Why I Believe Reliv' International Is Going Back To $1.35

Disclosure: I am short RELV. Here are some the reasons why.

I believe we are going back to somewhere around $1.35 -- not just because that is where the stock had previously been trading, and not just because that is near book value. But because the hype that exploded the stock price does not compensate for the poor fundamentals. And by the way, was the recent press release timed to divert attention from the California litigation?


See, Reliv International (RELV) is in the middle of an accusation of "failure to warn consumers that they have been exposed to lead from several of the company's nutritional health products. Lead is a chemical known to the State of California to cause cancer, birth defects and other reproductive harm." ~ Case: CIV1300429 Superior Court of the State of California

That complaint was initiated in January of 2013 by Environment Research Center, ("ERC")a non-profit corporation. A proposed stipulated consent judgment was later signed by Reliv's CFO and attorney. As usual, the defendant does not have to admit guilt. Nonetheless, according to the proposed consent judgment, as signed by Reliv's representatives,

• Civil penalties must be paid "pursuant to Health & Safety Code Section 25249.7(b)(1)"
• A portion of the above penalty is to be paid to the office of Environmental Hazard Assessment.

And most telling of all,

• "Since receiving ERC's Notices of Violation, Reliv has revised the formula for all of the covered Products to bring the lead levels in the Covered products that are manufactured going forward to below 0.5 micrograms per day, the level at which a warning would be required pursuant to Proposition 65." (Source: Proposed Stipulated Consent Judgment)

How can one bring levels below a required limit without implying that one had been above it?



And what was the big deal with the press release announcing "exclusive rights" to Lunasin? Reliv's price exploded. Ryan Montgomery, Reliv president claimed, "For the first time we own an ingredient in its entirety, from the extraction process to the patented mechanisms of action within the body. And lunasin isn't just any ingredient; it's the world's first epigenetic superfood." ~ Press Release: "Reliv Acquires Exclusive Rights to 'Superfood' Lunasin"

It is hard to know exactly what Mr. Montgomery meant. Certainly he is not claiming to own the natural ingredient, lunasin. He may however be referring to the trademark Lunasin, which according to its registration is for synthetic peptides. (USPTO Trademark Registration) (See my last article below, or on Seeking Alpha: Reliv' the Hype.)

Add to all of this Reliv's disclosure that some of its products contain genetically modified organisms and one wonders what kind of reaction the distributors will have when the news gets out.


RELV SEC filed 10-k

So why do I believe that Reliv's price will go down in the long run? Not "just because" of the points mentioned above. I don't think that any of the above matters as much as the simple fact that Reliv appears to be losing its distributor base -- one year at a time. And with that decrease, its sales are also decreasing -- one year at a time. The numbers say it all ....

Reliv' the Hype (RELV)

Disclosure: I am short RELIV' INTERNATIONAL, INC., (RELV) NOTE: Market Cap is only $35 Million & shares have been difficult to borrow.

Summary

• PR hype just days before ugly earnings report.
• Multi-year decreases in both sales and distributor count.
• RELV SEC FILING: "Some of [Reliv's] products in certain markets still contain substances that would be or might be classified as GMOs." ~ - 2012 10-K 

RELIV' INTERNATIONAL, INC's share price exploded last week.

(click to enlarge)

What happened? There is no way to know for sure, but there was some hype just before the price spike. First, RELIV announced the acquisition of "Exclusive Rights to [the] 'Superfood' Lunasin" (For "lunasin" see Wikipedia and Lunasin.com) and second, comparisons were drawn in cyberspace with Herbalife LTD (HLF), which also had a recent run up in price.

Like Herbalife, Reliv is a nutrition-centered multi-level marketing organization, making use of independent distributors.  

However, serious comparisons with Herbalife would be difficult. A distributor's prospects grow with a growing network … and shrink with a shrinking network. Herbalife's sales are growing, while Reliv's sales have been shrinking for years..

RELIV's distributor base is also shrinking.

(Sources: RELV 10-Ks; theSecond Quarter Announcement. See alsomoney.msn.com)

Those June '13 numbers were released just days after Reliv's PR pumped up the stock price. It seemed that investors reacted to the news of the "exclusive rights" as if, 1) Reliv had a blockbuster product and 2) the "superfood" was something entirely new.

In reality, Reliv had already been trying to sell its lunasin-based product, LunaRich, for almost a year and a half now.

"LunaRich was unveiled in January 2012. We believe these innovations will form a foundation for growth in 2012." ~ 2011 Annual Report

The agreement is new, not the attempt to market the product.

There have been other attempts to market Lunasin. Reliv's recent agreement is with Soy Labs LLC. Here's a 2009 promotion of Soy Lab's Lunasin:www.nutraingredients-usa.com.

Carefast sells a product which falls under the Lunasin trademark, apparently the same one licensed by Reliv's subsidiary. (You can see the product in 2010 through archive.org.)

I found a Carefast product with Lunasin for $17 at Amazon.com and one of Reliv'sfor $55 on Ebay. If Carefast's product has not been a blockbuster, why would I think that Reliv's might be?

Reliv sales have not turned around as a result of last year's launch. From Reliv's recent 10-Q:

"Net sales for the quarter were $15.4 million, an 8.1 percent decrease from the second quarter last year."

"Reliv's total distributor count was 53,390 as of June 30, 2013 - a decrease of 9.9 percent from the same date in 2012 …" ~ SEC filed press release

And Reliv's PR is curious:

"For the first time we own an ingredient in its entirety, from the extraction process to the patented mechanisms of action within the body. And lunasin isn't just any ingredient; it's the world's first epigenetic superfood." ~ Press Release

Just what does Reliv exclusively own? "Reliv Acquires Exclusive Rights to 'Superfood' Lunasin"

"Lunasin is a peptide found naturally in soy that scientists have identified as the key to many of soy's documented health benefits." ~ lunasin.com

No one is really claiming exclusive rights to the soy bean, right? But there is asynthetic version of the peptide in question and it is has the trademark -- "Lunasin" - a trademark held by the same LLC that Reliv's subsidiary has contracted with, Soy Labs:

(See larger image: http://sdrv.ms/13f5RRr. See Agreement & Trademark Registration Certificate)

Is this the ingredient (and technology) that Reliv is claiming exclusive rights to? A syntheticpeptide?

Reliv and GMO products

RELV in SEC filing

"Some of our products in certain markets still contain substances that would be or might be classified as GMOs. We cannot anticipate the extent to which future regulations in these markets will restrict the use of GMOs in our products or the impact of any regulations on our business in those markets." ~2012 10-K

This is not a question about whether or not GMO's can be healthy, but whether or not Reliv distributors will get on board if there is a GMO in the product. It is not a science question, but a marketing question. (And just which products is Reliv referring to in relation to GMO substances?)

A later sentence in the above SEC passage is a bit humorous.

"Compliance with regulatory requirements in this area should not have a material adverse effect on our business."

Of course, it would be hard to imagine "compliance" as adverse. I think investors are more concerned with any possible noncompliance, not to mention any consumer/distributor backlash if Reliv's SEC filed statements became widely known. Would those have a "materially adverse effect" ….? Or did Reliv only mean, "becoming compliant," which could mean that they were not currently compliant, which would not be a good thing at all. But then again, in the health food business even compliance would have an adverse effect - if it meant being OK with a GMO in the product mix just because it was legal.

"Some of our products in certain markets still contain substances that would be or might be classified as GMOs." ~ SEC 2012 10-K

Poor sales or not, healthy or not, synthetic or not, GMO or not, wasn't this all supposed to feel "natural"?

Disclosure: I am short RELV.