|• FORM 10-Q • EXHIBIT 10.1 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the transition period from _________to_________
Commission File Number
RELIV’ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
(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).
Part I – Financial Information
See notes to financial statements.
See notes to financial statements.
See notes to financial statements.
See notes to financial 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.
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.
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.
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.
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
Item No. 6 – Exhibits
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