Reliv' International (RELV) 10-Q 2011 Q2 Quarterly report

 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 June 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
incorporation or organization)	Identification Number)
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 July 29, 2011 was 12,420,974 (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

Consolidated Balance Sheets

	June 30			December 31
	2011			2010
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	7,015,049		$	6,331,038
Accounts receivable, less allowances of
$68,600 in 2011 and $67,100 in 2010		293,379			291,405
Accounts due from employees and distributors		39,052			55,854
Inventories
Finished goods		3,307,705			3,851,178
Raw materials		1,506,354			1,277,838
Sales aids and promotional materials		567,783			521,774
Total inventories		5,381,842			5,650,790
Refundable income taxes		194,786			62,324
Prepaid expenses and other current assets		891,156			519,915
Deferred income taxes		339,000			334,000
Total current assets		14,154,264			13,245,326
Other assets		324,662			364,626
Cash surrender value of life insurance		1,755,600			1,503,350
Intangible assets, net		1,683,232			1,785,987
Property, plant and equipment:
Land and land improvements		880,643	��		868,870
Building		9,940,460			9,928,950
Machinery & equipment		3,729,154			3,698,537
Office equipment		1,550,854			1,503,929
Computer equipment & software		3,064,254			2,980,370
		19,165,365			18,980,656
Less: Accumulated depreciation		11,515,731			11,036,244
Net property, plant and equipment		7,649,634			7,944,412
Total assets	$	25,567,392		$	24,843,701

See notes to financial statements.

1

Reliv International, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30			December 31
	2011			2010
	(unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses	$	3,487,050		$	2,437,965
Distributors' commissions payable		2,323,912			2,411,016
Sales taxes payable		393,763			445,653
Payroll and payroll taxes payable		387,894			525,657
Total accounts payable and accrued expenses		6,592,619			5,820,291
Current maturities of long-term debt		573,756			566,873
Total current liabilities		7,166,375			6,387,164
Noncurrent liabilities:
Long-term debt, less current maturities		3,863,543			4,150,770
Other noncurrent liabilities		305,043			375,244
Total noncurrent liabilities		4,168,586			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 12,423,674
shares outstanding as of 6/30/2011; 14,425,185 shares
issued and 12,450,808 shares outstanding as of 12/31/2010		14,425			14,425
Additional paid-in capital		30,392,347			30,300,463
Accumulated deficit		(9,786,098	)		(10,091,167	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(488,151	)		(448,024	)
Treasury stock		(5,900,092	)		(5,845,174	)
Total stockholders' equity		14,232,431			13,930,523
Total liabilities and stockholders' equity	$	25,567,392		$	24,843,701

See notes to financial statements.

2

Reliv International, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

	Three months ended  June 30						Six months ended  June 30
	2011			2010			2011			2010
Product sales	$	15,984,382		$	16,689,178		$	35,311,325		$	36,946,859
Handling & freight income		2,013,540			2,131,453			4,373,451			4,601,024
Net sales		17,997,922			18,820,631			39,684,776			41,547,883
Costs and expenses:
Cost of products sold		3,815,181			3,716,495			8,035,531			8,272,877
Distributor royalties and commissions		6,746,008			7,069,332			14,866,950			15,549,408
Selling, general and administrative		7,407,498			7,540,728			15,676,366			16,084,179
Total costs and expenses		17,968,687			18,326,555			38,578,847			39,906,464
Income from operations		29,235			494,076			1,105,929			1,641,419
Other income (expense):
Interest income		10,222			12,847			25,801			22,373
Interest expense		(35,801	)		(54,775	)		(72,424	)		(106,451	)
Other income (expense)		83,185			(36,128	)		14,335			21,155
Income before income taxes		86,841			416,020			1,073,641			1,578,496
Provision for income taxes		18,000			210,000			395,000			626,000
Net income	$	68,841		$	206,020		$	678,641		$	952,496
Earnings per common share - Basic	$	0.01		$	0.02		$	0.05		$	0.08
Weighted average shares		12,442,000			12,380,000			12,446,000			12,380,000
Earnings per common share - Diluted	$	0.01		$	0.02		$	0.05		$	0.08
Weighted average shares		12,444,000			12,380,000			12,449,000			12,380,000
Cash dividends declared per common share	$	0.03		$	0.02		$	0.03		$	0.02

See notes to financial statements.

3

Reliv International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

	Six months ended  June 30
	2011			2010
Operating activities:
Net income	$	678,641		$	952,496
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization		592,675			610,572
Stock-based compensation		91,884			100,702
Deferred income taxes		(81,000	)		(79,000	)
Foreign currency transaction (gain)/loss		(10,965	)		11,830
(Increase) decrease in accounts receivable		27,097			39,117
(Increase) decrease in inventories		319,462			(759,757	)
(Increase) decrease in refundable income taxes		(132,510	)		23,789
(Increase) decrease in prepaid expenses
and other current assets		(366,504	)		(415,618	)
(Increase) decrease in other assets		964			7,949
Increase (decrease) in income taxes payable		-			52,674
Increase (decrease) in accounts payable & accrued expenses
and other noncurrent liabilities		658,313			1,217,003
Net cash provided by operating activities		1,778,057			1,761,757
Investing activities:
Proceeds from the sale of property, plant and equipment		-			2,953
Purchase of property, plant and equipment		(191,700	)		(223,401	)
Payment of life insurance premiums		(252,250	)		(258,100	)
Net cash used in investing activities		(443,950	)		(478,548	)
Financing activities:
Principal payments on long-term borrowings		(280,344	)		(257,079	)
Common stock dividends paid		(373,572	)		(247,672	)
Purchase of stock for treasury		(54,917	)		-
Net cash used in financing activities		(708,833	)		(504,751	)
Effect of exchange rate changes on cash and cash equivalents		58,737			611
Increase in cash and cash equivalents		684,011			779,069
Cash and cash equivalents at beginning of period		6,331,038			5,760,913
Cash and cash equivalents at end of period	$	7,015,049		$	6,539,982

See notes to financial statements.

4

Reliv International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

June 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

Comprehensive income was $95,199 and $638,514 for the three and six months ended June 30, 2011, respectively.  For the three and six months ended June 30, 2010, comprehensive income was $167,636 and $959,155, 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  June 30				Six months ended  June 30
	2011		2010		2011		2010
Numerator:
Net income	$	68,841	$	206,020	$	678,641	$	952,496
Denominator:
Denominator for basic earnings per
share--weighted average shares		12,442,000		12,380,000		12,446,000		12,380,000
Dilutive effect of employee stock options
and other warrants		2,000		-		3,000		-
Denominator for diluted earnings per
share--adjusted weighted average shares		12,444,000		12,380,000		12,449,000		12,380,000
Basic earnings per share	$	0.01	$	0.02	$	0.05	$	0.08
Diluted earnings per share	$	0.01	$	0.02	$	0.05	$	0.08

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

5

Reliv International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

June 30, 2011

Note 4-- Other Income (Expense)

During the first quarter of 2011, the Company reported that a local nominee director and former employee of the Company's Indonesian subsidiary misappropriated approximately $97,000 from the subsidiary's bank account.  At March 31, 2011, it was management's best estimate that recovery of the misappropriated funds from the individual or reimbursement under the Company's crime insurance policy was uncertain.  Therefore, the Company recognized a loss of $97,000, which was recorded within the Other Income (Expense) line in the Consolidated Statements of Income for the three month period ending March 31, 2011.

During the second quarter of 2011, the Company successfully removed the former employee as a local nominee director of the Indonesia subsidiary.  In addition, the Company negotiated a settlement with the former employee which resulted in the former employee returning to the Company approximately $60,000 of the original $97,000 misappropriation.  As a result, the Company recognized a recovery of approximately $60,000, which has been recorded as an increase to income within the Other Income (Expense) line in the Consolidated Statements of Income for the three month period ending June 30, 2011.  For the six month period ending June 30, 2011, the Company has recognized a net expense of $37,000 within the Other Income (Expense) line in the Consolidated Statements of Income.

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.

6

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 FinancialCondition 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 83.9% of worldwide net sales for the six months ended June 30, 2011 and 85.2% of worldwide net sales for the six months ended June 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 June 30, 2011, consisted of approximately 58,450 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.

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.

7

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 six-month periods ended June 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 June 30,						Six months ended June 30,
	2011			2010			2011			2010
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Cost of products sold		21.2			19.7			20.2			19.9
Distributor royalties and commissions		37.5			37.6			37.5			37.4
Selling, general and administrative		41.2			40.1			39.5			38.7
Income from operations		0.1			2.6			2.8			4.0
Interest expense		(0.2	)		(0.3	)		(0.2	)		(0.3	)
Interest and other income (expense)		0.6			(0.1	)		0.1			0.1
Income before income taxes		0.5			2.2			2.7			3.8
Provision for income taxes		0.1			1.1			1.0			1.5
Net income		0.4	%		1.1	%		1.7	%		2.3	%

Net Sales.  Overall net sales decreased by 4.4% in the three months ended June 30, 2011 compared to the same period in 2010.  During the second quarter of 2011, sales in the United States decreased by 7.0%, and international sales increased by 10.1% over the prior-year period.  For the six months ended June 30, 2011, consolidated net sales declined 4.5% compared to the same period in 2010.  In the first half of 2011, net sales in the United States declined by 5.9% and international sales increased by 3.8% over the same period in 2010.

8

               The following table summarizes net sales by geographic market for the three months ended June 30, 2011 and 2010.

	Three months ended June 30,
	2011					2010					Change from prior year
	Amount		% of Net Sales			Amount		% of Net  Sales			Amount			%
				(dollars in thousands)
United States	$	14,841		82.5	%	$	15,954		84.7	%	$	(1,113	)		(7.0	)%
Australia/New Zealand		596		3.3			541		2.9			55			10.2
Canada		577		3.2			542		2.9			35			6.5
Mexico		354		2.0			394		2.1			(40	)		(10.2	)
Europe		856		4.7			581		3.1			275			47.3
Asia		774		4.3			809		4.3			(35	)		(4.3	)
Consolidated total	$	17,998		100.0	%	$	18,821		100.0	%	$	(823	)		(4.4	)%

The following table summarizes net sales by geographic market for the six months ended June 30, 2011 and 2010.

	Six months ended June 30,
	2011					2010					Change from prior year
	Amount		% of Net Sales			Amount		% of Net  Sales			Amount			%
	(dollars in thousands)
United States	$	33,306		83.9	%	$	35,403		85.2	%	$	(2,097	)		(5.9	)%
Australia/New Zealand		1,215		3.0			1,268		3.1			(53	)		(4.2	)
Canada		1,175		3.0			1,129		2.7			46			4.1
Mexico		702		1.8			787		1.9			(85	)		(10.8	)
Europe		1,579		4.0			1,001		2.4			578			57.7
Asia		1,708		4.3			1,960		4.7			(252	)		(12.9	)
Consolidated total	$	39,685		100.0	%	$	41,548		100.0	%	$	(1,863	)		(4.5	)%

The following table sets forth, as of June 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.

	June 30, 2011			June 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	45,880		5,680		49,630		6,430		(7.6	)%		(11.7	)%
Australia/New Zealand	2,120		150		2,520		190		(15.9	)		(21.1	)
Canada	1,360		190		1,360		160		0.0			18.8
Mexico	1,430		220		2,210		310		(35.3	)		(29.0	)
Europe	2,860		280		1,630		230		75.5			21.7
Asia	4,800		440		6,310		610		(23.9	)		(27.9	)
Consolidated total	58,450		6,960		63,660		7,930		(8.2	)%		(12.2	)%

9

In the United States, net sales were down 7.0% in the second quarter of 2011 compared to the same period in 2010.   Sales declined in the second 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 second quarter of 2011, approximately 403 distributors qualified as new Master Affiliates, compared to approximately 474 in the prior-year quarter, a decline of 15.0%.  As a result, the number of Master Affiliates and above as of June 30, 2011 decreased by 11.7% as compared to the number of Master Affiliates and above as of June 30, 2010.  Another factor in the decline in sales in the United States was fewer new distributor enrollments.  During the second quarter of 2011, approximately 3,218 new distributors were enrolled, compared to 3,255 new distributor enrollments in the prior-year quarter, a decline of 1.1%.  The number of active distributors in the United States as of June 30, 2011 decreased by 7.6% to 45,880, compared to the number of active distributors as of June 30, 2010.   Distributor retention was 70.3% for the first six months of 2011 compared to a rate of 62.6% for all of 2010.  For the six-month period ended June 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 second quarter of 2011, we processed approximately 59,700 orders in the United States for products at an average order of $317 at suggested retail.  In the same period of 2010, we processed approximately 64,800 product orders at an average order of $318 at suggested retail.  The average order size for all of 2010 was $336 at suggested retail.

During the three months ended June 30, 2011, net sales in our international operations increased in aggregate by 10.1% to $3.16 million compared to $2.87 million for the three months ended June 30, 2010.  For the six-month period ended June 30, 2011, international net sales increased by 3.8% to $6.38 million compared to $6.15 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 half of 2011.  When net sales are converted using the 2010 exchange rate for both 2010 and 2011, international net sales decreased by 3.7% for the first half of 2011 compared to the first half of the prior year.  Regional sales results on a constant currency basis for the first half of 2011 compared to the first half of 2010 were as follows:  Australia/New Zealand net sales down 16.8%, Canada net sales down 1.4%, Mexico net sales down 16.4%, and Asian sales down 18.4%. In all of these foreign markets, new distributor enrollments and new Master Affiliate qualifications were down in the first half of 2011 commensurate to the decline of sales in the respective markets.

In Europe, strong distributor activity and growth continued in the second quarter of 2011 and resulted in a 34.3% increase in net sales in the second quarter of 2011 and an increase of 48.9% for the first half of 2011 when measured on a constant currency basis, compared to the prior year periods.  New distributor enrollments were up 75% and the number of orders processed increased by 46% in the first half of 2011 compared to the same period in 2010.

Cost of Products Sold. Cost of products sold as a percentage of net sales was 21.2% for the three-month period ended June 30, 2011, compared to 19.7% for the same period in 2010.  For the six-month period ended June 30, 2011, cost of products sold as a percentage of net sales was 20.2 %, compared to 19.9% in the prior-year period.  Gross margins were negatively impacted in the second quarter of 2011 compared to the same period in 2010 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 37.5% for both the three- and six-month periods ended June 30, 2011, compared to 37.6%  for the three-month period and 37.4% for the six-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 June 30, 2011, selling, general and administrative, or SGA, expenses decreased by $133,000, compared to the same period in 2010. SGA expenses as a percentage of net sales were 41.2% and 40.1% for the three-month periods ended June 30, 2011 and 2010, respectively.   For the six-month period ended June 30, 2011, SGA expenses decreased by $408,000 when compared to the same period in 2010.  SGA expenses as a percentage of net sales were 39.5% and 38.7% for the six-month periods ended June 30, 2011 and 2010, respectively.

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Sales and marketing expenses decreased by approximately $372,000 in the first half 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.

Distribution and warehouse expenses increased by $42,000 and general and administrative expenses decreased by approximately $78,000 in the first half of 2011, compared to the prior-year period. The decrease in general and administrative expenses consists primarily of a reduction in the annual accrual to the Employee Stock Ownership Plan and lower incentive compensation expense.

Interest Expense.  Interest expense decreased to $72,000 during the first half of 2011 compared to $106,000 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.

Other Income/Expense.  Other income/expense in the first half of 2011 was a net amount of income of $14,000, compared to a net amount of income of $21,000 in the first half of 2010.  During the second quarter of 2011, we recovered approximately $60,000 of the $97,000 other expense incurred in our Indonesian subsidiary in the first quarter.  As further described in Note 4 to the Financial Statements, during the first quarter of 2011, a nominee director/former employee of the subsidiary misappropriated this amount from the subsidiary's bank account.

Income Taxes. We recorded income tax expense of $395,000 for the first six months of 2011, an effective rate of 36.8%. In the same period in 2010, we recorded income tax expense of $626,000, which represented an effective rate of 39.7%.  The effective tax rate is lower in 2011 as the result of re-measurements made to our uncertain tax positions.

Net Income. Our net income for the three and six months ended June 30, 2011 was $69,000 ($0.01 per share basic and diluted) and $679,000 ($0.05 per share basic and diluted), respectively, compared to $206,000 ($0.02 per share basic and diluted) and $952,000 ($0.08 per share basic and diluted) for the same periods in 2010. Profitability decreased in the second quarter and first half of 2011 as net sales decreased in the United States as discussed above.

Financial Condition, Liquidity and Capital Resources

During the first six months of 2011, we generated $1.78 million of net cash from operating activities, used $444,000 in investing activities, and used $709,000 in financing activities. This compares to $1.76 million of net cash provided by operating activities, $479,000 used in investing activities, and $505,000 used in financing activities in the same period of 2010. Cash and cash equivalents increased by $684,000 to $7.02 million as of June 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 $319,000, an increase in prepaid expenses/other current assets of $367,000, an increase in accounts payable and accrued expenses of $658,000, and an increase in refundable income taxes of $133,000 in the first six 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.   Refundable income taxes increased as our corporate estimated income tax deposits exceeded our income tax liability as of June 30, 2011.

Investing activities during the first six months of 2011 consisted of a net investment of $192,000 for capital expenditures and $252,000 for payment for key-man life insurance.  Financing activities during the first six months of 2011 consisted of principal payments of $280,000 on long-term borrowings, $374,000 in cash dividends paid, and $55,000 in purchases of treasury stock.

Stockholders’ equity increased to $14.23 million at June 30, 2011 compared to $13.93 million at December 31, 2010. The increase is due to net income during the first six months of 2011 of $679,000, partially offset by our cash dividend payment of $374,000.  Our working capital balance was $6.99 million at June 30, 2011 compared to $6.86 million at December 31, 2010. The current ratio at June 30, 2011 was 1.98 compared to 2.07 at December 31, 2010.

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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.  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, 2011.  As of June 30, 2011, 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 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 June 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.

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 June 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 June 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 second quarter of 2011 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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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)
April 1-30, 2011		—		—		—	$	1,000,000
May 1-31, 2011		12,645	$	2.04		12,645	$	974,000
June 1-30, 2011		14,489	$	2.01		14,489	$	945,000
Total		27,134				27,134

(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 June 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.

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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:  August 15, 2011

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

Date:  August 15, 2011

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