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 March 31, 2012
OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

 

Commission File Number

000-19932

RELIV’ INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware		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 þ     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 þ     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  þ

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of shares outstanding of the Registrant’s common stock as of April 30, 2012 was 12,512,505 (excluding treasury shares).

 

 

 

INDEX

 

 

Part I – Financial Information

 

Item No. 1	Financial Statements (Unaudited)	1
Item No. 2	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	7
Item No. 4	Controls and Procedures	12
Part II – Other Information
Item No. 2	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item No. 6	Exhibits	13

 

 

 

 

PART I -- FINANCIAL INFORMATION

Item No. 1 - Financial Statements

Reliv International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

		March 31				December 31
		2012				2011
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	6,590,435			$	7,174,213
Accounts receivable, less allowances of
$72,700 in 2012 and $70,300 in 2011			338,384				334,828
Accounts due from employees and distributors			32,188				43,191
Inventories
Finished goods			2,883,118				3,252,153
Raw materials			1,657,780				1,048,419
Sales aids and promotional materials			377,150				423,201
Total inventories			4,918,048				4,723,773
Refundable income taxes			-				96,387
Prepaid expenses and other current assets			1,112,541				607,989
Deferred income taxes			419,000				432,000
Total current assets			13,410,596				13,412,381
Other assets			267,347				204,461
Cash surrender value of life insurance			2,041,873				1,782,752
Note receivable			2,000,000				-
Intangible assets, net			1,559,142				1,597,644
Property, plant and equipment:
Land and land improvements			883,563				883,563
Building			9,916,867				9,899,291
Machinery & equipment			3,748,300				3,736,144
Office equipment			1,393,665				1,376,577
Computer equipment & software			2,964,889				2,911,778
			18,907,284				18,807,353
Less: Accumulated depreciation			11,623,135				11,385,406
Net property, plant and equipment			7,284,149				7,421,947
Total assets		$	26,563,107			$	24,419,185

 

 

See notes to financial statements.

 

 

 

Reliv International, Inc. and Subsidiaries

Consolidated Balance Sheets

 

		March 31				December 31
		2012				2011
		(unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses		$	3,333,196			$	2,492,973
Distributors' commissions payable			2,489,607				2,238,987
Sales taxes payable			405,817				365,897
Payroll and payroll taxes payable			538,240				427,719
Total accounts payable and accrued expenses			6,766,860				5,525,576
Income taxes payable			287,684				-
Current maturities of long-term debt			585,630				584,873
Total current liabilities			7,640,174				6,110,449
Noncurrent liabilities:
Long-term debt, less current maturities			3,421,300				3,566,175
Other noncurrent liabilities			286,834				256,710
Total noncurrent liabilities			3,708,134				3,822,885
Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000
shares authorized; -0- shares issued and outstanding
in 2012 and 2011			-				-
Common stock, par value $.001 per share; 30,000,000
authorized; 14,461,435 shares issued and 12,512,505
shares outstanding as of 3/31/2012; 14,425,185 shares
issued and 12,484,104 shares outstanding as of 12/31/2011			14,788				14,425
Additional paid-in capital			30,389,206				30,292,792
Accumulated deficit			(9,008,211	)			(9,540,595	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment			(507,531	)			(617,303	)
Treasury stock			(5,673,453	)			(5,663,468	)
Total stockholders' equity			15,214,799				14,485,851
Total liabilities and stockholders' equity		$	26,563,107			$	24,419,185

 

See notes to financial statements. 

 

 

 

Reliv International, Inc. and Subsidiaries

Condensed Consolidated Statements of Net

Income and Comprehensive Income

 

(unaudited)		Three months ended March 31
		2012				2011
Product sales		$	17,614,840			$	19,326,943
Handling & freight income			2,128,804				2,359,911
Net sales			19,743,644				21,686,854
Costs and expenses:
Cost of products sold			3,900,581				4,220,350
Distributor royalties and commissions			7,455,160				8,120,942
Selling, general and administrative			7,474,246				8,268,868
Total costs and expenses			18,829,987				20,610,160
Income from operations			913,657				1,076,694
Other income (expense):
Interest income			9,314				15,579
Interest expense			(30,919	)			(36,623	)
Other expense			(22,668	)			(68,850	)
Income before income taxes			869,384				986,800
Provision for income taxes			337,000				377,000
Net income		$	532,384			$	609,800
Other comprehensive income (loss):
Foreign currency translation adjustment			109,772				(66,485	)
Comprehensive income		$	642,156			$	543,315
Earnings per common share - Basic		$	0.04			$	0.05
Weighted average shares			12,512,000				12,451,000
Earnings per common share - Diluted		$	0.04			$	0.05
Weighted average shares			12,633,000				12,453,000
Cash dividends declared per common share		$	-			$	-

 

See notes to financial statements. 

 

 

 

Reliv International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		Three months ended March 31
		2012				2011
Operating activities:
Net income		$	532,384			$	609,800
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization			240,454				294,645
Stock-based compensation			53,277				45,942
Deferred income taxes			(36,000	)			(62,000	)
Foreign currency transaction (gain)/loss			(23,052	)			(17,945	)
(Increase) decrease in accounts receivable			19,509				67,452
(Increase) decrease in inventories			(143,739	)			(124,077	)
(Increase) decrease in refundable income taxes			96,387				62,324
(Increase) decrease in prepaid expenses
and other current assets			(499,481	)			(617,008	)
(Increase) decrease in other assets			(25,886	)			(14,619	)
Increase (decrease) in income taxes payable			287,467				293,250
Increase (decrease) in accounts payable & accrued expenses
and other noncurrent liabilities			1,267,820				1,797,517
Net cash provided by operating activities			1,769,140				2,335,281
Investing activities:
Purchase of property, plant and equipment			(61,457	)			(87,748	)
Purchase of note and mortgage secured by underlying property			(2,000,000	)			-
Payment of life insurance premiums			(259,121	)			(252,250	)
Net cash used in investing activities			(2,320,578	)			(339,998	)
Financing activities:
Principal payments on long-term borrowings			(144,118	)			(140,240	)
Purchase of stock for treasury			(9,985	)			-
Net cash used in financing activities			(154,103	)			(140,240	)
Effect of exchange rate changes on cash and cash equivalents			121,763				46,037
Increase (decrease) in cash and cash equivalents			(583,778	)			1,901,080
Cash and cash equivalents at beginning of period			7,174,213				6,331,038
Cash and cash equivalents at end of period		$	6,590,435			$	8,232,118

  

See notes to financial statements.

 

 

 

Reliv International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2012

 

Note 1--	Accounting Policies
	Basis of Presentation
	The accompanying unaudited condensed 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, 2011, filed March 23, 2012 with the Securities and Exchange Commission.
	Adoption of New Accounting Standards
	Effective January 1, 2012, the Company adopted Accounting Standards Update (ASU) No. 2011-5 and 2011-12, which amends accounting guidance on the financial statement presentation of comprehensive income. Under this guidance, a company has the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The company has elected to present total comprehensive income in a single continuous statement which contains two sections: net income and comprehensive income. The adoption of this new accounting guidance only impacted financial statement presentation and did not have any impact on the company's consolidated financial position, results of operations, or cash flows.
Note 2--	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 March 31
		2012				2011
Numerator:
Net income		$	532,384			$	609,800
Denominator:
Denominator for basic earnings per
share--weighted average shares			12,512,000				12,451,000
Dilutive effect of employee stock options
and other warrants			121,000				2,000
Denominator for diluted earnings per
share--adjusted weighted average shares			12,633,000				12,453,000
Basic earnings per share		$	0.04			$	0.05
Diluted earnings per share		$	0.04			$	0.05

 

Options and warrants to purchase 1,243,863 and 780,798 shares of common stock for the three months ended March 31, 2012 and 2011, respectively, were not included in the denominator for diluted earnings per share because their effect would be antidilutive or because the shares were deemed contingently issuable.

 

 

Note 3--	Purchase of Note Receivable
	On March 16, 2012, the Company entered into an agreement with a real estate investment management firm to purchase a note and mortgage on certain properties in Utah and Idaho for $2 million. Subsequently, the transaction closed in March 2012. Under a February 27, 2012 Memorandum of Agreement (MOA) between the Company and the obligor on the aforementioned note and mortgage, the Company anticipates entering into a restructured note and mortgage with the original obligor for a similar amount with, initially, interest only monthly payments for the remainder of 2012. The MOA contemplates that the restructured note and mortgage will be secured additionally by the obligor's Reliv distributorship business. Accordingly, pending completion of the restructured note and mortgage agreement, the Company has presented the note receivable as a non-current asset in the condensed consolidated balance sheets.
Note 4--	Stock-based Compensation
	In January 2012, the Company issued stock option grants totaling 775,000 shares. These option grants contain exercise prices ranging from $1.20 to $1.32 per share with a five-year term. One half of the options granted have time vesting provisions ranging from one to 4.8 years while the remainder have vesting provisions that are contingent upon the Company achieving certain financial performance measurements. The aggregate estimated compensation cost related to the time vesting stock option grant is $172,000 recognized on a straight-line basis over the weighted requisite service periods. The aggregate estimated compensation cost related to the performance based options is $185,000; however, recognition is contingent upon performance vesting. The grant-date fair value of the options range from $0.42 to $0.48 per share and was determined using the Black-Scholes option pricing model using an average risk-free rate of 0.82%, an average dividend yield of 1.60%, and an average volatility of 49.31%.
	The Company recognized stock-based compensation expense from all plans of approximately $53,000 and $46,000 in the three months ended March 31, 2012 and 2011, respectively. This expense is presented in Selling, General and Administrative in the accompanying condensed consolidated statements of net income and comprehensive income.
Note 5--	Taxes
	One of the Company's foreign subsidiaries is presently under local country audit for alleged deficiencies (totaling approximately $800,000 plus interest at 20% per annum) in value-added tax (VAT) and withholding tax for the years 2004 through 2006. The Company, in consultation with its legal counsel, believes that there are strong legal grounds that it should not be liable to pay the majority of the alleged tax deficiencies. As of December 31, 2010, management estimated and reserved approximately $185,000 for resolution of this matter and recorded this amount within Selling, General, and Administrative expense in the 2010 Consolidated Statement of Income. In 2011, the Company has made good faith deposits to the local tax authority under the tax agency's administrative judicial resolution process. As of March 31, 2012 and December 31, 2011, management's estimated reserve (net of deposits) for this matter is approximately $50,000. There has been no change in this matter during the first quarter of 2012.

 

 

 

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 annual 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 79.9% of worldwide net sales for the three months ended March 31, 2012 and 85.2% of worldwide net sales for the three months ended March 31, 2011. 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 March 31, 2012, consisted of approximately 58,530 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. As a result, exchange rate fluctuations may have an effect on sales and gross margins. United States generally accepted 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.

 

 

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 distributors, 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-month periods ended March 31, 2012 and 2011. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.

 

		Three months ended March 31,
			2012				2011
Net sales			100.0	%			100.0	%
Costs and expenses:
Cost of products sold			19.8				19.5
Distributor royalties and commissions			37.7				37.4
Selling, general and administrative			37.9				38.1
Income from operations			4.6				5.0
Interest expense			(0.1	)			(0.2	)
Interest and other income/(expense)			(0.1	)			(0.2	)
Income before income taxes			4.4				4.6
Provision for income taxes			1.7				1.8
Net income			2.7	%			2.8	%

 

 

Net Sales. Overall net sales decreased by 9.0% in the three months ended March 31, 2012 compared to the same period in 2011. During the first quarter of 2012, sales in the United States decreased by 14.6%, and international sales increased by 23.4% over the prior-year period.

 

 

     The following table summarizes net sales by geographic market for the three months ended March 31, 2012 and 2011.

 

		Three months ended March 31,
		2012								2011								Change from prior year
		Amount				% of Net Sales				Amount				% of Net Sales				Amount				%
		(dollars in thousands)
United States		$	15,770				79.9	%		$	18,466				85.2	%		$	(2,696	)			(14.6	)%
Australia/New Zealand			540				2.7				618				2.8				(78	)			(12.6	)
Canada			550				2.8				597				2.8				(47	)			(7.9	)
Mexico			287				1.4				348				1.6				(61	)			(17.5	)
Europe			1,595				8.1				724				3.3				871				120.3
Asia			1,002				5.1				934				4.3				68				7.3
Consolidated total		$	19,744				100.0	%		$	21,687				100.0	%		$	(1,943	)			(9.0	)%

 

 

The following table sets forth, as of March 31, 2012 and 2011, 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.

 

		March 31, 2012								March 31, 2011								% Change
			Active Distributors				Master Affiliates and Above				Active Distributors				Master Affiliates and Above				Active Distributors				Master Affiliates and Above
United States			42,910				4,550				46,910				5,360				(8.5	)%			(15.1	)%
Australia/New Zealand			1,950				120				2,200				140				(11.4	)			(14.3	)
Canada			1,340				190				1,370				170				(2.2	)			11.8
Mexico			1,640				140				1,630				240				0.6				(41.7	)
Europe			4,900				480				2,570				260				90.7				84.6
Asia			5,790				500				5,190				400				11.6				25.0
Consolidated total			58,530				5,980				59,870				6,570				(2.2	)%			(9.0	)%

 

 

In the United States, net sales were down 14.6% in the first quarter of 2012 compared to the same period in 2011. Sales declined in the first quarter of 2012 as distributor activity in United States continues to decline. This decline is shown in the form of a decrease in the number of active distributors and distributors at the level of Master Affiliate and above, along with a decrease in the number of new distributor enrollments. The net number of active distributors in the United States as of March 31, 2012 decreased by 8.5% to 42,910, compared to the number of active distributors as of March 31, 2011. The net number of distributors at the level of Master Affiliate and above as of March 31, 2012 decreased by 15.1% as compared to March 31, 2011. Additionally, in the first quarter of 2012, approximately 400 distributors qualified as new Master Affiliates, compared to approximately 581 in the prior-year quarter, a decline of 31.2%. During the first quarter of 2012, approximately 3,023 new distributors were enrolled, compared to 3,447 new distributor enrollments in the prior-year quarter, a decline of 12.3%. Distributor retention remained steady at 68.7% for the first three months of 2012 compared to a rate of 67.4% for all of 2011.

 

In the first quarter of 2012, we processed approximately 59,012 orders in the United States for products at an average order of $356 at suggested retail. In the same period of 2011, we processed approximately 67,274 product orders at an average order of $359 at suggested retail. This decline in the number of orders processed is attributable to the decline in distributor activity.

 

 

One of our key efforts in the United States to revive distributor activity and ordering focuses on product innovation. Using LunaRich, an enhanced soy powder, we have introduced reformulations of three of our products, Reliv NOW, SoySentials, and Reliv NOW for Kids. LunaRich was created through our research and development partnership with the Missouri Plant Science Center, and it delivers five to ten times more lunasin than standard soy powders. Lunasin is the peptide scientists have identified as the key to many of soy’s documented health benefits, including cholesterol management, cell health and more. We intend to introduce additional LunaRich-based reformulations in the United States and elsewhere in our existing markets in the coming months.

 

During the three months ended March 31, 2012, net sales in our international operations increased in aggregate by 23.4% to $3.97 million compared to $3.22 million for the three months ended March 31, 2011. When measured on a constant currency basis, sales increased in Europe and Asia, but were offset by declines in Australia/New Zealand, Canada, and Mexico during the first quarter of 2012. When net sales are converted using the 2011 exchange rate for both 2011 and 2012, international net sales increased by 23.7% for the first quarter of 2012 compared to the first quarter of the prior year. Regional sales results on a constant currency basis for the first quarter of 2012 compared to the first quarter of 2011 were as follows: Australia/New Zealand net sales down 17.1%, Canada net sales down 6.6%, Mexico net sales down 11.6%, Europe net sales up 124.5%, and Asian sales up 5.2%. In Australia/New Zealand, Canada, and Mexico, new distributor enrollments and new Master Affiliate qualifications were down in the first quarter of 2012 commensurate to the decline of sales in the respective markets.

 

In Europe, strong distributor activity and growth continued in the first quarter of 2012 and resulted in a 124.5% increase in net sales. New distributor enrollments were 1,424 in the first quarter of 2012, compared to 549 in the same period in 2011, an increase of 159%; and new Master Affiliate qualifications were 148 in the first quarter of 2012, compared to 45 in the same period in 2011, an increase of 229%.

 

In Asia, the increase in regional sales was driven by a 64.3% increase in sales in the Philippines. Sales of Reliv NOW, lemon-flavored Innergize, and Fibrestore in single-serving packs continue to gain momentum in that market.

 

Cost of Products Sold. Cost of products sold as a percentage of net sales was 19.8% for the three-month period ended March 31, 2012, compared to 19.5% for the same period in 2011. Gross margins decreased in the first quarter of 2012 as the result of increases in the cost of shipping for distributor orders in the United States.

 

Distributor Royalties and Commissions. Distributor royalties and commissions as a percentage of net sales was 37.7% for the three-month period ended March 31, 2012, compared to 37.4% in the same period in 2011. 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. The slight increase in the percentage in the first quarter of 2012 is due to a higher average level of distributor discounts at the time of purchase in 2012, compared to the prior-year quarter. Distributor royalties are based on product prices at suggested retail price.

 

Selling, General and Administrative Expenses. For the three months ended March 31, 2012, selling, general and administrative, or SGA, expenses decreased by $795,000, compared to the same period in 2011. SGA expenses as a percentage of net sales were 37.9% for the three-month period ended March 31, 2012, compared to 38.1% for the same period of 2011.

 

Sales and marketing expenses decreased by approximately $453,000 in the first quarter of 2012, compared to the prior-year quarter. Distributor bonuses and other expenses directly related to the level of sales decreased by approximately $170,000. Other changes included a decrease in conference and meeting expenses of $138,000 and a decrease in promotional expenses of $114,000.

 

Salaries, benefits, and incentive compensation decreased by $192,000 in the first quarter of 2012, compared to the prior-year quarter, due in part to the headcount reductions in the fourth quarter of 2011. Distribution and warehouse expenses increased by $10,000 and other general and administrative expenses decreased by approximately $159,000 in the first quarter of 2012, compared to the prior-year quarter. The decrease in other general and administrative expenses is the result of reductions in a number of expenses, including office rental expenses in Australia and Malaysia, consulting fees, directors’ fees, and fees paid to our medical advisory board which was disbanded in 2011.

 

 

Interest Expense. Interest expense decreased to $31,000 during the first quarter of 2012 compared to $37,000 in the first quarter of 2011. The lower interest expense is the result of a decrease in the amount of debt compared to the prior year.

 

Other Income/Expense. Other income/expense in the first quarter of 2012 was a net expense of $23,000, compared to a net expense of $69,000 in the first quarter of 2011. The first quarter 2012 net expense is the result of foreign currency exchange losses in certain of our subsidiaries. The net expense in 2011 is primarily the result of a loss of approximately $97,000 incurred in our Indonesian subsidiary in the 2011 first quarter. A nominee director/former employee of the subsidiary misappropriated this amount from the subsidiary's bank account. During the second quarter of 2011, we recovered $60,000 of this amount.

 

Income Taxes. We recorded income tax expense of $337,000 for the first three months of 2012, resulting in an effective rate of 38.8%. In the same period in 2011, we recorded income tax expense of $377,000, which represented an effective rate of 38.2%. Our effective rate is higher in 2012 due to a higher effective rate for state income taxes in 2012.

 

Net Income. Our net income for the three months ended March 31, 2012 was approximately $532,000 ($0.04 per share basic and diluted), compared to approximately $610,000 ($0.05 per share basic and diluted) for the same period in 2011. Profitability decreased in the first quarter of 2012 as net sales decreased in the United States as discussed above.

 

Financial Condition, Liquidity and Capital Resources

 

During the first three months of 2012, we generated $1.77 million of net cash from operating activities, $2.32 million was used in investing activities, and we used $154,000 in financing activities. This compares to $2.34 million of net cash provided by operating activities, $340,000 used in investing activities, and $140,000 used in financing activities in the same period of 2011. Cash and cash equivalents decreased by $584,000 to $6.59 million as of March 31, 2012 compared to December 31, 2011.

 

Significant changes in working capital items consisted of an increase in inventory of $144,000, an increase in prepaid expenses/other current assets of $499,000, an increase in accounts payable and accrued expenses of $1.27 million, and an increase in income taxes payable of $287,000 in the first three months of 2012. The increase in inventory is to support the sales growth in Europe, and the increase in prepaid expenses/other current assets represents 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 and the increase in inventory. The increase in income taxes payable is a function of the timing of estimated tax payments.

 

Investing activities during the first three months of 2012 consisted of the purchase of a note and mortgage for $2 million, a net investment of $61,000 for capital expenditures, and $259,000 for key-man life insurance. Financing activities during the first three months of 2012 consisted of principal payments of $144,000 on long-term borrowings and $10,000 in treasury stock purchased. The purchase of the note and mortgage are discussed further in Note 3 of the Consolidated Financial Statements.

 

Stockholders’ equity increased to $15.21 million at March 31, 2012 compared to $14.49 million at December 31, 2011. The increase is due to our net income during the first three months of 2012 of $532,000 and an improvement in the cumulative foreign currency translation adjustment of $110,000 due to the general weakening of the United States dollar. Our working capital balance was $5.77 million at March 31, 2012 compared to $7.30 million at December 31, 2011. The current ratio at March 31, 2012 was 1.76 compared to 2.19 at December 31, 2011.

 

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 March 31, 2012, there were no outstanding borrowings on the revolving credit facility.

 

The amended terms of the term loan and revolving credit facility are reflected in separate promissory notes dated November 30, 2010 between us and the Bank. A separate letter agreement stating the financial covenants related to the term loan and revolving credit facility was updated and amended on April 4, 2012 and continues in effect.

 

Under the terms of the amended 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 $11 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 March 31, 2012, we were in compliance with all financial covenants.

 

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

 

Critical Accounting Policies

 

A summary of our critical accounting policies and estimates is presented on pages 24-26 of our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2012.

 

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 March 31, 2012. 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 March 31, 2012, 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 first quarter of 2012 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

 

 

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)
January 1-31, 2012			7,849			$	1.27				7,849			$	870,000
February 1-29, 2012			-				-				-			$	870,000
March 1-31, 2012			-				-				-			$	870,000
Total			7,849								7,849
(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

 

10.1

Loan Sale Agreement between 2010-1 RADC/CADC Venture, LLC and Registrant dated March 16, 2012 (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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Net Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

 

 

 

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.

 

 

By: /s/ Robert L. Montgomery                                                                                                                                 

      Robert L. Montgomery, Chairman of the Board of Directors, President and Chief Executive Officer

 

Date: May 14, 2012

 

 

By: /s/ Steven D. Albright                                                                                                                                       

      Steven D. Albright, Chief Financial Officer (and accounting officer)

 

Date: May 14, 2012