RELIV INTERNATIONAL INC - Quarter Report: 2010 June (Form 10-Q)

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, 2010

¨	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 ¨

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 ¨ No ¨

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 ¨ Accelerated filer ¨ Non-accelerated filer ¨ 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 ¨ No þ

The number of shares outstanding of the Registrant’s common stock as of July 30, 2010 was 12,380,187 (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	12
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
	2010		2009
	(unaudited)
Assets

Current assets:
Cash and cash equivalents	$	6,539,982	$	5,760,913
Accounts and notes receivable, less allowances of $61,700 in 2010 and $59,700 in 2009		297,020		326,022
Accounts due from employees and distributors		67,923		78,500
Inventories
Finished goods		3,357,376		3,073,570
Raw materials		1,764,710		1,388,140
Sales aids and promotional materials		704,686		622,694
Total inventories		5,826,772		5,084,404

Refundable income taxes		-		23,789
Prepaid expenses and other current assets		1,066,920		652,544
Deferred income taxes		296,000		303,000
Total current assets		14,094,617		12,229,172

Other assets		1,887,002		1,569,079
Intangible assets, net		1,888,742		1,991,497

Property, plant and equipment:
Land and land improvements		852,147		852,147
Building		9,921,754		9,851,829
Machinery & equipment		3,477,333		3,426,720
Office equipment		1,476,778		1,494,915
Computer equipment & software		2,887,379		3,003,766
		18,615,391		18,629,377
Less: Accumulated depreciation		10,519,980		10,264,692
Net property, plant and equipment		8,095,411		8,364,685

Total assets	$	25,965,772	$	24,154,433

See notes to financial statements.

Reliv International, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30			December 31
	2010			2009
	(unaudited)
Liabilities and stockholders' equity

Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses	$	4,300,023		$	2,627,674
Distributors commissions payable		2,416,850			2,674,247
Sales taxes payable		317,494			362,612
Payroll and payroll taxes payable		436,500			577,756
Total accounts payable and accrued expenses		7,470,867			6,242,289

Income taxes payable		52,674			-
Current maturities of long-term debt		3,945,717			519,192
Total current liabilities		11,469,258			6,761,481

Noncurrent liabilities:
Long-term debt, less current maturities		1,035,938			4,719,542
Other noncurrent liabilities		381,524			406,544
Total noncurrent liabilities		1,417,462			5,126,086

Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000 shares authorized; -0- shares issued and outstanding in 2010 and 2009		-			-
Common stock, par value $.001 per share; 30,000,000 authorized; 14,425,185 shares issued and 12,380,187 shares outstanding as of 6/30/2010; 14,425,185 shares issued and 12,380,187 shares outstanding as of 12/31/2009		14,425			14,425
Additional paid-in capital		30,329,276			30,228,573
Accumulated deficit		(10,574,702	)		(11,279,526	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(621,045	)		(627,704	)
Treasury stock		(6,068,902	)		(6,068,902	)

Total stockholders' equity		13,079,052			12,266,866

Total liabilities and stockholders' equity	$	25,965,772		$	24,154,433

See notes to financial statements.

Reliv International, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

	Three months ended June 30						Six months ended June 30
	2010			2009			2010			2009

Product sales	$	16,689,178		$	17,772,137		$	36,946,859		$	38,938,318
Handling & freight income		2,131,453			2,280,992			4,601,024			4,905,801

Net sales		18,820,631			20,053,129			41,547,883			43,844,119

Costs and expenses:
Cost of products sold		3,716,495			3,773,902			8,272,877			8,349,653
Distributor royalties and commissions		7,069,332			7,634,899			15,549,408			16,572,566
Selling, general and administrative		7,540,728			8,050,852			16,084,179			16,668,725

Total costs and expenses		18,326,555			19,459,653			39,906,464			41,590,944

Income from operations		494,076			593,476			1,641,419			2,253,175

Other income (expense):
Interest income		12,847			14,704			22,373			35,419
Interest expense		(54,775	)		(41,384	)		(106,451	)		(50,934	)
Other income		(36,128	)		114,035			21,155			126,090

Income before income taxes		416,020			680,831			1,578,496			2,363,750
Provision for income taxes		210,000			271,000			626,000			942,000

Net income	$	206,020		$	409,831		$	952,496		$	1,421,750

Earnings per common share - Basic	$	0.02		$	0.03		$	0.08		$	0.10
Weighted average shares		12,380,000			12,821,000			12,380,000			13,556,000

Earnings per common share - Diluted	$	0.02		$	0.03		$	0.08		$	0.10
Weighted average shares		12,380,000			12,821,000			12,380,000			13,556,000

Cash dividends declared per common share	$	0.02		$	0.05		$	0.02		$	0.05

See notes to financial statements.

Reliv International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

	Six months ended June 30
	2010			2009

Operating activities:
Net income	$	952,496		$	1,421,750
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		610,572			560,867
Stock-based compensation		100,702			92,162
Deferred income taxes		(79,000	)		(4,000	)
Foreign currency transaction (gain)/loss		11,830			(62,622	)
(Increase) decrease in accounts and notes receivable		39,117			256,542
(Increase) decrease in inventories		(759,757	)		(17,532	)
(Increase) decrease in refundable income taxes		23,789			50,313
(Increase) decrease in prepaid expenses and other current assets		(415,618	)		(118,455	)
(Increase) decrease in other assets		(250,151	)		(276,401	)
Increase (decrease) in accounts payable & accrued expenses and other noncurrent liabilities		1,217,003			652,816
Increase (decrease) in income taxes payable		52,674			-

Net cash provided by operating activities		1,503,657			2,555,440

Investing activities:
Proceeds from the sale of property, plant and equipment		2,953			-
Purchase of property, plant and equipment		(223,401	)		(288,304	)
Proceeds from final withdrawal from limited partnership investment		-			488,633

Net cash provided by (used in) investing activities		(220,448	)		200,329

Financing activities:
Proceeds from line of credit borrowings		-			5,000,000
Repayment of line of credit borrowings		-			(4,120,000	)
Proceeds from term loan borrowings		-			4,120,000
Principal payments on short and long-term borrowings		(257,079	)		(569,375	)
Common stock dividends paid		(247,672	)		(611,681	)
Purchase of stock for treasury		-			(5,014,115	)

Net cash used in financing activities		(504,751	)		(1,195,171	)

Effect of exchange rate changes on cash and cash equivalents		611			99,145

Increase (decrease) in cash and cash equivalents		779,069			1,659,743

Cash and cash equivalents at beginning of period		5,760,913			4,460,637

Cash and cash equivalents at end of period	$	6,539,982		$	6,120,380

Supplementary disclosure of cash flow information:
Noncash investing and financing transactions:
Issuance of promissory note for purchase of stock for treasury	$	-		$	1,106,919

See notes to financial statements.

Reliv International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

June 30, 2010

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, 2009, filed March 12, 2010 with the Securities and Exchange Commission.

Adoption of New Accounting Standards

Effective January 1, 2010, the Company adopted the amendments to ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"). The amendments require new disclosures for transfers in and out of fair value hierarchy Levels 1 and 2 and activity within fair value hierarchy Level 3. The amendments also clarify existing disclosures regarding the disaggregation for each class of assets and liabilities, and the disclosures about inputs and valuation techniques. The amendments to ASC 820 did not have a material impact on the Company's consolidated financial statements.

Note 2—

Comprehensive Income

Comprehensive income was $167,636 and $959,155 for the three and six months ended June 30, 2010, respectively. For the three and six months ended June 30, 2009, comprehensive income was $525,185 and $1,428,997, 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
	2010		2009		2010		2009
Numerator:
Net income	$	206,020	$	409,831	$	952,496	$	1,421,750

Denominator:
Denominator for basic earnings per share—weighted average shares		12,380,000		12,821,000		12,380,000		13,556,000
Dilutive effect of employee stock options and other warrants		-		-		-		-

Denominator for diluted earnings per share—adjusted weighted average shares		12,380,000		12,821,000		12,380,000		13,556,000

Basic earnings per share	$	0.02	$	0.03	$	0.08	$	0.10
Diluted earnings per share	$	0.02	$	0.03	$	0.08	$	0.10

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. Options and warrants to purchase 835,040 shares of common stock for the three months and six months ended June 30, 2009, respectively, were not included in the denominator for diluted earnings per share because their effect would be antidilutive.

Reliv International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

June 30, 2010

Note 4—

Fair Value Measurements

Fair value can be measured using valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The carrying amount and fair value of financial instruments at June 30, 2010 and December 31, 2009 were as follows:

			Fair Value
					Using Quoted		Using Significant
			Total		Prices in		Other Observable
	Carrying		Fair		Active Markets		Inputs
Description	Amount		Value		(Level 1)		(Level 2)

June 30, 2010

Long-term debt (1)	$	4,981,655	$	4,935,000	$	-	$	4,935,000

Marketable securities (2)		192,000		192,000		192,000		-

December 31, 2009

Long-term debt (1)	$	5,238,734	$	5,184,000	$	-	$	5,184,000

Marketable securities (2)		200,000		200,000		200,000		-

(1)

The fair value of the Company's variable interest rate debt approximates carrying value due to the short-term duration of the debt and the frequent re-setting of its variable interest rate. The fair value of the of the Company's fixed interest rate long-term obligation was estimated by management based upon the rate available at the balance sheet date for the additional unused credit available to the Company.

(2)

Representing assets of the Company's Supplemental Executive Retirement Plan (trading securities). Presented within Other Assets in the consolidated balance sheets.

The carrying value of other financial instruments, including cash, accounts receivable and accounts payable, and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.

FORWARD-LOOKING STATEMENTS

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

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

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

Overview

We are a developer, manufacturer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. We also offer a line of skin care and food products under our Relivables brand. We sell our products through an international network marketing system utilizing independent distributors. Sales in the United States represented approximately 85.2% of worldwide net sales for the six months ended June 30, 2010 and 89.0% of worldwide net sales for the six months ended June 30, 2009. 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, 2010, consisted of approximately 63,660 distributors. Our sales can be affected by several factors, including our ability to attract new distributors and retain our existing distributor base, our ability to properly train and motivate our distributor base and our ability to develop new products and successfully maintain our current product line.

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

Components of Net Sales and Expense

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

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

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

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

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

Results of Operations

The following table sets forth selected results of our operations expressed as a percentage of net sales for the three- and six-month periods ended June 30, 2010 and 2009. 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,
	2010			2009			2010			2009

Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Cost of products sold		19.7			18.8			19.9			19.1
Distributor royalties and commissions		37.6			38.1			37.4			37.8
Selling, general and administrative		40.1			40.1			38.7			38.0

Income from operations		2.6			3.0			4.0			5.1
Interest expense		(0.3	)		(0.2	)		(0.3	)		(0.1	)
Interest and other income (expense)		(0.1	)		0.6			0.1			0.4

Income before income taxes		2.2			3.4			3.8			5.4
Provision for income taxes		1.1			1.4			1.5			2.2

Net income		1.1	%		2.0	%		2.3	%		3.2	%

Net Sales. Overall net sales decreased by 6.1% in the three months ended June 30, 2010 compared to the same period in 2009. During the second quarter of 2010, sales in the United States decreased by 9.5%, and international sales increased by 18.7% over the prior-year period. For the six months ended June 30, 2010, consolidated net sales declined 5.2% compared to the same period in 2009. In the first half of 2010, net sales in the United States declined by 9.3% and international sales increased by 27.4% over the same period in 2009.

The following table summarizes net sales by geographic market for the three months ended June 30, 2010 and 2009.

	Three months ended June 30,
	2010					2009					Change from prior year
	Amount		% of Net Sales			Amount		% of Net Sales			Amount			%
	(dollars in thousands)
United States	$	15,954		84.7	%	$	17,638		87.9	%	$	(1,684	)		(9.5	)%
Australia/New Zealand		541		2.9			535		2.7			6			1.1
Canada		542		2.9			313		1.6			229			73.2
Mexico		394		2.1			345		1.7			49			14.2
Europe		581		3.1			305		1.5			276			90.5
Asia		809		4.3			917		4.6			(108	)		(11.8	)
Consolidated total	$	18,821		100.0	%	$	20,053		100.0	%	$	(1,232	)		(6.1	)%

The following table summarizes net sales by geographic market for the six months ended June 30, 2010 and 2009.

	Six months ended June 30,
	2010					2009					Change from prior year
	Amount		% of Net Sales			Amount		% of Net Sales			Amount			%
	(dollars in thousands)
United States	$	35,403		85.2	%	$	39,019		89.0	%	$	(3,616	)		(9.3	)%
Australia/New Zealand		1,268		3.1			1,051		2.4			217			20.6
Canada		1,129		2.7			648		1.5			481			74.2
Mexico		787		1.9			627		1.4			160			25.5
Europe		1,001		2.4			613		1.4			388			63.3
Asia		1,960		4.7			1,886		4.3			74			3.9
Consolidated total	$	41,548		100.0	%	$	43,844		100.0	%	$	(2,296	)		(5.2	)%

The following table sets forth, as of June 30, 2010 and 2009, 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, 2010				June 30, 2009				% Change
	Total Active Distributors		Master Affiliates and Above		Total Active Distributors		Master Affiliates and Above		Total Active Distributors			Master Affiliates and Above
United States		49,630		6,430		54,160		7,880		(8.4	)%		(18.4	)%
Australia/New Zealand		2,520		190		2,440		180		3.3			5.6
Canada		1,360		160		1,230		120		10.6			33.3
Mexico		2,210		310		1,820		210		21.4			47.6
Europe		1,630		230		1,090		160		49.5			43.8
Asia		6,310		610		7,300		840		(13.6	)		(27.4	)
Consolidated total		63,660		7,930		68,040		9,390		(6.4	)%		(15.5	)%

In the United States, net sales were down 9.5% in the second quarter of 2010 compared to the same period in 2009. Sales in the United States continue to be adversely impacted by distributor uncertainty in the economic recovery and the reduced availability of consumer credit. In addition to the direct impact on sales, these factors lead to fewer distributors qualifying for the level of Master Affiliate. In the second quarter of 2010, approximately 474 distributors qualified as new Master Affiliates, compared to approximately 617 in the prior-year quarter, a decline of 23.2%. In addition, the number of Master Affiliates and above as of June 30, 2010 decreased by 18.4% as compared to the number of Master Affiliates and above as of June 30, 2009. This is consistent with reduced number of distributors qualifying for the level of Master Affiliate discussed earlier. Another factor in the decline in sales in the United States was fewer new distributor enrollments. During the second quarter of 2010, approximately 3,255 new distributors were enrolled, compared to 4,970 new distributor enrollments in the prior-year quarter, a decline of 34.5%. A portion of this decline in new enrollments was expected as we ran an initiative from January through August 2009 to increase new distributor enrollments by offering an enrollment fee of $20, half of the normal $39.95 fee. The number of active distributors in the United States as of June 30, 2010 decreased by 8.4% to 49,630, compared to the number of active distributors as of June 30, 2009. This decline in active distributors is caused by the decline in new distributor enrollments coupled with slightly lower distributor retention. Distributor retention was 61.7% for the first six months of 2010 compared to a rate of 63.1% for all of 2009. For the six-month period ended June 30, 2010, 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 2010, we processed approximately 64,800 orders in the United States for products at an average order of $318 at suggested retail. In the same period of 2009, we processed approximately 67,880 product orders at an average order of $333 at suggested retail. The average order size for all of 2009 was $353 at suggested retail. This decline in the average order size is another indicator of the reduced credit availability and fewer distributors reaching the Master Affiliate level.

During the three months ended June 30, 2010, net sales in our international operations increased in aggregate by 18.7% to $2.87 million compared to $2.41 million for the three months ended June 30, 2009. For the six-month period ended June 30, 2010, international net sales increased by 27.4% to $6.15 million compared to $4.82 million in the same period in 2009. Sales increased in all of our foreign regions during the first half of 2010; however, approximately 45% of the increase was the result of foreign currency fluctuation due to a weaker U.S. dollar. When net sales are converted using the 2009 exchange rate for both 2009 and 2010, international net sales increased by 15.2% for the first half of 2010 compared to the same period of the prior year. Regional sales results on a constant currency basis for the first half of 2010 compared to the first half of 2009 were as follows: Australia/New Zealand net sales down 3.6%, Canada net sales up 49.8%, Mexico net sales up 15.6%, European sales up 61.2%, and Asian sales down 1.3%. Sales results in Australia/New Zealand have declined somewhat in the second quarter of 2010 subsequent to price increases on most products that went into effect on April 1, 2010. Canada continues to show strong growth in new distributor enrollments, up 44%, and in new Master Affiliate qualifications, 50 in the first half of 2010 compared to 17 in the first half of 2009. Net sales in Mexico improved slightly as the result of higher Master Affiliate qualifications in the current year to date compared to the same period in 2009. European sales have shown improvement as the result of strong growth in both new distributor enrollments, up 138% in the first half of 2010, and in new Master Affiliate qualifications, up 146% in the current year to date. Asian sales have declined, particularly in the second quarter of 2010, as the result of departures in our local management staff in our Malaysian office. We have recently hired a new general manager to oversee the Southeast Asia region, which includes our Malaysia, Singapore, Brunei, and Indonesia operations.

Cost of Products Sold. Cost of products sold as a percentage of net sales was 19.7% for the three-month period ended June 30, 2010, compared to 18.8% for the same period in 2009. For the six-month period ended June 30, 2010, cost of products sold as a percentage of net sales was 19.9 %, compared to 19.1% in the prior year period. Gross margins were impacted in the second quarter and first half of 2010 compared to the same periods in 2009 by changes in the revenue mix with the introduction of the new Relivables product line in the third quarter of 2009. Higher testing costs also contributed to the higher cost of products sold percentage in the second quarter of 2010.

Distributor Royalties and Commissions. Distributor royalties and commissions as a percentage of net sales were 37.6% and 37.4% for the three- and six-month periods ended June 30, 2010, respectively, compared to 38.1% and 37.8% for the same periods in 2009. The minor reduction is due to the introduction of the Relivables product line in the third quarter of 2009, which has a lower commission rate.

Selling, General and Administrative Expenses. For the three months ended June 30, 2010, selling, general and administrative, or SGA, expenses decreased by $510,000, compared to the same period in 2009. SGA expenses as a percentage of net sales were 40.1% for each of the three-month periods ended June 30, 2010 and 2009. For the six-month period ended June 30, 2010, SGA expenses decreased by $585,000 when compared to the same period in 2009. SGA expenses as a percentage of net sales were 38.7% and 38.0% for the six-month periods ended June 30, 2010 and 2009, respectively.

Sales and marketing expenses decreased by approximately $100,000 in the first half of 2010, compared to the prior-year period. The decrease is the result of lower distributor bonuses and expenses directly related to the level of sales and a reduction in newsletter expenses and marketing consulting expenses, offset by an increase in promotional expenses due to an additional distributor incentive trip in February 2010 that did not occur in the prior year.

Distribution and warehouse expenses decreased by $91,000 and general and administrative expenses decreased by approximately $393,000 in the first half of 2010, compared to the prior-year period. The decrease in general and administrative expenses consists primarily of reductions in the annual accrual to the employee stock ownership plan, legal and accounting fees, directors’ fees, and business insurance expense.

Interest Income/Expense. Interest income decreased to $22,000 for the six months ended June 30, 2010, compared to $35,000 for the same period in 2009, due to lower interest rates in 2010. Interest expense increased to $106,000 during the first half of 2010 compared to $56,000 in the same period of 2009, as we entered into two long-term debt agreements during the second half of 2009.

Income Taxes. We recorded income tax expense of $626,000 for the first six months of 2010, an effective rate of 39.7%. In the same period in 2009, we recorded income tax expense of $942,000, which represented an effective rate of 39.9%.

Net Income. Our net income for the three and six months ended June 30, 2010 was $206,000 ($0.02 per share basic and diluted) and $952,000 ($0.08 per share basic and diluted), respectively, compared to $410,000 ($0.03 per share basic and diluted) and $1.4 million ($0.10 per share basic and diluted) for the same periods in 2009. Profitability decreased in the second quarter and first half of 2010 as net sales decreased in the United States as discussed above.

Financial Condition, Liquidity and Capital Resources

During the first six months of 2010, we generated $1.5 million of net cash from operating activities, used $220,000 in investing activities, and used $505,000 in financing activities. This compares to $2.6 million of net cash provided by operating activities, $200,000 provided by investing activities, and $1.2 million used in financing activities in the same period of 2009. Cash and cash equivalents increased by $779,000 to $6.5 million as of June 30, 2010 compared to $6.1 million as of December 31, 2009.

Significant changes in working capital items consisted of an increase in inventory of $760,000, an increase in prepaid expenses/other current assets of $416,000, an increase in accounts payable and accrued expenses of $1.2 million, and an increase in other assets of $250,000 in the first six months of 2010. Inventory increased as the result of lower than expected sales levels, compared to scheduled production. 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, increases in payables due to raw material vendors, coupled with various annual accruals. The change in other assets is due to a payment made on an officer’s life insurance policy in the first half of 2010.

Investing activities during the first six months of 2010 consisted of a net investment of $220,000 for capital expenditures. Financing activities during the first six months of 2010 consisted of principal payments of $257,000 on long-term borrowings and $248,000 in cash dividends paid.

Stockholders’ equity increased to $13.1 million at June 30, 2010 compared to $12.3 million at December 31, 2009. The increase is due to net income during the first six months of 2010 of $952,000, partially offset by our cash dividend payment of $248,000. Our working capital balance was $2.6 million at June 30, 2010 compared to $5.5 million at December 31, 2009. The current ratio at June 30, 2010 was 1.23 compared to 1.81 at December 31, 2009. The change in our current ratio is due to the balance sheet classification of our term loan as explained below.

In late June 2009, we entered into a term loan with our primary lender in the principal amount of $4.12 million. The term of the loan is for a period of two years with interest accruing on the outstanding principal balance at a floating interest rate based on the 30-day LIBOR plus 3.0%, subject to a 3.75% floor. As of June 30, 2010, we are subject to the 3.75% floor. Monthly principal and interest payments are based on a ten-year amortization. The aggregate outstanding balance of principal and interest is due and payable on June 29, 2011. The loan includes financial covenants under which we are required to (1) maintain at all times a tangible net worth of not less than $10 million and (2) maintain at all times a ratio of total funded debt to EBITDA of not greater than 2.5 to 1. The proceeds of the term loan were used to reduce the outstanding balance on the revolving credit facility we had with the lender. As the due date of the loan is less than one year, the loan’s June 30, 2010 balance of $3.8 million has been classified as a current liability; however, it is our intention to refinance this debt with a longer maturity.

The revolving credit facility is a $5 million secured revolving credit facility with the same lender that provided our term loan. This facility was renewed in September 2009 for a one-year term, and any advances accrue interest at a variable interest rate based on the 30-day LIBOR plus 3.0%, subject to a 4.0% floor. 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. This facility bears the same financial covenants as the term loan. At June 30, 2010, we had no outstanding borrowings on the revolving line of credit facility and were in compliance with all financial covenants of the term loan.

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 2010.

Critical Accounting Policies

A summary of our critical accounting policies and estimates is presented on pages 24-26 of our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2010.

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, 2010. 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, 2010, 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 2010 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

During the first six months of 2010, we did not repurchase any shares of our common stock under our share repurchase plan authorized by our Board of Directors in May 2007 that provided for share repurchases of up to $15 million through April 2010. As of April 30, 2010, the repurchase plan expired and a new plan has not been authorized as of the date of this filing.

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).

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 10, 2010

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

Date: August 10, 2010

Exhibit Index

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).