Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
þ
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
þ
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
þ
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
þ
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.
þ
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):
Indicate by check
mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
þ
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).
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 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:
|
·
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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.
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·
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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, 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 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.
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
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|
Product Name
|
|
% of 2016
Net Sales
(1)
|
|
|
Year
Introduced
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Basic Nutrition
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Reliv NOW
|
|
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20.2
|
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1988
|
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Reliv Classic
|
|
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9.6
|
|
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1988
|
|
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NOW for Kids
|
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4.2
|
|
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2000
|
|
|
|
|
|
|
|
|
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Specific Wellness
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FibRestore
|
|
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9.7
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|
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1993
|
|
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Arthaffect
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6.8
|
|
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1996
|
|
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ReversAge
|
|
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3.7
|
|
|
2000
|
|
|
SoySentials
|
|
|
1.6
|
|
|
1998
|
|
|
CardioSentials
|
|
|
1.5
|
|
|
2005
|
|
|
GlucAffect
|
|
|
1.2
|
|
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2008
|
|
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24K
|
|
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1.8
|
|
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2011
|
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LunaRich X capsules
|
|
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15.8
|
|
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2013
|
|
|
|
|
|
|
|
|
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Weight Management
|
|
Meal Replacements
(2)
|
|
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1.1
|
|
|
Various
|
|
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Cellebrate
|
|
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0.8
|
|
|
1995
|
|
|
|
|
|
|
|
|
|
Sports Nutrition
|
|
Innergize!
|
|
|
7.6
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1991
|
|
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ProVantage
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3.6
|
|
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1997
|
|
|
|
|
|
|
|
|
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Other
|
|
Sweetener and Reliv Delight
(3)
|
|
|
0.1
|
|
|
Various
|
|
(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.
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(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.
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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.
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
|
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•
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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.
|
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•
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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.
|
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•
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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.
|
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•
|
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, 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.
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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.
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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.
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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, 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 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
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Discount
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Retail Distributor
(1)
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10
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%
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Affiliate
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25
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%
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Key Affiliate
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30
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%
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Senior Affiliate
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35
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%
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Master Affiliate
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40
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%
(2)
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Director
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40
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%
(2)
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Key Director
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40
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%
(2)
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Senior Director
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40
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%
(2)
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Master Director/Ambassador
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40
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%
(2)
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Presidential Director/Ambassador
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40
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%
(2)
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(1)
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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.
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(2)
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In addition to discounts, these levels also receive commissions
based on sales in their downline organization.
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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 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:
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During 2016, we sponsored numerous special events in cities across all of our markets led by corporate executives and/or experienced
Ambassadors;
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For the key markets in which we operate, we sponsor an annual conference for distributors; and
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In the United States during 2016, we sponsored an annual International Conference in the summer for U.S. distributors.
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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.
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
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Year Entered
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|
Country
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|
Year Entered
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United States
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1988
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Ireland
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2003
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Australia
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|
1991
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Singapore
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2004
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New Zealand
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1992
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Germany
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2005
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Canada
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1992
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Austria
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2006
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Mexico
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1993
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Netherlands
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2006
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United Kingdom
(1)
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1995
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Indonesia
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2009
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Philippines
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2000
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France
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2013
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Malaysia
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2003
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|
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(1)
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Includes Great Britain, Scotland, Wales and Northern Ireland.
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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.
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:
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help ensure that our network marketing system and products comply with all applicable regulations;
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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
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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.
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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.
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.
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
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Patent Expiration Date
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Arthaffect
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|
March 2018
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ReversAge
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May 2021
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ProVantage
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December 2030
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GlucAffect
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|
November 2029
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24K
|
|
February 2032
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CardioSentials
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January 2029
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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.
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. 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
.
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
|
|
corporate headquarters/call center/manufacturing/warehouse
|
|
126,000
|
|
Owned
|
Seven Hills (Sydney), Australia
|
|
central office/call center
|
|
1,000
|
|
Leased
|
Oakville, Ontario, Canada
|
|
warehouse/distribution
|
|
2,100
|
|
Leased
|
Guadalajara, Mexico
|
|
central office/warehouse/call center
|
|
2,300
|
|
Leased
|
Makati City (Manila), Philippines
|
|
central office/ warehouse/distribution
|
|
2,700
|
|
Leased
|
Redditch (Birmingham), England, UK
|
|
central office/ warehouse/distribution
|
|
11,500
|
|
Leased
|
Subang Jaya (Kuala Lumpur), Malaysia
|
|
central office/call center
|
|
1,300
|
|
Leased
|
Jakarta, Indonesia
|
|
central office/ warehouse/distribution
|
|
1,100
|
|
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.
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.
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.”
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.
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.
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 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.
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.
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
905,190
|
|
|
$
|
905,190
|
|
Building
|
|
|
9,943,512
|
|
|
|
9,951,555
|
|
Machinery and equipment
|
|
|
4,329,329
|
|
|
|
4,344,403
|
|
Office equipment
|
|
|
1,203,868
|
|
|
|
1,223,921
|
|
Computer equipment and software
|
|
|
2,218,766
|
|
|
|
2,341,149
|
|
|
|
|
18,600,665
|
|
|
|
18,766,218
|
|
Less accumulated depreciation
|
|
|
12,746,363
|
|
|
|
12,347,091
|
|
|
|
$
|
5,854,302
|
|
|
$
|
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
2,352,692
|
|
|
$
|
1,859,716
|
|
Distributors' commissions
|
|
|
1,402,370
|
|
|
|
1,567,883
|
|
Sales taxes
|
|
|
234,153
|
|
|
|
232,996
|
|
Payroll and payroll taxes
|
|
|
245,090
|
|
|
|
277,157
|
|
|
|
$
|
4,234,305
|
|
|
$
|
3,937,752
|
|
4.
Amortizable Intangible Assets
The Company had amortizable intangible
assets as follows as of December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Gross Carrying Amount
|
|
|
Amortization
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributorship and related agreements
|
|
$
|
2,060,000
|
|
|
$
|
2,060,000
|
|
|
$
|
1,217,689
|
|
|
$
|
1,078,394
|
|
Lunasin technology license
|
|
|
1,954,661
|
|
|
|
1,954,661
|
|
|
|
396,738
|
|
|
|
280,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,014,661
|
|
|
$
|
4,014,661
|
|
|
$
|
1,614,427
|
|
|
$
|
1,359,014
|
|
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:
|
|
Intangible
|
|
|
|
Amortization
|
|
|
|
|
|
2017
|
|
$
|
226,000
|
|
2018
|
|
|
226,000
|
|
2019
|
|
|
226,000
|
|
2020
|
|
|
226,000
|
|
2021
|
|
|
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:
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Amount
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,907,437
|
|
|
$
|
2,907,437
|
|
|
|
-
|
|
|
$
|
2,907,437
|
|
|
|
-
|
|
Note receivable
|
|
|
1,630,164
|
|
|
|
1,812,000
|
|
|
|
-
|
|
|
|
1,812,000
|
|
|
|
|
|
Marketable securities
|
|
|
296,000
|
|
|
|
296,000
|
|
|
$
|
296,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
3,941,080
|
|
|
$
|
3,941,080
|
|
|
|
-
|
|
|
$
|
3,941,080
|
|
|
|
|
|
Note receivable
|
|
|
1,732,982
|
|
|
|
1,942,000
|
|
|
|
-
|
|
|
|
1,942,000
|
|
|
|
-
|
|
Marketable securities
|
|
|
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.
|
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
2,843,301
|
|
|
$
|
3,168,261
|
|
Notes payable
|
|
|
64,136
|
|
|
|
283,455
|
|
Obligation for acquisition of technology license, net
|
|
|
-
|
|
|
|
489,364
|
|
|
|
|
2,907,437
|
|
|
|
3,941,080
|
|
Less current maturities
|
|
|
389,096
|
|
|
|
781,505
|
|
Long-term portion
|
|
$
|
2,518,341
|
|
|
$
|
3,159,575
|
|
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
|
|
$
|
389,096
|
|
2018
|
|
|
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 Company 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.
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.
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.
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:
|
|
2016
|
|
|
2015
|
|
|
|
Options
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Avg.
Exercise
Price
|
|
Outstanding beginning of the year
|
|
|
261,700
|
|
|
$
|
8.11
|
|
|
|
197,419
|
|
|
$
|
24.37
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
130,710
|
|
|
|
7.77
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Expired and forfeited
|
|
|
(24,856
|
)
|
|
|
7.96
|
|
|
|
(66,429
|
)
|
|
|
55.78
|
|
Outstanding at end of year
|
|
|
236,844
|
|
|
$
|
8.14
|
|
|
|
261,700
|
|
|
$
|
8.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-.
|
|
|
As of December 31, 2016
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
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
|
|
|
|
114,282
|
|
|
|
3.17
|
|
|
$
|
7.77
|
|
|
|
6,856
|
|
|
|
3.17
|
|
|
$
|
7.77
|
|
|
$ 8.19
|
|
|
|
26,142
|
|
|
|
1.17
|
|
|
|
8.19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$8.40 - $9.24
|
|
|
|
96,420
|
|
|
|
0.04
|
|
|
|
8.57
|
|
|
|
48,210
|
|
|
|
0.04
|
|
|
|
8.65
|
|
|
$7.77 - $9.24
|
|
|
|
236,844
|
|
|
|
1.68
|
|
|
$
|
8.14
|
|
|
|
55,066
|
|
|
|
0.43
|
|
|
$
|
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.
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:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected warrant life (years)
|
|
|
3.0
|
|
|
|
3.0
|
|
Risk-free weighted average interest rate
|
|
|
1.47
|
%
|
|
|
1.37
|
%
|
Stock price volatility
|
|
|
75.9
|
%
|
|
|
68.2
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
A summary of the Company’s warrant
activity and related information for the years ended December 31 follows:
|
|
2016
|
|
|
2015
|
|
|
|
Warrants
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Warrants
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of the year
|
|
|
5,484
|
|
|
$
|
10.13
|
|
|
|
4,974
|
|
|
$
|
12.47
|
|
Granted
|
|
|
2,519
|
|
|
|
4.64
|
|
|
|
2,183
|
|
|
|
4.06
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(1,712
|
)
|
|
|
19.67
|
|
|
|
(1,673
|
)
|
|
|
9.17
|
|
Outstanding at end of year
|
|
|
6,291
|
|
|
$
|
5.34
|
|
|
|
5,484
|
|
|
$
|
10.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
6,291
|
|
|
|
|
|
|
|
5,484
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
Warrants Outstanding and Exercisable
|
|
Range of
Exercise Prices
|
|
Warrants
|
|
|
Weighted
Avg. Exercise
Price
|
|
|
Weighted
Avg. Remaining
Life
|
|
$ 4.06
|
|
|
2,183
|
|
|
$
|
4.06
|
|
|
|
2.00
|
|
$ 4.64
|
|
|
2,519
|
|
|
|
4.64
|
|
|
|
3.00
|
|
$ 8.19
|
|
|
1,589
|
|
|
|
8.19
|
|
|
|
1.00
|
|
$4.06 - $8.19
|
|
|
6,291
|
|
|
$
|
5.34
|
|
|
|
2.15
|
|
The intrinsic
value for stock warrants outstanding at December 31, 2016 was $1,000.
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:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(625,055
|
)
|
|
$
|
(1,224,667
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share – weighted average shares
|
|
|
1,845,000
|
|
|
|
1,839,000
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of employee stock options and other warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share – adjusted weighted average shares
|
|
|
1,845,000
|
|
|
|
1,839,000
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.67
|
)
|
Diluted loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(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
|
|
$
|
282,211
|
|
2018
|
|
|
133,435
|
|
2019
|
|
|
70,124
|
|
2020
|
|
|
50,742
|
|
2021
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
536,512
|
|
Rent expense for operating leases was $370,554
and $424,810 for the years ended December 31, 2016 and 2015, respectively.
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:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(499,004
|
)
|
|
$
|
(103,069
|
)
|
Foreign
|
|
|
(117,051
|
)
|
|
|
(1,359,598
|
)
|
|
|
$
|
(616,055
|
)
|
|
$
|
(1,462,667
|
)
|
Compenents of provision (benefit) for income taxes:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(15,000
|
)
|
|
$
|
(389,000
|
)
|
State
|
|
|
(10,000
|
)
|
|
|
21,000
|
|
Foreign
|
|
|
29,000
|
|
|
|
38,000
|
|
Total current
|
|
|
4,000
|
|
|
|
(330,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(27,000
|
)
|
|
|
27,000
|
|
State
|
|
|
(4,000
|
)
|
|
|
5,000
|
|
Foreign
|
|
|
36,000
|
|
|
|
60,000
|
|
Total deferred
|
|
|
5,000
|
|
|
|
92,000
|
|
|
|
$
|
9,000
|
|
|
$
|
(238,000
|
)
|
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:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Income taxes at U.S. statutory rate
|
|
$
|
(209,000
|
)
|
|
$
|
(497,000
|
)
|
State income taxes, net of federal benefit
|
|
|
11,000
|
|
|
|
21,000
|
|
Higher/(lower) effective taxes on earnings/losses in foreign countries
|
|
|
(104,000
|
)
|
|
|
63,000
|
|
Foreign corporate income taxes
|
|
|
44,000
|
|
|
|
43,000
|
|
Effect of future tax rate changes to foreign deferred income taxes
|
|
|
21,000
|
|
|
|
55,000
|
|
Nondeductible meals and entertainment expense
|
|
|
15,000
|
|
|
|
18,000
|
|
Qualified domestic production activities income, net
|
|
|
-
|
|
|
|
45,000
|
|
Net operating loss carryback claims
|
|
|
(19,000
|
)
|
|
|
-
|
|
Valuation allowance, net
|
|
|
292,000
|
|
|
|
-
|
|
Other
|
|
|
(42,000
|
)
|
|
|
14,000
|
|
|
|
$
|
9,000
|
|
|
$
|
(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.
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:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Product refund reserve
|
|
$
|
10,000
|
|
|
$
|
12,000
|
|
Inventory obsolescence reserve
|
|
|
25,000
|
|
|
|
20,000
|
|
Vacation accrual
|
|
|
6,000
|
|
|
|
14,000
|
|
Stock-based compensation
|
|
|
9,000
|
|
|
|
11,000
|
|
Organization costs
|
|
|
189,000
|
|
|
|
195,000
|
|
Deferred compensation
|
|
|
108,000
|
|
|
|
107,000
|
|
Miscellaneous accrued expenses
|
|
|
10,000
|
|
|
|
13,000
|
|
Domestic net operating loss carryforwards
|
|
|
282,000
|
|
|
|
-
|
|
Foreign net operating loss carryforwards
|
|
|
3,237,000
|
|
|
|
3,112,000
|
|
Valuation allowance
|
|
|
(3,042,000
|
)
|
|
|
(2,489,000
|
)
|
|
|
|
834,000
|
|
|
|
995,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
182,000
|
|
|
|
240,000
|
|
Foreign currency exchange
|
|
|
165,000
|
|
|
|
160,000
|
|
|
|
|
347,000
|
|
|
|
400,000
|
|
Net deferred tax assets (liabilities)
|
|
$
|
487,000
|
|
|
$
|
595,000
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
-
|
|
|
$
|
66,000
|
|
Non-current deferred tax assets
|
|
|
487,000
|
|
|
|
623,000
|
|
Non-current deferred tax liabilities
|
|
|
-
|
|
|
|
94,000
|
|
Net deferred tax assets
|
|
$
|
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.
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
46,000
|
|
|
$
|
48,000
|
|
Settlements and effective settlements with tax authorities
|
|
|
-
|
|
|
|
-
|
|
Lapse of statute of limitations
|
|
|
(13,000
|
)
|
|
|
(6,000
|
)
|
Decrease to tax positions taken during prior periods
|
|
|
(7,000
|
)
|
|
|
(7,000
|
)
|
Increase to tax positions taken during current period
|
|
|
6,000
|
|
|
|
11,000
|
|
End of year
|
|
$
|
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 resolution process. As of December
31, 2016, management’s estimated reserve (net of deposits) for this matter is approximately $158,000.
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. In 2016 and 2015, the Company did not make any contributions to the ESOP.
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 whereby the
Company: issued notes payable of approximately $424,000, issued 100,000 shares of Company common stock (fair value at settlement
of $117,000), and made cash payments of approximately $216,000.
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales by product category
|
|
|
|
|
|
|
|
|
Nutritional and dietary supplements
|
|
$
|
40,554,312
|
|
|
$
|
46,276,222
|
|
Skin care products
|
|
|
-
|
|
|
|
267,737
|
|
Sales aids and other
|
|
|
1,450,649
|
|
|
|
1,215,594
|
|
Handling & freight income
|
|
|
3,507,875
|
|
|
|
4,009,304
|
|
Total net sales
|
|
$
|
45,512,836
|
|
|
$
|
51,768,857
|
|
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:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,591,831
|
|
|
$
|
40,384,993
|
|
Australia/New Zealand
|
|
|
1,079,054
|
|
|
|
1,279,549
|
|
Canada
|
|
|
1,065,147
|
|
|
|
1,296,543
|
|
Mexico
|
|
|
529,871
|
|
|
|
719,101
|
|
Europe
(1)
|
|
|
5,490,508
|
|
|
|
6,192,453
|
|
Asia
(2)
|
|
|
1,756,425
|
|
|
|
1,896,218
|
|
Total net sales
|
|
$
|
45,512,836
|
|
|
$
|
51,768,857
|
|
|
|
|
|
|
|
|
|
|
Assets by area
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
18,563,523
|
|
|
$
|
20,429,025
|
|
Australia/New Zealand
|
|
|
568,890
|
|
|
|
562,961
|
|
Canada
|
|
|
375,264
|
|
|
|
374,863
|
|
Mexico
|
|
|
311,102
|
|
|
|
288,406
|
|
Europe
(1)
|
|
|
1,694,113
|
|
|
|
1,879,473
|
|
Asia
(2)
|
|
|
952,835
|
|
|
|
726,304
|
|
Total consolidated assets
|
|
$
|
22,465,727
|
|
|
$
|
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.