FORWARD-LOOKING STATEMENTS

 

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

 

PART I

 

Item No. 1 - Business

 

Overview

 

We are a developer 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 direct selling system using independent distributors. We have sold products in the United States since 1988 and in selected international markets since 1991.

 

Our Products

 

We currently offer 19 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. Most of our supplements are in powdered form that the consumer mixes with water, juice or other liquid and others are available in capsule form.   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. Sales of these products represented approximately 53.5% of total product sales in 2019. In June 2019 we launched our RLV line of hemp-extract products in the United States which now include ingestible and topical products. The RLV line represented approximately 4.9% of net sales in the United States in 2019. We have not experienced any significant difficulty in obtaining supplies of raw materials for our nutritional supplements or finished products.

 

On January 1, 2019, we sold substantially all of the machinery, equipment, inventory, tools and other assets and materials used in manufacturing operations to Nutracom, LLC, (“Nutracom”). Nutracom is substantially owned and is controlled by former officers/employees of Reliv. Nutracom is leasing the manufacturing space in our facility for a period of seven years, with an option to renew for a five-year term. We also entered into agreements whereby Nutracom will continue to manufacture our core products on our premises for a period of seven years.

 

Markets

 

We currently sell our products throughout the United States and in 12 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 2019, approximately 26.6% of our net sales were generated outside of the United States

 

Within the United States, we sell our products to distributors in all 50 states. We derived 43.2% of our domestic net sales in 2019 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.

 

 

Direct Selling Program

 

We market and sell our products through a direct selling 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 distributors reaching a certain rank, commissions on the volume of products sold by their downline organization. We believe direct selling 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. Due to our distribution method we are not dependent on any one or a few customers.

 

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 direct selling companies, for distributors. Our competitors include both direct selling companies, many of which are much larger and have far greater resources than we have, such as Alticor Global Holdings, 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 direct selling tends to be limited in each market and may be reduced to the extent other direct selling 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.

 

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! competes, a market led by Gatorade. 24K competes with 5-Hour Energy and numerous other liquid energy shots and drinks. Our competitive advantages include the uniqueness of our products, our ability to formulate new products in-house, and the intellectual property rights we possess in many of our products.

 

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 five products as set forth below:

 

Product	Patent Expiration Date
ReversAge	May 2021
ProVantage	December 2030
GlucAffect	November 2029
24K	February 2032
CardioSentials	January 2029

 

In addition to our patented formulas, we own four U.S. patents, 12 international patents and three 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 18 nutritional products. 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 direct selling 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.      Most of the products we market are classified as dietary supplements under the FDCA. Dietary supplements, for which no “drug” claim is made, are not subject to FDA approval prior to their sale.      

 

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. 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 aggressive recently in pursuing enforcement against dietary supplement products, 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.

 

While the sale of hemp-based CBD products in the United States has increased dramatically throughout almost all sales channels in 2019, the FDA has not issued regulations governing the sale of ingestible Hemp-extract products containing CBD and has not approved the sale of such products. The FDA has indicated that it is currently pursuing actions against companies selling such products that are making deceptive health claims, mis-labelling their products or engaging in improper manufacturing practices. Many states have issued regulations governing the manufacturing, labelling and sale of hemp-extract products in their state, which in certain cases includes registration with the state. The FDA has indicated that it intends to issue regulations governing the manufacture, labelling and sale of hemp-extract products and we are unable to predict the effect such regulations will have on our RLV line nor are we able to predict the probability of future laws, regulations or interpretations which may be passed by state or federal regulatory authorities

 

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. Federal and state laws directed at direct selling 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.

 

The FTC has been very aggressive recently in investigating and prosecuting direct selling companies whose compensation plans they claim are illegal pyramid schemes. These actions typically include claims that the companies and/or their key distributors made deceptive statements regarding the company’s products, the compensation plan and a participant’s ability to earn income. These actions have resulted in several million dollar civil penalties and/or restitution against the companies and/or their key distributors as well as court-ordered injunctions, and in one instance the agreement of the company to discontinue the sale of its products through direct selling. 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. The regulatory and legal requirements concerning direct selling systems do not include “bright line” rules and are inherently fact-based.

 

 

Employees

 

As of December 31, 2019, we and all of our subsidiaries had approximately 91 full-time employees compared with 99 such employees as of January 1, 2019.

 

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 23, 2020:

 

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			6,300		Leased
Redditch (Birmingham), England, UK	central office/ warehouse/distribution			11,500		Leased
Subang Jaya (Kuala Lumpur), Malaysia	central office/call center			300		Leased

 

On January 1, 2019, we sold substantially all of the machinery, equipment, inventory, tools and other assets and materials used in our manufacturing operations to Nutracom, LLC, (“Nutracom”). Effective January 1, 2019, we leased 96,450 square feet of manufacturing and office space in our Chesterfield facility to Nutracom for a period of seven years with a five-year option. We also entered into agreements whereby Nutracom will continue to manufacture our core products on our premises for a period of seven years.

 

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.

 

 

PART II

 

Item No. 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is listed on the NASDAQ Capital Market under the symbol: RELV. The following table sets forth the high and low sales prices of our common stock and the quarterly dividends per share paid on our common stock during the years ended December 31, 2019 and 2018.

 

		High				Low				Dividend
Year Ending December 31, 2019
Fourth Quarter		$	4.87			$	3.45			$	-
Third Quarter			4.66				3.95				-
Second Quarter			5.89				3.80				-
First Quarter			4.62				3.85				-
Year Ending December 31, 2018
Fourth Quarter		$	5.06			$	3.83			$	-
Third Quarter			5.26				4.62				-
Second Quarter			5.35				4.15				-
First Quarter			6.24				4.60				-

 

As of March 23, 2020, there were approximately 975 holders of record of our common stock and an additional 1,762 beneficial owners, including shares of common stock held in street name.

 

We have not declared any cash dividends over the past two years.  The declaration of future dividends is subject to the discretion of our Board of Directors and will depend upon various factors, including our earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, and other factors deemed relevant by our Board of Directors.  Our current lending agreements contain covenants which may limit our ability to declare cash dividends.

 

 

Item No. 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis discusses the financial condition and results of our operations on a consolidated basis, unless otherwise indicated.

 

Overview

 

We are a developer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. In 2019, we introduced a line of hemp-extract products under the RLV brand name. We sell our products through an international direct selling system utilizing independent distributors. Sales in the United States represented approximately 73.4% of worldwide net sales for the year ended December 31, 2019 compared to approximately 76.6% for the year ended December 31, 2018. Our international operations currently generate sales through distributor networks with facilities in Australia, Canada, Malaysia, Mexico, the Philippines, and the United Kingdom. We also operate in Ireland, France, Germany, Austria and the Netherlands from our United Kingdom distribution center, and in New Zealand from our Australia office.
 

We derive our revenues principally through product sales made by our global independent distributor base, which, as of December 31, 2019, consisted of approximately 15,630 registered customers and 25,730 active distributors. Our sales can be affected by several factors, including our ability to attract new distributors and retain our existing distributor base, our ability to properly train and motivate our distributor base and our ability to develop new products and successfully maintain our current product line.

 

All of our sales to distributors outside the United States are made in the respective local currency; therefore, our earnings and cash flows are subject to fluctuations due to changes in foreign currency rates as compared to the U.S. dollar. Our foreign subsidiaries primarily source their nutritional and dietary inventories in U.S. dollars from our U.S. manufacturer. As a result, exchange rate fluctuations may have an effect on sales and gross margins. Accounting practices require that our results from operations be converted to U.S. dollars for reporting purposes. Consequently, our reported earnings may be significantly affected by fluctuations in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. From time to time, we enter into foreign exchange forward contracts to mitigate our foreign currency exchange risk.

 

Components of Net Sales and Expense

 

Product sales represent the actual product purchase price typically paid by our distributors, after giving effect to distributor allowances, which can range from 20% to 40% of suggested retail price, depending on the rank of a particular distributor. Freight income represents the amounts billed to distributors for shipping costs. We record net sales and the related commission expense when the merchandise is shipped. Other revenue included in net sales now includes the leasing revenue, plus common area expense billings, on the lease of the manufacturing portion of our building to Nutracom, LLC (“Nutracom”) as of January 1, 2019 after the adoption of ASU 2016-02.

 

Our primary expenses include cost of products sold, distributor royalties and commissions and selling, general and administrative expenses.

 

In 2018, our cost of goods sold primarily consisted of expenses related to raw materials, labor, quality control and overhead directly associated with production of our products and sales materials, as well as shipping costs relating to the shipment of products to distributors, and duties and taxes associated with product exports. Cost of goods sold was impacted by the cost of the ingredients used in our products, the cost of shipping distributors’ orders, along with our efficiency in managing the production of our products. For 2019, we no longer manufacture our products; therefore, the costs consist of the purchase price of the products, along with shipping costs, and duties and taxes where applicable. Cost of goods sold also include the costs related to leasing income now included in net sales after the adoption of ASU 2016-02.

 

 

Distributor royalties and commissions are monthly payments made to distributors based on products sold in their downline organization. Based on our distributor agreements, these expenses have typically approximated 23% of sales at suggested retail. Wholesale pricing discounts on distributor orders are based on the retail value of the product. Distributor royalties and commissions are paid on an amount referred to as the business value (“BV”), which typically ranges between 80% and 90% of the retail price of each product. Also, we include other sales leadership bonuses, such as Ambassador bonuses, within this caption. Overall, distributor royalties and commissions remain directly related to the level of our sales and should continue at comparable levels as a percentage of net sales going forward.

 

Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation and amortization, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits; the amount we decide to invest in distributor training and motivational initiatives; and the cost of regulatory compliance.

 

 

Results of Operations

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Net sales decreased by 2.9% worldwide as net sales in the United States and Europe decreased, offset by an increase in Asia. Net sales in the United States decreased by 7.0% in the year ended December 31, 2019 compared with 2018. During 2019, our international net sales increased by 10.3% over the prior year with an unfavorable impact of 1.6% from foreign currency fluctuations in the aggregate. Net sales in Europe decreased by 18.8% in 2019 compared to the prior year, with an unfavorable impact of 3.7% due to the impact of foreign currency fluctuation. Net sales in Asia increased by 68.7% in 2019 compared to the prior year. When measured in local currencies, net sales in Asia increased by 66.1% in 2019.

 

          The following table summarizes net sales by geographic market for the years ended December 31, 2019 and 2018.

 

Net Sales by Market		Year Ended December 31,
(in thousands)		2019								2018								Change from prior year
		Amount				% of Net Sales				Amount				% of Net Sales				Amount				%
		(dollars in thousands)
United States		$	25,747				73.4	%		$	27,673				76.6	%		$	(1,926	)			(7.0	)%
Australia/New Zealand			595				1.7				732				2.0				(137	)			(18.7	)
Canada			617				1.8				719				2.0				(102	)			(14.2	)
Mexico			577				1.6				474				1.3				103				21.7
Europe			3,225				9.2				3,973				11.0				(748	)			(18.8	)
Asia			4,294				12.3				2,545				7.1				1,749				68.7
Consolidated total		$	35,055				100.0	%		$	36,116				100.0	%		$	(1,061	)			(2.9	)%

 

 

The following table sets forth, as of December 31, 2019 and 2018, the number of our Retail Customers/Preferred Customers/Active Distributors and Master Affiliates and above. The total number of active distributors includes Master Affiliates and above. We define an active retail or preferred customer as one that has placed a product order in the prior twelve months, and we define an active distributor as one that enrolls as a distributor or renews his or her distributorship during the prior twelve months. Many individuals join Reliv as distributors to obtain our products at a discount and may not participate in the Reliv business opportunity. Master Affiliates and above are distributors that have attained the highest level of discount and are eligible for royalties generated by Master Affiliate groups in their downline organization.

 

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

 

		As of 12/31/2019
		Retail Customers				Preferred Customers				Active Distributors				Total Customers and Distributors				Master Affiliates and Above
United States			3,500				1,500				17,580				22,580				2,110
Australia/New Zealand			50				210				660				920				80
Canada			90				30				470				590				60
Mexico			20				100				1,160				1,280				100
Europe			740				690				1,650				3,080				330
Asia			1,910				6,790				4,210				12,910				620
Consolidated Total			6,310				9,320				25,730				41,360				3,300

 

		As of 12/31/2018
		Retail Customers				Preferred Customers				Active Distributors				Total Customers and Distributors				Master Affiliates and Above
United States			4,190				1,470				18,340				24,000				2,340
Australia/New Zealand			50				240				720				1,010				90
Canada			100				30				530				660				80
Mexico			10				110				860				980				90
Europe			550				1,120				1,860				3,530				390
Asia			2,820				2,090				3,000				7,910				380
Consolidated Total			7,720				5,060				25,310				38,090				3,370

 

		Change in %
		Retail Customers				Preferred Customers				Active Distributors				Total Customers and Distributors				Master Affiliates and Above
United States			-16.5	%			2.0	%			-4.1	%			-5.9	%			-9.8	%
Australia/New Zealand			0.0	%			-12.5	%			-8.3	%			-8.9	%			-11.1	%
Canada			-10.0	%			0.0	%			-11.3	%			-10.6	%			-25.0	%
Mexico			100.0	%			-9.1	%			34.9	%			30.6	%			11.1	%
Europe			34.5	%			-38.4	%			-11.3	%			-12.7	%			-15.4	%
Asia			-32.3	%			224.9	%			40.3	%			63.2	%			63.2	%
Consolidated Total			-18.3	%			84.2	%			1.7	%			8.6	%			-2.1	%

 

 

Use of Non-GAAP Financial Information

 

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

 

The following table provides key statistics related to distributor activity by market and should be read in conjunction with the following discussion.

 

Distributor Activity by Market
		United States				AUS/NZ				Canada				Mexico				Europe				Asia				International-- Total
Sales in USD (in 000's):
Year ended 12/31/2019		$	25,747			$	595			$	617			$	577			$	3,225			$	4,294			$	9,308
Year ended 12/31/2018		$	27,673			$	732			$	719			$	474			$	3,973			$	2,545			$	8,443
% change in sales-2019 vs. 2018:
Change in GAAP sales in USD			-7.0	%			-18.7	%			-14.2	%			21.7	%			-18.8	%			68.7	%			10.3	%
Due to currency fluctuation			-				-5.7	%			-2.1	%			-0.3	%			-3.7	%			2.6	%			-1.6	%
Sales in local currency (non-GAAP)			-7.0	%			-13.0	%			-12.1	%			22.0	%			-15.1	%			66.1	%			11.9	%
# of new Preferred customers-2019			1,239				71				26				83				469				5,815				6,464
# of new Preferred customers-2018			1,352				97				25				112				682				1,459				2,375
% change			-8.4	%			-26.8	%			4.0	%			-25.9	%			-31.2	%			298.6	%			172.2	%
# of new distributors-2019			2,849				52				49				707				455				2,420				3,683
# of new distributors-2018			2,344				49				81				446				576				1,583				2,735
% change			21.5	%			6.1	%			-39.5	%			58.5	%			-21.0	%			52.9	%			34.7	%
# of new Master Affiliates-2019			448				11				7				39				67				428				552
# of new Master Affiliates-2018			330				9				14				50				86				171				330
% change			35.8	%			22.2	%			-50.0	%			-22.0	%			-22.1	%			150.3	%			67.3	%
# of Product orders-2019			101,663				3,774				2,109				4,061				10,856				41,414				62,214
# of Product orders-2018			107,731				4,452				2,418				3,496				13,000				29,791				53,157
% change			-5.6	%			-15.2	%			-12.8	%			16.2	%			-16.5	%			39.0	%			17.0	%

 

 

United States

 

●

Net sales in the United States declined by 7.0% in 2019 compared to the prior year. Direct selling net sales in the United States in 2019 declined by 4.9% as the number of product orders dropped by 5.6%. Net sales in the U.S. in 2019 no longer include contract packaging sales as these operations were divested in January 2019. Contract manufacturing sales represented $1.44 million in 2018. These sales were partially offset by leasing revenue from Nutracom of $783,000.

●

Products in the LunaRich line, including Reliv Now® and LunaRich X™, continued to perform well, constituting 14.6% and 11.6% of net sales in the United States, respectively, in 2019. Reliv Now and LunaRich X represented 15.9% and 12.4%, respectively, of net sales in the United States in the prior year.

●

In late June 2019, we introduced our RLV line of hemp-extract products. Initially, the RLV line includes three liquid tinctures and one balm. All of the RLV products are derived from organically-grown, non-GMO hemp. The RLV line represented 4.9% of net sales in United States in 2019.

●

New Master Affiliate qualifications increased by 35.8% in 2019 compared to the prior year, and Master Affiliate retention remained comparable at 71.2% in 2019 versus 71.3% in 2018. Master Affiliate retention is defined by the percentage of Master Affiliates as of end of 2018 that requalified their distributorships as Master Affiliates during 2019. New Master Affiliate qualifications improved in response to a cash bonus incentive in place beginning in Q1 2019 and an incentive trip promotion that took place in Q4 2019.

●

Distributor retention was 80.3% for the twelve-month period ended December 31, 2019 compared to 73.5% for all of 2018. Distributor retention is determined by the percentage of active distributors from 2018 that renewed their distributorships in 2019.

●

Our average order size in 2019 increased by 1.5% to $342 at suggested retail value compared to the prior year; however, the number of product orders decreased by 5.6% in 2019 compared to the prior year.

●

In March 2019, we introduced a feature in our compensation plan in the United States to pay the wholesale profit earned by distributors on a weekly basis. This feature does not alter the timing of the expense recognition of the commission earnings, but does speed up the timing of the wholesale commission payment.

●

In January 2019, we sold substantially all of the machinery, equipment, inventory, tools and other assets and materials used in our manufacturing operations to Nutracom. Nutracom is substantially owned and is controlled by former officers/employees of Reliv. Nutracom is leasing the manufacturing space in our facility for a period of seven years, with an option to renew for a five-year term. We also entered into agreements whereby Nutracom will continue to manufacture our core products on our premises for a period of seven years.

 

International Operations

 

●

The average foreign exchange rate for the U.S. dollar for 2019 was stronger against most of the currencies in which we conduct business, except for the Philippine peso, when compared to the average foreign exchange rates for the year ended December 31, 2018. In the aggregate, foreign currency fluctuations in 2019 had a negative impact of 1.6% on foreign sales reported in U.S. dollars.

●

Australia/New Zealand and Canadian net sales in 2019 decreased by 13.0% and 12.1%, respectively, in local currency compared to the prior year as the result of decreased distributor activity in the market.

●

Net sales in Mexico increased by 22.0% in local currency in 2019 compared to the prior year. Distributor activity has increased in recent quarters subsequent to retaining a sales consultant with prior experience in direct selling sales in Mexico. New distributor enrollments increased by 58.5% in 2019 compared to the prior year. Product order count increased by 16.2% in 2019 as well.

●

Net sales in Europe decreased by 15.1% in local currency in 2019 compared to the prior year. Distributor activity continues to decline both in the form of new distributor and preferred customer enrollments and number of product orders placed in the region.

●

Sales in Asia increased by 66.1% in local currency in 2019 compared to the prior year, driven primarily by sales growth in the Philippines, our largest market in the region. All measures of distributor and preferred customer activity have grown rapidly. New preferred customer and distributor enrollments increased by 299% and 53%, respectively, in 2019 compared to the prior year. The number of new Master Affiliate qualifications increased by 150% and the product order count increased by 39.0% in 2019 compared to the prior year.

 

 

Costs and Expenses

 

The following table sets forth selected results of our operations expressed as a percentage of net sales for the years ended December 31, 2019 and 2018. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.

 

Statement of Operations data
(amounts in thousands)		2019								2018
		Amount				% of net sales				Amount				% of net sales
Net sales		$	35,055				100.0	%		$	36,116				100.0	%
Costs and expenses:
Cost of goods sold			9,557				27.3				9,710				26.9
Distributor royalties and commissions			11,259				32.1				11,749				32.6
Selling, general and administrative			14,798				42.2				16,521				45.7
Loss from operations			(559	)			(1.6	)			(1,864	)			(5.2	)
Interest income			178				0.5				93				0.3
Interest expense			(47	)			(0.1	)			(96	)			(0.3	)
Other income			17				0.1				63				0.2
Gain (loss) of sale of fixed assets			435				1.2				(1	)			-
Income (loss) before income taxes			24				0.1				(1,805	)			(5.0	)
Provision for income taxes			468				1.4				98				0.3
Net loss		$	(444	)			(1.3	)%		$	(1,903	)			(5.3	)%
Loss per common share-Basic		$	(0.25	)						$	(1.03	)
Loss per common share-Diluted		$	(0.25	)						$	(1.03	)

 

 

 

Cost of Goods Sold:

●

The cost of goods sold as a percentage of net sales in 2019 increased by 0.4% compared to the prior-year period. The cost of goods as a percentage was negatively impacted by several factors, including promotions in the United States that reduced our freight income and the lower gross margin percentage associated with our leasing revenue which began in 2019.

 

 

Distributor Royalties and Commissions:

●

Distributor royalties and commissions as a percentage of net sales for 2019 decreased by 0.5% of net sales when compared to the prior-year period. This decrease is primarily due to the inclusion of leasing revenue in current year net sales on which distributor commissions are not paid.

 

 

Selling, General and Administrative Expenses:

●

Selling, general and administrative (“SGA”) expenses declined by $1.72 million in 2019 and decreased as a percentage of net sales when compared to the prior-year period.

●

SGA expenses, including salaries and other staffing expenses, related to the manufacturing/Nutracom operations represent a net decrease of $1.19 million of the SGA decrease in 2019, compared to the prior-year period

●

Other SGA Salaries, other staffing expenses, benefits, and incentive compensation decreased in the aggregate by $292,000 in 2019 compared to the prior-year period.

●

Sales and marketing expenses decreased by $118,000 in 2019 compared to the prior-year period. Components of the decrease, with offsets in certain increases, include:

o

$130,000 decrease in distributor conferences and meeting expenses as we held smaller regional events in the U.S. in 2019.

o

$61,000 increase in Star Director and other distributor bonuses, credit card fees, and other expenses related to the level of sales.

o

$112,000 increase in promotion and incentive trip expenses in the United States and Philippines compared to prior year.

o

$37,000 decrease in video production and other sales development expense in 2019 compared to the prior-year period.

o

$110,000 decrease in other sales and marketing expenses, including a $55,000 reduction in newsletter expenses as we discontinued most printed newsletters in 2019.

●

Other general and administrative expenses decreased by $244,000 in 2019 versus the prior-year period. Significant components of the decrease include:

o

$180,000 decrease in legal fees

o

$68,000 decrease in accounting fees

 

Other Income/Expense:

●

The other income in 2019 and 2018 is primarily the result of foreign currency exchange gains on intercompany debt denominated in U.S. dollars in certain of our subsidiaries.

●

2019 includes $435,000 in income from the sale of our manufacturing equipment as part of the asset sale with Nutracom in Q1.

 

Income Taxes:

●

We reported income tax expense of $468,000 for 2019, compared to income tax expense of $98,000 in 2018.

●

Our income tax expense for 2019 was related to income taxes on our earnings in our Philippine entity, audit settlements for FY 2004 through 2006 and 2017 on our Philippine entity, and minimum U.S. state income tax expense.

●

See Note 13 of the Consolidated Financial Statements for additional detail regarding income taxes, including a reconciliation of the income tax expense/benefit to the U.S. statutory rate for each period.

 

Net Loss:

●

For 2019, we reported a net loss of $444,000 compared to a net loss of $1.90 million in 2018. The decrease in the net loss is primarily the result of the decrease in SGA expenses, coupled with the gain on the sale of fixed assets as part of the asset sale with Nutracom.

 

 

Liquidity and Capital Resources

 

In 2019, we used $943,000 of net cash in operating activities, $64,000 was provided by investing activities, and $500,000 was provided by financing activities. This compares to $1.17 million used in operating activities, $3.01 million provided by investing activities, and $3.05 million used in financing activities in 2018. Cash and cash equivalents decreased by $359,000 to $1.63 million as of December 31, 2019 compared to $1.99 million as of December 31, 2018.

 

Significant changes in working capital items consisted of an increase in trade/accounts receivable and deposits to related parties of $645,000, a decrease in inventory of $844,000, a decrease in prepaid expenses and other current assets of $143,000, and a decrease in accounts payable, accrued expenses, deferred revenue and non-current liabilities of $784,000 in 2019. The increase in accounts receivable and deposits is primarily the result of deposits required on production purchase orders to Nutracom, in accordance with the supply agreement executed as of January 1, 2019. The decrease in inventory is the result of the timing of the transfer of finished goods from Nutracom to us under the terms of the supply agreement, partially offset by cash payments for finished goods. The decrease in prepaid expenses and other current assets is the result of the divestiture of manufacturing operations to Nutracom, and the decrease in accounts payable and other liabilities is the result of decrease in trade payables as we no longer are responsible for stocking raw materials for production.

 

Investing activities during 2019 consisted of $162,000 in payments received on a distributor and other related party note receivable, offset by an investment of $99,000 for capital expenditures. Financing activities during 2019 consisted of borrowings of $500,000 on a revolving line of credit.

 

Stockholders’ equity decreased to $11.10 million at December 31, 2019 compared to $11.99 million at December 31, 2018. The decrease is primarily due to our net loss during 2019 of $444,000 and $540,000 in treasury stock acquired under the purchase agreement with Nutracom, offset by a favorable adjustment in foreign currency translation of $45,000. Our working capital balance was $1.88 million at December 31, 2019 compared to $4.17 million at December 31, 2018. The current ratio at December 31, 2019 was 1.47 compared to 2.07 at December 31, 2018.

 

In September 2018, the maximum borrowing amount on our revolving line of credit was reduced from $2.0 million to $750,000. As amended, the revolver’s maturity date remained April 29, 2019 and the revolver’s interest rate continued to be based on the 30-day LIBOR plus 2.25%. In March 2019, the revolving line of credit’s maturity date was extended to April 28, 2020, and the interest rate was revised to the 30-day LIBOR plus 3.00%. As amended, the revolver’s maximum borrowing amount remains $750,000. As of December 31, 2019, we have borrowed $500,000 under our revolving line of credit. Borrowings under the lending agreement continue to be secured by all our tangible and intangible assets and by a mortgage on the real estate of our corporate headquarters.

 

We have experienced significant losses over the last several years and experienced a loss in 2019. Our existing cash, cash equivalents, operating revenue and borrowing facilities may not be sufficient to fund our operating expenses through the next 12 months which would require us to obtain additional financing before that time. We have taken several steps which management believes will result in an improved financial position, operating results, and cash flows. Over the last several years, we have also taken other cost cutting measures including reductions in staff, freezing or lowering salaries, limiting promotional events all in an effort to reduce operating expenses.

 

As detailed in Note 2 of the accompanying consolidated financial statements, in January 2019, we entered into a Purchase Agreement with Nutracom pursuant to which Nutracom purchased the assets used by us in our manufacturing operations. Assets purchased by Nutracom from us were financed by us under payment terms scheduled to provide incoming funds to us of $100,000 or more per year. We have also entered into an agreement for Nutracom to lease a significant portion of our headquarters building. Management believes that these transactions with Nutracom will be favorable to our financial position, operating results, and cash flows; however, there are risks and uncertainties which arise with these Nutracom transactions and their impact to our operations.

 

Should the aforementioned changes to the company’s operations not provide sufficient cash flow improvement or should we be unable to obtain sufficient additional capital or borrowings, we may have to engage in any or all of the following activities: (i) monetize our headquarters building via traditional bank lending or a sale and leaseback-type transaction; (ii) seek to monetize a note receivable from the related parties; (iii) modify our distributor promotions, incentives, and other activities; (iv) cease operations in certain geographic regions, and (v) reduce employee compensation and benefits.

 

 

We may not be able to obtain sufficient additional funding through monetizing certain of our existing assets, sourcing additional borrowings, and issuing additional equity, or any other means, and if we are able to do so, these available sources of funds may not be on satisfactory terms. Our ability to raise additional capital in the equity markets, should we choose to do so, is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of business risks and uncertainties, as well as the uncertainty that we would be able to raise such additional capital at a price or on terms that are favorable to us.

 

These actions may have a material adverse impact on our ability to achieve certain of our planned objectives. Even if we are able to source additional funding, we may be forced to significantly reduce our operations if our operating performance does not improve. If we are unable to source additional funding, we may be forced to significantly reduce or shut down our operations. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effect on our assets or liabilities should we not be able to continue as a going concern.

 

Critical Accounting Policies

 

Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

 

Revenue

 

We recognize revenue from product sales under a five step process with our independent distributors (including customers) when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Product sales revenue (principally nutritional and dietary supplements) and commission expenses are recorded when control is transferred to the independent distributors, which occurs at the time of shipment. Generally, net sales reflect product sales less the distributor discount of 20 percent to 40 percent of the suggested retail price. We present distributor royalty and commission expense as an operating expense, rather than a reduction to net sales, as these payments are not made to the purchasing distributor. At point of sale, we receive payment by credit card, personal check, or guaranteed funds for contracts from independent distributors and make related commission payments no later than the following month.

 

We recognize the performance obligation for membership fees-type revenue over the membership term of generally twelve months. We receive payment for membership fees at the beginning of the annual membership term and recognize membership fees revenue on a straight-line basis in correlation with the completion of our performance obligation under the membership term. Our remaining unearned membership fees obligations is reported as deferred revenue liability.

 

Actual and estimated sales returns are classified as a reduction of net sales. We estimate and accrue a reserve for product returns based on our return policy and historical experience. Our product returns policy allows for distributors to return product only upon termination of his or her distributorship. Allowable returns are limited to saleable product which was purchased within twelve months of the termination for a refund of 100% of the original purchase price less any distributor royalties and commission received relating to the original purchase of the returned products. For the years ended December 31, 2019 and 2018, total returns as a percent of net sales were approximately 0.08% and 0.17%, respectively.

 

We record freight income as a component of net sales and record freight costs as a component of cost of goods sold. Total net sales do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting applicable sales taxes.

 

 

Other revenue consists of revenue derived from our leasing a portion of our headquarters building to Nutracom beginning January 1, 2019. The leased space encompasses manufacturing, warehouse, and certain office space. We recognize lessor rent revenue on a straight-line basis over the term of the lease. As part of this straight-line methodology, the cumulative facility rental billings may be greater or less than the financial period’s recognized revenue; such timing differences are recognized on the balance sheet as an accrued other liability or an unbilled rent revenue receivable. Also included in other revenue are billings to the tenant for its share of the facility’s common area costs such as real estate taxes, maintenance, and utilities. These same common area costs plus the tenant’s share of the facilities’ depreciation are recorded as cost of goods sold.

 

Inventories

 

Inventories are valued at the lower of cost or market and are accounted for on a first-in, first-out basis. Effective January 1, 2019, finished goods inventories primarily consist of purchased products held for resale. Prior to 2019, finished goods inventories were primarily comprised of internally manufactured products consisting of the costs associated with raw material, labor and overhead. On a periodic basis, we review our inventory levels in each country for estimated obsolescence or unmarketable items, as compared to future demand requirements and the shelf life of the various products. Based on this review, we record inventory write-downs when costs exceed expected net realizable value. Historically, our estimates of obsolete or unmarketable items have been materially accurate. 

 

Sales aids and promotional materials inventories represent distributor kits, product brochures, and other sales and business development materials which are held for sale to distributors. Costs of the sales aids and promotional materials held for sale are capitalized as inventories and subsequently recorded to cost of goods sold upon recognition of revenue when sold to distributors. All other advertising and promotional costs are expensed when incurred.

 

Variable Interest Entities (VIE) - Unconsolidated

 

Effective January 1, 2019, we have a financial interest in Nutracom. If we are the primary beneficiary of a VIE, we are required to consolidate the VIE in our consolidated financial statements. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our VIE evaluation requires significant assumptions and judgments.

 

We do not have the power to direct the significant activities of Nutracom, primarily because we do not have governance rights. We also do not participate in the annual profits or losses of Nutracom. Therefore, we do not consolidate the financial results of Nutracom in our consolidated financial statements. We account for our financial interest in Nutracom as an equity investment measured at cost minus impairment, if any. A cost method equity investment is subject to periodic impairment review using the other-than-temporary impairment model, which considers the severity and duration of a decline in fair value below cost and our ability and intent to hold the investment for a sufficient period of time to allow for recovery.

 

Concentrations of Risk

 

Effective January 1, 2019, we have entered into outsourcing agreements with Nutracom to manufacture our nutritional and dietary supplements and for warehousing and fulfillment services for the U.S. distribution of our products. Nutracom has also issued promissory notes to us for the acquisition of our manufacturing and fulfillment operations. Any inability of Nutracom to deliver these contracted services or to repay the promissory notes could adversely impact our future operating results and valuation of our Nutracom equity investment.

 

 

Legal Proceedings

 

In the ordinary course of business, we are subject to various legal proceedings, including lawsuits and other claims related to labor, product and other matters. We are required to assess the likelihood of adverse judgments and outcomes to these matters as well as the range of potential loss. Such assessments are required to determine whether a loss contingency reserve is required under the provisions of FASB ASC Topic 450, “Contingencies,” and to determine the amount of required reserves, if any. These assessments are subjective in nature. Management makes these assessments for each individual matter based on consultation with outside counsel and based on prior experience with similar claims. To the extent additional information becomes available or our strategies or assessments change, our estimates of potential liability for a given matter may change. Changes to estimates of liability would result in a corresponding additional charge or benefit recognized in the statement of operations in the period in which such changes become known. We recognize the costs associated with legal defense in the periods incurred. Accordingly, the future costs of defending claims are not included in our estimated liability.

 

Income Tax Matters

 

We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes,” (ASC Topic 740) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC Topic 740 also requires that deferred tax assets be reduced by a valuation allowance if it is “more likely than not” that some portion or the entire deferred tax asset will not be realized. In our quarterly evaluation of the need for a valuation allowance, we consider and weigh both positive and negative factors, including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in our previous evaluation of our valuation allowance, we may record a change in valuation allowance through income tax expense in the period this determination is made.

 

The calculations of our tax liabilities involve dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed in the guidance under ASC Topic 740. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, or new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

 

During 2016 through 2019, we determined that it was more likely than not that U.S. federal and various state net operating losses primarily generated in these years 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 2019 and 2018 income tax provisions include the impact of recording a full deferred tax asset valuation allowance of approximately $91,000 and $186,000 against the annual losses generated from a U.S. tax perspective.

 

At December 31, 2019, we had deferred tax assets related to net operating loss carryforwards and other income tax credits in our foreign operations with a tax value of $3.3 million. These net operating loss carryforwards principally do not expire, depending on the country and period in which they occurred. We continue to have a full valuation allowance applied to all net operating loss carryforwards in our foreign operations.

 

Current-Year Adoption of Recent Accounting Pronouncements

 

Discussion regarding our adoption of accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.

 

 

Item No. 8 - Financial Statements and Supplementary Data

 

Reference is made to the Consolidated Financial Statements contained in Part IV hereof.

 

Item No. 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 

 

None

 

Item No. 9A - Controls and Procedures 

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of December 31, 2019, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our evaluation, management has concluded our internal controls over financial reporting were effective as of December 31, 2019.

 

Attestation Report of the Registered Public Accounting Firm 

 

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

Changes in Internal Control over Financial Reporting

 

There were no material changes in our internal control over financial reporting during the fourth quarter of 2019 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

 

 

Item No. 9B - Other Information

 

None

 

 

PART III

 

Item No. 10 - Directors, Executive Officers and Corporate Governance

 

Board of Directors

 

Name		Age		Position
Robert L. Montgomery		77		Director, Chairman of the Board
Ryan A. Montgomery		46		Director, Chief Executive Officer
John M. Klimek		60		Director
Robert M. Henry		72		Director
Paul J. Adams		59		Director

 

Robert L. Montgomery is the Chairman of the Board of Directors and former Chief Executive Officer. Mr. Montgomery became Chairman of the Board of Directors and Chief Executive Officer on February 15, 1985 and served as the Chief Executive Officer until June 2018. Mr. Montgomery served as President of the Company from July 1985 until July 2012. Mr. Montgomery had been the principal executive officer of the Company since its founding in 1985. Prior to that time, he held positions for a number of years as an executive officer of several life insurance companies. Mr. Montgomery received a B.A. degree in Economics from the University of Missouri in Kansas City, Missouri in 1965. Mr. Montgomery is the father of Ryan A. Montgomery, the Company’s Chief Executive Officer, and R. Scott Montgomery, the President of Operations and International.

 

Ryan A. Montgomery was appointed Chief Executive Officer in June 2018 and has served as a member of the Board of Directors since May 2018. Previously he was President from July 2012 to June 2018, Executive Vice President, Worldwide Sales from April 2007 to July 2012 and Vice President, Sales from 2004 to 2007. Mr. Montgomery served as Corporate Counsel from September 1999 to October 2004. Mr. Montgomery received his B.A. degree in Economics from Vanderbilt University and graduated from Saint Louis University Law School.

 

John M. Klimek has been a member of the Board of Directors since May 2010. Mr. Klimek has been a practicing attorney in Illinois since 1984 specializing in corporate and securities law.  From August 2004 to July 2018, Mr. Klimek was employed by HFR Asset Management, LLC, Chicago, Illinois, a hedge fund management company, most recently as President.    He holds a B.S. in Accountancy from the University of Illinois and Juris Doctor Degree from the University of Illinois School of Law.  Mr. Klimek serves as the Chairman of the Compensation Committee and is a member of the Audit and Nominating Committees.  He is also a director of CTI Industries Corporation (NASDAQ – CTIB).

 

Robert M. Henry has been a member of the Board of Directors of the Company since November 2013. He was previously a member of the Board of Directors of the Company from May 2004 through May 2011. Mr. Henry is currently a private investor and business consultant. From January 2011 until May 2013, Mr. Henry served as Chief Executive Officer and Chairman of the Board for Immunotec, Inc., a public Canadian direct selling company that sells nutritional supplements (TSX Venture Exchange – IMM). From December 2004 to 2008, Mr. Henry served as Chairman and Chief Executive Officer of Arbonne International, Inc., a personal care products company. Mr. Henry received a B.S. degree in Accounting from Hunter College in New York and a J.D. from Brooklyn Law School. Mr. Henry serves as Chairman of the Audit Committee and a member of the Compensation and Nominating Committees.

 

Paul J. Adams has been a member of the Board of Directors of the Company since May 2019. He is the President/CEO of the Adams Resource Group, a company he formed in 2017 that consults to direct selling companies in their marketing/communications and management strategies. Mr. Adams has been actively involved in the direct selling channel for over 32 years, serving as the head of marketing, sales and general management for one of the largest supplier/partners in the industry, SUCCESS Partners/VideoPlus, prior to forming Adams Resource Group. Mr. Adams attended the University of Texas at Arlington.

 

 

Executive Officers

 

Name		Age		Position
Ryan A. Montgomery		46		Chief Executive Officer and Director
R. Scott Montgomery		50		President of Operations and International
Thomas W. Pinnock		69		President of Sales and Marketing
Stephen M. Merrick		78		Secretary and General Counsel
Steven D. Albright		58		Sr. Vice President and Chief Financial Officer
Debra P. Bernardoni		48		Sr. Vice President and Chief Operating Officer
Kurt C. Wulff		55		Sr. Vice President of Marketing

 

R. Scott Montgomery was appointed President of Operations and International in July 2018. Mr. Montgomery joined the Company in 1993 and previously served as President of Reliv Asia Pacific from July 2012 to July 2018, Executive Vice President and Chief Operating Officer from April 2007 to July 2012, Senior Vice President – Worldwide Operations from 2004 to 2007 and Vice President of International Operations from 2001 to 2004. Mr. Montgomery graduated from Southwest Missouri State University with a B.S. degree in Finance and Investments.

 

Thomas W. Pinnock was named President of Sales and Marketing in July 2018. Previously, Mr. Pinnock served as Executive Vice President, Chief of Sales from December 2016 to July 2018. Mr. Pinnock has been an independent distributor of the Company since January 1990 and has served previously as Senior Vice President - U.S. Sales from May 1992 to June 1994. Mr. Pinnock is a former Army officer, journalist, and published author. Mr. Pinnock holds a B.A. degree from Valencia College, Orlando, Florida and studied journalism at the University of Florida and the Defense Department School of Journalism.

 

Stephen M. Merrick has been Secretary and General Counsel since July 1989 and served as a member of the Board of Directors from 1989 to May 2013 and from May 2014 to May 2016. Mr. Merrick has been engaged in the practice of law for more than 45 years and has represented the Company since the Company’s founding. Mr. Merrick received a Juris Doctor degree from Northwestern University School of Law in 1966. He is also an officer and director of CTI Industries Corporation (NASDAQ – CTIB).

 

Steven D. Albright has been Senior Vice President and Chief Financial Officer since March 2005. Mr. Albright was the Vice President, Finance/Controller from 2002 to 2005 and was the Controller since 1992. Prior to his employment with the Company, Mr. Albright was employed from 1987 to 1992 as Assistant Controller for Kangaroos USA, Inc., an athletic shoe importer and distributor. For the period from 1983 to 1987, he was employed by the public accounting firm of Ernst & Young LLP. Mr. Albright received a B.S. degree in Accountancy from the University of Illinois at Urbana-Champaign and is a CPA.

 

Debra P. Bernardoni was appointed as Senior Vice President and Chief Operating Officer in July 2018. Previously, Ms. Hellweg served as Vice President, Operations June 2008 to July 2018.   She has been employed by the Company since 2004 and served as Director of Internal Audit from 2004 to 2008.   Prior to her employment with the Company, Ms. Bernardoni was a Manager with Deloitte & Touche LLP and Vice President & Auditor of Southwest Bank of St. Louis.  Ms. Bernardoni has a B.S.B.A. degree in Accounting from the University of Missouri and an MBA from Webster University and is a CIA.

 

Kurt C. Wulff was appointed Vice President of Marketing in 2005 and Senior Vice President of Marketing in 2019. He has been employed by the Company in marketing positions since 1999. Previously, Mr. Wulff had over 10 years of sales and marketing experience in a variety of industries. He graduated from the University of Missouri-Columbia with a Bachelor of Journalism degree.

 

 

CORPORATE GOVERNANCE AND

THE BOARD OF DIRECTORS

 

General

 

The business and affairs of the Company are managed under the direction of the Board of Directors in accordance with the General Corporation Law of the State of Delaware and the Company’s Second Amended and Restated Certificate of Incorporation and Bylaws, as amended. Members of the Board are kept informed of the Company’s business through discussions with the Chairman and Chief Executive Officer and other officers, by reviewing materials provided to them and by participating in meetings of the Board of Directors and its committees.

 

For the period from May 2013 to May 2014, the Board had five members. From May 2014 to May 2016 the Board had seven members, and in May 2016 the Board reverted back to five members. The Board met four times during 2019. During 2019, no director attended less than 75% of the combined Board of Directors and Committee meetings. The Board has determined that Messrs. Henry, Klimek, and Adams are independent based on the application of the rules and standards of the Nasdaq Stock Market.

 

Board Leadership Structure

 

Our Board of Directors has appointed the Company’s former Chief Executive Officer, Robert L. Montgomery, to continue to serve as Chairman of the Board. In his role as Chairman of the Board, he presides over the meetings of the Board of Directors and communicates the decisions and directives of the Board to management.

 

Our Board of Directors recognizes that depending on the circumstances, other leadership models might be appropriate. Accordingly, the Board of Directors periodically evaluates its leadership structure.

 

The Board of Directors has not appointed a lead independent director at this time. The Board has evaluated whether appointing a lead independent director facilitates the ability of the Company’s independent directors to carry out their duties. The independent directors of the Board attend at least one executive session, and may call such further sessions as they deem necessary, at which only independent directors are present and at which the independent directors are free to discuss any aspect of the Company’s business and risk management without the influence of interested directors or management. In addition, all members of the Company’s Audit, Nominating and Compensation Committees have been determined by the Board of Directors to be independent based on the application of the rules and standards of the NASDAQ Stock Market.

 

Board Role in Risk Oversight

 

The Board of Directors plays an active role, as a whole and at the committee level, in overseeing management of the Company’s risks. The Board regularly reviews information regarding our credit, liquidity and operations, as well as the risks associated with each. The Audit Committee oversees management of financial risks through regular meetings with the Company’s independent registered public accounting firm and the Company’s Chief Financial Officer and Manager of Internal Audit. The Company’s Compensation Committee evaluates and addresses risks relating to executive compensation, our incentive compensation plans and other compensatory arrangements. The Nominating Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of those risks, the entire Board of Directors is regularly informed through committee reports and management presentations to the full Board about these and other operational risks.

 

Committees of the Board of Directors

 

The Board of Directors has standing Audit, Nominating, and Compensation Committees.

 

Audit Committee

 

Since 2000, the Company has had a standing Audit Committee, which is presently composed of Messrs. Henry (Chairman), Klimek, and Adams. Mr. Henry has been designated and is the Company’s “Audit Committee Financial Expert” pursuant to Item 401 of Regulation S-K of the Securities Exchange Act of 1934. The Audit Committee held six meetings during fiscal year 2019, including quarterly meetings with management, the Manager of Internal Audit and the independent registered public accounting firm to discuss the Company’s financial statements and control systems. Mr. Henry and each appointed member of the Committee satisfies the definition of “independent” as that term is defined in the rules governing companies whose stock is traded on the Nasdaq Stock Market. The Board of Directors has adopted a written charter for the Audit Committee. A copy of the Audit Committee Charter has been posted and can be viewed on the Company’s Internet website at www.reliv.com under the section entitled “Investor Relations.” In addition, the Audit Committee has adopted a complaint monitoring procedure to enable confidential and anonymous reporting to the Audit Committee of concerns regarding, among other things, questionable accounting or auditing matters.

 

 

Report of the Audit Committee

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in the Annual Report with management and the Company’s independent registered public accounting firm, Ernst & Young LLP, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, the clarity of disclosures in the financial statements and internal controls.

 

The Audit Committee reviewed with the independent registered public accounting firm, which is responsible for expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Company’s application of accounting principles and such other matters as are required to be discussed with the Audit Committee in accordance with the standards of the Public Company Accounting Oversight Board (U.S.) (“PCAOB”) including but not limited to those matters required to be discussed by PCAOB Auditing Standard No. 16. In addition, the Audit Committee has discussed with the independent registered public accounting firm their independence from management and the Company including the matters in the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding its communications with the Audit Committee concerning independence.

 

The Audit Committee discussed with the Company’s independent registered public accounting firm the overall scope and plans for their audit of the Company’s financial statements. The Audit Committee meets with the internal auditor and independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal controls and the overall quality of the Company’s financial reporting.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2019 for filing with the Securities and Exchange Commission. The Audit Committee and the Board of Directors have also recommended, subject to stockholder approval, the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm.

 

Robert M. Henry, Audit Committee Chair

John M. Klimek, Member

Paul J. Adams, Member

 

Nominating Committee

 

The Nominating and Governance Committee consists of two directors, Messrs. Klimek (Chairman) and Henry. The Nominating Committee does not have a charter. The Board of Directors has determined that each of the members of the Nominating Committee is independent as defined in the listing standards for the Nasdaq Stock Market.

 

 

The Nominating Committee has not adopted a formal policy with regard to consideration of director candidates recommended by security holders. The Company believes that the continuing service of qualified incumbent members of the Board of Directors promotes stability and continuity at the Board level, contributes to the Board’s ability to work as a collective body and provides the benefit of familiarity and insight into the Company’s affairs. Accordingly, the process of the Nominating Committee for identifying nominees reflects the Company’s practice of re-nominating incumbent directors who continue to satisfy the criteria for membership on the Board. For vacancies which are anticipated on the Board of Directors, the Nominating Committee intends to seek out and evaluates potential candidates from a variety of sources that may include recommendations by security holders, members of management and the Board of Directors, consultants and others. The minimum qualifications for potential candidates for the Board of Directors include demonstrated business experience, decision-making abilities, personal integrity and a good reputation. While diversity is not a leading factor in the Nominating Committee’s evaluation of potential candidates and there is no formal policy for considering diversity when nominating a potential director, it is a consideration that is evaluated along with other qualifications of potential candidates. In light of the foregoing, it is believed that a formal policy and procedure with regard to consideration of director candidates recommended by security holders is not necessary in order for the Nominating Committee to perform its duties.

 

Compensation Committee

 

The Compensation Committee consists of three directors: Messrs. Klimek (Chairman), Henry, and Adams. The Board has determined that each of the members of the Compensation Committee is independent as defined in the listing standards for the Nasdaq Stock Market. The Compensation Committee reviews and acts on the Company’s executive compensation and employee benefit and retirement plans, including their establishment, modification and administration. It also determines the compensation of the Chief Executive Officer and certain other executive officers, including incentive compensation programs and stock options. The Compensation Committee has a charter which has been posted and can be viewed on the Company’s Internet website at www.reliv.com under the section entitled “Investor Relations.” The Compensation Committee met two times in 2019.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the Nasdaq Stock Market. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on a review of the copies of such forms furnished to the Company, or written representations that no Form 5’s were required, the Company believes that, for calendar year 2019, all of the officers, directors and ten percent beneficial owners of the Company complied with all applicable Section 16(a) filing requirements.

 

Code of Ethics

 

The Company has adopted a code of ethics that applies to senior executive and financial officers. The Company’s Code of Ethics seeks to promote (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (2) full, fair, accurate, timely and understandable disclosure of information to the Commission, (3) compliance with applicable governmental laws, rules and regulations, (4) prompt internal reporting of violations of the Code of Ethics to predesignated persons, and (5) accountability for adherence to the Code of Ethics. A copy of the Company’s Code of Ethics has been posted to and can be viewed on the Company’s Internet website at http://www.reliv.com under the section entitled “Investor Relations.”

 

 

Item No. 11 - Executive Compensation

 

The Company is a “smaller reporting company” under Item 10 of Regulation S-K promulgated under the Securities Exchange Act of 1934 and has elected to comply with certain of the requirements applicable to smaller reporting companies in connection with this proxy statement.

 

SUMMARY COMPENSATION TABLE

 

The following table sets forth the annual and long-term compensation for the fiscal years ended December 31, 2019 and 2018, respectively, of the Company’s Principal Executive Officer and each of the two other most highly compensated executive officers. These individuals, including the Chief Executive Officer, are collectively referred to in this proxy statement as the Named Executive Officers.

 

Name and Principal Position		Year		Salary				Bonus				Option Awards (1)				Non-Equity Incentive Plan Compensation (2)				All Other Compensation (3, 4, 5, 6, 7)				Total
Robert L. Montgomery		2019		$	490,000			$	-			$	-			$	-			$	48,268			$	538,268
Chairman and former Chief		2018		$	559,516			$	-			$	-			$	-			$	43,745			$	603,261
Executive Officer
Ryan A. Montgomery		2019		$	211,366			$	-			$	-			$	-			$	7,528			$	218,894
Chief Executive Officer		2018		$	180,690			$	-			$	-			$	-			$	16,600			$	197,290
Thomas W. Pinnock		2019		$	144,000			$	-			$	-			$	-			$	198,380			$	342,380
President of Sales and		2018		$	144,000			$	-			$	-			$	-			$	192,749			$	336,749
Marketing

 

---

 

(1)

No option grants were made to any of the Named Executive Officers in 2019.

(2)

Amounts determined solely under the Company’s Incentive Compensation Plan. No amounts were earned under this plan in 2019.

(3)

Amounts for Thomas W. Pinnock for 2019 represent earnings from his Reliv distributorship.

(4)

Amounts for 2019 include matching 401(k) contributions as follows: Robert L. Montgomery, $2,450; and Ryan A. Montgomery, $959.

(5)

No Company contributions were made to the Employee Stock Ownership Plan in 2019.

(6)

Amounts for 2019 include life insurance allowance paid for Robert L. Montgomery of $39,000 and Ryan A. Montgomery of $2,000. A travel allowance of $4,569 for 2019 is also included for Ryan A. Montgomery.

(7)

Amounts for 2019 include value of automobile provided for Robert L. Montgomery of $6,818.

 

 

 

Narrative Disclosure for Summary Compensation Table

 

Employment Agreements with Our Named Executive Officers

 

In June 2007, the Company entered into an Employment Agreement with Robert L. Montgomery replacing a prior agreement. The agreement, as amended, is for a term of employment commencing on January 1, 2007 and expiring on December 31, 2009 with a provision for automatic one-year renewal terms, and provides for Mr. Montgomery to receive base annual compensation during the term of not less than $600,000. Mr. Montgomery is also to participate in the Company’s annual incentive compensation and the Company’s long-term equity incentive compensation plans and such other compensation plans as the Company may from time to time have for executives. In the event of Mr. Montgomery’s death during the term of the agreement, payments equal to the total compensation that would have been paid for a period of six months to Mr. Montgomery under the agreement, but for his death, will be made to his heirs. The agreement also allows Mr. Montgomery the option to reduce his level of service to the Company by approximately one-half with a corresponding decrease in base annual compensation and a reduction of 25% of his incentive compensation, after a requisite waiting period. Mr. Montgomery also has the option to terminate his active service and continue in a consulting capacity. The term of the consulting period will be 15 years and Mr. Montgomery will receive approximately 30% of his prior average annual cash compensation over the five years immediately preceding the earlier of (1) his election to terminate his employment and continue to serve the Company as a consultant or (2) his election to continue his employment at a reduced rate of service and compensation. The agreement includes the obligation of Mr. Montgomery to maintain the confidentiality of the Company’s confidential information and contains a covenant of Mr. Montgomery not to compete with the Company. In addition, for a period of at least 20 years following the termination of the agreement, the Company has the right to continue its use of Mr. Montgomery’s name and likeness in consideration of a $10,000 annual fee paid to Mr. Montgomery or his heirs.

 

 

In January 2008, the Company entered into an Employment Agreement with Ryan A. Montgomery. The agreement is for a term of employment commencing on January 1, 2008 and expiring on December 31, 2008 with a provision for automatic one-year renewal terms, and provides for Mr. Montgomery to receive base annual compensation during the term of not less than $170,000. Mr. Montgomery is also to participate in the Company’s annual incentive compensation and the Company’s long-term equity incentive compensation plans and such other compensation plans as the Company may from time to time have for executives. In the event of termination of this agreement and employment by the Company pursuant to the agreement, the Company shall be obligated to pay Mr. Montgomery an amount of severance equal to six months’ salary, payable by the Company over a 12-month period to commence on the date of termination.

 

Information Relating to Cash Incentives and Stock and Option Awards

 

Effective January 1, 2007, the Board of Directors, on the recommendation of the Compensation Committee, adopted an Incentive Compensation Plan providing for annual incentive compensation to be paid to executive and managerial employees of the Company. Under the Plan, designated Named Executive Officers and a number of other executive officers and managers receive incentive compensation payments, determined on a quarterly and annual basis, which are based upon the income from operations of the Company for the period if the profits exceed a threshold amount of quarterly income from operations in the amount of $500,000. The benefits under the Plan are divided into two Pools of compensation. Pool I (representing the largest pool of incentive compensation) covers senior executive officers who participate in the pool of incentive compensation based upon a percentage allocation made by the Compensation Committee each year. Pool II covers managers who are selected to participate in proportions determined by senior management. The Compensation Committee believes such incentive compensation motivates participants to achieve strong profitability which is viewed as the most significant element of corporate performance, provides rewards for strong corporate performance and aligns the incentive with the interests of the stockholders. Incentive compensation participation levels are generally determined during the first quarter of each fiscal year.

 

With respect to Pool I participants, the Compensation Committee, in consultation with management and the Chief Executive Officer, determines the participants and their relative level of participation during the first quarter of the year for a recommendation to the Board of Directors for formal approval. In determining participation and the level of participation each year, management and the Compensation Committee consider the executive’s responsibilities and individual performance during the prior year. For the fiscal year ended December 31, 2019, no amounts were earned under the Incentive Compensation Plan.

 

Long-Term Equity Incentives

 

At the Company’s Annual Meeting of Stockholders held in May 2017, the Company’s 2017 Incentive Stock Plan was approved by the stockholders. The Plan provides for the issuance of stock options or incentive stock grants of up to 200,000 shares of common stock of the Company. No option awards have been made from this Incentive Stock Plan as of December 31, 2019.

 

Stock option grants are determined from time to time by the Compensation Committee in consultation with management. The actual grant for each executive is determined taking into consideration (i) individual performance, (ii) corporate performance and (iii) prior grants to, or stock ownership of the Company by, the executive. Generally, stock options are granted with an exercise price equal to or greater than the closing price of the Company’s common stock on the NASDAQ Capital Market on the date of the grant.

 

 

In 2019, no grants of stock options were made to any Named Executive Officer.

 

We view participation by our executives in our Employee Stock Ownership Plan (the “ESOP”) as a component of long-term compensation. Shares purchased by the ESOP, or contributed to the ESOP, are allocated among participants based upon relative eligible compensation levels and subject to the vesting requirements of the ESOP.

 

Retirement Benefits

 

The Company maintains a 401(k) employee savings plan (the “401(k) Plan”) in which all salaried employees that have met the plan’s service requirements are eligible to participate. The Company also maintains the ESOP, which was adopted by the Company on September 1, 2006. Both plans are tax qualified retirement plans.

 

Under the 401(k) Plan, employees may contribute up to 15% of their eligible compensation to the 401(k) Plan and the Company will contribute a matching amount to the 401(k) Plan each year. The federal statutory limit for eligible compensation in 2019 was $280,000. Participating employees may direct the investment of individual and company contributions into one or more of the investment options offered by the 401(k) Plan, provided that, for new contributions, employees may not invest more than 15% in common stock of the Company. During 2019, the Company made matching contributions of 10% on employee contributions to the 401(k) Plan, subject to statutory limits and top-heavy plan rules. The Company’s contributions to the 401(k) Plan totaled approximately $24,000 in 2019, which is subject to the vesting requirements of the 401(k) Plan.

 

Under the ESOP, all employees of the Company are eligible to participate in the ESOP and interests in the ESOP are allocated to participants based on relative eligible compensation. All contributions to the ESOP are made by the Company in the form of cash or stock and are discretionary. The maximum amount of contribution which the Company can make is 25% of the annual eligible compensation of employees after taking into account contributions to the 401(k) Plan. Shares of stock purchased by, or contributed to the ESOP, are allocated to participants based on qualified compensation and subject to the vesting requirements of the ESOP. During 2019, the Company elected not to make a contribution to the ESOP.

 

Other Benefits

 

The Company provides certain general employee benefits and health insurance plans of the type commonly offered by other employers. These benefits form part of our compensation philosophy because the Company believes they are necessary in order to attract, motivate and retain talented executives.

 

Outstanding Equity Awards

 

As of March 23, 2020, the Company has no outstanding equity awards to any of the Named Executive Officers.

 

 

Payments upon Termination or Change of Control

 

The Company has no agreements with Named Executives or other executives of the Company under which payments are to be made in the event of change of control of the Company.

 

Under the Employment Agreement between the Company and Robert L. Montgomery, Mr. Montgomery has the right, to reduce his level of service to the Company by approximately one-half with a corresponding decrease in position and base annual compensation and a 25% decrease in incentive compensation. Mr. Montgomery also has the option to terminate his active service and continue in a consulting capacity. The term of the consulting period will be 15 years and Mr. Montgomery will receive approximately 30% of his prior average annual compensation over the previous five years or last five years of his full-time employment as a consulting fee. In the event of Mr. Montgomery’s death during the term of the agreement, payments equal to his total compensation under the agreement will be made to his heirs for a period of six months. In addition, for a period of 20 years following termination of the agreement, the Company has the right to continue its use of Mr. Montgomery’s name and likeness in consideration of a $10,000 annual fee payable to Mr. Montgomery or his heirs.

 

Under the Employment Agreement between the Company and Ryan A. Montgomery, Mr. Montgomery has the right to receive an amount of severance equal to six months’ salary, payable by the Company over a 12-month period to commence on the date of termination.     

 

 

DIRECTOR COMPENSATION

 

Name		Fees Earned or Paid in Cash ($)				Option Awards(1)				All Other Compensation ($)				Total ($)
John M. Klimek		$	50,500			$	-			$	117,000			$	167,500
Robert M. Henry			43,500				-				6,000				49,500
Paul J. Adams			25,000				-				-				25,000

 

---

 

(1)

No stock option grants were awarded to these directors in 2019.

 

 

Narrative Description of Director Compensation

 

Members of the Board of Directors who are not employees receive a monthly fee of $2,000 and $1,500 per attendance at meetings in person of the Board of Directors or any committees of the Board of Directors, and $1,000 per attendance at meetings via conference call, up to a maximum of $3,000 per day. In 2018, Mr. Henry and Mr. Klimek were appointed as members of a special committee of the Board of Directors to evaluate the sale of substantially all of the machinery, equipment, inventory, tools and other assets and materials used in the Company’s manufacturing operations to Nutracom. (See “Part I - Item 2 – Properties”) The sale was completed on January 1, 2019. Amounts identified under “All Other Compensation” in the table above include amounts paid to Mr. Henry and Mr. Klimek for serving on the special committee as well as other amounts paid to Mr. Klimek for his work on other special projects for the Board of Directors.

 

 

 

Item No. 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

BENEFICIAL OWNERSHIP OF SHARES BY MANAGEMENT AND

SIGNIFICANT STOCKHOLDERS

 

The following table provides information concerning the beneficial ownership of the Company’s common stock by each director and nominee for director, named executive officers, all of the Company’s directors and officers as a group, and the beneficial owners known to the Company to hold more than five percent of the Company’s outstanding common stock as of March 23, 2020.

 

The amounts and percentage of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after March 23, 2020. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Percentage of class is based on 1,746,449 shares of common stock outstanding as of March 23, 2020.

 

Name of beneficial owner(1)		Amount of shares beneficially owned				Percentage of Shares Beneficially Owned
Directors and Named Executive Officers:
Robert L. Montgomery(2)			313,559				17.95	%
Ryan A. Montgomery			112,033				6.41	%
John M. Klimek			---				*
Robert M. Henry			143				*
Paul J. Adams			---				*
Thomas W. Pinnock			5,000				*
R. Scott Montgomery			126,450				7. 24	%
All Directors, nominees and officers as a group (7 persons)			557,185				31. 90	%
Other 5% or greater shareholders:
Renaissance Technologies LLC (3)			106,880				6.12	%
800 Third Avenue
New York, NY 10022

 

---

 

^* less than one percent

 

(1)

Unless otherwise indicated below, the person named in the table has sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise indicated, the address for each person is c/o Reliv’ International, Inc., 136 Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005.

 

(2)	Includes 5,932 shares held through the Montgomery Family Limited Partnership, and 69,129 shares held through Montgomery Enterprises, Ltd., for which Mr. Robert L. Montgomery has voting and investment power.

 

(3)	Information obtained from the Schedule 13G filed with the SEC by Renaissance Technologies LLC on February 13, 2020.

 

 

EQUITY COMPENSATION PLAN INFORMATION 

 

The following table sets forth the common stock of the Company authorized for issuance under the Company’s equity compensation plans as of March 23, 2020.

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		-			-			200,000(1)
Equity compensation plans not approved by security holders		-			-			-
Total		-			-			200,000

 

---

 

(1)

Represents 200,000 shares available for issuance under the Company’s 2017 Incentive Stock Plan.

 

 

 

Item No. 13 - Certain Relationships and Related Transactions, and Director Independence

 

Certain Relationships and Related Transactions

 

Robert L. Montgomery, Chairman of the Board, is the father of Ryan A. Montgomery and R. Scott Montgomery. Ryan A. Montgomery is the current Chief Executive Officer and his compensation is listed in the Summary Compensation Table. R. Scott Montgomery is the President of Operations and International and as a result of serving in such capacity, the Company paid him cash compensation of $221,384 in 2019 and $207,200 in 2018.

 

 

Item No. 14 - Principal Accountant Fees and Services

 

Fees Billed by Independent Registered Public Accounting Firm

 

The following table sets forth the amount of fees billed by Ernst & Young LLP for services rendered for the years ended December 31, 2019 and 2018:

 

		2019				2018
Audit Fees (1)		$	297,000			$	325,000
Audit-Related Fees (2)			40,000				---
Tax Fees (3)			113,000				108,000
Total Fees		$	450,000			$	433,000

 

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(1)

Includes the annual consolidated financial statement audit, limited quarterly reviews, reviews of registration statements and comfort letters, and statutory audits required internationally.

(2)

Includes fees for services rendered in connection with accounting and reporting consultations.

(3)

Primarily represents the preparation of tax returns and other tax compliance and consulting services.

 

 

All audit, tax, and other services to be performed by Ernst & Young LLP for the Company must be pre-approved by the Audit Committee. The Audit Committee reviews the description of the services and an estimate of the anticipated costs of performing those services. Services not previously approved cannot commence until such approval has been granted. Pre-approval is granted usually at regularly scheduled meetings. If unanticipated items arise between meetings of the Audit Committee, the Audit Committee has delegated approval authority to the chairman of the Audit Committee, in which case the chairman communicates such pre-approvals to the full committee at its next meeting. During 2019, all services performed by Ernst & Young LLP were pre-approved by the Audit Committee in accordance with this policy.

 

The Audit Committee reviews all relationships with Ernst & Young LLP, including the provision of non-audit services, which may relate to the independent registered public accounting firm’s independence. The Audit Committee considered the effect of Ernst & Young LLP’s non-audit services in assessing the independence of the independent registered public accounting firm and concluded that the provision of such services by Ernst & Young LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

 

 

PART IV

 

Item No. 15 - Exhibits and Financial Statement Schedules

 

(a)	1.   The Consolidated Financial Statements filed as part of this report on Form 10-K are listed on the accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules.

 

2.    Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below:

 

All other financial schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

 

3.    Exhibits: See the Exhibit Index immediately before the signature page of this Annual Report on Form 10-K.

 

 

Item No. 16 – Form 10-K Summary

 

None

 

 

Exhibit Index

 

Exhibit Number

Document

 

2.1	Purchase Agreement with Nutracom, LLC dated January 1, 2019 (incorporated by reference to Exhibit 2.1 to the Form 10-K of the Registrant for the year ended December 31, 2018).

 

3.1	Second Amended and Restated Certificate of Incorporation (incorporated by reference to Appendix B of Schedule 14A of the Registrant filed on April 17, 2003).

 

3.2	Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Form 10-K of the Registrant for the year ended December 31, 2016)

 

3.3	By-Laws (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).

 

3.4	Amendment to By-Laws dated March 22, 2001 (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).

 

3.5	Certificate of Designation to Create a Class of Series A Preferred Stock for Reliv’ International, Inc. (incorporated by reference to Exhibit 3.1 to the Form 10-Q of the Registrant for quarter ended March 31, 2003).

 

4.1	Form of Reliv International, Inc. common stock certificate (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).

 

10.1	Amended Exclusive License Agreement with Theodore P. Kalogris dated December 1, 1991 (incorporated by reference to Exhibit 10.1 to the Form 10-K of the Registrant for the year ended December 31, 1992).

 

10.2*

Robert L. Montgomery Employment Agreement dated June 19, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed June 25, 2007).

 

10.3*

Reliv International, Inc. Employee Stock Ownership Plan and Trust dated August 29, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed August 30, 2006).

 

10.4*

2014 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to the Form S-8 Registration Statement the Registrant filed November 19, 2014).

 

10.5*

Reliv International, Inc. Incentive Compensation Plan effective January 1, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed May 31, 2007).

 

10.6*

R. Scott Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed January 4, 2008).

 

10.7*

Ryan A. Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed January 4, 2008).

 

10.8*

Steven D. Albright Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.4 to the Form 8-K of the Registrant filed January 4, 2008).

 

10.9	Loan Sale Agreement between 2010-1 RADC/CADC Venture, LLC and Reliv International, Inc. dated March 16, 2012 (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant for the quarter ended March 31, 2012).

 

 

10.10

Technology License Agreement by and between SL Technology, Inc. and Soy Labs, LLC dated July 23, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 25, 2013).

 

10.11

Agreement by and among Reliv International, Inc., SL Technology, Inc., Soy Labs, LLC and 1Soy, Inc. dated July 23, 2013 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed July 25, 2013).

 

10.12

Letter agreement between SL Technology, Inc. and Soy Labs, LLC dated September 2, 2016 (incorporated by reference to Exhibit 10.18 to the Form 10-K of the Registrant for the year ended December 31, 2016)

 

10.13

Promissory Note (revolving credit facility) dated September 30, 2015 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Registrant filed November 13, 2015).

 

10.14

Business Loan Agreement dated September 30, 2015 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.3 to the Form 10-Q of the Registrant filed November 13, 2015).

 

10.15

Deed of Trust dated September 30, 2015 between Reliv International, Inc. as Grantor and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.4 to the Form 10-Q of the Registrant filed November 13, 2015).

 

10.16

First Amendment to Loan Agreement dated September 30, 2016 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant filed November 14, 2016).

 

10.17

Change in Terms Agreement (revolving credit facility) dated September 30, 2016 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Registrant filed November 14, 2016).

 

10.18

Second Amendment to Loan Agreement dated April 11, 2018 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant filed May 15, 2018).

 

10.19

Change in Terms Agreement (revolving credit facility) dated April 30, 2018 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.3 to the Form 10-Q of the Registrant filed May 15, 2018).

 

10.20

Third Amendment to Loan Agreement dated September 11, 2018 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant filed November 14, 2018).

 

10.21

Change in Terms Agreement (revolving credit facility) dated September 11, 2018 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Registrant filed November 14, 2018).

 

 

10.22

Lease between Registrant (lessor) and Nutracom, LLC (lessee) dated January 1, 2019 (incorporated by reference to Exhibit 10.26 to the Form 10-K of the Registrant for the year ended December 31, 2018).

 

10.23

Secured Term Note issued by Nutracom, LLC to Registrant dated January 1, 2019 (incorporated by reference to Exhibit 10.27 to the Form 10-K of the Registrant for the year ended December 31, 2018).

 

10.24

Unsecured Term Note issued by Nutracom, LLC to Registrant dated January 1, 2019 (incorporated by reference to Exhibit 10.28 to the Form 10-K of the Registrant for the year ended December 31, 2018).

 

10.25

Fourth Amendment to Loan Agreement dated March 25, 2019 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.29 to the Form 10-K of the Registrant for the year ended December 31, 2018)

 

10.26

Change in Terms Agreement (revolving credit facility) dated March 25, 2019 among Reliv International, Inc., Reliv, Inc., Reliv World Corporation, and SL Technology, Inc., as Borrowers and Enterprise Bank & Trust (incorporated by reference to Exhibit 10.30 to the Form 10-K of the Registrant for the year ended December 31, 2018).

 

10.27

Agreement dated June 1, 2019 with Nutracom, LLC to modify Purchase Agreement and Secured Promissory Note dated January 1, 2019 (incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Registrant filed August 14, 2019).

 

11	Statement re: computation of per share earnings (incorporated by reference to Note 11 of the Consolidated Financial Statements contained in Part IV).

 

21	Subsidiaries of the Registrant (filed herewith).

 

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

 

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

 

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

 

101

Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Loss and Comprehensive Loss, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements.

 

 

*Indicates management compensation plan, contract or arrangement.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RELIV’ INTERNATIONAL, INC.

 

 

By:	/s/ Ryan A. Montgomery
	Ryan A. Montgomery, Chief Executive Officer

 

Date: March 27, 2020

 

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:	/s/ Robert L. Montgomery
	Robert L. Montgomery, Chairman of the Board of Directors

 

Date: March 27, 2020

 

By:	/s/ Steven D. Albright
	Steven D. Albright, Chief Financial Officer (and accounting officer)

 

Date: March 27, 2020

 

By:	/s/ Ryan A. Montgomery
	Ryan A. Montgomery, Chief Executive Officer, Director

 

Date: March 27, 2020

 

By:	/s/ Robert M. Henry
	Robert M. Henry, Director

 

Date: March 27, 2020

 

By:	/s/ John M. Klimek
	John M. Klimek, Director

 

Date: March 27, 2020

 

By:	/s/ Paul J. Adams
	Paul J. Adams, Director

 

Date: March 27, 2020

 

 

 

Reliv’ International, Inc.

and Subsidiaries

 

Consolidated Financial Statements

 

 

Years ended December 31, 2019 and 2018

 

 

 

Contents

 

Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2019 and 2018	F-2
Consolidated Statements of Net Loss and Comprehensive  Loss for the years ended December 31, 2019 and 2018	F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018	F-6
Notes to Consolidated Financial Statements – December 31, 2019	F-8

 

 

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Reliv’ International, Inc.   

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Reliv’ International, Inc. and Subsidiaries (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of net loss and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

 

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1991.

 

 

St. Louis, Missouri

March 27, 2020

 

 

Reliv’ International, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

 

 

Reliv’ International, Inc. and Subsidiaries

 

Consolidated Balance Sheets (continued)

 

 

 

See accompanying notes.

 

 

Reliv’ International, Inc. and Subsidiaries

 

Consolidated Statements of Net Loss

and Comprehensive Loss

 

 

 

See accompanying notes.

 

 

Reliv’ International, Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

 

 

 

 

See accompanying notes.

 

 

Reliv’ International, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

 

 

 

Reliv’ International, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows (continued)

 

 

 

See accompanying notes.

 

 

Reliv’ International, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

December 31, 2019