders-YTD 2016
|
|
|
75,047
|
|
|
|
3,696
|
|
|
|
1,936
|
|
|
|
1,995
|
|
|
|
11,824
|
|
|
|
5,730
|
|
|
|
25,181
|
|
% change
|
|
|
-11.1
|
%
|
|
|
-21.8
|
%
|
|
|
-15.2
|
%
|
|
|
-10.0
|
%
|
|
|
-21.5
|
%
|
|
|
124.8
|
%
|
|
|
13.1
|
%
|
|
(1)
|
The new distributor totals for Q2 2017 and Q2 2016 include
964 and 927, respectively, of new worldwide preferred customers.
|
|
(2)
|
The new distributor totals for YTD 2017 and YTD 2016 include
1,983 and 1,763, respectively, of new worldwide preferred customers.
|
United States
|
·
|
Net sales declined in the United States in Q2 2017 compared to the prior-year quarter, as new distributor/preferred customer
enrollments and sales of the new Fit3 products declined in Q2 2017 compared to the sales when launched in the first quarter of
2017 (“Q1 2017”).
|
|
·
|
In February 2017, we launched Fit3
TM
, a new fitness and weight loss program. The Fit3 program consists of three
principal components: nutrition coaching, exercise coaching, and three new Fit3 formulas: Active, Burn and Purify. Active combines
a three-protein blend of whey, casein and non-GMO soy with additional ingredients to support weight loss, athletic performance
and energy. Burn and Purify are capsule products, with Burn as a targeted fat-burning formula and Purify as a probiotic, liver
cleanse and metabolic supporter.
|
|
·
|
Sales of the Fit3 product line represented 4.9% of net sales in the U.S. in Q2 2017, down from 10.1% of net U.S. sales in Q1
2017. Products in the LunaRich line, including Reliv Now® and LunaRich X™, continued to perform well, constituting 16.8%
and 13.7% of net sales in the United States, respectively, in Q2 2017. Reliv NOW and LunaRich X represented 17.9% and 15.1%, respectively,
of net sales in the United States in the prior-year quarter.
|
|
·
|
For the six months ended June 30, 2017 (“YTD 2017”), sales of Reliv Now and LunaRich X represented 16.2% and 13.4%,
respectively, of net sales in the United States. Sales of the Fit3 product line represented 7.9% of net sales in the United States
for the YTD 2017 period.
|
|
·
|
Distributor/preferred customer enrollments decreased by 24.0% and new Master Affiliate qualifications increased by 2.2% in
Q2 2017 compared to the prior year quarter.
|
|
·
|
Distributor retention was 67.8% for the twelve month period ended June 30, 2017 compared to 66.9% for all of 2016. Distributor
retention is determined by the percentage of active distributors from 2016 that renewed their distributorships in 2017.
|
|
·
|
Our average order size in Q2 2017 increased by 1.1% to $324 at suggested retail value compared to the prior-year quarter. The
number of product orders decreased by 11.8% in Q2 2017 compared to the prior year quarter for the same reasons as the overall decrease
in sales.
|
International Operations
|
·
|
The average foreign exchange rate for the U.S. dollar for YTD 2017 was stronger versus the British pound, Philippine peso,
Canadian dollar, and Mexican peso when compared with the average exchange rates for the same period in 2016. The average exchange
rates for the Australian and New Zealand dollars both increased versus the U.S. dollar in YTD 2017.
|
|
·
|
We continue to review prices and margins in all of our international markets and plan to make adjustments as needed during
2017. We are also reviewing sales by product to phase out products with lower sales levels and gross margins as strategically appropriate.
|
|
·
|
Australia/New Zealand and Canadian net sales in Q2 2017 decreased by 21.1% and 5.7%, respectively, in local currency compared
to the prior-year quarter as the result of decreased distributor activity in the market.
|
|
·
|
Net sales in Mexico decreased by 36.0% in local currency in Q2 2017 compared to the prior-year quarter. Sales decreased as
new distributor enrollments and the number of product orders declined by 46.7% and 26.0%, respectively.
|
|
·
|
Net sales in Europe decreased by 9.5% in local currency in Q2 2017 compared to the prior-year quarter. Distributor activity
declined both in the form of new distributor and preferred customer enrollments and in new Master Affiliate qualifications in the
region.
|
|
·
|
Sales in Asia increased by 86.2% in local currency in Q2 2017 compared to the prior-year quarter led by strong sales growth
in the Philippines. Local currency sales in the Philippines improved 107% in Q2 2017 as all measures of distributor activity showed
strong increases in the market. Local sales campaigns involving our NOW for Kids nutritional product continue to show good success.
|
Costs and Expenses
The following table sets forth selected results
of our operations expressed as a percentage of net sales for the three- and six-month periods ended June 30, 2017 and 2016. Our
results of operations for the periods described below are not necessarily indicative of results of operations for future periods.
Income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Three months ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,007
|
|
|
|
100.0
|
%
|
|
$
|
11,053
|
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
2,328
|
|
|
|
23.3
|
|
|
|
2,531
|
|
|
|
22.9
|
|
Distributor royalties and commissions
|
|
|
3,555
|
|
|
|
35.5
|
|
|
|
3,921
|
|
|
|
35.5
|
|
Selling, general and administrative
|
|
|
4,632
|
|
|
|
46.3
|
|
|
|
5,541
|
|
|
|
50.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(508
|
)
|
|
|
(5.1
|
)
|
|
|
(940
|
)
|
|
|
(8.5
|
)
|
Interest income
|
|
|
26
|
|
|
|
0.3
|
|
|
|
27
|
|
|
|
0.2
|
|
Interest expense
|
|
|
(28
|
)
|
|
|
(0.3
|
)
|
|
|
(26
|
)
|
|
|
(0.2
|
)
|
Other income
|
|
|
12
|
|
|
|
0.1
|
|
|
|
71
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(498
|
)
|
|
|
(5.0
|
)
|
|
|
(868
|
)
|
|
|
(7.9
|
)
|
Provision for income taxes
|
|
|
22
|
|
|
|
0.2
|
|
|
|
120
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(520
|
)
|
|
|
(5.2
|
)%
|
|
$
|
(988
|
)
|
|
|
(8.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share-Basic and Diluted
(1)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
22,784
|
|
|
|
100.0
|
%
|
|
$
|
24,090
|
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
5,164
|
|
|
|
22.7
|
|
|
|
5,515
|
|
|
|
22.9
|
|
Distributor royalties and commissions
|
|
|
8,053
|
|
|
|
35.3
|
|
|
|
8,545
|
|
|
|
35.5
|
|
Selling, general and administrative
|
|
|
9,558
|
|
|
|
42.0
|
|
|
|
11,151
|
|
|
|
46.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9
|
|
|
|
-
|
|
|
|
(1,121
|
)
|
|
|
(4.7
|
)
|
Interest income
|
|
|
51
|
|
|
|
0.2
|
|
|
|
54
|
|
|
|
0.2
|
|
Interest expense
|
|
|
(52
|
)
|
|
|
(0.2
|
)
|
|
|
(53
|
)
|
|
|
(0.2
|
)
|
Other income
|
|
|
45
|
|
|
|
0.2
|
|
|
|
185
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
53
|
|
|
|
0.2
|
|
|
|
(935
|
)
|
|
|
(3.9
|
)
|
Provision for income taxes
|
|
|
49
|
|
|
|
0.2
|
|
|
|
97
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4
|
|
|
|
-
|
%
|
|
$
|
(1,032
|
)
|
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
(1)
|
|
$
|
-
|
|
|
|
|
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
(1)
|
The three- and six-month per share amounts for 2016 have
been adjusted for the 1-for-7 reverse stock split effective on October 4, 2016.
|
Cost of Products Sold:
|
·
|
The cost of products sold as a percentage of net sales
in Q2 2017 increased compared to the prior-year period; however, for YTD 2017, the percentage decreased compared to the prior-year
period. For Q2 2017, the cost of products sold was negatively impacted by lower plant utilization.
|
Distributor Royalties and Commissions:
|
·
|
Distributor royalties and commissions as a percentage of
net sales for Q2 2017 and YTD 2017 remained relatively steady compared to the prior-year periods. Overall, distributor royalties
and commissions remain directly related to the level of our sales and should continue at comparable levels as a percentage of
net sales.
|
Selling, General and Administrative Expenses:
|
·
|
Selling, general and administrative expenses declined by $909,000 in Q2 2017 and declined by $1.59 million in YTD 2017 compared
to the prior-year periods.
|
|
·
|
Salaries, other staffing expenses, benefits, and incentive compensation decreased in the aggregate by $826,000 in YTD 2017,
compared to the prior-year period. Total compensation expense decreased as the result of continued headcount reductions in the
United States through attrition and a worldwide workforce reduction that took place in May 2016.
|
|
·
|
Sales and marketing expenses decreased by $370,000 in YTD 2017 vs. the prior-year period. Components of decrease include:
|
|
o
|
Conference and other corporate-sponsored distributor meeting expenses decreased by $244,000 as we have reduced the quantity
of corporate-sponsored events and the cost of our major distributor conference.
|
|
o
|
Star Director and other distributor bonuses, credit card fees, and other expenses related to the level of sales decreased by
$154,000.
|
|
·
|
Other general and administrative expenses decreased by $373,000 in YTD 2017 versus the prior-year period.
|
|
o
|
Research & development expenses, along with other foreign product compliance requirements decreased by $175,000 in YTD
2017 compared to the prior-year period.
|
|
o
|
Other decreases from YTD 2017 vs. YTD 2016 include:
|
|
§
|
Consulting fees decreased by $38,000.
|
|
§
|
Utility expenses decreased by $33,000.
|
|
§
|
Computer software maintenance expenses decreased by $39,000.
|
|
§
|
Shareholder communication and other SEC-related expenses decreased by $41,000.
|
Other Income/Expense:
|
·
|
The other income in YTD 2017 and YTD 2016 is primarily
the result of foreign currency exchange gains on intercompany debt denominated in U.S. dollars in certain of our subsidiaries.
|
Income Taxes:
|
·
|
We reported an income tax expense of $49,000 for YTD 2017.
|
|
·
|
See Note 4 of the Condensed Consolidated Financial Statements for additional detail regarding income taxes, including a reconciliation
of the income tax expense/benefit to the U.S. statutory rate for each period.
|
Net Income/Loss:
|
·
|
We reported a net loss of $520,000 in Q2 2017 compared to a net loss of $988,000 in the prior-year quarter. For YTD 2017, we
reported net income of $4,000 compared to a net loss of $1.03 million in the prior year-to-date period. Although net sales decreased
by 9.5% in Q2 2017 vs. Q2 2016, our results from operations improved as the result of the continuing impact of the reduction in
selling, general and administrative expenses from last year’s cost reduction initiative.
|
Liquidity and Capital Resources
During the first six months of 2017, we generated
$339,000 of net cash from operating activities, $338,000 was used in investing activities, and we used $228,000 in financing activities.
This compares to $451,000 of net cash provided by operating activities, $36,000 provided by investing activities, and $289,000
used in financing activities in the same period of 2016. Cash and cash equivalents decreased by $158,000 to $3.45 million
as of June 30, 2017 compared to December 31, 2016.
Significant changes in working capital items
consisted of a decrease in inventory of $112,000, and an increase in prepaid expenses/other current assets of $343,000 in the first
six months of 2017. The decrease in inventory is the result of production adjustments subsequent to the launch of the Fit3 product
line, and the increase in prepaid expenses/other current assets represents the annual premium payments made in the first quarter
of 2017 on most of the corporate business insurance policies.
Investing activities during the first six months of 2017 consisted
of an investment of $404,000 for capital expenditures, offset by payments received on a distributor note receivable of $54,000.
Financing activities during the first six months of 2017 consisted of principal payments of $228,000 on long-term borrowings.
Stockholders’ equity increased to $15.0
million at June 30, 2017 compared to $14.9 million at December 31, 2016. The increase is due to our net income during
the first six months of 2017 of $4,000 coupled with a favorable adjustment in foreign currency translation of $91,000. Our working
capital balance was $4.28 million at June 30, 2017 compared to $4.31 million at December 31, 2016. The current ratio at June
30, 2017 was 1.91 compared to 1.93 at December 31, 2016.
Our $3.25 million term loan has a term of three
years and requires monthly term loan payments, under a ten-year amortization, consisting of principal of $27,080 plus interest
with a balloon payment for the outstanding balance due and payable on September 30, 2018. The term loan's interest rate is based
on the 30-day LIBOR plus 2.25% and was 3.24% at June 30, 2017.
Our $3.5 million revolving line of credit agreement
accrues interest at a floating interest rate based on the 30-day LIBOR plus 2.25% and has a maturity date of April 30, 2018. As
of June 30, 2017, there were no outstanding borrowings on the revolving line of credit.
Borrowings under the new lending agreements
are secured by all our tangible and intangible assets, a whole life insurance policy on the life of our Chief Executive Officer,
and by a mortgage on the real estate of our headquarters.
The lending agreements include quarterly covenants
requiring us to maintain net tangible worth of not less than $9.5 million, and i) a cumulative minimum EBITDA requirement of $400,000,
$600,000, and $800,000 for the fiscal periods ending June 30, 2017, September 30, 2017, and December 31, 2017, respectively; and
ii) a minimum EBITDA of $200,000 for the quarter ended March 31, 2018.
As defined, EBITDA means our consolidated net
income for such period, before interest expense, income tax expense, depreciation and amortization, and management fees, and further
adjusted to exclude any gain or loss on the sale of assets, other extraordinary gains or losses, and any one-time adjustment approved
by the lender.
At June 30, 2017, we were in compliance with
all applicable covenants.
Management believes that our cash on hand, internally
generated funds, and revolving line of credit extension will be sufficient to meet working capital requirements and our debt service
requirements for the next twelve months.
Critical Accounting Policies
A summary of our critical
accounting policies and estimates is presented in our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 28, 2017. Our critical accounting policies remain unchanged as of June 30, 2017.