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EX-32 - EXHIBIT 32 - RELIV INTERNATIONAL INCv239248_ex32.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.   20549
 

FORM 10-Q

(Mark One)
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________to_________
 
Commission File Number
000-19932
RELIV’ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
        371172197
(State or other jurisdiction of
 
(I.R.S. Employer Identification Number)
incorporation or organization)
   

136 Chesterfield Industrial Boulevard
   
Chesterfield, Missouri
 
63005
(Address of principal executive offices)
 
(Zip Code)

(636) 537-9715
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer o      Non-accelerated filer o Smaller reporting company  x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

The number of shares outstanding of the Registrant’s common stock as of October 31, 2011 was 12,405,202 (excluding treasury shares).
 
 
 

 
 
INDEX
 
PART I – FINANCIAL INFORMATION  
 
 
Item No. 1
Financial Statements (Unaudited)
    3  
Item No. 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    8  
Item No. 4
Controls and Procedures
    13  
           
PART II – OTHER INFORMATION        
           
Item No. 2
Unregistered Sales of Equity Securities and Use of Proceeds
    14  
Item No. 6
Exhibits
    14  
 
 
2

 
 
PART I  FINANCIAL INFORMATION

Item No. 1 - Financial Statements

Reliv International, Inc. and Subsidiaries

Consolidated Balance Sheets
 
   
September 30
   
December 31
 
   
2011
   
2010
 
   
(unaudited)
       
Assets
           
Current assets:
           
  Cash and cash equivalents
  $ 7,140,671     $ 6,331,038  
  Accounts receivable, less allowances of
               
     $69,400 in 2011 and $67,100 in 2010
    274,767       291,405  
  Accounts due from employees and distributors
    50,023       55,854  
  Inventories
               
          Finished goods
    3,394,451       3,851,178  
          Raw materials
    1,374,698       1,277,838  
          Sales aids and promotional materials
    437,151       521,774  
                     Total inventories
    5,206,300       5,650,790  
                 
  Refundable income taxes
    79,600       62,324  
  Prepaid expenses and other current assets
    732,036       519,915  
  Deferred income taxes
    388,000       334,000  
Total current assets
    13,871,397       13,245,326  
                 
Other assets
    280,102       364,626  
Cash surrender value of life insurance
    1,755,600       1,503,350  
Intangible assets, net
    1,636,147       1,785,987  
                 
Property, plant and equipment:
               
            Land and land improvements
    883,563       868,870  
            Building
    9,920,925       9,928,950  
            Machinery & equipment
    3,733,074       3,698,537  
            Office equipment
    1,422,978       1,503,929  
            Computer equipment & software
    2,844,060       2,980,370  
      18,804,600       18,980,656  
Less: Accumulated depreciation
    11,318,515       11,036,244  
          Net property, plant and equipment
    7,486,085       7,944,412  
                 
Total assets
  $ 25,029,331     $ 24,843,701  
 
See notes to financial statements.
 
 
3

 
 
Reliv International, Inc. and Subsidiaries

Consolidated Balance Sheets

   
September 30
   
December 31
 
   
2011
   
2010
 
   
(unaudited)
       
Liabilities and stockholders' equity
           
Current liabilities:
           
  Accounts payable and accrued expenses:
           
            Trade accounts payable and other accrued expenses
  $ 3,209,687     $ 2,437,965  
            Distributors' commissions payable
    2,295,120       2,411,016  
            Sales taxes payable
    389,948       445,653  
            Payroll and payroll taxes payable
    361,658       525,657  
  Total accounts payable and accrued expenses
    6,256,413       5,820,291  
                 
    Current maturities of long-term debt
    581,539       566,873  
  Total current liabilities
    6,837,952       6,387,164  
                 
Noncurrent liabilities:
               
Long-term debt, less current maturities
    3,713,188       4,150,770  
Other noncurrent liabilities
    261,770       375,244  
Total noncurrent liabilities
    3,974,958       4,526,014  
                 
Stockholders' equity:
               
  Preferred stock, par value $.001 per share; 3,000,000
               
   shares authorized; -0- shares issued and outstanding
               
   in 2011 and 2010
    -       -  
  Common stock, par value $.001 per share; 30,000,000
               
   authorized; 14,425,185 shares issued and 12,408,302
               
   shares outstanding as of 9/30/2011; 14,425,185 shares
               
   issued and 12,450,808 shares outstanding as of 12/31/2010
    14,425       14,425  
  Additional paid-in capital
    30,438,289       30,300,463  
  Accumulated deficit
    (9,736,940 )     (10,091,167 )
  Accumulated other comprehensive loss:
               
  Foreign currency translation adjustment
    (573,639 )     (448,024 )
  Treasury stock
    (5,925,714 )     (5,845,174 )
                 
Total stockholders' equity
    14,216,421       13,930,523  
                 
Total liabilities and stockholders' equity
  $ 25,029,331     $ 24,843,701  

See notes to financial statements.
 
 
4

 
 
Reliv International, Inc. and Subsidiaries

Consolidated Statements of Income
(unaudited)

   
Three months ended September 30
   
Nine months ended September 30
 
   
2011
   
2010
   
2011
   
2010
 
Product sales
  $ 15,382,332     $ 16,612,215     $ 50,693,657     $ 53,559,074  
Handling & freight income
    1,927,261       2,060,849       6,300,712       6,661,873  
                                 
Net sales
    17,309,593       18,673,064       56,994,369       60,220,947  
                                 
Costs and expenses:
                               
  Cost of products sold
    3,601,116       3,820,490       11,636,647       12,093,367  
  Distributor royalties and commissions
    6,450,155       7,011,217       21,317,105       22,560,625  
  Selling, general and administrative
    7,089,832       7,402,210       22,766,198       23,486,389  
                                 
Total costs and expenses
    17,141,103       18,233,917       55,719,950       58,140,381  
                                 
Income from operations
    168,490       439,147       1,274,419       2,080,566  
                                 
Other income (expense):
                               
  Interest income
    7,045       12,961       32,846       35,334  
  Interest expense
    (32,925 )     (52,885 )     (105,349 )     (159,336 )
  Other income (expense)
    (452 )     437       13,883       21,592  
                                 
Income before income taxes
    142,158       399,660       1,215,799       1,978,156  
Provision for income taxes
    93,000       228,000       488,000       854,000  
                                 
Net income
  $ 49,158     $ 171,660     $ 727,799     $ 1,124,156  
                                 
Earnings per common share - Basic
  $ 0.00     $ 0.01     $ 0.06     $ 0.09  
Weighted average shares
    12,416,000       12,380,000       12,436,000       12,380,000  
                                 
Earnings per common share - Diluted
  $ 0.00     $ 0.01     $ 0.06     $ 0.09  
Weighted average shares
    12,416,000       12,380,000       12,436,000       12,380,000  
                                 
Cash dividends declared per common share
  $ -     $ -     $ 0.03     $ 0.02  

See notes to financial statements.
 
 
5

 
 
Reliv International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(unaudited)

   
Nine months ended September 30
 
   
2011
   
2010
 
Operating activities:
           
Net income
  $ 727,799     $ 1,124,156  
Adjustments to reconcile net income to
               
  net cash provided by operating activities:
               
    Depreciation and amortization
    847,341       910,338  
    Stock-based compensation
    137,826       151,232  
    Deferred income taxes
    (112,000 )     (142,000 )
    Foreign currency transaction (gain)/loss
    43,184       (48,919 )
    (Increase) decrease in accounts receivable
    19,406       115,265  
    (Increase) decrease in inventories
    421,432       (815,305 )
    (Increase) decrease in refundable income taxes
    (17,316 )     (3,251 )
    (Increase) decrease in prepaid expenses
               
      and other current assets
    (217,026 )     (136,790 )
    (Increase) decrease in other assets
    43,524       (13,069 )
    
               
    Increase (decrease) in accounts payable & accrued expenses and other noncurrent liabilities
    352,607       553,321  
                 
Net cash provided by operating activities
    2,246,777       1,694,978  
                 
Investing activities:
               
Proceeds from the sale of property, plant and equipment
    -       2,925  
Purchase of property, plant and equipment
    (241,000 )     (348,252 )
Payment of life insurance premiums
    (252,250 )     (258,100 )
                 
Net cash used in investing activities
    (493,250 )     (603,427 )
                 
Financing activities:
               
Principal payments on long-term borrowings
    (422,916 )     (387,255 )
Common stock dividends paid
    (373,572 )     (247,672 )
Other
    -       547  
Purchase of stock for treasury
    (80,539 )     -  
                 
Net cash used in financing activities
    (877,027 )     (634,380 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (66,867 )     186,604  
                 
Increase in cash and cash equivalents
    809,633       643,775  
                 
Cash and cash equivalents at beginning of period
    6,331,038       5,760,913  
                 
Cash and cash equivalents at end of period
  $ 7,140,671     $ 6,404,688  
 
See notes to financial statements

 
6

 
 
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

September 30, 2011

Note 1 — Accounting Policies

Basis of Presentation
 
The accompanying unaudited consolidated financial statements and notes thereto have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments (which primarily include normal recurring accruals) which management believes are necessary to present fairly the financial position, results of operations and cash flows.  These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States.  Interim results may not necessarily be indicative of results that may be expected for any other interim period or for the year as a whole.  These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the year ended December 31, 2010, filed March 17, 2011 with the Securities and Exchange Commission.
 
Note 2 — Comprehensive Income (Loss)

Comprehensive income (loss) was $(36,330) and $602,184 for the three and nine months ended September 30, 2011, respectively.  For the three and nine months ended September 30, 2010, comprehensive income was $330,843 and $1,289,998, respectively.  The Company's only component of other comprehensive income is the foreign currency translation adjustment.

Note 3 — Basic and Diluted Earnings per Share

Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per share are computed using the weighted average number of common shares and potential dilutive common shares that were outstanding during the period.  Potential dilutive common shares consist of outstanding stock options, outstanding stock warrants, and convertible preferred stock.

The following table sets forth the computation of basic and diluted earnings per share:


   
Three months ended September 30
   
Nine months ended September 30
 
   
2011
   
2010
   
2011
   
2010
 
Numerator:
                       
Net income
  $ 49,158     $ 171,660     $ 727,799     $ 1,124,156  
                                 
Denominator:
                               
Denominator for basic earnings per
                               
share--weighted average shares
    12,416,000       12,380,000       12,436,000       12,380,000  
Dilutive effect of employee stock options
                               
and other warrants
    -       -       -       -  
                                 
Denominator for diluted earnings per
                               
share--adjusted weighted average shares
    12,416,000       12,380,000       12,436,000       12,380,000  
                                 
Basic earnings per share
  $ 0.00     $ 0.01     $ 0.06     $ 0.09  
Diluted earnings per share
  $ 0.00     $ 0.01     $ 0.06     $ 0.09  

Options and warrants to purchase 780,798 shares of common stock for the three months and nine months ended September 30, 2011, respectively, were not included in the denominator for diluted earnings per share because their effect would be antidilutive. Options and warrants to purchase 806,689 shares of common stock for the three months and nine months ended September 30, 2010, respectively, were not included in the denominator for diluted earnings per share because their effect would be antidilutive.

Note 4 — Subsequent Event

In October 2011, the Company implemented an employee headcount cost reduction program resulting in the reduction of approximately 8% of the Company's U.S. employees.  The total cost of this program, representing severance and benefits, is estimated to be $236,000 ($138,000 net of tax) and will be included in the Company's operating results for the quarter ended December 31, 2011.  The aggregate annual salaries of the affected employees was approximately $690,000.

Note 5 — Recent Accounting Standards Pending Adoption

In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment on the presentation of other comprehensive income.  Under this amendment, entities will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or two separate but consecutive statements.  The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated.  This amendment will be effective for the Company on January 1, 2012, and retrospective application is required.  The Company does not anticipate that this amendment will have a material impact on its financial statements.

In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures.  The new guidance clarified the concepts applicable for fair value measurement of non-financial assets and requires the disclosure of quantitive information about the unobservable inputs used in a fair value measurement.  This guidance will be effective for the Company on January 1, 2012, and will be applied prospectively.  The Company does not anticipate that this amendment will have a material impact on its financial statements.
 
 
7

 
 
FORWARD-LOOKING STATEMENTS

This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  We have based these forward-looking statements on our current expectations and projections about future results.  Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words.  Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q.  We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.

Item No. 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We are a developer, manufacturer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. We also offer a line of skin care and food products under our Relivables brand. We sell our products through an international network marketing system utilizing independent distributors. Sales in the United States represented approximately 83.3% of worldwide net sales for the nine months ended September 30, 2011 and 85.3% of worldwide net sales for the nine months ended September 30, 2010. Our international operations currently generate sales through distributor networks with facilities in Australia, Canada, Indonesia, Malaysia, Mexico, the Philippines, and the United Kingdom.  We also operate on a limited basis in Ireland, Germany, Austria and the Netherlands from our U.K. distribution center, in New Zealand from our Australia office, and in Singapore and Brunei from our Malaysia office.

We derive our revenues principally through product sales made by our global independent distributor base, which, as of September 30, 2011, consisted of approximately 57,660 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.

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

Components of Net Sales and Expense

Product sales represent the actual product purchase price typically paid by our distributors, after giving effect to distributor allowances, which can range from 20% to 40% of suggested retail price, depending on the rank of a particular distributor.  Handling and freight income represents the amounts billed to distributors for shipping costs.  We record net sales and the related commission expense when the merchandise is shipped.

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

 
8

 
 
Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead directly associated with production of our products and sales materials, as well as shipping costs relating to the shipment of products to distributors, and duties and taxes associated with product exports.  Cost of products sold is impacted by the cost of the ingredients used in our products, the cost of shipping distributors’ orders, along with our efficiency in managing the production of our products.

Distributor royalties and commissions are monthly payments made to Master Affiliates and above, based on products sold in their downline organization. Based on our distributor agreements, these expenses typically approximate 23% of sales at suggested retail. Also, we include other sales leadership bonuses, such as Ambassador bonuses, in this line item. Distributor royalties and commissions are directly related to the level of our sales and, absent any changes in our distributor compensation plan, should continue at comparable levels as a percentage of net sales as in recent periods.

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

Results of Operations

               The following table sets forth selected results of our operations expressed as a percentage of net sales for the three- and nine-month periods ended September 30, 2011 and 2010. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
   
2011
   
2010
   
2011
   
2010
 
Net sales                                             
    100.0 %     100.0 %     100.0 %     100.0 %
Costs and expenses:
                               
Cost of products sold                                           
    20.8       20.5       20.4       20.1  
Distributor royalties and commissions
    37.3       37.6       37.4       37.4  
Selling, general and administrative
    40.9       39.6       40.0       39.0  
                                 
Income from operations                                             
    1.0       2.3       2.2       3.5  
Interest expense                                             
    (0.2 )     (0.3 )     (0.2 )     (0.3 )
Interest and other income                                             
    0.0       0.1       0.1       0.1  
                                 
Income before income taxes                                             
    0.8       2.1       2.1       3.3  
Provision for income taxes                                             
    0.5       1.2       0.9       1.4  
                                 
Net income                                             
    0.3 %     0.9 %     1.3 %     1.9 %
 
Net Sales.  Overall net sales decreased by 7.3% in the three months ended September 30, 2011 compared to the same period in 2010.  During the third quarter of 2011, sales in the United States decreased by 11.5%, and international sales increased by 17.7% over the prior-year period.  For the nine months ended September 30, 2011, consolidated net sales declined 5.4% compared to the same period in 2010.  In the first nine months of 2011, net sales in the United States declined by 7.7% and international net sales increased by 8.0% over the same period in 2010.
 
 
9

 
 
               The following table summarizes net sales by geographic market for the three months ended September 30, 2011 and 2010.
 
   
Three months ended September 30,
             
   
2011
   
2010
   
Change from prior year
 
   
Amount
   
% of  Net Sales
   
Amount
   
% of Net
 Sales
   
Amount
   
%
 
   
(dollars in thousands)
       
  United States  
  $ 14,134       81.6 %   $ 15,975       85.5 %   $ (1,841 )     (11.5 )%
  Australia/New Zealand
    563       3.2       656       3.5       (93 )     (14.2 )
  Canada   
    495       2.9       505       2.7       (10 )     (2.0 )
  Mexico          
    280       1.6       320       1.7       (40 )     (12.5 )
  Europe            
    998       5.8       439       2.4       559       127.3  
  Asia     
    840       4.9       778       4.2       62       8.0  
                                                 
    Consolidated total
  $ 17,310       100.0 %   $ 18,673       100.0 %   $ (1,363 )     (7.3 )%

The following table summarizes net sales by geographic market for the nine months ended September 30, 2011 and 2010.
 
   
Nine months ended September 30,
             
   
2011
   
2010
   
Change from prior year
 
   
Amount
   
% of Net Sales
   
Amount
   
% of Net
 Sales
   
Amount
   
%
 
   
(dollars in thousands)
       
  United States
  $ 47,440       83.3 %   $ 51,378       85.3 %   $ (3,938 )     (7.7 )%
  Australia/New Zealand
    1,778       3.1       1,924       3.2       (146 )     (7.6 )
  Canada      
    1,669       2.9       1,634       2.7       35       2.1  
  Mexico       
    982       1.7       1,107       1.9       (125 )     (11.3 )
  Europe           
    2,577       4.5       1,440       2.4       1,137       79.0  
  Asia       
    2,548       4.5       2,738       4.5       (190     (6.9
                                                 
    Consolidated total
  $ 56,994       100.0 %   $ 60,221       100.0 %   $ (3,227 )     (5.4 )%

The following table sets forth, as of September 30, 2011 and 2010, the number of our active distributors and Master Affiliates and above.  The total number of active distributors includes Master Affiliates and above. We define an active distributor as one that enrolls as a distributor or renews his or her distributorship during the prior twelve months.  Master Affiliates and above are distributors that have attained the highest level of discount and are eligible for royalties generated by Master Affiliate groups in their downline organization.  Growth in the number of active distributors and Master Affiliates and above is a key factor in the growth of our business.
 
 
September 30, 2011
 
September 30, 2010
 
% Change
 
Total
Active Distributors
 
Master Affiliates and Above
 
Total
Active Distributors
 
Master Affiliates and Above
 
Total
Active Distributors
 
Master Affiliates and Above
                                           
  United States
44,900
   
5,920
     
48,520
     
6,730
     
(7.5
)%
   
(12.0
)%
  Australia/New Zealand
1,950
   
160
     
2,410
     
200
     
(19.1
)
   
(20.0
)
  Canada    
1,350
   
200
     
1,390
     
180
     
(2.9
)
   
11.1
 
  Mexico       
1,310
   
230
     
2,100
     
300
     
(37.6
)
   
(23.3
)
  Europe           
3,280
   
360
     
1,860
     
260
     
76.3
     
38.5
 
  Asia        
4,870
   
500
     
5,950
     
620
     
(18.2
)
   
(19.4
)
                                           
    Consolidated total
57,660
   
7,370
     
62,230
     
8,290
     
(7.3
)%
   
(11.1
)%
 
 
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In the United States, net sales were down 11.5% in the third quarter of 2011 compared to the same period in 2010.   Sales declined in the third quarter of 2011 as the effects of the continuing economic downturn impact us in the form of a lower number of active distributors and distributors at the level of Master Affiliate and above.   In the third quarter of 2011, approximately 348 distributors qualified as new Master Affiliates, compared to approximately 503 in the prior-year quarter, a decline of 30.8%.  As a result, the number of Master Affiliates and above as of September 30, 2011 decreased by 12.0% as compared to the number of Master Affiliates and above as of September 30, 2010.  Another factor in the decline in sales in the United States was fewer new distributor enrollments.  During the third quarter of 2011, 2,721 new distributors were enrolled, compared to 3,492 new distributor enrollments in the prior-year quarter, a decline of 22.1%.  The number of active distributors in the United States as of September 30, 2011 decreased by 7.5% to 44,900, compared to the number of active distributors as of September 30, 2010.   Distributor retention was 70.1% for the first nine months of 2011 compared to a rate of 62.6% for all of 2010.  For the nine-month period ended September 30, 2011, the decline in net sales in the United States compared to the prior-year period were due to these same factors.

In the third quarter of 2011, we processed approximately 59,150 orders in the United States for products at an average order of $308 at suggested retail.  In the same period of 2010, we processed approximately 64,420 product orders at an average order of $320 at suggested retail.  The average order size for all of 2010 was $336 at suggested retail.

During the three months ended September 30, 2011, net sales in our international operations increased in aggregate by 17.7% to $3.18 million compared to $2.70 million for the three months ended September 30, 2010.  For the nine-month period ended September 30, 2011, international net sales increased by 8.0% to $9.55 million compared to $8.84 million in the same period in 2010.  When measured on a constant currency basis, sales decreased in all of our foreign regions, except for Europe, during the first nine months of 2011.  When net sales are converted using the 2010 exchange rate for both 2010 and 2011, international net sales increased by 0.1% for the first nine months of 2011 compared to the same period of the prior year.  Regional sales results on a constant currency basis for the first nine months of 2011 compared to the same period of 2010 were as follows:  Australia/New Zealand net sales down 20.2%, Canada net sales down 3.7%, Mexico net sales down 16.4%, and Asia sales down 13.0%.  In all of these foreign markets, new distributor enrollments and new Master Affiliate qualifications were down in the first nine months of 2011 commensurate to the decline of sales in the respective markets.

In Europe, strong distributor activity and growth continued in the third quarter of 2011 and resulted in a 115.7% increase in net sales in the third quarter of 2011 and an increase of 69.2% for the first nine months of 2011 when measured on a constant currency basis, compared to the prior-year periods.  New distributor enrollments were up 77.8%, new Master Affiliate qualifications were up 29.8%, and the number of orders processed increased by 48.5% in the first nine months of 2011 compared to the same period in 2010.

Cost of Products Sold. Cost of products sold as a percentage of net sales was 20.8% for the three-month period ended September 30, 2011, compared to 20.5% for the same period in 2010.  For the nine-month period ended September 30, 2011, cost of products sold as a percentage of net sales was 20.4 %, compared to 20.1% in the prior-year period.  When compared to the same periods in 2010, gross margins were negatively impacted as we experienced increases in production costs and higher order shipping costs due to general rate increases and higher fuel surcharges.

Distributor Royalties and Commissions.  Distributor royalties and commissions as a percentage of net sales were 37.3% and 37.4% for the three- and nine-month periods ended September 30, 2011, respectively, compared to 37.6%  for the three-month period and 37.4% for the nine-month period in 2010.  Distributor royalties and commissions are directly related to the level of our sales and, absent any changes in our distributor compensation plan, should continue at comparable levels as a percentage of net sales as in recent periods.

Selling, General and Administrative Expenses. For the three months ended September 30, 2011, selling, general and administrative, or SGA, expenses decreased by $312,000, compared to the same period in 2010. SGA expenses as a percentage of net sales were 40.9% and 39.6% for the three-month periods ended September 30, 2011 and 2010, respectively.   For the nine-month period ended September 30, 2011, SGA expenses decreased by $720,000 when compared to the same period in 2010.  SGA expenses as a percentage of net sales were 40.0% and 39.0% for the nine-month periods ended September 30, 2011 and 2010, respectively.

Sales and marketing expenses decreased by approximately $562,000 in the first nine months of 2011, compared to the prior-year period.  The decrease is the result of lower distributor bonuses and expenses directly related to the level of sales, a reduction in external sales meeting expenses, and a reduction in newsletter expense.
 
 
11

 
 
Distribution and warehouse expenses increased by $100,000 and general and administrative expenses decreased by approximately $259,000 in the first nine months of 2011, compared to the prior-year period.  The decreases in general and administrative expenses consist of a reduction in 2011 incentive compensation expense of approximately $102,000 and a non-recurring accrual recorded in the third quarter of 2010 of approximately $185,000 in our Philippine subsidiary related to a tax audit on VAT and other transactional taxes.

Interest Expense.  Interest expense decreased to $105,000 during the first nine months of 2011 compared to $159,000 in the same period of 2010.  The lower interest expense is the result of a lower interest rate on our term loan with our primary lender that was renegotiated in November 2010.

Income Taxes. We recorded income tax expense of $488,000 for the first nine months of 2011, an effective rate of 40.1%. In the same period in 2010, we recorded income tax expense of $854,000, which represented an effective rate of 43.2%.  The decrease in the effective rate was due to non-deductible losses in our Philippine subsidiary due to the tax audit accrual recorded in 2010 as discussed previously.

Net Income. Our net income for the three and nine months ended September 30, 2011 was $49,000 ($0.00 per share basic and diluted) and $728,000 ($0.06 per share basic and diluted), respectively, compared to $172,000 ($0.01 per share basic and diluted) and $1.12 million ($0.09 per share basic and diluted) for the same periods in 2010. Profitability decreased in the third quarter and first nine months of 2011 as net sales decreased in the United States as discussed above.

Financial Condition, Liquidity and Capital Resources

During the first nine months of 2011, we generated $2.25 million of net cash from operating activities, used $493,000 in investing activities, and used $877,000 in financing activities. This compares to $1.69 million of net cash provided by operating activities, $603,000 used in investing activities, and $634,000 used in financing activities in the same period of 2010. Cash and cash equivalents increased by $810,000 to $7.14 million as of September 30, 2011 compared to $6.33 million as of December 31, 2010.

Significant changes in working capital items consisted of a decrease in inventory of $421,000, an increase in prepaid expenses/other current assets of $217,000, and an increase in accounts payable and accrued expenses of $353,000 in the first nine months of 2011.  Inventory decreased proportionally with the reduced sales levels.  The increase in prepaid expenses/other current assets is primarily due to the annual premium payments made in the first quarter on most of the corporate insurance policies.  The increase in accounts payable and accrued expenses is partially related to a financing arrangement for our annual corporate insurance policy renewals, coupled with various annual accruals.

Investing activities during the first nine months of 2011 consisted of a net investment of $241,000 for capital expenditures and a $252,000 payment for key-man life insurance.  Financing activities during the first nine months of 2011 consisted of principal payments of $423,000 on long-term borrowings, $374,000 in cash dividends paid, and $81,000 in purchases of treasury stock.

Stockholders’ equity increased to $14.22 million at September 30, 2011 compared to $13.93 million at December 31, 2010. The increase is due to net income during the first nine months of 2011 of $728,000, partially offset by our cash dividend payment of $374,000.  Our working capital balance was $7.03 million at September 30, 2011 compared to $6.86 million at December 31, 2010. The current ratio at September 30, 2011 was 2.03 compared to 2.07 at December 31, 2010.

On November 30, 2010, we entered into a term loan with our primary lender (“the Bank”) in the principal amount of $3.66 million.  The loan was renegotiated from a loan that originated with the Bank on June 29, 2009.  The term of the loan is for a period of three years with interest accruing on the outstanding principal balance at a floating interest rate based on the 30-day LIBOR plus 2.0%.  Monthly principal and interest payments are based on approximately a nine-year amortization.  The aggregate outstanding balance of principal and interest is due and payable on November 30, 2013.

We also renewed a revolving credit facility for $5 million with the Bank in October 2011.  The credit facility accrues interest on the outstanding principal balance at a floating interest rate based on 30-day LIBOR plus 1.85% and has a maturity date of September 30, 2012.  As of September 30, 2011, there were no outstanding borrowings on the revolving credit facility.
 
 
12

 
 
The amended terms of the term loan and revolving credit facility are reflected in separate promissory notes between us and the Bank.  A separate letter agreement dated June 29, 2009 stating the financial covenants related to the term loan and revolving credit facility continues in effect.

Under the terms of the letter agreement, we have agreed to financial covenants under which we are required to (i) maintain at all times a tangible net worth of not less than $10 million and (ii) maintain at all times a ratio of Total Funded Debt to EBITDA of not greater than 2.5 to 1.  The term loan and revolving credit facility are secured by all of our tangible and intangible assets and also by a mortgage on our building and real estate located in Chesterfield, Missouri.  As of September 30, 2011, we were in compliance with all financial covenants.

Management believes that our internally generated funds coupled with the bank loan facilities will be sufficient to meet working capital requirements for the remainder of 2011 and through 2012.

Critical Accounting Policies

A summary of our critical accounting policies and estimates is presented on pages 23-25 of our 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2011.

Item No. 4 - 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 September 30, 2011.  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 September 30, 2011, 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.  There were no material changes in our internal control over financial reporting during the third quarter of 2011 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 
13

 

PART II – OTHER INFORMATION

Item No. 2 – Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SHARES

 
 
 
 
Period
 
 
Total Number of Shares Purchased
   
 
 
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Programs
   
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
 
July 1-31, 2011
    2,700     $ 1.87       2,700     $ 940,000  
                                 
August 1-31, 2011
    12,108     $ 1.62       12,108     $ 920,000  
                                 
September 1-30, 2011
    564     $ 1.60       564     $ 919,000  
                                 
Total
    15,372               15,372          
 

(1) In April 2011, the Company’s Board of Directors approved a share repurchase plan of up to $1 million through April 2013.
 
Item No. 6 – Exhibits
 
     
Exhibit
   
Number
 
Document
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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.
 
 
14

 
 
SIGNATURES

Pursuant to the requirements 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.
 
       
Date:  November 14, 2011
By:  
/s/ Robert L. Montgomery   
   
Robert L. Montgomery, Chairman of the Board of Directors,
President and Chief Executive Officer
 
       
       
Date:  November 14, 2011
By:  
/s/ Steven D. Albright  
   
Steven D. Albright, Chief Financial Officer
(and accounting officer)
 
 
 
15