R E L I V I N T E R N AT I O N A L — 2016 AN N UA L RE P OR T
1 Letter to Shareholders
5 Reliv Kalogris Foundation
7 Directors and Executive Officers
8 Five-Year Financial Summary,
Stock Price & Dividend Summary
9 10-K
inside back cover:
Shareholder Information
2016 Financial Highlights
(In thousands, except per share amounts)
At December 31
Net sales
Net income (loss)
Earnings per share (loss)
Basic
Diluted
Total assets
Long-term debt, less current maturities
Stockholders’ equity
Return on net sales
Return on average total assets
Return on equity
Current ratio
2016
$ 45,513
(625)
(0.34)
(0.34)
22,466
2,518
14,914
-1.4%
-2.7%
-4.1%
1.93
% change
(12.1)
N.M.
2015
$ 51,769
(1,225)
N.M.
N.M.
(7.4)
(20.3)
(6.1)
(0.67)
(0.67)
24,261
3,160
15,882
-2.4%
-4.7%
-7.4%
2.08
N.M. = Not Meaningful
For people of all backgrounds who want to lead healthy, self-directed and
meaningful lives, Reliv International offers exceptionally effective nutritional
products, a simple and profitable business opportunity and the chance
to change lives and provide hope to people around the world. Reliv
operates in 15 countries worldwide: United States, Australia, New Zealand,
Canada, Mexico, United Kingdom, Ireland, the Philippines, Malaysia, Singapore,
Germany, Austria, the Netherlands, Indonesia and France.
Dear Fellow Reliv Shareholder,
In 2016, we began the year transforming our business opportunity and distributor compensation plan to
simplify and enhance their appeal to current and potential distributors alike. By the end of the year, we were
preparing to launch a new product line and fitness program called Fit3™ to transform our appeal to individuals
interested in weight loss and their fitness level. In 2016 we built a foundation for growth by strengthening
our business opportunity and developing a dynamic life-changing nutritional and fitness program.
Reliv continues to internally develop, as evidenced by our Fit3 line, and manufacture its proprietary line of
high quality nutritional supplements, and that will always remain at the core of what we do. In fact, we are
so committed to that core principle that we have invested in equipment to install a canister line so that
we can produce all of the Fit3 products in our facility. We know our products work and are of the highest
quality, and the cutting-edge science behind them gives Reliv a competitive advantage.
Now, though, we combined that cutting-edge nutritional science with a real-world nutrition and exercise
plan to create a program that we believe will be a catalyst for growth in 2017 and years to come. Our Fit3
program is a comprehensive lifestyle program that doesn’t involve dieting and deprivation but rather adopting
healthier, fitter options as part of your daily routine. Our Fit3 program allows each person the flexibility to
adapt the program to their lifestyle and daily routine in a scale and on a timeline of their choosing — all with
a community of supporters and others encountering the same challenges and successes available through
social media.
While 2016 was a challenging year for us, we believe we have laid the groundwork for growth in 2017 and
the years ahead. This letter will go into greater detail on this and our Fit3 program. First, I’ll report on our
2016 financial results.
1
2016 Results
For 2016, Reliv reported a net loss of $625,000 (loss per diluted share of $0.34), compared to a net loss for
2015 of $1.2 million (loss per diluted share of $0.67). All loss per share amounts are based on the number of
shares outstanding subsequent to the one-for-seven reverse stock split that took effect on October 4, 2016.
Net sales in 2016 were $45.5 million, compared to $51.8 million in 2015, a decrease of 12.1%. All of our
markets experienced declines in net sales, with a decrease in net sales in the U.S. of 11.9% and a decrease
in foreign net sales of 12.9%. Foreign net sales were impacted by a strengthening U.S. dollar, with 8.1% of
the decline due to the impact of foreign currency fluctuation.
Beginning in May 2016, we executed a cost reduction program to reduce expenses in light of the current
level of sales and activity. As a result of this program and other measures taken, we reduced our selling,
general and administrative expenses from $23.6 million in 2015 to $20.2 million in 2016, and we returned
to profitability in the third and fourth quarters of 2016. We continue to monitor our expenses closely and
critically evaluate those areas that are not providing an appropriate return on investment.
Our financial condition remains solid with $3.6 million in cash and cash equivalents as of December 31, 2016,
compared to $3.3 million at the end of the prior year. Our net cash generated from operating activities was
$1.5 million in 2016, compared to $800,000 of cash used in operations in 2015. Further, our long-term debt
decreased from $3.2 million at the end of 2015 to $2.5 million at the end of 2016.
As mentioned above, we executed a one-for-seven (1:7) reverse stock split and our common stock began
trading on a split-adjusted basis when the market opened on October 4, 2016. As a result of the reverse
stock split, each seven pre-split shares of common stock automatically combined into one new share
of common stock, and the number of outstanding common shares decreased from approximately 12.9
million shares to 1.85 million shares. This reverse stock split, and the resulting increase in our share price,
allowed us to satisfy the NASDAQ minimum share price requirement for continued listing on the NASDAQ
Capital Market.
4
Making the Reliv Business Opportunity Stronger
In 2016, we continued to train our distributor force on the compensation and marketing plan changes
made early in the year. On February 1, 2016, major updates to our distributor compensation plan went into
effect in the United States and Canada. The updated compensation plan adjusted profit level qualifications
for distributors and introduced a new preferred customer program. The new profit level qualifications simplify
the compensation structure and provide a clearer, more achievable path to advancement.
The preferred customer program allows new customers to receive an automatic discount on all product
orders without having to sign up as a distributor — a first for Reliv. People interested in our nutritional
solutions but hesitant to launch a Reliv distributorship now have added incentive to become customers.
Similar programs within the direct sales industry have been met with great success, and we anticipate this
program will lead to an increase in customer retail sales.
We also have developed a new five-step program for the distributors to present the company, products,
and opportunity to new prospective distributors and customers called “ICSAR”. ICSAR stands for: 1) Identify,
2) Connect, 3) Share the story, 4) Ask for a decision, and 5) Register & go. We developed a number of tools
and videos training our distributors how to execute these steps and create a path to success.
We continued to improve our mobile web presence by making our entire Reliv corporate website mobile-
ready. This allows distributors to work their Reliv business on whatever platform they choose: phone, tablet,
or laptop computer. We also extended our online capabilities around the world, including the expansion of
our personal websites tool for distributors in Europe and the ability to enroll new distributors and customers
online in nearly all of our markets around the globe.
In February 2017, the U.S. Patent & Trademark Office issued Reliv a patent on CardioSentials®, Reliv’s 10th
patented product historically, again recognizing Reliv’s commitment to providing unique and highly effective
formulas that accomplish their intended results like no other products in the marketplace. In addition to
our patented products, Reliv, through its wholly-owned subsidiary SL Technology, Inc., holds several patents
related to lunasin, the active ingredient in LunaRich X™. Few companies can match the breadth of our
patented technology or the achievements of our R&D team — our Fit3 line being their latest achievement.
3
Fit3 Launch
On February 1st of this year, we formally announced the launch of Fit3, a new fitness and weight loss program
created to help real people get real fitness and weight loss results. Weight management is one of the most
critical elements of an individual’s wellness, and we believe we offer a real and achievable solution through
our Fit3 program. Fit3 is our comprehensive solution to promote a healthy weight, improve physical perfor-
mance and create and maintain a fit lifestyle for life.
The Fit3 program consists of three principal components: (1) nutrition coaching, (2) exercise coaching and
Fit3 workout videos, and (3) three new Fit3 formulas: Active, Burn and Purify. Active combines a three-protein
blend of whey, casein and non-GMO soy with active ingredients to support weight loss, athletic performance
and energy. Burn promotes weight loss when combined with healthy eating and exercise through a targeted
fat-burning formula. Purify completes the trio as a probiotic, liver cleanse and metabolic supporter intended
to cleanse the digestive system and allow maximum absorption and metabolic efficiency.
We designed the Fit3 program to provide flexibility for people to incorporate it into their daily routines.
We provide guides for healthy portions and options to encourage consumption of multiple well-balanced
meals and snacks throughout the day. Our exercise coaching and videos allow for individuals at various
fitness levels to begin and maintain exercise routines on their own time and at a level with which they are
comfortable. The Fit3 products provide a complete nutritional platform to enhance weight loss and improve
an individual’s fitness level. In addition, through social media we and our distributors provide continuous
encouragement, ideas and best practices to assist every Fit3 participant’s journey towards a more fit and
confident outcome.
Our Fit3 program offers an unprecedented opportunity to combine Reliv’s industry-renowned nutrition
with a comprehensive lifestyle program to promote weight loss and improved fitness. Fit3 provides an
enticing and dynamic entry option for potential distributors and customers in addition to our essential
nutrition. We believe our Fit3 program will broaden our appeal to the public and provide an avenue for
distributors to attract those individuals looking for weight management solutions.
4
Reliv Kalogris Foundation —
Moving forward to the next 20 years.
The Reliv Kalogris Foundation (RKF) is a central component of Reliv’s mission to Nourish Our World. Since
1995, the Foundation has provided more than $46 million in free nutritional supplements to malnourished
people. Today, it feeds more than 35,000 people, mostly children, daily through more than 250 feeding
centers in nine countries. Donations to the Reliv Kalogris Foundation for 2016 totaled $747,000.
In February 2016 the RKF held our inaugural See the Change trip. See the Change is a trip designed by
the RKF staff for Reliv distributors to experience our feeding programs first hand in Haiti. The first trip
was a great success with nine distributors participating. The six-day trip included visiting several feeding
programs, distributing morning shakes to the children, a service painting project at Haute Limbe Baptist
School and a visit to Dr. Manno’s clinic. The RKF is excited about offering this opportunity to distributors
on a yearly basis.
In July, the RKF kicked off Saturday morning at International Conference in St. Louis with its annual fun-
draising event by spreading awareness for the organization and its efforts to Nourish Our World, and
the year ended with the annual Papa Noel trip in December where Christmas gifts were provided to the
orphaned children of the RKF Home in Petite Anse, Haiti.
5
Fit for Life
Our theme for 2017 is “Fit for Life.” This applies to both physical fitness — through our Fit3 program, our
essential nutrition and LunaRich-based products, or one of our other targeted solutions — and the financial
fitness of our distributors by making the most of our home-based business opportunity. Getting “Fit” will
be our focus across multiple platforms and our business in general. Armed with the Fit3 program and other
business opportunity enhancements, we look forward to making 2017 the first of many years of growth
and profitability.
Here’s to a profitable and prosperous 2017,
Robert L. Montgomery
Chairman and Chief Executive Officer
6
Corporate Officers
Robert L. Montgomery
Chairman and
Chief Executive Officer
Carl W. Hastings, Ph.D.
Vice Chairman and
Chief Scientific Officer
Ryan A. Montgomery
President, Reliv International, Inc.
R. Scott Montgomery
President, Reliv Asia-Pacific
Steven G. Hastings
Executive Vice President
Sales & Marketing
Thomas W. Pinnock
Executive Vice President
Chief of Sales
Brett M. Hastings
Senior Vice President and
Chief Operating Officer
Steven D. Albright
Senior Vice President, Finance
and Chief Financial Officer
Stephen M. Merrick
Senior Vice President,
General Counsel and Secretary
Debra P. Hellweg
Vice President, Operations
Kurt C. Wulff
Vice President, Marketing
Board of Directors
Robert L. Montgomery
Chairman and
Chief Executive Officer
Reliv International, Inc.
Carl W. Hastings, Ph.D.
Vice Chairman and
Chief Scientific Officer
Reliv International, Inc.
Robert M. Henry
Private Investor and Consultant
John B. Akin
Retired Vice President,
A. G. Edwards, Inc.
John M. Klimek
President
HFR Asset Management, LLC
7
Five-Year Financial Summary
(In thousands, except per share amounts)
Net sales
Net income (loss)
Earnings (loss) per common share(1):
Basic
Diluted
Cash dividends per share of common stock (1)
Total assets
Long-term debt, less current maturities
2016
$ 45,513
(625)
2015
$ 51,769
(1,225)
2014
$ 57,345
725
2013
$ 68,207
777
2012
$ 68,710
1,359
(0.34)
(0.34)
—
22,466
2,518
(0.67)
(0.67)
—
24,261
3,160
0.42
0.42
—
26,848
3,547
0.42
0.42
0.21
27,599
3,782
0.77
0.77
0.21
25,259
2,401
(1) Earnings (loss) and cash dividends per common share for 2012-2015 have been retroactively adjusted
for the 1:7 reverse stock split in October 2016
Stock Price & Dividend Summary
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 7.14
6.02
7.91
12.53
High
$ 8.68
9.80
9.66
5.53
Low
$ 3.43
3.57
3.85
3.84
Low
$ 7.49
7.42
4.69
2.59
Close
$ 5.46
4.20
4.83
4.64
Close
$ 7.84
8.82
5.18
4.06
Dividend
$ —
—
—
—
Dividend
$ —
—
—
—
Note: All stock price data has been adjusted for the 1:7 reverse stock split in October 2016.
8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri
(Address of principal executive offices)
371172197
(I.R.S. Employer Identification Number)
63005
(Zip Code)
(636) 537-9715
Registrant’s telephone number, including area code
Securities registered pursuant to Sections 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.001
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller Reporting Company
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No
Based upon the closing price of $0.60 per share of the registrant’s common stock as reported on the
NASDAQ Global Select Market on June 30, 2016, the aggregate market value of the common stock held by non-
affiliates of the registrant was approximately $4.8 million. (The determination of stock ownership by non-affiliates
was made solely for the purpose of responding to the requirements of the Form and the registrant is not bound by
this determination for any other purpose.)
The number of shares outstanding of the registrant’s common stock as of March 10, 2017 was 1,845,160
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Document
Sections of the registrant’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 25, 2017, which is expected
to be filed no later than 120 days after December 31, 2016
Part of Form 10-K into Which
Document Is Incorporated
Part III
INDEX
Part I
Item No. 1
Item No. 2
Item No. 3
Part II
Item No. 5
Item No. 7
Item No. 8
Item No. 9
Item No. 9A
Item No. 9B
Part III
Item No. 10
Item No. 11
Item No. 12
Item No. 13
Item No. 14
Part IV
Business ................................................................................................................................ 1
Properties .............................................................................................................................. 18
Legal Proceedings ................................................................................................................. 18
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................................................................ 19
Management’s Discussion and Analysis of
Financial Condition and Results of Operations..................................................................... 20
Financial Statements and Supplementary Data ..................................................................... 29
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .............................................................................. 29
Controls and Procedures ....................................................................................................... 29
Other Information ................................................................................................................. 29
Directors, Executive Officers and Corporate Governance .................................................... 30
Executive Compensation....................................................................................................... 30
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............................................................. 30
Certain Relationships and Related Transactions, and Director Independence ...................... 30
Principal Accounting Fees and Services ............................................................................... 30
Item No. 15
Exhibits and Financial Statement Schedules......................................................................... 30
FORWARD-LOOKING STATEMENTS
This annual 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 annual report. 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.
PART I
Item No. 1 - Business
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 using independent distributors. We have sold products in the United States
since 1988 and in selected international markets since 1991.
We currently offer 20 nutritional supplements, and our product offering has selectively evolved over our
history. Our core line of nutritional supplements which represented 62.9% of net sales for the year ended December
31, 2016, included the following five products:
•
•
•
•
Reliv Classic and Reliv NOW — two basic nutritional supplements containing a full and balanced
blend of vitamins, minerals, protein and herbs
Innergize! — an isotonic sports supplement in two flavors
FibRestore — a high-fiber and antioxidant supplement
LunaRich X — a soy concentrate with elevated levels of lunasin, in capsule form
Following the introduction of our LunaRich X capsules in 2013, we experienced a gradual shift in our
product sales mix reflecting an increasing emphasis on Reliv NOW and LunaRich X capsules. For the year ended
December 31, 2016, Reliv NOW constituted 22.6% of net product sales, and LunaRich X capsules represented
17.7%. The combination of Reliv NOW and LunaRich X capsules have increasingly become the focus of our
product strategy. As a result of this strategy, we offer a Super Pack product kit that contains four cans of Reliv
NOW and four bottles of LunaRich X each containing 60 capsules. We also offer a Super Pack kit with Reliv
Classic instead of Reliv NOW. The Super Pack was designed as a simple, focused approach that capitalizes on our
most popular products and provides an entry point at a 25% discount for new distributors who want to build a
business.
In February 2017, we launched our Fit3 fitness and weight loss program in the United States to broaden and
bolster our weight management offering, and to appeal to a broader demographic than our essential nutrition. The
Fit3 program consists of three principal components: (1) nutrition coaching, (2) exercise coaching and videos, and
(3) three fitness products: Active, Burn and Purify. The Fit3 program involves our most interactive offering for
distributors and customers, including a separate website with independent content and a focused social media
outreach and support initiative. We offer a Fit Kit that includes a 90-day supply of the Fit3 products and access to
the information, tools and videos we offer through the program. We believe the Fit3 program provides an attractive
alternate entry point for new distributors or customers who are more interested in weight loss and fitness than our
essential nutrition or targeted solutions.
We periodically refine our products and introduce related new products and product categories. Our
internal research and development team has developed most of our products, and we hold U.S. patents on six of
1
these products —Arthaffect, ReversAge, GlucAffect, ProVantage, 24K and CardioSentials. We also own several
U.S. and international patents and patent applications related to lunasin through our acquisition of the lunasin
technology in September 2016.
We believe that our network marketing model is the best method for the marketing and sale of our products
because it utilizes ongoing personal contact among our distributors and their retail customers. This enables our
distributors to communicate directly regarding the products, the business opportunity we offer and their personal
experiences with both. We provide our distributors with a financially rewarding and entrepreneurial business
opportunity, affording them the ability to earn compensation both from the direct sale of products and from sales
volume generated by distributors they sponsor. We actively support our distributors by providing marketing
materials, a dependable product fulfillment system and frequent educational, training and motivational programs.
The majority of our sales traditionally has been, and is expected to continue to be, made through our
distributors in the United States. We also currently generate sales through distributor networks in Australia, Austria,
Canada, France, Germany, Indonesia, Ireland, Malaysia, Mexico, the Netherlands, New Zealand, the Philippines,
Singapore and the United Kingdom. In each country in which we conduct business, our distributors operate under a
business and compensation model that maintains consistent marketing, sales, fulfillment, and compliance
procedures. As of December 31, 2016, our network consisted of approximately 38,480 distributors and preferred
customers —27,220 in the United States and 11,260 across our international markets.
We manufacture nearly all of our powdered nutritional supplements and all of our encapsulated products at
our facility in Chesterfield, Missouri. We believe our ability to formulate and manufacture our own nutritional
supplements enables us to produce our products efficiently while maintaining our high standards of quality
assurance and proprietary product composition.
Industry Overview
Nutritional Supplement Market
We operate primarily in the $38.8 billion U.S. nutritional supplement market, which is part of the broader
$140 billion U.S. nutrition industry according to data published by the Nutrition Business Journal, or NBJ, and an
estimated $320.0 billion global nutrition industry, also according to the NBJ. Additionally, more than 170 million
Americans, or 71% of all U.S. adults, take dietary supplements annually according to the Council for Responsible
Nutrition.
A combination of demographic, healthcare and lifestyle trends are expected to drive continued growth in
the nutritional supplement market. These trends include:
•
•
Aging Population: The older population (persons 65 years or older) numbered 44.7 million in 2013
according to latest information from the Department of Health and Human Services. They represented
14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be
approximately 98 million older persons living in the United States, more than twice their number in
2013. Recent data from the Council for Responsible Nutrition shows that 74% of adults aged 55 and
over take dietary supplements. We believe this ever-growing population, living longer lives than in
previous decades, will continue to focus on their nutritional needs as they age.
Rising Healthcare Costs and Commitment to Health: The cost of healthcare in the United States
continues to increase rapidly each year and grew at an annual rate of 5.8% according to the Centers for
Medicare and Medicaid Services (CMS). In 2015, U.S. healthcare spending reached $3.2 trillion or
$9,990 per person. As reported from Frost and Sullivan, approximately 75% of total U.S. health care
expenditures are spent on preventable health issues. Many studies have demonstrated that dietary
supplements have a positive effect on reducing the potential for health issues and consumers are
reacting to this by taking charge of their personal health. In a recent survey conducted by Harris Poll,
taking vitamins was in the top five commitments to health and wellness habits. We believe more
consumers will seek the use of nutritional supplements to maintain quality of life as well as reduce
medical costs.
2
•
Continued Focus on Weight Management: According to a report published by The State of Obesity in
September 2016, nearly 38%, or more than one-third of U.S. men and women were obese, as were
almost 17% of U.S. children. It is estimated that 86.3% of Americans will be overweight or obese by
2030. Health care costs related to obesity are expected to grow, from $860.7 billion to $956.9 billion
by 2030 and currently account for almost 21% of U.S. health care costs according to a report by
Cornell University. Being overweight is linked to more than 90 chronic diseases and can lead to more
serious health concerns such as diabetes, heart disease and other chronic illnesses. According to a May
2016 report from Technavio, the global weight loss supplement market via direct selling was valued at
$624.9 million in 2015 and North America accounted for more than one-third of those sales. Bearing
these facts in mind, we believe that there will be a continual need not only for weight loss products but
also for wellness products.
Direct Selling Market
Health and nutrition products are distributed through various market means, including retailers such as
supermarkets, drugstores, mass merchants and specialty retailers; direct marketers such as mail order companies and
Internet retailers; and direct sellers such as network marketers and healthcare practitioners. We distribute our
products through the direct selling channel via our network marketers.
Direct selling involves the marketing of products and services directly to consumers in a person-to-person
manner. Direct selling is a significant global industry largely utilized for the sale of a wide range of consumer
products from companies such as Avon Products Inc., Alticor Inc. (Amway Corp.) and Tupperware Brands
Corporation. According to the World Federation of Direct Selling Associations, or WFDSA, the 2015 global direct
selling market (for all product categories) was estimated to be $183.7 billion, an increase from $182.8 billion in
2014. The WFDSA estimates that the number of individuals engaged in direct selling more than doubled between
1999 and 2015, from 35.9 million sellers to 103.2 million in 2015. The United States had 20.2 million direct sellers
in 2015, the most of any country. Globally, wellness products came in as the top selling category, compared to 2014
when it was second behind cosmetics and personal care.
While the United States is currently the largest direct selling market with $36.1 billion in annual sales in
2015, international markets account for 81% of the entire industry, according to the WFDSA. Twenty-three
countries (including the United States) have annual direct sales revenue of at least $1 billion and another thirty-one
have annual direct sales revenue of at least $100 million, according to the WFDSA.
We believe that we are well positioned to capitalize on the world-wide growth trends in direct sales, as both
a developer and manufacturer of proprietary nutritional products, utilizing our network marketing distribution
system.
Our Competitive Strengths
We believe that we possess a number of competitive strengths that are the keys to our growth and
profitability in the future.
Leading Marketer of Bioavailable Lunasin-Containing Products. We own certain technology and
proprietary testing and manufacturing processes that allow us to produce LunaRich X, to our knowledge, the only
commercial source of soy concentrate with elevated levels of bioactive lunasin. One 310 mg capsule of LunaRich X
contains an amount of lunasin equivalent to 25 grams of high quality soy protein. In addition to our LunaRich X
capsules, we fortified seven other nutritional supplements with LunaRich X so that a serving of those products
yields an amount of bioactive lunasin equivalent to consuming 25 grams of soy protein. The products fortified with
LunaRich X are Reliv NOW, Reliv NOW for Kids, ProVantage, GlucAffect, SoySentials, Slimplicity and Fit3
Active.
Complete, Simple Nutrition. We focus on the completeness, balance and simplicity of our basic nutritional
supplements — Reliv Classic or Reliv NOW — combined with LunaRich X. Our recommended daily regimen of
essential nutrition for any new distributor or customer is one shake of either Reliv NOW or Reliv Classic and two
capsules of LunaRich X. Our two basic nutritional supplements each contain a full and balanced blend of vitamins,
3
minerals, proteins and herbs supporting an individual’s daily nutritional needs and our LunaRich X capsules support
an individual’s wellness at the epigenetic level. The combination of Reliv NOW or Reliv Classic and LunaRich X
makes supplementation simple and effective for the consumer. For more specific individual needs, we provide 17
additional supplements. We believe that our two basic nutritional supplements, together with LunaRich X and our
additional supplements, enhance the ability of our distributors to build their businesses by providing a
comprehensive, simple product offering.
In-House Development and Production. We utilize nutrition science as the basis for product formulation.
We maintain an ongoing research and development effort led by Carl W. Hastings, Ph.D., our Chief Scientific
Officer and Vice Chairman. Since 1993, we have manufactured substantially all of our nutritional products at our
facility in Chesterfield, Missouri. In 2015, we installed an encapsulator and bottling line to produce our
encapsulated products. In 2017, we ordered equipment to install a canister line to produce our Active product and
potentially other products as we transition from cardboard cans to plastic canisters. We anticipate that our canister
production line will be operational by the end of our second quarter if not earlier. We outsource our ready-to-drink
product, 24K. We believe our ability to formulate and manufacture nearly all of our nutritional supplement products
enables us to maintain our high standards of quality assurance and proprietary product composition.
Experienced Ambassador Team. Our Ambassador corps consists of distributors who have achieved the
level of Master Director, have earned royalty payments of at least $4,000 in consecutive months and meet our
leadership and character criteria necessary to garner our invitation to be an Ambassador. Our Ambassadors generally
are our most productive distributors and are essential in recruiting, motivating and training our entire distributor
network. We, and our Ambassadors, lead hundreds of annual events throughout all of our markets to motivate and
train distributors, including regular recruiting meetings, trainings, conference calls, training schools for Master
Affiliates and higher levels and regional, national and international distributor conferences. As of December 31,
2016, we had approximately 332 Ambassadors worldwide.
Experienced and Incentivized Management Team. Our management team is led by our founder, Robert L.
Montgomery, who has been our Chief Executive Officer since the inception of our company in 1985. Our executive
officers have been employed by our company for an average of 21 years and are experienced in their areas of focus,
which include manufacturing, sales, finance, marketing and operations. As of March 10, 2017, our directors and
executive officers beneficially own approximately 37.8% of our common stock.
Our Business Strategy
Our basic objective is to increase our net sales by adding customers and distributors, increasing the
productivity of our distributors, and by periodically improving our existing products and introducing new products.
We also intend to invest in our infrastructure to improve our operating efficiencies, provide better service to our
customers and distributors and leverage our current operating facilities to improve our profitability. We seek to
accomplish these objectives by employing the following strategic initiatives:
Leverage and Expand our Existing Distributor Base Throughout the United States. The United States has
been and will continue to be our largest market. Our growth strategy in the United States involves multiple
initiatives, such as the launch in early 2017 of our Fit3 product line and fitness program, continued investment in
company-sponsored events and distributor training and better utilization of our upper-level distributors across
different geographical areas to increase our distributor base.
Increase Appeal to Broader Demographic. Traditionally, our customer and distributor demographic has
skewed towards baby boomers and older individuals searching for nutritional solutions to supplement their diet and
support overall wellness. While continuing to maintain our focus on the needs of this important segment, we believe
there is an opportunity to expand our sales and distributor base by increasing our appeal to younger generations
interested in nutrition and an active healthy lifestyle. In February 2017, we launched our Fit3 product line and
fitness program aimed at individuals seeking to improve their fitness levels and incorporate healthier options into
their daily routines. We believe the nutritional and fitness aspects of Fit3 will attract health conscious on-the-go
individuals, many of whom fall within the under-40 demographic. Further, we maintain an active presence on
popular social media sites including Facebook, Twitter, YouTube and several other social networks that are popular
with younger generations. Our internal social media team is comprised of Gen X and Gen Y staffers who regularly
interact with distributors, customers and prospects. We plan to continue to develop products and programs and
4
expand our technology offerings in an effort to further appeal to younger generations interested in healthy active
lifestyles and a vibrant evolving business opportunity.
Expand in Existing and New International Markets. We believe there is a significant opportunity to
increase our net sales in international markets. We have a business model that is compatible across all of our
markets and encourages our distributors to pursue their business in multiple markets. We believe this business
model supports expansion of our distributor network in our existing international markets and will provide a
framework that facilitates our entry into new international markets. To that end, we continue to monitor business
conditions in potential new markets and will selectively expand as timing and conditions are appropriate.
Invest in Improved and New Products. As a developer of nutritional supplements, it is vital to continue to
invest in the research and development of new and innovative products. For example, in January 2017, we
introduced our Fit3 line of products and in January 2013 we launched LunaRich X to support heart health and
overall wellness. Additionally, we will continue to improve and validate the efficacy of our existing product line.
These types of investments should facilitate customer and distributor retention, as well as the recruitment of new
distributors.
Expand and Improve our Manufacturing and Distribution Capabilities. We currently manufacture all of
our powdered nutritional supplements, excluding Active, and our encapsulated products at our facility in
Chesterfield, Missouri. This allows us to precisely control product composition and quality assurance as well as
better manage inventory levels. Periodically, we make appropriate investments that enhance our manufacturing
capabilities and capacity to further leverage our existing facilities and trained production staff. We recently ordered
equipment to install a canister line in our facilities to produce Active and allow us the option to transition the
packaging of our other products to a plastic canister. We expect to have the canister line operational by mid-2017.
In the second half of 2014, we purchased and installed an encapsulation production line. We expect to continue to
make appropriate investments in our manufacturing and fulfillment facilities.
Our Products
Product Overview
Our product line includes nutritional supplements that address basic nutrition, specific wellness needs,
weight management and sports nutrition. We combine ingredients from science and nature in targeted, well-
balanced, easy-to-use formulas that are specifically designed to enhance wellness and increase performance and
energy in specific applications. All but four of our supplements are in powdered form that the consumer mixes with
water, juice or other liquid. 24K is a ready-to-drink nutritional supplement and LunaRich X, Burn and Purify are
available in capsule form.
We currently offer 20 nutritional supplements. Our basic nutritional supplements are formulated to provide
a balanced and complete level of supplementation for the consumer. For more specific needs, we provide other
focused product formulations. We have purposely been selective in the number and types of products that we offer.
By providing a line of targeted products, we make it simple for our distributors and consumers to choose products
appropriate for their objectives. We consider four of our oldest and best selling products — Reliv Classic, Reliv
NOW, Innergize!, and FibRestore — along with LunaRich X capsules to be our primary or “core” products.
5
1993
1996
2000
1998
2005
2008
2011
2013
Various
1995
1991
1997
Various
The following table summarizes our product categories as of December 31, 2016. The net sales figures are
for the year ended December 31, 2016:
Product Category
Basic Nutrition
Specific Wellness
Product Name
% of 2016
Net Sales(1)
Reliv NOW ................................
Reliv Classic ................................
NOW for Kids ................................
20.2
9.6
4.2
Year
Introduced
1988
1988
2000
9.7
FibRestore................................
6.8
Arthaffect................................
3.7
ReversAge ................................
1.6
SoySentials ................................
1.5
CardioSentials................................
1.2
GlucAffect ................................
24K ................................................................
1.8
LunaRich X capsules ................................15.8
Weight Management
Meal Replacements(2)................................1.1
0.8
Cellebrate................................
Sports Nutrition
Other
Innergize!................................
ProVantage ................................
7.6
3.6
Sweetener and Reliv
Delight(3) ................................................................
0.1
______________________
(1) This table does not include net sales for the year ended December 31, 2016 related to freight and handling and
sales of marketing materials, which represented approximately 10.7% of net sales for the year ended
December 31, 2016.
(2) Since its introduction in February 2007, our Slimplicity Meal Replacement formula has replaced Reliv Ultrim-
Plus (available since 1988) in all but our Canadian and Mexican markets. Upon introduction of our Slimplicity
products in a particular market, our Reliv Ultrim-Plus line was discontinued in that market. In October 2013,
Reliv ReShape was launched in our Australian and New Zealand markets, at which time Slimsimply was
discontinued in those markets. With the launch of our Fit3 program and products in February 2017, we plan to
discontinue Slimplicity in the United States.
(3) Our sweetener product was discontinued in early 2016. Reliv Delight is expected to be discontinued once
remaining inventory is exhausted.
Basic Nutrition Supplements
Our three basic nutrition supplements provide consumers with a broad spectrum of essential nutrients.
Every formulation is specifically designed to optimize and enhance the benefits of the nutrients it contains.
•
•
Reliv NOW is a nutritional supplement containing a variety of vitamins and minerals, soy and various
herbs. Reliv NOW is available in every country where we operate. In Australia, the product is
marketed as Nourish.
Reliv Classic is a nutritional supplement containing a variety of vitamins and minerals, soy and various
herbs. It is a vegetarian product that contains no animal compounds, artificial preservatives, artificial
flavors or added simple sugars. Reliv Classic is available in the United States, Canada, France,
Germany, Austria, the Netherlands, the United Kingdom and Ireland.
6
•
NOW for Kids is a product designed to provide a balanced nutritional supplement for a child’s diet and
contains a variety of vitamins and minerals. NOW for Kids is available in Australia, New Zealand, the
United States, the United Kingdom, France, Germany, Ireland, Austria, the Netherlands, Mexico,
Malaysia and the Philippines. In Australia, the product is marketed as Nourish for Kids.
Specific Wellness Supplements
Our line of eight specific wellness supplements contains specific compounds that target certain nutritional
needs. Each product is intended to work in conjunction with our basic nutritional supplement formulas to provide an
effective and balanced method for sustaining health and well-being.
•
•
•
•
•
•
•
•
ReversAge is a patented youth-promoting nutritional supplement designed to slow down the effects of
the aging process. Three proprietary complexes form the foundation of the supplement: longevity
complex, antioxidant complex and herbal complex. The longevity complex is restorative and designed
to replenish key hormones while creating balance within the body’s major systems; the antioxidant
complex is designed to slow aging at the cellular level; and the herbal complex delivers a variety of
herbs, including Ginkgo Biloba and Maca. ReversAge is available in every country where we operate
except Germany, the United Kingdom, France, the Netherlands and Ireland. In Canada, the product is
marketed as Nutriversal.
SoySentials is a nutritional supplement containing soy as well as other vitamins, minerals and herbs
designed for use by women. SoySentials provides a woman with key nutrients targeted to promote
women’s health and ease the symptoms of menopause and PMS. SoySentials is available in the United
States and Mexico.
CardioSentials is a patented berry-flavored nutritional supplement that promotes heart health. The
product contains 1,500 mg of phytosterols per serving, policosanol and several powerful antioxidants.
In a clinical study of this product, participants experienced meaningful reductions in cholesterol as
well as improvement in their high-density lipoprotein, or HDL, and low-density lipoprotein, or LDL,
ratios. CardioSentials is available only in the United States.
Arthaffect is a patented nutritional supplement containing Arthred, a form of hydrolyzed collagen
protein, which is clinically reported to support healthy joint function. The product is available in the
United States, Australia, New Zealand, Mexico, the Philippines, Malaysia, Singapore, and Canada. The
product is marketed as A-Affect in Australia, New Zealand and Canada due to local product
regulations.
FibRestore is a nutritional supplement containing fiber, vitamins, minerals and herbs. A modified
version of the FibRestore formula is marketed in Canada under the name Herbal Harmony to comply
with Canada’s nutritional regulations. FibRestore is available in all of the countries in which we
operate.
GlucAffect is a patented cinnamon cream flavored nutritional supplement designed to support healthy
blood sugar levels. GlucAffect contains Pycnogenol® and other clinically supported active ingredients.
GlucAffect has been clinically proven to assist in healthy blood sugar management and support weight
loss. GlucAffect is available in the United States.
24K is a patented ready-to-drink healthy energy product. 24K is our first ready-to-drink nutritional
supplement available in a multi-serving 30-ounce bottle and in a two-ounce double serving bottle. 24K
is formulated with a synergistic blend of 24 active ingredients designed to enhance the body’s natural
vitality and provide energy, focus and stress relief. It contains no caffeine and only 5 calories per
serving. 24K is available only in the United States.
LunaRich X is a nutritional supplement available in capsule form and comes in a bottle of 60 or 120
capsules. LunaRich X is a soy concentrate with elevated levels of bioactive lunasin, a soy peptide
shown to have heart health and wellness benefits. LunaRich X is currently available in the United
States, Canada, Mexico, the United Kingdom, France, Germany, Ireland, Austria, the Netherlands,
7
Indonesia, the Philippines and Singapore. The product is marketed as LunaRich C in Germany,
Austria, the United Kingdom, France, the Netherlands and Ireland due to local regulations.
Weight Management Supplements
Our seven weight management supplements combine advanced weight loss promoting complexes with
scientifically balanced nutrition and protein for muscle development and toning. Our ingredients are designed to
work together, along with proper diet and exercise, to turn unwanted fat into energy without sacrificing muscle
mass.
• Active is a nutritional supplement designed as the protein, energy and recovery product for use in our
Fit3 program introduced in February 2017. Active combines a three-protein blend of whey, casein and
non-GMO soy with active ingredients to support weight loss, physical performance and energy when
combined with healthy eating and exercise. Active is currently available in the United States.
•
•
•
•
•
•
Burn is a nutritional supplement in our Fit 3 program that promotes weight loss when combined with
healthy eating and exercise through a targeted fat-burning formula. Burn is available in the United
States.
Purify is a nutritional supplement in our Fit3 program that contains probiotics and liver and metabolic
supporting ingredients intended to cleanse the digestive system and allow maximum absorption and
metabolic efficiency. Purify is available in the United States.
Reliv ReShape is designed as a meal replacement or a nutritious snack delivering 12 grams of
protein. Reliv ReShape is only sold in Australia and New Zealand.
Slimplicity is a meal replacement intended for use, along with proper diet and exercise, to facilitate
weight management. Slimplicity is currently available in the United States, but has been discontinued
with the introduction of the Fit3 product line.
Reliv Ultrim-Plus is designed as a meal replacement (for a maximum of two meals per day) for use in
a weight loss program. Reliv Ultrim-Plus is sold in Mexico and Canada, but has been discontinued in
Canada.
Cellebrate is a weight loss aid designed to suppress appetite, curb the storage of body fat, and facilitate
the body’s fat burning process. Cellebrate is available in the United States, but has been discontinued
with the introduction of our Fit 3 product line.
Sports Nutrition Supplements
Our two sports nutrition supplements contain a balance of nutrients scientifically designed to improve
athletic performance and endurance, as well as muscle recovery and repair.
•
•
Innergize! is a sports supplement, containing vitamins and minerals designed for performance
enhancement. Innergize! is available in every country where we operate. In Canada, the product is
marketed as Optain due to local product regulations.
ProVantage is a patented nutritional supplement containing soy designed to enhance athletic
performance with a balance of nutrients needed to improve endurance, muscle recovery and repair. The
product also benefits those seeking to increase their soy intake. ProVantage is available in the United
States and Canada.
Research and Development
We maintain an ongoing research and development effort, led by Carl W. Hastings, Ph.D., and consult with
other industry professionals with respect to developments in nutritional science, product enhancements and new
products. Since 2011, we have introduced five nutritional supplement products, including 24K, LunaRich X, Active,
8
Burn and Purify. From time to time, we reformulate and enhance our products. Our research and development team
consistently evaluates product advancements in the marketplace and advancements in raw materials and ingredients
available for new product ideas and developments.
For the years ended December 31, 2016 and 2015, our research and development expenses were $694,000
and $765,000, respectively.
SL Technology, Inc.
In mid-2013, we formed a wholly-owned subsidiary, SL Technology, Inc. (“SLTI”) for the purpose of
entering into a Technology License Agreement (the “License Agreement”) with Soy Labs, LLC (“Soy Labs”).
Pursuant to this License Agreement, Soy Labs granted SLTI an exclusive license for its intellectual property related
to its soy concentrate with elevated levels of bioactive lunasin and other soy-related ingredients. The license covered
an issued patent and several patent applications related to lunasin and soy-related peptides, proprietary information
and manufacturing processes of Soy Labs.
In September 2016, we entered into a letter agreement with Soy Labs to acquire sole ownership of
intellectual property subject to the License Agreement. In consideration for acceleration of the final payment under
the License Agreement, Soy Labs transferred all rights, title and interest in the technology to us and terminated any
of our future royalty obligations under the License Agreement. See Note 6 to our Consolidated Financial Statements
for more information on the terms of the License Agreement and subsequent letter agreement.
Network Marketing Program
General Overview
We market and sell our products through a network marketing system of independent distributors, who
purchase our products from us, or from other distributors, and who then sell our products directly to consumers. In
addition to selling our products, our distributors also recruit others to distribute our products. Distributors receive
compensation from both the sale of the products they have purchased at wholesale and, in the case of Master
Affiliates and above, commissions on the volume of products sold by their downline organization. We believe
network marketing is an effective way to distribute our products because it allows and relies on personal contact,
education and endorsement of products which are not as readily available through other distribution channels.
We recognize that our sales growth is based on the continued development and growth of our independent
distributor force and we strive to maintain an active and motivated distributor network through a combination of
quality products, and a business opportunity with distributor discounts, commissions and bonus payments, sales
conventions, training, personal recognition and a variety of publications and promotional materials.
Program Structure
Individuals that do not wish to become distributors, but want to purchase products directly from the
company may enroll as retail or preferred customers, so long as they are sponsored by an existing distributor. We
created a Preferred Customer program in the United States and Canada, effective February 1, 2016. Those wishing
to join as a preferred customer may enroll for an annual fee of $10, for which they receive a 10% discount from the
retail prices of our products.
Individuals who desire to market and sell our products may become distributors by being sponsored into
the program by an existing distributor, and becoming part of that distributor’s “downline.” We offer a tiered
discount and commission, or royalty, format that consists of four principal levels and several sub-levels, which are
designed to compensate and motivate distributors to increase their networks and sales volumes.
Our distributors consist principally of individuals, although we also permit entities such as corporations,
partnerships, limited liability companies and trusts to become distributors. A new distributor is required to complete
a distributor application and, in most areas, to purchase a package of distributor materials (for $40 plus sales tax in
the United States, as of February 1, 2016) consisting of a Distributor Guide and CD, business forms and promotional
materials. The Distributor Agreement, when accepted by us, becomes the contract between us and the distributor and
9
obligates the distributor to the terms of the agreement, which includes our Policies and Procedures for conduct of
their business. All distributors are independent contractors and are not our employees.
In each country in which we conduct business, distributors operate under a compensation system pursuant
to which distributors generally are compensated based on their sales volumes. On the basis of sales volume or
commission volume, distributors may achieve the following successive levels of achievement and compensation:
Designation
Retail Distributor(1).................................................
Affiliate ..................................................................
Key Affiliate ..........................................................
Senior Affiliate.......................................................
Master Affiliate ......................................................
Director ..................................................................
Key Director...........................................................
Senior Director .......................................................
Master Director/Ambassador .................................
Presidential Director/Ambassador..........................
Discount
10%
25%
30%
35%
40% (2)
40% (2)
40% (2)
40% (2)
40% (2)
40% (2)
______________________
(1) Effective February 1, 2016, we made adjustments to our distributor compensation plan. Among the changes
made, we reduced the purchasing discount of a Retail Distributor to 10%; however, the distributor is able to
reach the Affiliate level through cumulative purchases totaling $750 at suggested retail.
In addition to discounts, these levels also receive commissions based on sales in their downline organization.
(2)
Distributors purchase products from us at a discount from the suggested retail price for the products and
then may sell the product at retail to customers, sell the product to other distributors at wholesale or consume the
product. The amount of the discount varies depending on the distributor’s level of achievement, as indicated above.
Distributors generate income equal to the difference between the price at which they sell the product to
customers and the discounted price they pay for the product. Distributors also earn wholesale commissions on
products purchased by downline distributors in the distributor’s sponsored group equal to the difference between the
price at which the distributor is entitled to purchase product and the price at which downline distributors purchase
product. We calculate payments and issue a check directly to the qualified distributor once a month. For example,
assume Distributor A is a 40% discount Master Affiliate who signs up Distributor B, a 30% discount Key Affiliate,
who signs up Distributor C, a 10% discount Retail Distributor. If Distributor C purchases directly from us, a 10%
wholesale profit check will be sent to Distributor A and a 20% wholesale profit check will be sent to Distributor B.
Upon achieving the level of Master Affiliate, distributors begin to receive additional compensation —
“generation royalty” — payments of 8%, 6%, 4%, 3% and 2% of the retail volume of product purchased from us by
Master Affiliates and above (and their personal groups) whom they have sponsored, and for each of five downline
levels of sponsorship. To qualify for these additional compensation payments, Master Affiliates and above are
required to maintain certain monthly sales volumes.
Master Affiliates who sponsor other distributors that achieve the level of Master Affiliate are entitled to
become part of the Director Program. Advancement at the Director level is based upon achieving increasing levels
of royalties based on sales generated by other distributors in the Director’s downline organization. Distributors
achieving each level receive recognition for their achievements at our company-sponsored events and in our
publications. We also have a Star Director Program under which distributors achieving the level of Director and
above receive additional compensation based on the number of Master Affiliates they have sponsored into the
program. Directors receive an additional 1% to 3% royalty on the retail sales volume of Master Affiliates in their
downline organization for an unlimited number of levels of sponsorship, until reaching a level that includes a Master
Affiliate who also has achieved Star Director status.
Master Directors and Presidential Directors may also be invited to participate in the Ambassador Program.
As of December 31, 2016, we had approximately 332 Ambassadors worldwide. Qualifications to be invited by us to
10
participate in the Ambassador Program include demonstrated competence and leadership qualities. Ambassadors
receive recognition and awards for achieving Ambassador status and can then achieve additional levels of
accomplishment. We utilize our Ambassadors to lead meetings and conferences, and to provide training and
education to our distributors. Ambassadors achieving the level of Silver and higher also participate in the “Reliv
Inner Circle,” which may entitle them to receive additional compensation, paid participation in our sponsored
events, health insurance and car allowances.
In addition to the levels of compensation described, we also provide a variety of incentives, bonuses,
awards and trips to distributors who achieve high sales volumes and who advance in the distributor ranks.
Distributor Training, Motivation and Management
Our marketing efforts are focused on the development, training, motivation and support of our independent
distributors. We support an active training program for our distributors in which our representatives and experienced
distributors, usually Ambassadors, lead group training sessions. We provide distributors with manuals, brochures
and other promotional, training and informational publications. We encourage distributors to hold regular weekly
recruiting meetings and training sessions. We sponsor weekly training conference calls in which a significant
number of distributors participate.
Our sponsorship generally includes the following:
•
•
•
During 2016, we sponsored numerous special events in cities across all of our markets led by corporate
executives and/or experienced Ambassadors;
For the key markets in which we operate, we sponsor an annual conference for distributors; and
In the United States during 2016, we sponsored an annual International Conference in the summer for
U.S. distributors.
During 2016, we invested approximately $1.59 million in training, conferences and promotional events for
our distributors worldwide compared with $1.96 million in 2015.
Distributor Compliance
Our distributor organization and business model are designed and intended to promote the sale of our
products to consumers by distributors. Sales training and promotional efforts emphasize that intention. To that end,
we monitor purchases by distributors to identify potentially excessive individual purchases and keep detailed
information regarding customer purchases through our corporate shopping cart and as part of our autoship program.
Distributors are not required at any time to purchase product, although Master Affiliates and above are required to
maintain certain minimum sales levels in their personal groups to continue receiving generation royalty
compensation payments.
Distributors may create their own advertising provided that it is within our advertising rules. Unless a
distributor is using our designed and approved advertisements, the distributor must submit for approval in writing all
advertising (e.g. brochures, flyers, audio tapes, classified or display ads, radio scripts) to our Compliance
Department before placing it or arranging for placement.
Pursuant to our Policies and Procedures, which are incorporated by reference into our Distributor
Agreement, distributors are permitted to make only those claims about our products that have been approved by us
and/or provided in sales and training materials. Distributors acknowledge that our products are not represented as
drugs and they are not authorized to make any diagnosis of any medical condition, make drug-type claims for, or
prescribe our products to treat or cure, any disease or condition. We do not authorize or permit our distributors to
make any express or implied references with regard to our products that they cure, prevent or relieve disease, replace
or augment medication, provide therapy, promote healing, alleviate illnesses or symptoms of illnesses, or make any
other medical claims for specific ailments.
11
In order to comply with regulations that apply to both us and our distributors, we conduct considerable
research into the applicable regulatory framework prior to entering any new market to identify all necessary licenses
and approvals and applicable limitations on operations in that market. We devote substantial resources to obtaining
the necessary licenses and approvals and maintaining operations that are in compliance with the applicable
limitations. We also research laws applicable to distributor operations and revise or alter distributor materials and
products, as required by applicable regulations in each market.
Regulations in existing and new markets often are ambiguous and subject to considerable interpretive and
enforcement discretion by the responsible regulators. In addition, regulations affecting our business often change
and are subject to varying interpretation and application. We make every effort to monitor and comply with changes
in laws and regulations as they occur.
We have a Compliance Department that receives and reviews allegations of distributor misconduct. If we
determine that a distributor has violated our Policies and Procedures, we may take a number of disciplinary actions.
For example, we may impose sanctions such as warnings or suspensions until specific conditions are satisfied, or
take other appropriate actions at our discretion, including termination of the distributor’s agreement.
Geographic Presence
Markets
We currently sell our products throughout the United States and in 14 other countries around the world. We
have sold products in the United States since 1988 and our first product outside of the United States in 1991 when
we entered Australia. In 2016, approximately 21.8% of our net sales were generated outside of the United States.
The table below shows the countries in which we operate and the year we commenced selling products:
Country
United States
Australia
New Zealand
Canada
Mexico
United Kingdom(1)
Philippines
Malaysia
______________________
Year Entered
1988
1991
1992
1992
1993
1995
2000
2003
Country
Ireland
Singapore
Germany
Austria
Netherlands
Indonesia
France
Year Entered
2003
2004
2005
2006
2006
2009
2013
(1)
Includes Great Britain, Scotland, Wales and Northern Ireland.
Within the United States, we sell our products to distributors in all 50 states. We derived 43.1% of our
domestic net sales in 2016 in California, Pennsylvania, Illinois, Michigan, Texas, Ohio, and Florida, with each state
contributing at least 4% of net sales. We believe that there is the opportunity to increase the number of our
distributors in all markets where we sell our products.
We organize all of our international operations under our wholly owned subsidiary, Reliv’ World. As of
December 31, 2016, Reliv’ World consisted of the following market-specific entities: Reliv’ Australia, Reliv’ New
Zealand, Reliv’ Canada, Reliv’ Mexico, Reliv’ Europe, Reliv’ Philippines, Reliv’ Malaysia, Reliv’ Singapore, and
PT Reliv’ Indonesia. We have utilized this method of separate corporations in most of our markets, as local business
licensing and product approvals require a local legal entity.
We believe that there is a significant opportunity to increase sales in our current international markets, as a
whole. We have established a substantially consistent business model and compensation plan across all of our
markets, and we continue to support our international markets with additional marketing programs and materials.
In addition to increasing sales in current international markets, our expansion strategy targets selected new
foreign markets, when appropriate.
12
New Market Entry Process
When conditions warrant, we evaluate new markets for our products. In order to do so, we perform an
analysis of synergies between new and existing countries and distributor presence or interest in new markets, market
conditions, regulatory conditions, product approval procedures and competition before selecting markets to enter.
Once we decide to enter a new market, we first hire local legal counsel and/or a consultant with appropriate
expertise to:
•
•
•
help ensure that our network marketing system and products comply with all applicable regulations;
help establish favorable public relations in the new market by acting as an intermediary between us and
local regulatory authorities, public officials and business people; and
explain our products and product ingredients to appropriate regulators and, when necessary, to arrange
for local technicians to conduct required ingredient analysis tests of the products.
Where regulatory approval in a foreign market is required, we utilize local counsel and/or consultants to
work with regulatory agencies to confirm that all of the ingredients in our products are permissible within the new
market. Where reformulation of one or more of our products is required, we attempt to obtain substitute or
replacement ingredients. During the regulatory compliance process, we may alter the formulation, packaging,
branding or labeling of our products to conform to applicable regulations as well as local variations in customs and
consumer habits, and we may modify some aspects of our network marketing system as necessary to comply with
applicable regulations.
Following completion of the regulatory compliance phase, we undertake the steps necessary to meet the
operations requirements of the new market. In the majority of our new markets, we establish a sales center in a
major city and provide for product purchases by telephone and/or pick up. Product is shipped to the purchaser from
a warehouse located in the general geographic market or the distributor may walk in to the local office and purchase
products, if a pick up center is available. In addition, we initiate plans to satisfy inventory, personnel and
transportation requirements of the new market, and we modify our distributor materials, recordings, videos and other
training materials as necessary to be suitable for the new market.
In some countries, regulations applicable to the activities of our distributors also may affect our business
because in some countries we are, or regulators may assert that we are, responsible for our distributors’ conduct. In
these countries, regulators may request or require that we take steps to ensure that our distributors comply with local
regulations.
Manufacturing
We established a manufacturing line at our headquarters facility in Chesterfield, Missouri and began to
manufacture all of our nutritional supplements in early 1993. We expanded our Chesterfield facility in 1997 to now
include 126,000 square feet of total space. At this facility, we manufacture all of our powdered nutritional
supplements, excluding Active, and encapsulated products for distribution both domestically and internationally.
Currently, our 24K and Active products are manufactured by a third party. In January 2017, we ordered equipment
to install a canister production line to produce Active and any other products we determine to produce in a plastic
canister versus our traditional cardboard can.
Our ability to manufacture nearly all of our nutritional supplements is a competitive advantage over
competitors not engaged in manufacturing and contributes to our ability to provide high-quality products. Our
product manufacturing includes identifying suppliers of raw materials, acquiring the finest quality raw materials,
blending exact amounts of raw materials into batches, and packaging and labeling the finished products. Since we
carefully select our ingredient suppliers, we are able to control the quality of raw materials and our finished
products. We have not experienced any significant difficulty in obtaining supplies of raw materials for our
nutritional supplements or finished product of our 24K or Active products. By monitoring and testing products at all
stages of the manufacturing process, we precisely control product composition. In addition, we believe we can more
efficiently control costs by manufacturing nearly all of our nutritional supplements.
13
In 1996, we received approval from the Australian Therapeutic Goods Administration, or TGA, to
manufacture products sold in Australia at our Chesterfield plant. In 2013, our Chesterfield plant was audited by the
Australian TGA. Our current certification is valid until April 2017. In light of increasing costs associated with our
TGA certification, we have determined to let it expire without renewal and adjust our product line in Australia
accordingly. We continue to produce Nourish, Nourish for Kids, FibRestore and ReShape at our Chesterfield plant.
Fulfillment
Distributors order product in case lots of individual quantities and pay for the goods prior to shipment. We
offer a program for distributors and their retail customers to order product in less than case lots directly from us by
phone or internet order. Direct Advantage, an automatic monthly reorder program available for distributors and
customers, provides a simple and convenient ordering process for consumers as well as distributors. Product is
shipped directly to the distributor or customer and upline distributors earn wholesale profits or, if applicable, a
commission on all Direct Advantage sales.
In the United States, our products are warehoused at our Chesterfield facility and shipped by common
carrier to distributors upon order. Our facility in Chesterfield, Missouri serves all parts of the country. Our products
are also warehoused in, and shipped to local distributors from: Sydney, Australia; Auckland, New Zealand;
Oakville, Canada; Guadalajara, Mexico; Redditch (Birmingham), England; Makati (Manila), Philippines; Subang
Jaya (Kuala Lumpur), Malaysia; Singapore; and Jakarta, Indonesia. With the exception of our Canada, New
Zealand, and Singapore subsidiaries, each of our subsidiaries maintains an office and personnel to receive, record,
and fill orders from distributors. Distributors in Ireland, France, Germany, Austria, and the Netherlands order and
receive product from our UK-based subsidiary.
We maintain a policy that unused product may be returned by a customer to the selling distributor for a full
refund or exchange within 30 days after purchase. We also maintain a policy that any distributor who terminates his
or her distributorship may return saleable product which was purchased from us within twelve months of the
termination for a refund of 100% of the purchase price less any compensation received relating to the purchase of
the products. We believe this buyback policy addresses and satisfies a number of regulatory compliance issues
pertaining to network marketing systems.
Historically, product returns and buy backs have not been significant. Product returns and buy backs have
been approximately 0.20% and 0.24% of net sales in 2016 and 2015, respectively.
Information Technology Systems
In order to facilitate growth in the future and support our distributor activities, we continually upgrade our
management information and telecommunication systems, along with increasing our internet-based capabilities.
These systems include: (1) a centralized host computer in our Chesterfield headquarters, which is linked to our
international offices via secure data connections that provide real-time order entry and information to respond to
distributor inquiries, as well as financial and inventory management systems; (2) local area networks of personal
computers within our markets, serving our local administrative staffs; (3) an international e-mail system through
which our employees communicate; and (4) internet capabilities that provide a variety of online services to
distributors, including product ordering, product information, event information and other related announcements,
and tools to assist distributor leaders in managing their downline distributor group. We continue to pursue initiatives
to increase the percentage of distributor orders placed via the internet. To accomplish this goal, we continue to make
improvements to our shopping cart platform, and we have run periodic incentives to encourage distributors to place
their orders via the internet. As a result of these initiatives, approximately 60% of our order volume in the United
States is placed via internet.
These systems are designed to provide financial and operating data for management, timely and accurate
product ordering, generation royalty payment calculation and processing, inventory management, and detailed
distributor records. We intend to continue to invest in our systems in order to help meet our business strategies.
14
Intellectual Property
Our formulas are protected as trade secrets and, to the extent necessary, by confidentiality agreements. In
addition, we have obtained U.S. patents on six products as set forth below:
Product
Patent Expiration Date
Arthaffect
ReversAge
ProVantage
GlucAffect
24K
CardioSentials
March 2018
May 2021
December 2030
November 2029
February 2032
January 2029
In addition to our patented formulas, we own three U.S. patents, 13 international patents and two patent applications
related to our soy concentrate ingredient with elevated levels of bioactive lunasin, the key ingredient in our
LunaRich X product. Further, we utilize a proprietary production process to produce our soy concentrate that we
protect as a trade secret, along with the bioassay to determine the bioavailability of lunasin in our products.
Currently, we have 14 trademarks registered with the U.S. Patent and Trademark Office, or USPTO,
including Reliv and the names of 12 of our 20 nutritional products. Reliv NOW for Kids, LunaRich X, ReShape,
Active, Burn and Purify are not registered with the USPTO. Cellebrate and Slimplicity trademarks have been
abandoned due to their discontinuance. Trademark registrations for selected marks have been issued or applied for in
Australia, New Zealand, Canada, Mexico, the United Kingdom, Ireland, the Philippines, Malaysia, Singapore,
Germany and several other foreign countries that offer network marketing opportunities. We consider our
trademarks to be an important asset of our business.
Regulation
Product Regulation
The formulation, manufacturing, labeling and advertising or promotion of our products are subject to
regulation by the Food and Drug Administration, or FDA, which regulates our products under the federal Food,
Drug and Cosmetic Act, or FDCA, the Federal Trade Commission, or FTC, and various agencies of the states or
countries into which our products are shipped or sold. FDA regulations include requirements and limitations with
respect to the labeling of our food products and also with respect to the formulation of those products. FDA
regulations also limit and control the extent to which health or other claims can be made with respect to the efficacy
of any food or cosmetic. The FDCA has been amended several times with respect to dietary supplements, most
recently by the Nutrition Labeling and Education Act of 1990, or NLEA, and the Dietary Supplement Health and
Education Act of 1994, or DSHEA, and related regulations. Such legislation governs the formulation,
manufacturing, marketing and sale of nutritional supplements, including the content and presentation of health-
related information included on the labels or labeling of nutritional supplements.
The majority of the products we market are classified as dietary supplements under the FDCA. Dietary
supplements such as those we manufacture and sell, for which no “drug” claim is made, are not subject to FDA
approval prior to their sale. However, DSHEA established a pre-market notification process for dietary supplements
that contain a “new dietary ingredient,” or NDI, a term that is defined as “a dietary ingredient that was not marketed
in the United States before October 15, 1994,” the date on which DSHEA was signed into law. Certain NDIs that
have been “present in the food supply” are exempt from the notification requirement. For those NDIs that are not
exempt, DSHEA requires the manufacturer or distributor of a dietary supplement containing an NDI to submit to the
FDA, at least 75 days prior to marketing, a notification containing the basis for concluding that the dietary
supplement containing the NDI will “reasonably be expected to be safe.” Dietary supplement products can be
removed from the market if shown to be unsafe, or if the FDA determines, based on the labeling of products, that the
intended use of the product is for the diagnosis, cure, mitigation, treatment or prevention of disease. The FDA can
regulate those products as “drugs” and require premarket approval of a “new drug application.” Manufacturers of
dietary supplements that make any claims for dietary supplements, including product performance and health benefit
claims must have substantiation that the statements are truthful and not misleading.
15
In January 2000, the FDA published a final rule that defines the types of statements that can be made
concerning the effect of a dietary supplement on the structure or function of the body pursuant to DSHEA. Under
DSHEA, dietary supplement labeling may bear “structure/function” claims, which are claims that the products affect
the structure or function of the body, without prior FDA approval. They may not, without prior FDA approval, bear
a claim that they can prevent, treat, cure, mitigate or diagnose disease, otherwise known as a “drug claim.” The final
rule describes how the FDA will distinguish drug claims from structure/function claims. Dietary supplements, like
conventional foods, are also permitted to make “health claims,” which are claims that are exempt from regulation as
“drug” claims pursuant to the amendments to the FDCA established by the NLEA in 1990. A “health claim” is a
claim, ordinarily approved by FDA regulation, on a food or dietary supplement product’s labeling that
“characterizes the relationship of any substance to a disease or health-related condition.” To help assure that foods,
dietary supplements and cosmetics comply with the provisions of the FDCA and FDA’s regulations, the FDA has
numerous enforcement tools, including the ability to issue warning letters, initiate product seizures and injunctions
and pursue criminal penalties.
The manufacture of dietary supplements is subject to existing FDA current good manufacturing practice, or
cGMP, regulations for food. In June 2007, the FDA issued regulations relating to more detailed cGMP specifically
for dietary supplements. Under these regulations, we qualify as a small business and became subject to the
regulations in June 2009. We are periodically audited by the FDA and believe our systems and facilities in
Chesterfield are in full compliance with cGMP.
Advertisements for our products are subject to regulation by the FTC. The FTC prohibits unfair methods of
competition and unfair or deceptive acts or practices in or affecting commerce and provides that the dissemination of
any false advertisement pertaining to drugs, cosmetics or foods, including dietary supplements, is an unfair or
deceptive practice. Under the FTC’s substantiation doctrine, an advertiser must have a “reasonable basis” for all
claims made about a product. The failure to be able to adequately substantiate claims may be considered either
deceptive or unfair practices. In order to avoid a violation of the FTC standards, we endeavor to assure that we have
adequate substantiation for all advertising claims made for our products. In addition, the FTC has increased its
scrutiny of the use of distributor testimonials. Although it is impossible for us to monitor all the product claims
made by our independent distributors, we make efforts to monitor distributor testimonials and restrict inappropriate
distributor claims. The FTC has been more aggressive in pursuing enforcement against dietary supplement products
since the passage of DSHEA in 1994, and has brought numerous actions against dietary supplement companies,
some resulting in several million dollar civil penalties and/or restitution as well as court-ordered injunctions.
We are aware that there is adverse publicity in many markets, including the United States, concerning
foods that are grown from genetically modified organisms, or GMOs. In some markets, the possibility of health risks
thought to be associated with GMOs has prompted proposed or actual governmental regulation. Nearly all
ingredients in our formulas are non-GMO. We use non-GMO ingredients when required by governmental
regulations and strive to use non-GMO ingredients in every other instance when commercially feasible and
available. We believe compliance with regulatory requirements in this area should not have a material adverse
effect on our business.
Sales Program Regulation
Our distribution and sales program is subject to regulation by the FTC and other federal and state regulation
as well as regulations in several countries in which we conduct business. Various state agencies regulate multi-level
distribution services. We are required to register with, and submit information to, certain of such agencies and we
believe we have complied fully with such requirements. We actively strive to comply with all applicable state and
federal laws and regulations affecting our products and our sales and distribution programs. The Attorneys General
of several states have taken an active role in investigating and prosecuting companies whose compensation plans
they claim violate local anti-pyramid and/or consumer protection statutes. We are unable to predict the effect such
increased activity will have on our business in the future nor are we able to predict the probability of future laws,
regulations or interpretations which may be passed by state or federal regulatory authorities.
Federal and state laws directed at network marketing programs have been adopted throughout the years to
prevent the use of fraudulent practices often characterized as “pyramid schemes.” Illegal pyramid schemes
compensate participants primarily for the introduction or enrollment of additional participants into the program.
16
Often these schemes are characterized by large up-front entry or sign-up fees, over-priced products of low value,
little or no emphasis on the sale or use of products, high-pressure recruiting tactics and claims of huge and quick
financial rewards with little or no effort. Generally, these laws are directed at ensuring that product sales ultimately
are made to consumers and that advancement within such sales organizations is based on sales of products.
We believe that our network marketing system satisfies the standards and case law defining a legal
marketing system. It is an ongoing part of our business to monitor and respond to regulatory and legal
developments, including those that may affect our network marketing system. However, the regulatory and legal
requirements concerning network marketing systems do not include “bright line” rules and are inherently fact-based.
Competition
The business of developing and distributing nutritional products such as those we offer is highly
competitive. Numerous manufacturers, distributors and retailers compete for consumers and, in the case of other
network marketing companies, for distributors. Our competitors include both network marketing companies such as
Alticor Inc. (Amway Corp.), Avon Products Inc., Herbalife Ltd., Mary Kay Inc., Melaleuca, Inc., Mannatech, Inc.,
Nature’s Sunshine Products Inc., NuSkin Enterprises Inc. and USANA Health Sciences Inc., as well as specialty and
mass retail establishments. Our ability to remain competitive depends on the underlying science and high quality of
our products and our success in recruiting and retaining distributors. The pool of individuals interested in network
marketing tends to be limited in each market and may be reduced to the extent other network marketing companies
successfully recruit these individuals into their businesses. We believe that we offer a rewarding compensation plan
with attractive financial benefits to compete for the time, attention and commitment of distributors. Our
compensation plan is seamless, permitting international expansion.
Reliv NOW and Reliv Classic compete with numerous supplements that offer multi-vitamin benefits. Our
fitness and weight management products compete with other products in the weight loss market, including
nationally advertised products such as SlimFast. Many companies have entered, or have plans to enter, the sports
drink market in which Innergize! and ProVantage compete, a market led by Gatorade. 24K competes with 5-Hour
Energy and numerous other liquid energy shots and drinks. With Arthaffect, FibRestore, ReversAge, GlucAffect,
CardioSentials, SoySentials, and LunaRich X, we are in the specific wellness needs, food and anti-aging markets,
which are extremely competitive and led by the major food companies.
Employees
As of December 31, 2016, we and all of our subsidiaries had approximately 161 full-time employees
compared with 189 such employees at the end of 2015.
Additional Available Information
We make available, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such
material is electronically filed with, or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act.
This information is available on our corporate web site at www.reliv.com under the “Investor Relations” section.
This information may also be obtained from the SEC’s on-line database located at www.sec.gov.
17
Item No. 2 – Properties
We own approximately six acres of land and a building containing approximately 126,000 square feet of
office, manufacturing and warehouse space located in Chesterfield, Missouri, where we maintain our corporate
headquarters and sole manufacturing facility. We believe that our worldwide facilities are suitable and adequate in
relation to our present and immediate future needs.
The following table summarizes information related to our worldwide facilities as of March 10, 2017:
Location
Nature of Use
Square Feet Owned/Leased
Chesterfield, MO, USA
Seven Hills (Sydney), Australia
Oakville, Ontario, Canada
Guadalajara, Mexico
Makati City (Manila), Philippines
Redditch (Birmingham), England,
UK
Subang Jaya (Kuala Lumpur),
Malaysia
Jakarta, Indonesia
corporate headquarters/call
center/manufacturing/warehouse
central office/call center
warehouse/distribution
central office/warehouse/call center
central office/
warehouse/distribution
central office/
warehouse/distribution
central office/call center
central office/
warehouse/distribution
126,000
Owned
1,000
2,100
2,300
2,700
Leased
Leased
Leased
Leased
11,500
Leased
1,300
1,100
Leased
Leased
Item No. 3 - Legal Proceedings
From time to time, we are involved in litigation incidental to the conduct of our business. We do not
believe that any current proceedings will have a material adverse effect on our business, financial condition,
results of operations or cash flows.
18
PART II
Item No. 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed on the NASDAQ Global Select Market under the symbol: RELV. The
following table sets forth the high and low sales prices of our common stock and the quarterly dividends per share
paid on our common stock during the years ended December 31, 2016 and 2015. We executed a one-for-seven
(1:7) reverse stock split on our common stock, effective when the market opened on October 4, 2016. All stock
prices prior to that date have been adjusted for the effect of the reverse split for purposes of this table.
Year Ending December 31, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ending December 31, 2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
Dividend
$
$
12.53
7.91
6.02
7.14
5.53
9.66
9.80
8.68
$ 3.84
3.85
3.57
3.43
$
2.59
4.69
7.42
7.49
$
$
-
-
-
-
-
-
-
-
As of March 10, 2017, there were approximately 325 holders of record of our common stock and an
additional 2,464 beneficial owners, including shares of common stock held in street name.
We have not declared any cash dividends over the past two years. The declaration of future dividends is
subject to the discretion of our Board of Directors and will depend upon various factors, including our earnings,
financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, and other
factors deemed relevant by our Board of Directors. Our current lending agreements contain covenants which may
limit our ability to declare cash dividends.
19
Item No. 7 - 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 Annual Report on Form 10-
K. 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 78.2% of worldwide net sales for the year ended December 31, 2016 compared to approximately
78.0% for the year ended December 31, 2015. 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 December 31, 2016, consisted of approximately 38,480 distributors and preferred customers. 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.
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, and 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 typically approximate 23% of
sales at suggested retail. 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. We have implemented or are in the process of implementing similar
pricing structures in all of our international markets.
20
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
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net sales decreased by 12.1% worldwide, as net sales in the United States decreased by 11.9% in the year
ended December 31, 2016 compared with 2015. During 2016, our international net sales decreased by 12.9% over
the prior year with 8.1% of the decline due to the impact of foreign currency fluctuation as the result of a stronger
U.S. dollar. Net sales in Europe, our largest foreign market, decreased by 11.3% in 2016 compared to the prior year,
with virtually the entire decline due to the impact of foreign currency fluctuation.
The following table summarizes net sales by geographic market for the years ended December 31, 2016
and 2015.
Net Sales by Market
(in thousands)
Year Ended December 31,
2016
Amount
% of Net
Sales
2015
Change from prior year
% of Net
Amount
Sales
(dollars in thousands)
Amount
%
United States
Australia/New Zealand
Canada
Mexico
Europe
Asia
Consolidated total
$
$
35,592
1,079
1,065
530
5,491
1,756
45,513
78.2% $
2.4
2.3
1.2
12.0
3.9
100.0% $
40,385
1,280
1,297
719
6,192
1,896
51,769
78.0% $
2.5
2.5
1.4
12.0
3.6
100.0% $
(4,793)
(201)
(232)
(189)
(701)
(140)
(6,256)
(11.9)%
(15.7)
(17.9)
(26.3)
(11.3)
(7.4)
(12.1)%
The following table sets forth, as of December 31, 2016 and 2015, 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 5,050 and 4,180 of the Active
Distributor count as of December 31, 2016 and 2015, respectively. The significant majority of these Preferred
Customers are in Europe.
21
Active Distributors/Master
Affiliates by Market
December 31, 2016
December 31, 2015
% 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
Australia/New Zealand
Canada
Mexico
Europe
Asia
Consolidated total
27,220
1,530
840
940
4,860
3,090
38,480
4,080
130
150
90
530
340
5,320
32,310
1,700
1,200
1,220
6,300
2,990
45,720
4,740
140
230
110
650
330
6,200
(15.8)%
(10.0)
(30.0)
(23.0)
(22.9)
3.3
(15.8)%
(13.9)%
(7.1)
(34.8)
(18.2)
(18.5)
3.0
(14.2)%
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.
The following table provides key statistics related to 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):
Year ended 12/31/2016
Year ended 12/31/2015
% change in sales-2016 vs. 2015:
Change in GAAP sales in USD
Due to currency fluctuation
Sales in local currency
(non-GAAP)
# of new distributors-2016
(1)
# of new distributors-2015
(1)
% change
# of new Master Affiliates-2016
# of new Master Affiliates-2015
% change
# of Product orders-2016
# of Product orders-2015
% change
$
$
35,592
40,385
$
$
1,079
1,280
$
$
1,065
1,297
$
$
530
719
$
$
5,491
6,192
$
$
1,756
1,896
$
$
9,921
11,384
-11.9%
-
-15.7%
-0.9%
-17.9%
-3.1%
-26.3%
-13.0%
-11.3%
-11.3%
-7.4%
-3.8%
-12.9%
-8.1%
-11.9%
-14.8%
-14.8%
-13.3%
0.0%
-3.6%
-4.8%
5,553
8,069
-31.2%
747
1,302
-42.6%
145,172
167,947
-13.6%
370
533
-30.6%
28
28
0.0%
6,846
8,064
-15.1%
165
403
-59.1%
22
67
-67.2%
3,716
4,999
-25.7%
389
662
-41.2%
20
30
-33.3%
3,698
4,143
-10.7%
2,110
3,247
-35.0%
152
185
-17.8%
20,850
24,103
-13.5%
1,720
1,625
5.8%
129
163
-20.9%
12,937
11,484
12.7%
4,754
6,470
-26.5%
351
473
-25.8%
48,047
52,793
-9.0%
______________________
(1)
The new distributor totals for 2016 and 2015 include 3,510 and 2,640, respectively, new worldwide preferred customers.
22
United States
•
• Net sales declined in the United States in 2016 compared to the prior-year period. We believe this decrease
is due in part to the changes made effective February 1, 2016 to our distributor compensation plan in the
United States and Canada.
Effective February 1, 2016, we updated our distributor compensation plan to introduce a Preferred
Customer program and to modify the requirements for a Retail Distributor (entry-level) to advance to the
Affiliate distributor level. Advancement to Affiliate distributor entitles a distributor to a higher discount on
their purchases and the opportunity to earn retail and wholesale profits. The updates to the distributor
compensation plan also included adjustments to a distributor’s group business volume required to achieve
the Master Affiliate level. We believe these changes enhance the value of the business opportunity to
Master Affiliates and distributors at levels below Master Affiliate; however, we continue to train the
distributor field to understand the benefit of these changes and to teach these concepts to their local
distributor groups.
Flagship products in the LunaRich line, including Reliv Now® and LunaRich X™, constituted 18.0% and
15.4% of net sales in the United States, respectively, in 2016 as our marketing continued to focus on these
two products. Reliv NOW and LunaRich X represented 18.8% and 15.5%, respectively, of net sales in the
United States in 2015.
•
• Distributor/preferred customer enrollments and new Master Affiliate qualifications decreased by 31.2% and
42.6%, respectively, in 2016 compared to the prior year in response to the changes to the new distributor
enrollment process and the increased business volume requirements to reach the Master Affiliate level.
• Distributor retention was 66.9% in 2016 compared to 71.1% for 2015. Distributor retention is determined
by the percentage of active distributors from 2015 that renewed their distributorships in 2016.
• Our average order size in 2016 increased by 2.0% to $341 at suggested retail value compared to the prior
year. However, the number of product orders decreased by 13.6% in 2016 compared to the prior year for
the same reasons as the overall decrease in sales.
International Operations
•
The average foreign exchange rate for the U.S. dollar for 2016 was stronger versus all of the local
currencies in which we conduct business when compared with the average exchange rates for 2015.
• As a result of the stronger U.S. dollar, we have implemented price increases in all of our international
markets. We are also reviewing sales by product to phase out products with lower sales levels and gross
margins as strategically appropriate.
•
• Net sales in Australia/New Zealand decreased by 14.8% in local currency in 2016 compared to the prior
year. We instituted price increases effective May 1, 2016, and new distributor/preferred customer
enrollments decreased by 30.6% in 2016 compared to the prior year.
Canadian net sales in 2016 decreased by 14.8% in local currency compared to the prior year as a result of
decreased distributor activity in the market. New distributor/preferred customers enrollments and new
Master Affiliate qualifications decreased by 59.1% and 67.2%, respectively, in 2016, compared to the prior
year as the result of changes to the new distributor enrollment process and increased business volume
requirements to reach the Master Affiliate level, similar to the United States. Additionally, we
implemented price increases effective April 1, 2016.
• Net sales in Mexico decreased by 13.3% in local currency in 2016 compared to the prior year. We
implemented price increases in this market on April 1, 2016, and distributor activity remains down as new
distributor enrollments decreased by 41.2% in 2016 compared to the prior year. The decline in the value in
the Mexican peso, especially since the U.S. presidential election, puts greater pressure on our gross margins
in Mexico and concerns over U.S. policy in Mexico causes uncertainty in the local distributor base
regarding the business.
• Net sales in Europe remained level in local currency in 2016 compared to the prior year. Sales have
rebounded in the second half of 2016 when compared to Q2 2016 subsequent to a price increase on May 1,
2016. However, we face declining margins subsequent to the drop in the value of the British pound after
the Brexit vote on June 23, 2016. New distributor/preferred customer enrollments decreased by 35.0% and
new Master Affiliate qualifications decreased by 17.8% in 2016 compared to 2015.
• Our Asia region consists of sales operations in the Philippines, Malaysia, Singapore, and Indonesia. Sales
in Asia decreased by 3.6% in local currency in 2016 compared to the prior year. A slight increase in net
23
sales in local currency in the Philippines, our largest Asian market, of 0.4% in 2016 was offset by declines
in our other Asian markets. New distributor/preferred customer enrollments increased by 5.8% in 2016
compared to the prior year; however, new Master Affiliate qualifications decreased by 20.9% in 2016.
Costs and Expenses
The following table sets forth selected results of our operations expressed as a percentage of net sales for
the years ended December 31, 2016 and 2015. 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)
2016
2015
Amount
% of net sales
Amount
% of net sales
Net sales
$
45,513
100.0 %
$
51,769
100.0 %
Costs and expenses:
Cost of products sold
Distributor royalties and commissions
Selling, general and adminstrative
10,024
16,095
20,206
Loss from operations
Interest income
Interest expense
Other income/(expense)
Loss before income taxes
Provision (benefit) for income taxes
Net loss
Loss per common share-Basic(1)
Loss per common share-Diluted(1)
$
$
$
(812)
107
(107)
196
(616)
9
(625)
(0.34)
(0.34)
22.0
35.4
44.4
(1.8)
0.2
(0.2)
0.4
(1.4)
-
11,086
18,410
23,547
(1,274)
117
(114)
(192)
(1,463)
(238)
21.4
35.6
45.5
(2.5)
0.2
(0.2)
(0.4)
(2.9)
(0.5)
(1.4) %
$
$
$
(1,225)
(2.4) %
(0.67)
(0.67)
____________
(1) All per share amounts 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 2016 increased by 0.6% compared to the prior-year
period. The cost of products sold as a percentage of net sales in 2016 was negatively impacted by lower
plant utilization and higher quality control expenses.
Distributor Royalties and Commissions:
• Distributor royalties and commissions as a percentage of net sales for 2016 compared to the prior-year
period remained relatively steady. 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 $3.34 million in 2016 compared to the prior-year
period.
24
•
Salaries, salary-related expenses, and incentive compensation decreased in the aggregate by $1.48 million
in 2016, 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. This headcount reduction program eliminated approximately 9 percent of the
company's worldwide employees. The total cost of this program, representing severance and benefits, was
approximately $275,000, and was included in the company's operating results for 2016. The aggregate
annual salaries of the affected employees were approximately $1.10 million.
• Other general and administrative expenses decreased by $777,000 in 2016 vs. the prior-year period. This
reduction was the result of both ongoing expense reductions, coupled with non-recurring expense items.
Non-recurring expense items from 2015 include:
o Compensation expense recognized as part of a long-term incentive agreement with our
management team in our European subsidiary was $91,000 in 2015. During Q2 2015, this long-
term incentive agreement became 100% vested and the participants exercised their put option in
the agreement. This incentive agreement is described in Note 13 of the Consolidated Financial
Statements.
In Mexico, we recognized expense of approximately $130,000 during Q2 2015 related to the
write-off of VAT credits and VAT paid on behalf of our distributors as part of an amnesty
agreement related to the implementation of a new VAT arrangement in that country.
o
Significant ongoing expense reductions include:
o Consulting, legal, accounting, and other professional fees decreased by $312,000 in 2016
compared to the prior-year period.
o General & administrative travel expenses decreased by $68,000 in 2016 compared to the prior-
year period.
o Business insurance expenses decreased by $44,000.
Offsetting increases include:
o
Foreign product compliance requirements increased by $101,000 in 2016 compared to the prior-
year period.
•
Sales and marketing expenses decreased by $1.00 million in 2016 compared to 2015. Components of the
decrease include:
o
o
o
$477,000 decrease in Star Director and other distributor bonuses, credit card fees, and other
expenses related to the level of sales.
$199,000 decrease in distributor conferences and meeting expenses. Most of the decrease was the
result of not holding regional conferences in the United States during Q1 2016.
$149,000 decrease in the cost of our promotional trips and other promotional incentives.
Other Income/Expense:
•
The other income in 2016 is primarily the result of foreign currency exchange gains on intercompany debt
denominated in U.S. dollars in certain of our subsidiaries. In 2015, we recognized foreign currency
exchange losses on the same intercompany debt.
Income Taxes/Benefit:
• We reported income tax expense of $9,000 for 2016, compared to an income tax benefit of $238,000 in
2015.
• During the second quarter of 2016, we determined that it was more likely than not that Federal and various
state net operating losses we expect to generate in 2016 will not be realized based on projections of future
taxable income and other considerations. Accordingly, as of December 31, 2016, the tax provision for
2016 includes the impact of recording a valuation allowance of $292,000 against the losses generated from
a U.S. tax perspective.
See Note 11 of the 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:
•
For 2016, we reported a net loss, although smaller compared to the same period in 2015. The impact of the
decline in net sales in the United States and other foreign markets was offset by the reduction in selling,
general and administrative expenses in 2016.
25
Liquidity and Capital Resources
In 2016, we generated $1.53 million of net cash in operating activities, $70,000 was used in investing
activities, and we used $1.02 million in financing activities. This compares to $800,000 used in operating activities,
$146,000 used in investing activities, and $733,000 used in financing activities in 2015. Cash and cash equivalents
increased by $345,000 to $3.61 million as of December 31, 2016 compared to $3.26 million as of December 31,
2015.
Significant changes in working capital items consisted of a decrease in inventory of $538,000, a decrease in
refundable income taxes of $425,000, and an increase in accounts payable and accrued expenses of $405,000 in
2016. The decrease in inventory is the result of a planned decrease in our inventory levels relative to sales, the
decrease in refundable income taxes is the result of collecting a refund on the net operating loss carryback from
2015, and the increase in accounts payable and accrued expenses is primarily due to inventory and other purchases
related to the launch of our Fit3 product line in late January 2017.
Investing activities during 2016 consisted of $173,000 for net capital expenditures, offset by payments
received on a distributor note receivable of $103,000. Financing activities during 2016 consisted of principal
payments of $1.02 million on long-term borrowings, including an accelerated final principal payment of $250,000
due under a Technology License Agreement entered into in 2013. See Note 6 to the Consolidated Financial
Statements for a further description. No cash dividends were paid in 2016.
Stockholders’ equity decreased to $14.91 million at December 31, 2016 compared to $15.88 million at
December 31, 2015. The decrease is due to our net loss in 2016 of $625,000 coupled with an unfavorable adjustment
in foreign currency translation of $396,000. Our working capital balance was $4.31 million at December 31, 2016
compared to $5.08 million at December 31, 2015. The current ratio at December 31, 2016 was 1.93 compared to
2.08 at December 31, 2015.
On September 30, 2015, we entered into a series of agreements with a new primary lender which included
agreements for a $3.25 million term loan and a $3.5 million revolving credit facility. These lending agreements
replaced similar borrowings under agreements with our former primary lender.
The $3.25 million term loan is for a period 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 2.78% at December 31, 2016.
The proceeds from the new $3.25 million term loan were used to pay off the outstanding term loan and
revolving line of credit balances, plus accrued interest, due under loan agreements with our former primary lender.
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 $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 was renewed on September 30, 2016, with a new maturity date of April 30, 2018.
As of December 31, 2016, there were no outstanding borrowings on the revolving line of credit.
The original September 30, 2015 lending agreements include a quarterly covenant requiring us to maintain
net tangible worth of not less than $9.5 million. The September 30, 2016 revolving line of credit agreement
extension adds a quarterly financial covenant under which we will have: i) a quarterly minimum requirement of
earnings before interest expense, income tax expense, depreciation, and amortization ("EBITDA") of $200,000 for
the quarter ended December 31, 2016; ii) a cumulative minimum EBITDA requirement of $200,000, $400,000,
$600,000, and $800,000 for the fiscal periods ending March 31, 2017, June 30, 2017, September 30, 2017, and
December 31, 2017, respectively; and iii) 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.
26
At December 31, 2016, 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
Our financial statements are based on the selection and application of significant accounting policies, which
require management to make significant estimates and assumptions. We believe that the following are some of the
more critical judgment areas in the application of our accounting policies that currently affect our financial condition
and results of operations.
Revenue
We receive payment by credit card, personal check, or guaranteed funds for orders from independent
distributors and make related commission payments in the following month. Net sales reflect product sales at
suggested retail price less the distributor discount of 10% to 40%. Sales revenue and commission expenses are
recorded when the merchandise is shipped, as this is the point title and risk of loss pass. In accordance with FASB
ASC, Topic 650-50, “Revenue Recognition-Customer Payments and Incentives,” 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.
Actual and estimated 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 return policy allows for a distributor 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 commission received relating to the original purchase of the returned products.
Total returns have been approximately 0.20% and 0.24% of net sales in 2016 and 2015, respectively. We record
handling and freight income as a component of net sales and record handling and freight costs as a component of
cost of products sold. Total revenues do not include sales tax as we consider ourselves a pass-through conduit for
collecting and remitting applicable sales taxes.
Inventories
Inventories are valued at the lower of cost or market. Product cost includes raw material, labor and
overhead costs and is accounted for using the first-in, first-out basis. On a periodic basis, we review our inventory
levels in each country for estimated obsolescence or unmarketable items, as compared to future demand
requirements and the shelf life of the various products. Based on this review, we record inventory write-downs when
costs exceed expected net realizable value. Historically, our estimates of obsolete or unmarketable items have been
materially accurate.
Sales aids and promotional materials inventories represent distributor kits, product brochures, and other
sales and business development materials which are held for sale to distributors. Costs of the sales aids and
promotional materials held for sale are capitalized as inventories and subsequently recorded to cost of goods sold
upon recognition of revenue when sold to distributors. All other advertising and promotional costs are expensed
when incurred.
Legal Proceedings
In the ordinary course of business, we are subject to various legal proceedings, including lawsuits and other
claims related to labor, product and other matters. We are required to assess the likelihood of adverse judgments and
outcomes to these matters as well as the range of potential loss. Such assessments are required to determine whether
a loss contingency reserve is required under the provisions of FASB ASC Topic 450, “Contingencies,” and to
determine the amount of required reserves, if any. These assessments are subjective in nature. Management makes
these assessments for each individual matter based on consultation with outside counsel and based on prior
experience with similar claims. To the extent additional information becomes available or our strategies or
27
assessments change, our estimates of potential liability for a given matter may change. Changes to estimates of
liability would result in a corresponding additional charge or benefit recognized in the statement of operations in the
period in which such changes become known. We recognize the costs associated with legal defense in the periods
incurred. Accordingly, the future costs of defending claims are not included in our estimated liability.
Income Tax Matters
We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes,” (ASC Topic
740) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax bases of recorded assets and liabilities. ASC Topic 740 also
requires that deferred tax assets be reduced by a valuation allowance if it is “more likely than not” that some portion
or the entire deferred tax asset will not be realized. In our quarterly evaluation of the need for a valuation allowance,
we consider and weigh both positive and negative factors, including the expected level of future taxable income and
available tax planning strategies. If actual results differ from the assumptions made in our previous evaluation of
our valuation allowance, we may record a change in valuation allowance through income tax expense in the period
this determination is made.
The calculations of our tax liabilities involve dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed in the
guidance under ASC Topic 740. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It
is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various
possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues
under audit, or new audit activity. Such a change in recognition or measurement would result in the recognition of a
tax benefit or an additional charge to the tax provision.
During the second quarter of 2016, we determined that it was more likely than not that U.S. federal and
various state net operating losses primarily generated in 2016 will not be realized based on projections of future U.S.
taxable income, estimated reversals of existing taxable timing differences, and other considerations. This
determination was affirmed as of December 31, 2016. Accordingly, the 2016 income tax provision includes the
impact of recording a full deferred tax asset valuation allowance of approximately $292,000 against the 2016 losses
generated from a U.S. tax perspective.
At December 31, 2016, we had deferred tax assets related to net operating loss carryforwards and other
income tax credits in our foreign operations with a tax value of $3.2 million. These net operating loss carryforwards
have various expiration dates, depending on the country and period in which they occurred. A valuation allowance
of $2.7 million has been established for these deferred tax assets based on the weight of positive and negative
evidence considered, including history of income or loss, projected future taxable income, availability of tax
planning strategies and the expiration dates of these carryforwards. In 2014, we recorded a tax benefit of $758,000
due to a reduction of the valuation allowance related to deferred tax assets for net operating losses of approximately
$3.6 million in our United Kingdom subsidiary. Based on our assessment, we reduced the United Kingdom’s NOL
valuation allowance because the weight of evidence regarding the future realizability of the deferred tax assets had
become predominantly positive and realization of the deferred tax assets was more likely than not. The positive
evidence considered primarily related to three years of consistent profitability while the only negative evidence was
historical losses prior to 2012 for this subsidiary. As of December 31, 2016 the net deferred tax asset attributable to
the United Kingdom subsidiary’s net operating loss carryforward was $487,000.
Current-Year Adoption of Recent Accounting Pronouncements
Discussion regarding our adoption of accounting pronouncements is included in Note 1 to the Consolidated
Financial Statements.
28
Item No. 8 - Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements contained in Part IV hereof.
Item No. 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item No. 9A - Controls and Procedures
Evaluation of Disclosure 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 December 31, 2016. 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
December 31, 2016, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the 2013 framework in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a
conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal
control over financial reporting, based on our evaluation, management has concluded our internal controls over
financial reporting were effective as of December 31, 2016.
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of the company’s independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not subject to
attestation by the company’s independent registered public accounting firm as the company is classified as a
“Smaller Reporting Company.”
Changes in Internal Control over Financial Reporting
There were no material changes in our internal control over financial reporting during the fourth quarter of
2016 that have materially affected or are reasonably likely to materially affect our internal controls over financial
reporting.
Item No. 9B - Other Information
None
29
PART III
Item No. 10 - Directors, Executive Officers and Corporate Governance
Information called for by Item 10 of Part III is incorporated by reference to the definitive Proxy Statement
for the 2017 Annual Meeting of Shareholders to be held on May 25, 2017, which is expected to be filed with the
Commission within 120 days after December 31, 2016.
Item No. 11 - Executive Compensation
Information called for by Item 11 of Part III is incorporated by reference to the definitive Proxy Statement
for the 2017 Annual Meeting of Shareholders to be held on May 25, 2017, which is expected to be filed with the
Commission within 120 days after December 31, 2016.
Item No. 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information called for by Item 12 of Part III is incorporated by reference to the definitive Proxy Statement
for the 2017 Annual Meeting of Shareholders to be held on May 25, 2017, which is expected to be filed with the
Commission within 120 days after December 31, 2016.
Item No. 13 - Certain Relationships and Related Transactions, and Director Independence
Information called for by Item 13 of Part III is incorporated by reference to the definitive Proxy Statement
for the 2017 Annual Meeting of Shareholders to be held on May 25, 2017, which is expected to be filed with the
Commission within 120 days after December 31, 2016.
Item No. 14 - Principal Accountant Fees and Services
Information called for by Item 14 of Part III is incorporated by reference to the definitive Proxy Statement
for the 2017 Annual Meeting of Shareholders to be held on May 25, 2017, which is expected to be filed with the
Commission within 120 days after December 31, 2016.
PART IV
Item No. 15 - Exhibits and Financial Statement Schedules
(a)
1.
The Consolidated Financial Statements filed as part of this report on Form 10-K are listed on the
accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement
Schedules.
2.
Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below:
All other financial schedules are not required under the related instructions or are inapplicable and
therefore have been omitted.
3.
Exhibits: See the Exhibit Index immediately following the signature page of this Annual Report
on Form 10-K.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Robert L. Montgomery
Robert L. Montgomery, Chairman of the Board of Directors and Chief Executive Officer
Date: March 28, 2017
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Robert L. Montgomery
Robert L. Montgomery, Chairman of the Board of Directors and Chief Executive Officer
Date: March 28, 2017
By:
/s/ Steven D. Albright
Steven D. Albright, Chief Financial Officer (and accounting officer)
Date: March 28, 2017
By:
/s/ Carl W. Hastings
Carl W. Hastings, Vice Chairman, Chief Scientific Officer, Director
Date: March 28, 2017
By:
/s/ John B. Akin
John B. Akin, Director
Date: March 28, 2017
By:
/s/ Robert M. Henry
Robert M. Henry, Director
Date: March 28, 2017
By:
/s/ John M. Klimek
John M. Klimek, Director
Date: March 28, 2017
31
Exhibit Index
Exhibit
Number
Document
3.1
3.2
3.3
3.4
3.5
4.1
10.1
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Second Amended and Restated Certificate of Incorporation (incorporated by reference to
Appendix B of Schedule 14A of the Registrant filed on April 17, 2003).
Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation (filed
herewith)
By-Laws (incorporated by reference to the Registration Statement on Form S-3 of the Registrant
filed on February 21, 2006).
Amendment to By-Laws dated March 22, 2001 (incorporated by reference to the Registration
Statement on Form S-3 of the Registrant filed on February 21, 2006).
Certificate of Designation to Create a Class of Series A Preferred Stock for Reliv’ International,
Inc. (incorporated by reference to Exhibit 3.1 to the Form 10-Q of the Registrant for quarter ended
March 31, 2003).
Form of Reliv International, Inc. common stock certificate (incorporated by reference to the
Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
Amended Exclusive License Agreement with Theodore P. Kalogris dated December 1, 1991
(incorporated by reference to Exhibit 10.1 to the Form 10-K of the Registrant for the year ended
December 31, 1992).
Robert L. Montgomery Employment Agreement dated June 19, 2007 (incorporated by reference to
Exhibit 10.1 to the Form 8-K of the Registrant filed June 25, 2007).
Carl W. Hastings Employment Agreement dated March 31, 2014 (incorporated by reference to
Exhibit 10.1 to the Form 8-K of the Registrant filed April 3, 2014).
Reliv’ International, Inc. Supplemental Executive Retirement Plan dated June 1, 1998
(incorporated by reference to Exhibit 10.19 to the Form10-K of the Registrant for year ended
December 31, 1998).
Reliv International, Inc. Employee Stock Ownership Plan and Trust dated August 24, 2006
(incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed August 30,
2006).
2009 Distributor Stock Purchase Plan (incorporated by reference to Appendix 1 of Form S-3
Registration Statement the Registrant filed July 1, 2009).
2009 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to the Form S-8 Registration
Statement the Registrant filed December 2, 2010).
2014 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to the Form S-8 Registration
Statement the Registrant filed November 19, 2014).
Reliv International, Inc. Incentive Compensation Plan effective January 1, 2007 (incorporated by
reference to Exhibit 10.1 to the Form 8-K of the Registrant filed May 31, 2007).
10.10*
R. Scott Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference
to Exhibit 10.1 to the Form 8-K of the Registrant filed January 4, 2008).
32
10.11*
10.12*
10.13*
10.14*
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Ryan A. Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference
to Exhibit 10.2 to the Form 8-K of the Registrant filed January 4, 2008).
Steven G. Hastings Employment Agreement dated January 2, 2008 (incorporated by reference to
Exhibit 10.3 to the Form 8-K of the Registrant filed January 4, 2008).
Steven D. Albright Employment Agreement dated January 2, 2008 (incorporated by reference to
Exhibit 10.4 to the Form 8-K of the Registrant filed January 4, 2008).
Brett M. Hastings Employment Agreement dated January 2, 2008 (incorporated by reference to
Exhibit 10.5 to the Form 8-K of the Registrant filed January 4, 2008).
Loan Sale Agreement between 2010-1 RADC/CADC Venture, LLC and Reliv International, Inc.
dated March 16, 2012 (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the
Registrant for the quarter ended March 31, 2012).
Technology License Agreement by and between SL Technology, Inc. and Soy Labs, LLC dated
July 23, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed
July 25, 2013).
Agreement by and among Reliv International, Inc., SL Technology, Inc., Soy Labs, LLC and
1Soy, Inc. dated July 23, 2013 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the
Registrant filed July 25, 2013).
Letter agreement between SL Technology, Inc. and Soy Labs, LLC dated September 2, 2016 (filed
herewith).
Promissory Note (term loan) dated September 30, 2015 among Reliv International, Inc., Reliv,
Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank &
Trust (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant filed
November 13, 2015).
Promissory Note (revolving credit facility) dated September 30, 2015 among Reliv International,
Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise
Bank & Trust (incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Registrant filed
November 13, 2015).
Business Loan Agreement dated September 30, 2015 among Reliv International, Inc., Reliv, Inc.,
Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust
(incorporated by reference to Exhibit 10.3 to the Form 10-Q of the Registrant filed November 13,
2015).
Deed of Trust dated September 30, 2015 between Reliv International, Inc. as Grantor and
Enterprise Bank & Trust (incorporated by reference to Exhibit 10.4 to the Form 10-Q of the
Registrant filed November 13, 2015).
First Amendment to Loan Agreement dated September 30, 2016 among Reliv International, Inc.,
Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank
& Trust (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant filed
November 14, 2016).
Change in Terms Agreement (revolving credit facility) dated September 30, 2016 among Reliv
International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers
and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.2 to the Form 10-Q of the
Registrant filed November 14, 2016).
33
11
21
23
31.1
31.2
32
101
Statement re: computation of per share earnings (incorporated by reference to Note 8 of the
Consolidated Financial Statements contained in Part IV).
Subsidiaries of the Registrant (filed herewith).
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).
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).
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).
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).
Interactive Data Files, including the following materials from the Company’s Annual Report on
Form 10-K for the year ended December 31, 2016, formatted in XBRL: (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Net Loss and Comprehensive Loss, (iii) the
Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows,
and (v) the Notes to Consolidated Financial Statements.
*Indicates management compensation plan, contract or arrangement.
34
Reliv’ International, Inc.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Contents
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm.....................................F-1
Consolidated Balance Sheets as of December 31, 2016 and 2015 ...........................F-2
Consolidated Statements of Net Loss and Comprehensive
Loss for the years ended December 31, 2016 and 2015 ........................................F-4
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2016 and 2015 ................................................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2016 and 2015 .................................................................................F-6
Notes to Consolidated Financial Statements – December 31, 2016 .........................F-8
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Reliv’ International, Inc.
We have audited the accompanying consolidated balance sheets of Reliv’ International, Inc. and Subsidiaries (the
Company) as of December 31, 2016 and 2015, and the related consolidated statements of net
loss and
comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December
31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Reliv’ International, Inc. and Subsidiaries at December 31, 2016 and 2015, and the consolidated
results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in
conformity with U.S. generally accepted accounting principles.
St. Louis, Missouri
March 28, 2017
F-1
Reliv’ International, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $26,700
in 2016 and $30,200 in 2015
Accounts due from employees and distributors
Inventories:
Finished goods
Raw materials
Sales aids and promotional materials
Total inventories
Refundable income taxes
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Other assets
Cash surrender value of life insurance
Note receivable due from distributor
Deferred income taxes
Intangible assets, net
Property, plant, and equipment
Less accumulated depreciation
Property, plant, and equipment, net
December 31
2016
2015
$
3,606,817
$
3,262,263
126,113
139,931
2,629,541
1,728,136
130,153
4,487,830
97,194
-
474,183
8,932,068
305,137
2,965,981
1,521,005
487,000
2,400,234
89,376
134,668
3,657,612
1,382,635
132,475
5,172,722
522,035
66,000
552,645
9,799,709
285,153
2,848,232
1,630,164
623,000
2,655,647
18,600,665
12,746,363
5,854,302
18,766,218
12,347,091
6,419,127
Total assets
$
22,465,727
$
24,261,032
F-2
Reliv’ International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses
Current maturities of long-term debt
Total current liabilities
Noncurrent liabilities:
Long-term debt, less current maturities
Noncurrent deferred income taxes
Other noncurrent liabilities
Total noncurrent liabilities
Stockholders’ equity:
Preferred stock, par value $0.001 per share;
3,000,000 shares authorized; -0- shares issued and
outstanding in 2016 and 2015
Common stock, par value $0.001 per share;
30,000,000 shares authorized, 2,110,013 shares
issued and 1,845,160 shares outstanding in 2016;
2,110,436 shares issued and 1,845,583 shares
outstanding in 2015
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss:
Foreign currency translation adjustment
Treasury stock
Total stockholders’ equity
December 31
2016
2015
$
4,234,305
389,096
4,623,401
$
3,937,752
781,505
4,719,257
2,518,341
-
409,813
2,928,154
3,159,575
94,000
405,705
3,659,280
-
-
2,110
30,565,144
(9,284,317)
(1,030,205)
(5,338,560)
14,914,172
2,110
30,512,480
(8,659,262)
(634,273)
(5,338,560)
15,882,495
Total liabilities and stockholders’ equity
$
22,465,727
$
24,261,032
See accompanying notes.
F-3
Reliv’ International, Inc. and Subsidiaries
Consolidated Statements of Net Loss
and Comprehensive Loss
Product sales
Handling & freight income
Net sales
Costs and expenses:
Cost of products sold
Distributor royalties and commissions
Selling, general, and administrative
Loss from operations
Other income (expense):
Interest income
Interest expense
Other income (expense)
Loss before income taxes
Provision (benefit) for income taxes
Net loss available to common
shareholders
Year ended December 31
2016
2015
$
$
42,004,961
3,507,875
45,512,836
47,759,553
4,009,304
51,768,857
10,024,021
16,095,032
20,205,762
(811,979)
11,086,152
18,410,190
23,546,926
(1,274,411)
107,006
(106,682)
195,600
(616,055)
9,000
117,027
(113,881)
(191,402)
(1,462,667)
(238,000)
$
(625,055)
$
(1,224,667)
Other comprehensive income (loss):
Foreign currency translation adjustment
(395,932)
(68,435)
Comprehensive loss
$
(1,020,987)
$
(1,293,102)
Loss per common share - Basic
($0.34)
($0.67)
Weighted average shares
1,845,000
1,839,000
Loss per common share - Diluted
($0.34)
($0.67)
Weighted average shares
1,845,000
1,839,000
2015 loss per common share has been restated for the 2016 reverse stock split; see Note 7.
See accompanying notes.
F-4
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Balance at December 31, 2014
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Total comprehensive loss
Common stock issued (Note 13)
Stock-based compensation
Expired stock options & warrants; deferred tax effect
Balance at December 31, 2015
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Total comprehensive loss
Stock-based compensation
Expired stock options & warrants; deferred tax effect
Common stock repurchased and retired
Balance at December 31, 2016
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Accumulated Comprehensive
Treasury Stock
Deficit
Loss
Shares
Amount
Total
2,096,150
-
$
$
2,096
-
30,334,175
-
$
(7,434,595)
(1,224,667)
$
(565,838)
-
264,853
-
$
(5,338,560)
-
$
16,997,278
(1,224,667)
-
-
-
-
(68,435)
-
-
14,286
-
-
2,110,436
-
14
-
-
2,110
-
116,986
63,064
(1,745)
30,512,480
-
-
-
-
(8,659,262)
(625,055)
-
-
-
(634,273)
-
-
-
-
264,853
-
-
-
-
(5,338,560)
-
-
-
-
-
(395,932)
-
-
-
-
(423)
2,110,013
$
-
-
-
2,110
$
60,342
(5,467)
(2,211)
30,565,144
$
-
-
-
(9,284,317)
$
-
-
-
(1,030,205)
-
-
-
264,853
$
-
-
-
(5,338,560)
$
(68,435)
(1,293,102)
117,000
63,064
(1,745)
15,882,495
(625,055)
(395,932)
(1,020,987)
60,342
(5,467)
(2,211)
14,914,172
Applicable 2015 and 2014 amounts have been restated for the 2016 reverse stock split; see Note 7.
See accompanying notes.
F-5
Reliv’ International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Operating activities
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Stock-based compensation
Non-cash life insurance policy accretion
Deferred income taxes
Foreign currency transaction (gain)/loss
(Increase) decrease in accounts receivable and
accounts due from employees and distributors
(Increase) decrease in inventories
(Increase) decrease in refundable income taxes
(Increase) decrease in prepaid expenses and other
current assets
(Increase) decrease in other assets
Increase (decrease) in accounts payable & accrued
expenses and other non-current liabilities
Net cash provided by (used in) operating activities
Investing activities
Proceeds from sale of property, plant, and equipment
Purchase of property, plant, and equipment
Payments received on distributor note receivable
Net cash used in investing activities
Financing activities
Repayment of revolving line of credit borrowings
Proceeds from long-term borrowings
Principal payments on long-term borrowings
Purchase of stock for treasury
Net cash used in financing activities
Effect of exchange rate changes on cash and cash
equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended December 31
2016
2015
$
(625,055)
$
(1,224,667)
984,031
60,342
(117,750)
(3,000)
(147,623)
(39,282)
537,665
425,099
66,014
(19,936)
404,767
1,525,272
912
(173,903)
102,818
(70,173)
-
-
(1,017,367)
(2,211)
(1,019,578)
(90,967)
344,554
3,262,263
3,606,817
$
$
1,003,096
63,064
(100,288)
92,000
109,491
156,865
(138,490)
(264,243)
95,861
10,776
(603,020)
(799,555)
7,281
(250,284)
96,845
(146,158)
(500,000)
3,249,501
(3,482,561)
-
(733,060)
(48,356)
(1,727,129)
4,989,392
3,262,263
F-6
Reliv’ International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
2016
2015
$
$
$
$
94,100
$
87,710
(398,900)
$
(68,000)
-
-
$
$
424,000
117,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes paid (received), net
Noncash financing transactions (Note 13):
Issuance of promissory notes
Issuance of company common stock
See accompanying notes.
F-7
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016
1. Nature of Business and Significant Accounting Policies
Nature of Business
Reliv’ International, Inc. (the Company) produces a proprietary line of nutritional supplements
addressing basic nutrition, specific wellness needs, weight management, and sports nutrition.
These products are sold by subsidiaries of the Company to a sales force of independent
distributors of the Company that sell products directly to consumers. The Company and its
subsidiaries sell products to distributors throughout the United States and in Australia, Austria,
Canada, France, Germany, Indonesia, Ireland, Malaysia, Mexico, the Netherlands, New Zealand,
the Philippines, Singapore, and the United Kingdom.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its foreign and
domestic subsidiaries. All significant
intercompany accounts and transactions have been
eliminated.
On October 4, 2016, the Company effected a 1-for-7 reverse stock split of the Company’s
common stock. Each stockholder’s percentage ownership and proportional voting power
remained unchanged as a result of the reverse stock split. All applicable share data, per share
amounts, and related information in these consolidated financial statements and notes thereto
have been adjusted retroactively to give effect to the 1-for-7 reverse stock split.
Cash Equivalents
The Company's policy is to consider the following as cash and cash equivalents: demand
deposits and short-term investments with a maturity of three months or less when purchased.
Inventories
Inventories are valued at the lower of cost or market. Product cost includes raw materials, labor,
and overhead costs and is accounted for on a first-in, first-out basis. On a periodic basis, the
Company reviews its inventory levels, as compared to future demand requirements and the shelf
life of the various products. Based on this review, the Company records inventory write-downs
when necessary.
Sales aids and promotional materials inventories represent distributor kits, product brochures,
and other sales and business development materials which are held for sale to distributors. Cost
of the sales aids and promotional materials held for sale are capitalized as inventories and
subsequently recorded to cost of goods sold upon recognition of revenue when sold to
distributors. All other advertising and promotional costs are expensed when incurred.
F-8
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Property, Plant, and Equipment
Property, plant, and equipment are stated on the cost basis. Depreciation is computed using the
straight-line or an accelerated method over the useful life of the related assets. Generally,
computer equipment and software are depreciated over 3 to 5 years, office equipment and
machinery over 7 years, and real property over 39 years.
Foreign Currency Translation and Transaction Gains or Losses
All balance sheet accounts have been translated using the exchange rates in effect at the balance
sheet date. Statements of net income (loss) amounts have been translated using the average
exchange rate for the year. The gains and losses resulting from the changes in exchange rates
from year to year have been reported in other comprehensive income (loss). The foreign
currency translation adjustment is the only component of accumulated other comprehensive loss.
If applicable, foreign currency translation adjustments exclude income tax expense (benefit) as
certain of the Company’s investments in non-U.S. subsidiaries are deemed to be reinvested for
an indefinite period of time. Foreign currency transaction gains (losses) were $147,623 and
$(109,491) for 2016 and 2015, respectively.
Basic and Diluted Earnings per Share
Basic earnings per common share are computed using the weighted average number of common
shares outstanding during the year. Diluted earnings per common share are computed using the
weighted average number of common shares and potential dilutive common shares that were
outstanding during the period. Potential dilutive common shares consist of outstanding stock
options, outstanding stock warrants, and convertible preferred stock. See Note 8 for additional
information regarding earnings per share.
Stock-Based Compensation
The Company has stock-based incentive plans under which it may grant stock option, restricted
stock, and unrestricted stock awards. The Company recognizes stock-based compensation
expense based on the grant date fair value of the award and the related vesting terms. Depending
upon the characteristics of the option,
the fair value of stock-based awards is primarily
determined using the Black-Scholes model, which incorporates assumptions and management
estimates including the risk-free interest rate, expected volatility, expected option life, and
dividend yield. See Note 7 for additional information.
The Company accounts for options granted to non-employees and warrants granted to
distributors under the fair value approach required by FASB ASC Topic 505-50, “Equity Based
Payments to Non-Employees.”
F-9
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Revenue Recognition
The Company receives payment by credit card, personal check, or guaranteed funds for orders
from independent distributors and makes related commission payments in the following month.
Generally, net sales reflect product sales less the distributor discount of 20 percent to 40 percent
of the suggested retail price. Sales revenue and commission expenses are recorded when the
merchandise is shipped, as this is the point title and risk of loss pass to the distributor.
In
accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 605-50, “Revenue Recognition – Customer Payments and
Incentives,” the Company presents 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.
Actual and estimated sales returns are classified as a reduction of net sales. The Company
estimates and accrues a reserve for product returns based on the Company’s return policy and
historical experience. The Company’s return 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 commission received relating to the
original purchase of the returned products. For the years ended December 31, 2016 and 2015,
total returns as a percent of net sales were approximately 0.20% and 0.24%, respectively.
The Company records handling and freight income as a component of net sales and records
handling and freight costs as a component of cost of products sold. Total net sales do not include
sales tax as the Company considers itself a pass-through conduit for collecting and remitting
applicable sales taxes.
Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value,
establishes a framework for measuring fair value, and requires disclosures about fair value
measurements required under other accounting pronouncements.
See Note 5 for further
discussion.
Income Taxes
The provision for income taxes is computed using the liability method. The primary differences
between financial statement and taxable income result from financial statement accruals and
reserves and differences between depreciation and stock options for book and tax purposes.
Unrecognized tax benefits are accounted for as required by FASB ASC Topic 740 which
prescribes a more likely than not threshold for financial statement presentation and measurement
of a tax position taken or expected to be taken in a tax return. See Note 11 for further discussion.
F-10
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Advertising
Costs of sales aids and promotional materials are capitalized as inventories. All other advertising
and promotional costs are expensed when incurred. The Company recorded $36,900 and
$18,500 of advertising expense in 2016 and 2015, respectively.
Research and Development Expenses
Research and development expenses, which are charged to selling, general, and administrative
expenses as incurred, were $694,000 and $765,000 in 2016 and 2015, respectively.
Amortizable Intangible Assets
The Company records intangible assets based on management’s determination of the fair value
of the respective assets at the time of acquisition. Determining the fair value of intangible assets
is judgmental and involves the use of significant estimates and assumptions of future company
operations. The Company bases its fair value estimates and related asset lives on assumptions it
believes to be reasonable but that are unpredictable and inherently uncertain. Actual future
results may differ from these estimates.
Intangible assets estimated to have finite lives are amortized over their estimated economic life
under the straight-line method; such method correlates to management’s estimate of the assets’
economic benefit. Based on management’s estimates at origination, these lives range from two
to seventeen years. Related amortization expense is presented within Selling, General, and
Administrative in the accompanying consolidated statements of net loss and comprehensive loss.
As of December 31, 2016, remaining lives of intangible assets range from eight to thirteen years.
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.
F-11
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
New Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes, which requires all deferred income tax assets and liabilities to be classified as
non-current on the balance sheet, rather than being separated into current and non-current
amounts. The new standard is effective for annual reporting periods beginning after December
15, 2016 with early adoption permitted. The Company early adopted ASU No. 2015-17 as of
December 31, 2016. The prospective adoption of this guidance resulted in the classification of
all deferred tax assets and deferred tax liabilities as non-current on the Company’s consolidated
balance sheet as of December 31, 2016. Prior periods were not reclassified.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers,
which requires an entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to customers. The ASU will replace most existing
U.S. GAAP revenue recognition guidance and becomes effective for the Company on January 1,
2018. The new standard permits the use of either the retrospective or modified retrospective
transition method. The Company anticipates adopting this guidance in the first quarter of fiscal
2018. The Company’s primary source of revenue is from the sale of nutritional products to the
Company’s independent distributors whereby revenue is currently recognized when product is
shipped and risk of loss has passed to the customer. Upon adoption of this new standard, the
Company believes that the timing of revenue recognition related to nutritional product sales will
remain materially consistent with its current practice. Based on the evaluation completed to date,
the Company has identified membership fee-type revenue and sales incentive programs as areas
that may be affected by the new standard; and these areas require further evaluation. Overall, the
Company continues to evaluate the adoption of this standard, including the transition method,
will have on its consolidated financial consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the
Measurement of Inventory, which requires inventory within the scope of this update to be
measured at the lower of its cost or net realizable value, with net realizable value being the
estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. The new standard is effective prospectively for fiscal
years beginning after December 15, 2016 and will be adopted by the Company in the first quarter
of 2017. The Company does not anticipate that the adoption of this standard will have a material
impact on its consolidated financial statements and related disclosures.
F-12
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern, which requires management to assess, at each
annual and interim reporting period, the entity’s ability to continue as a going concern within one
year from the date the financial statements are issued and provide related disclosures. As
required, the Company adopted this standard as of December 31, 2016. The Company’s
adoption of this standard did not have any impact on its consolidated financial statements and
related disclosures.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) which supersedes the
existing lease guidance. This update requires lessees to recognize a lease liability and a lease
asset for all leases, including operating leases, with a term greater than twelve months on its
balance sheet. The update also expands the required quantitative and qualitative disclosures
surrounding leases. This update is effective for fiscal years beginning after December 15, 2018
and interim periods within those fiscal years, with earlier application permitted. The Company
expects the adoption of this standard to result in the recognition of right-of-use assets and lease
liabilities not currently recorded in the Company’s consolidated financial statements. The
Company is evaluating its transition method and other effects that the new standard will have on
its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting. This amendment is
intended to simplify several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liability,
forfeitures, and classification on the statement of cash flows. This update is effective for fiscal
years beginning after December 15, 2016 and will be adopted by the Company in the first quarter
of 2017. The Company does not anticipate that the adoption of this standard will have a material
impact on its consolidated financial statements and related disclosures.
F-13
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2016 and 2015, consist of the following:
Land and land improvements
Building
Machinery and equipment
Office equipment
Computer equipment and software
Less accumulated depreciation
2016
2015
$
$
905,190
9,943,512
4,329,329
1,203,868
2,218,766
18,600,665
12,746,363
5,854,302
$
$
905,190
9,951,555
4,344,403
1,223,921
2,341,149
18,766,218
12,347,091
6,419,127
For the years ended December 31, 2016 and 2015, depreciation expense was $728,618 and
$732,968, respectively.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2016 and 2015, consist of the
following:
Trade payables
Distributors' commissions
Sales taxes
Payroll and payroll taxes
4. Amortizable Intangible Assets
2016
2015
$
$
2,352,692
1,402,370
234,153
245,090
4,234,305
$
$
1,859,716
1,567,883
232,996
277,157
3,937,752
The Company had amortizable intangible assets as follows as of December 31, 2016 and 2015:
Gross Carrying Amount
Accumulated
Amortization
2016
2015
2016
2015
Distributorship and related agreements
Lunasin technology license
$2,060,000
1,954,661
$2,060,000
1,954,661
$1,217,689
396,738
$1,078,394
280,620
$4,014,661
$4,014,661
$1,614,427
$1,359,014
F-14
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Amortizable Intangible Assets (continued)
Amortization expense for intangible assets totaled $255,413 and $270,128 in 2016 and 2015,
respectively. Amortization expense for amortizable intangible assets over the next five years is
estimated to be:
2017
2018
2019
2020
2021
Intangible
Amortization
$226,000
226,000
226,000
226,000
226,000
5. Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments at December 31, 2016 and 2015
were approximately as follows:
Description
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2016
Long-term debt
Note receivable
Marketable securities
December 31, 2015
Long-term debt
Note receivable
Marketable securities
$2,907,437
$2,907,437
1,630,164
1,812,000
-
-
$2,907,437
1,812,000
296,000
296,000
$296,000
-
$3,941,080
$3,941,080
1,732,982
1,942,000
-
-
$3,941,080
1,942,000
275,000
275,000
$275,000
-
-
-
-
-
-
-
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.
F-15
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Fair Value of Financial Instruments (continued)
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Long-term debt: The fair value of the Company’s term and revolver loans approximate carrying
value as these loans have variable market-based interest rates that reset every thirty days. The
fair value of the Company’s obligation for the acquisition of its lunasin technology license
approximates carrying value as this obligation was a zero-interest based obligation discounted
utilizing an interest rate factor comparable to the Company’s market-based interest rate of its
term and revolver loans. The fair value of the Company’s notes payable approximates carrying
value as these notes have variable market-based interest rates that reset every ninety days.
Note receivable: The Company’s note receivable 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.
Marketable securities: The assets (trading securities) of the Company’s Supplemental Executive
Retirement Plan are recorded at fair value on a recurring basis, and are presented within Other
Assets in the consolidated balance sheets.
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.
6. Debt
Debt at December 31, 2016 and 2015 consists of the following:
Term loan
Notes payable
Obligation for acquisition of technology license, net
Less current maturities
Long-term portion
2016
2015
$
$
2,843,301
64,136
-
2,907,437
389,096
2,518,341
$
$
3,168,261
283,455
489,364
3,941,080
781,505
3,159,575
F-16
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Debt (continued)
Principal maturities of debt at December 31, 2016, are as follows:
2017
2018
$
389,096
2,518,341
$ 2,907,437
Term Loan and Revolving Loan Agreements
Effective September 30, 2015, the Company entered into a series of lending agreements with a
new primary lender which include agreements for a $3.25 million term loan and $3.5 million
revolving credit facility. These lending agreements replace similar borrowings under agreements
with the Company’s former primary lender.
The new $3.25 million term loan is for a period 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 is based on the 30-day LIBOR plus 2.25% and was 2.78% at December 31, 2016.
The new $3.5 million revolving line of credit agreement, originally dated September 30, 2015,
accrues interest at a floating interest rate based on the 30-day LIBOR plus 2.25% and had an
original term of one year. Effective September 30, 2016, the revolving line of credit agreement
was extended under similar terms to April 30, 2018. As of December 31, 2016, there were no
outstanding borrowings on the revolving line of credit.
The proceeds from the new $3.25 million term loan were used to pay off the outstanding term
loan and revolving line of credit balances, plus accrued interest, due under loan agreements with
the Company’s former primary lender.
Borrowings under the new lending agreements are secured by all tangible and intangible assets
of the Company, a whole life insurance policy on the life of the Company’s Chief Executive
Officer, and by a mortgage on the real estate of the Company’s headquarters.
The original September 30, 2015 lending agreements include a quarterly covenant requiring the
Company to maintain net tangible worth of not less than $9.5 million. The September 30, 2016
revolving line of credit agreement extension adds a quarterly financial covenant under which the
i) a quarterly minimum requirement of earnings before interest expense,
Company will have:
income tax expense, depreciation, and amortization (“EBITDA”) of $200,000 for the quarter
ended December 31, 2016; ii) a cumulative minimum EBITDA requirement of $200,000,
$400,000, $600,000, and $800,000 for the fiscal periods ending March 31, 2017, June 30, 2017,
September 30, 2017, and December 31, 2017, respectively; and iii) a minimum EBITDA of
$200,000 for the quarter ended March 31, 2018.
F-17
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Debt (continued)
Term Loan and Revolving Loan Agreements (continued)
As defined, EBITDA means the Company’s consolidated net income for such period, before
interest expense, income tax expense, depreciation and amortization, 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 adjustments approved by the lender.
At December 31, 2016, the Company was in compliance with its loan covenant requirements.
Obligation for Acquisition of Technology License, net
In July 2013, a newly-formed, wholly-owned subsidiary of the Company entered into a
Technology License Agreement (TLA) with a privately-held company. The TLA provides the
Company the exclusive license for certain intellectual property related to the nutritional
ingredient lunasin and other soy-related peptides and proteins. In consideration for the TLA, the
Company agreed to pay the licensor a purchase price of $2 million; $1.15 million paid at closing,
with the remaining obligation (non-interest bearing) payable over the next four years in a series
of annual payments ranging from $150,000 to $250,000 as stated in the agreement. Subject to
certain minimum and maximum thresholds, the Company may also have been required to pay the
licensor royalties during the remaining life of the intellectual properties. During the third quarter
of 2016, the Company made a scheduled $250,000 payment on this obligation.
In addition,
during the third quarter of 2016, the Company and licensor entered into a letter agreement
pursuant to which the Company paid licensor the final $250,000 payment, due in July 2017 per
the original agreement.
In consideration for acceleration of the final payment, the licensor
transferred all rights, title and interest in the technology to the Company and terminated any
future royalty obligations on the part of the Company.
The Company has accounted for the TLA as an asset purchase acquisition consisting of a long-
term finite-lived asset to be amortized over the life of the associated intellectual property
(approximately seventeen years at origination).
Notes Payable
A description of the Notes Payable is presented in Note 13 – Incentive Compensation Plans.
7. Stockholders’ Equity
On October 4, 2016, the Company effected a 1-for-7 reverse stock split of the Company’s
common stock. Each stockholder’s percentage ownership and proportional voting power
remained unchanged as a result of the reverse stock split. All applicable share data, per share
amounts, and related information in these consolidated financial statements and notes thereto
have been adjusted retroactively to give effect to the 1-for-7 reverse stock split.
F-18
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Stockholders’ Equity (continued)
Stock Options – Incentive Stock Plans
The Company sponsors two incentive stock plans (a “2014 Plan” and a “2009 Plan”) each
allowing for a maximum of 142,857 shares to be granted in the form of either incentive stock
options, non-qualified stock options, restricted stock awards, or unrestricted stock awards.
Employees, directors, advisors, and consultants of the Company are eligible to receive the grants.
These plans have been approved by the stockholders of the Company. The Compensation
Committee of the Board of Directors administers the plans.
The 2014 Plan and the 2009 Plan provide that options may be issued under the Plans at an option
price not less than fair market value of the stock at the time the option is granted. Under these
plans, restricted stock of the Company may be granted at no cost to the grantee. The grantees are
entitled to dividends and voting rights for their respective shares. Restrictions limit the sale or
transfer of these shares during the requisite service period. In addition, the committee may grant
or sell unrestricted stock at a purchase price to be determined by the committee. Vesting terms
and restrictions, if applicable, under the plans, are set by the committee and will be 10 years or
less. The 2014 Plan expires in 2024 and the 2009 Plan expires in 2019.
In March 2015, under the 2014 Plan, the Company issued time-vesting stock option grants
totaling 39,210 shares. These option grants have an exercise price of $7.77 per share with a five-
year term and vest annually in equal increments over 4.8 years. The aggregate estimated
compensation cost related to the time-vesting stock option grant was $150,200. The grant-date
fair value of the options was $3.8311 per share and was determined using a Black-Scholes option
pricing model using an average risk-free rate of 1.68%, an average dividend yield of 0%, and an
average volatility of 56.3%.
Also, in March 2015, under the 2014 Plan, the Company issued performance-based stock option
grants totaling 91,500 shares. These option grants have an exercise price of $7.77 per share with
a five-year term. The options’ vesting provisions are contingent upon the Company achieving
certain financial performance measurements. The aggregate estimated compensation cost related
to the performance based options was $342,300; however, recognition is contingent upon
performance vesting. As of December 31, 2016, vesting conditions are not probable and no
expense has been recorded. The grant-date fair value of the options was $3.8311 per share and
was determined using a Black-Scholes option pricing model using an average risk-free rate of
1.68%, an average dividend yield of 0%, and an average volatility of 56.3%.
Compensation cost for all of the stock option plans was approximately $56,280 ($56,000 net of
tax) and $57,468 ($57,000 net of tax) for the years ended December 31, 2016 and 2015,
respectively, and has been recorded in selling, general, and administrative expense. As of
December 31, 2016, the total remaining unrecognized compensation cost related to the non-
vested portion of time vesting stock options totaled $81,500 ($81,500 net of tax), which will be
amortized over the weighted remaining requisite service period of 3.0 years.
F-19
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Stockholders’ Equity (continued)
Stock Options – Incentive Stock Plans (continued)
A summary of the Company’s stock option activity and related information for the years ended
December 31 follows:
Outstanding beginning of the year
Granted
Exercised
Expired and forfeited
Outstanding at end of year
2016
2015
Weighted
Avg.
Exercise
Price
$8.11
7.96
$8.14
Weighted
Avg.
Exercise
Price
$24.37
7.77
55.78
$8.11
Options
197,419
130,710
-
(66,429)
261,700
Options
261,700
-
-
(24,856)
236,844
Exercisable at end of year
55,066
$8.54
30,638
$8.64
The aggregate intrinsic value of stock options outstanding and currently exercisable at December
31, 2016 was $-0-.
Options Outstanding
Options Exercisable
As of December 31, 2016
Range of
Exercise Prices
Number
Outstanding
Weighted Avg.
Remaining Life
Weighted Avg.
Exercise Price
Number
Exercisable
Weighted Avg.
Remaining Life
Weighted Avg.
Exercise Price
$7.77
$8.19
$8.40 - $9.24
$7.77 - $9.24
114,282
26,142
96,420
236,844
3.17
1.17
0.04
1.68
$7.77
8.19
8.57
$8.14
6,856
-
48,210
55,066
3.17
-
0.04
0.43
$7.77
-
8.65
$8.54
Distributor Stock Purchase Plan
In July 2009, the Company established a Distributor Stock Purchase Plan (2009 Plan) which
replaced a similar plan which had expired. Since inception, a total of 14,396 warrants have been
issued under the 2009 Plan.
The plan allows distributors who have reached the “Ambassador” status the opportunity to
allocate up to 10% of their monthly compensation into the plan to be used to purchase the
Company’s common stock at the current market value. The plan also states that at the end of
each year, the Company will grant warrants to purchase additional shares of the Company’s
common stock based on the number of shares purchased by the distributors under the plan during
the year. The warrant exercise price will equal the market price for the Company’s common
stock at the date of issuance. The warrants issued shall be in the amount of 25% of the total
shares purchased under the plan during the year and the warrants are fully vested upon grant.
F-20
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Stockholders’ Equity (continued)
Distributor Stock Purchase Plan
The Company records expense under the fair value method for warrants granted to distributors.
Total expense recorded for these warrants was $4,062 and $5,596 in 2016 and 2015,
respectively.
The fair value of the warrants was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions:
Expected warrant life (years)
Risk-free weighted average interest rate
Stock price volatility
Dividend yield
Year ended December 31
2016
2015
3.0
1.47%
75.9%
0.0%
3.0
1.37%
68.2%
0.0%
A summary of the Company’s warrant activity and related information for the years ended
December 31 follows:
2016
Weighted
Avg.
Exercise
Price
Warrants
2015
Weighted
Avg.
Exercise
Price
Warrants
Outstanding beginning of the year
Granted
Exercised
Expired
5,484
2,519
-
(1,712)
$10.13
4.64
19.67
4,974
2,183
-
(1,673)
$12.47
4.06
9.17
Outstanding at end of year
6,291
$5.34
5,484
$10.13
Exercisable at end of year
6,291
5,484
Range of
Exercise Prices
$ 4.06
$ 4.64
$ 8.19
$4.06 - $8.19
As of December 31, 2016
Warrants Outstanding and Exercisable
Weighted
Avg. Exercise
Price
$4.06
4.64
8.19
$5.34
Weighted
Avg. Remaining
Life
2.00
3.00
1.00
2.15
Warrants
2,183
2,519
1,589
6,291
The intrinsic value for stock warrants outstanding at December 31, 2016 was $1,000.
F-21
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Loss per Share
The following table sets forth the computation of basic and diluted loss per share:
Numerator:
Net loss
Denominator:
Denominator for basic loss per share – weighted
average shares
Dilutive effect of employee stock options and
other warrants
Denominator for diluted loss per share – adjusted
weighted average shares
Basic loss per share
Diluted loss per share
Year ended December 31
2016
2015
($625,055)
($1,224,667)
1,845,000
1,839,000
-
-
1,845,000
1,839,000
($0.34)
($0.34)
($0.67)
($0.67)
The 2015 loss per common share has been restated for the 2016 reverse stock split; see Note 7.
For the years ended December 31, 2016 and 2015, options and warrants totaling 238,433 and
265,001, respectively, shares of common stock were not included in the denominator for diluted
loss per share because their effect would be anti-dilutive or because the shares were deemed
contingently issuable.
9. Leases
The Company leases certain office facilities, storage, and equipment. These leases have varying
terms, and certain leases have renewal and/or purchase options. Future minimum payments under
non-cancelable leases with initial or remaining terms in excess of one year consist of the
following at December 31, 2016:
2017
2018
2019
2020
2021
Thereafter
$
$
282,211
133,435
70,124
50,742
-
-
536,512
Rent expense for operating leases was $370,554 and $424,810 for the years ended December 31,
2016 and 2015, respectively.
F-22
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Note Receivable Due From Distributor
In March 2012, the Company purchased a note and mortgage (“Note”) from a real estate
investment management firm on certain properties in Wyoming and Idaho for $2 million.
In
May 2012, the Company entered into a Loan Modification Agreement (“LMA”) with the Note’s
original and present borrower (“Borrower”) to restructure the Note’s principal amount due and
related terms. The LMA terms are for a principal balance due of $2 million with interest only
payments made monthly in 2012. The LMA’s interest rate is the greater of 6% or prime and
there is no prepayment penalty for voluntary principal payments. Concurrently, with the
execution of the LMA, the Company and the Borrower also entered into a Security Agreement in
which repayment of the LMA is secured by the Borrower’s Reliv distributorship business.
As originally structured, beginning in 2013, the LMA was to require monthly payment of
principal and interest under a five-year amortization period. In February 2013, while retaining
the Company’s right to require Borrower’s compliance with the LMA’s terms, the Company and
the Borrower agreed to a verbal modification in the payment schedule in which the Company
agreed to accept monthly payments of principal and interest under a fifteen-year amortization
period. The outstanding balance of the note receivable was $1,630,164 and $1,732,982 as of
December 31, 2016 and 2015, respectively.
11. Income Taxes
Compenents of loss before income taxes:
United States
Foreign
Year ended December 31
2016
2015
($499,004)
(117,051)
($616,055)
($103,069)
(1,359,598)
($1,462,667)
Compenents of provision (benefit) for income taxes:
Year ended December 31
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
2016
2015
($15,000)
(10,000)
29,000
4,000
(27,000)
(4,000)
36,000
5,000
$9,000
($389,000)
21,000
38,000
(330,000)
27,000
5,000
60,000
92,000
($238,000)
F-23
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes (continued)
The provision (benefit) for income taxes is different from the amounts computed by applying the
United States federal statutory income tax rate of 34%. The reasons for these differences are as
follows:
Income taxes at U.S. statutory rate
State income taxes, net of federal benefit
Higher/(lower) effective taxes on earnings/losses
in foreign countries
Foreign corporate income taxes
Effect of future tax rate changes to foreign
deferred income taxes
Nondeductible meals and entertainment expense
Qualified domestic production activities income, net
Net operating loss carryback claims
Valuation allowance, net
Other
Year ended December 31
2016
2015
($209,000)
11,000
($497,000)
21,000
(104,000)
44,000
63,000
43,000
21,000
15,000
-
(19,000)
292,000
(42,000)
$9,000
55,000
18,000
45,000
-
-
14,000
($238,000)
The Company has a deferred tax asset of $3,237,000 as of December 31, 2016, and $3,112,000
as of December 31, 2015, relating to foreign net operating loss carryforwards (NOLs) in various
jurisdictions which expire in a range of years from one to unlimited.
In 2014, the Company
recorded a net income tax benefit of $758,000 due to a reduction of the valuation allowance
related to deferred tax assets for net operating losses of approximately $3.6 million in the
Company’s Europe subsidiary. Based on management’s 2014 assessment, the Company reduced
the Europe subsidiary’s NOL valuation allowance because the weight of evidence regarding the
future realizability of the deferred tax assets had become predominantly positive and realization
of the deferred tax assets was more likely than not. The positive evidence considered in 2014
(and re-affirmed annually thereafter) primarily related to three years of consistent profitability
while the only negative evidence was historical losses prior to 2012 for this subsidiary. As of
December 31, 2016 and 2015, the net deferred tax asset attributable to the Europe subsidiary’s
net operating loss carryforward was $487,000 and $623,000, respectively. The Company has
recorded a valuation allowance of $2,750,000 against all other foreign net operating loss
carryforward balances as it is more likely than not that this asset will not be realized before it
expires beginning in 2017.
During 2016, the Company determined that it was more likely than not that U.S. federal and
various state net operating losses primarily generated in 2016 will not be realized based on
projections of future U.S.
taxable income, estimated reversals of existing taxable timing
differences, and other considerations. Accordingly, the 2016 income tax provision includes the
impact of recording a full deferred tax asset valuation allowance of approximately $292,000
against the 2016 losses generated from a U.S. tax perspective.
F-24
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes (continued)
The components of the deferred tax assets and liabilities, and the related tax effects of each
temporary difference at December 31, 2016 and 2015, are as follows:
Deferred tax assets:
Product refund reserve
Inventory obsolescence reserve
Vacation accrual
Stock-based compensation
Organization costs
Deferred compensation
Miscellaneous accrued expenses
Domestic net operating loss carryforwards
Foreign net operating loss carryforwards
Valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Foreign currency exchange
Net deferred tax assets (liabilities)
Reported as:
Current deferred tax assets
Non-current deferred tax assets
Non-current deferred tax liabilities
Net deferred tax assets
2016
2015
$
$
$
10,000
25,000
6,000
9,000
189,000
108,000
10,000
282,000
3,237,000
(3,042,000)
834,000
182,000
165,000
347,000
487,000
-
487,000
-
12,000
20,000
14,000
11,000
195,000
107,000
13,000
-
3,112,000
(2,489,000)
995,000
240,000
160,000
400,000
595,000
66,000
623,000
94,000
487,000
$
595,000
$
$
$
$
Through December 31, 2016, the cumulative amount of unremitted earnings on which the
Company has not recognized United States income tax was $57,000 as the Company plans to
indefinitely reinvest these earnings outside the United States.
The Company applied applicable accounting guidance relating to accounting for uncertainty in
income taxes. Reserves for uncertainty in income taxes are adjusted quarterly in light of
changing facts and circumstances, such as the progress of tax audits, case law, and emerging
legislation. The primary difference between gross unrecognized tax benefits and net
unrecognized tax benefits is the U.S. federal tax benefit from state tax deductions.
It is the
Company’s practice to recognize interest and / or penalties related to income tax matters in
income tax expense.
F-25
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes (continued)
At December 31, 2016 and 2015, the Company had $43,000 and $63,000, respectively, of
cumulative unrecognized tax benefits, of which only the net amount of $32,000 would impact the
effective income tax rate if recognized.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows:
Beginning of year
Settlements and effective settlements with tax authorities
Lapse of statute of limitations
Decrease to tax positions taken during prior periods
Increase to tax positions taken during current period
End of year
2016
2015
$46,000
-
(13,000)
(7,000)
6,000
$48,000
-
(6,000)
(7,000)
11,000
$32,000
$46,000
At December 31, 2016 and 2015, the Company had $13,000 and $22,000, respectively, accrued
for interest and penalties within the balance of unrecognized tax benefits. The Company’s
unrecognized tax benefits balance is included within other noncurrent
liabilities on the
consolidated balance sheets.
The Company, including its domestic and foreign subsidiaries, is subject to U.S. federal income
tax as well as income tax of multiple state and foreign jurisdictions. The Company has
concluded all U.S. federal income tax matters for years through 2012 and concluded years
through 2012 with its primary state jurisdiction.
One of the Company’s foreign subsidiaries is presently under local country audit for alleged
deficiencies (totaling approximately $800,000 plus interest at 20% per annum) in value-added
tax (VAT) and withholding tax for the years 2004 through 2006. The Company, in consultation
with its legal counsel, believes that there are strong legal grounds that it should not be liable to
pay the majority of the alleged tax deficiencies. As of December 31, 2010, management
estimated and reserved approximately $185,000 for resolution of this matter and recorded this
amount within Selling, General, and Administrative expense in the 2010 Consolidated Statement
of Income. In 2011, the Company made good faith deposits to the local tax authority under the
tax agency’s administrative judicial
As of December 31, 2016,
management’s estimated reserve (net of deposits) for this matter is approximately $158,000.
resolution process.
F-26
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Employee Benefit Plans
The Company sponsors a 401(k) employee savings plan which covers substantially all
employees. Employees can contribute up to 15% of their gross income to the plan. The
Company matched a percentage of the employee’s contribution at a rate of 10% for the years
ended December 31, 2016, and 2015, respectively. Company contributions under the 401(k)
plan totaled $44,200 and $49,300 in 2016 and 2015, respectively.
On September 1, 2006, the Company established an employee stock ownership plan ("ESOP")
which covers substantially all U.S. employees. Contributions to the ESOP are funded by the
Company on a discretionary basis.
the Company did not make any
contributions to the ESOP.
In 2016 and 2015,
13. Incentive Compensation Plans
In May 2007, the Board of Directors approved the adoption of a new incentive compensation
plan. This new plan was effective for fiscal year 2007 and replaced a previous plan. Under the
plan, bonuses are payable quarterly in an amount not to exceed 18% of the Company’s Income
from Operations for any period, subject to the Company achieving a minimum quarterly Income
from Operations of at least $500,000. For fiscal years 2016 and 2015, the Board determined that
the aggregate amount of incentive compensation available under the Plan shall be equal to 18%
of the Company’s Income from Operations. The bonus pool is allocated to executives according
to a specified formula, with a portion allocated to a middle management group determined by the
Executive Committee of the Board of Directors. The Company did not incur any incentive
compensation expense for 2016 and 2015.
In July 2010, the Company’s Reliv Europe subsidiary entered into a long-term performance-
based incentive compensation agreement with the subsidiary’s senior managers. The valuation
of the compensation agreement was an EBITDA-based formula derived from the subsidiary’s
financial performance and vested in 20% annual
increments which began in April 2011.
Thereafter, annually,
the Company incrementally recognized compensation expense in
correlation with the incentive’s valuation, with 2015 compensation expense of $90,800 presented
within Selling, General, and Administrative in the accompanying consolidated statements of net
loss and comprehensive loss.
During the second quarter of 2015, the cumulative incentive amount of $756,800 became 100%
vested, and concurrently, each of the subsidiary’s senior managers exercised 100% of his/her put
option. In the aggregate, the Company and the managers agreed to settle the incentive obligation
issued notes payable of approximately $424,000, issued 100,000 shares
whereby the Company:
of Company common stock (fair value at settlement of $117,000), and made cash payments of
approximately $216,000.
F-27
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Incentive Compensation Plans (continued)
The notes payable were issued by the Company to the managers in April 2015 and range in
length from one to two years with quarterly payments of principal and interest beginning three
months from issuance. Each of the notes accrue interest at a floating interest rate based on the
three-month pound LIBOR plus 3%. The interest rate at December 31, 2016 was 3.41%. The
notes payable have a principal balance at December 31, 2016 of $64,136 and are presented
within the respective current and noncurrent portions of long-term debt in the accompanying
consolidated balance sheets.
The Company sponsors a Supplemental Executive Retirement Plan (SERP) to allow certain
executives to defer a portion of their annual salary and bonus into a grantor trust. A grantor trust
was established to hold the assets of the SERP. The Company funds the grantor trust by paying
the amount deferred by the participant into the trust at the time of deferral. Investment earnings
and losses accrue to the benefit or detriment of the participants. The SERP also provides for a
discretionary matching contribution by the Company not to exceed 100% of the participant’s
annual contribution. In 2016 and 2015, the Company did not provide a match. The participants
fully vest in the deferred compensation three years from the date they enter the SERP. The
participants are not eligible to receive distribution under the SERP until retirement, death, or
disability of the participant. At December 31, 2016 and 2015, SERP assets were $296,000 and
$275,000, respectively, and are included in “Other Assets” in the accompanying consolidated
balance sheets. At December 31, 2016 and 2015, SERP liabilities were $299,000 and $277,000,
respectively, and are included in “Other Non-Current Liabilities” in the accompanying
consolidated balance sheets. The changes in the balances of SERP assets and SERP liabilities
during 2016 and 2015 were due to net realized and unrealized investment gains/losses incurred
by the plan.
14. Segment Information
Description of Products and Services by Segment
The Company classifies its sales into three categories of sales products plus handling & freight
income. Net sales by product category data for the years ended December 31, 2016 and 2015,
follow:
Net sales by product category
Nutritional and dietary supplements
Skin care products
Sales aids and other
Handling & freight income
Total net sales
2016
2015
$40,554,312
-
1,450,649
3,507,875
$45,512,836
$46,276,222
267,737
1,215,594
4,009,304
$51,768,857
F-28
Reliv’ International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. Segment Information (continued)
Description of Products and Services by Segment (continued)
The Company operates 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. Geographic area data for the years ended December 31, 2016 and 2015
follow:
Net sales to external customers
United States
Australia/New Zealand
Canada
Mexico
Europe (1)
Asia (2)
Total net sales
Assets by area
United States
Australia/New Zealand
Canada
Mexico
Europe (1)
Asia (2)
Total consolidated assets
2016
2015
$35,591,831
1,079,054
1,065,147
529,871
5,490,508
1,756,425
$45,512,836
$18,563,523
568,890
375,264
311,102
1,694,113
952,835
$22,465,727
$40,384,993
1,279,549
1,296,543
719,101
6,192,453
1,896,218
$51,768,857
$20,429,025
562,961
374,863
288,406
1,879,473
726,304
$24,261,032
(1) Europe consists of United Kingdom, Ireland, France, Germany, Austria, and the Netherlands.
(2) Asia consists of Philippines, Malaysia, Singapore, and Indonesia.
15. Restructuring Activities
In May 2016, the Company implemented an employee headcount cost reduction program
resulting in the reduction of approximately 9% of the Company’s worldwide employees. The
total cost of the program, representing severance and benefits, was approximately $275,000 in
2016, and was included within Selling, General, and Administrative in the accompanying
consolidated statements of net loss and comprehensive loss. The aggregate annual salaries of the
affected employees was approximately $1,100,000. At December 31, 2016, there was no
remaining reserve for severance and benefits under the program.
F-29
Corporate Headquarters
Reliv International, Inc.
136 Chesterfield Industrial Blvd.
Chesterfield, Missouri 63005
Phone: 636.537.9715
Fax: 636.537.9753
Annual Meeting
The annual meeting of shareholders will be
held at 9:00 a.m. on Thursday May 25, 2017,
at Reliv Corporate Headquarters,
136 Chesterfield Industrial Blvd.
Chesterfield, Missouri 63005
State & Date of Incorporation
Delaware, February 11, 1985
Independent Auditors
Ernst & Young LLP
Fiscal Year-End
December 31
Dividend Reinvestment,
Share Purchase & Sale Program
This Program is available to the general public
and current shareholders of the Company.
If you would like to receive information on this
Program, please call American Stock Transfer &
Trust Co., toll free, at 800.937.5449.
Stock Exchange Listing
Nasdaq Stock Market® under the symbol RELV.
Transfer Agent
American Stock Transfer & Trust Co.
6201 15th Avenue
Brooklyn, NY 11219
800.937.5449
www.astfinancial.com
Number of Shareholders
Approximately 2,790 as of March 10, 2017
Shareholder Questions
Communications concerning stock transfer
requirements, lost certificates, change of address
or dividends should be addressed to American
Stock Transfer & Trust Co. at 800.937.5449.
Financial Information
Reliv International maintains
a website at www.reliv.com.