UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014

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:  000-50417

RBC Life Sciences, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
91-2015186
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
2301 Crown Court, Irving, Texas
 
75038
(Address of principal executive offices)
 
(Zip Code)

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

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

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

Large accelerated filer
o
  
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding at November 1, 2014
Common Stock, $0.001 par value per share
 
2,212,350 shares




TABLE OF CONTENTS

 
Page Number
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements Of Comprehensive Income (Loss)
 
Condensed Consolidated Statements Of Cash Flows
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
 
 
Exhibit Index
 



PART 1 – FINANCIAL INFORMATION

ITEM 1.             FINANCIAL STATEMENTS

RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,398,327

 
$
3,745,684

Accounts receivable, net of allowance for doubtful accounts of $34,000 and $28,000, respectively
1,249,153

 
907,287

Inventories
5,010,852

 
5,141,509

Deferred income taxes
387,052

 
429,640

Prepaid expenses and other current assets
672,644

 
793,548

Total current assets
8,718,028

 
11,017,668

Property and equipment, net
4,635,330

 
4,169,078

Goodwill, net
2,237,684

 
2,263,458

Intangible assets, net
51,341

 
37,979

Other assets, net
362,846

 
45,327

 
$
16,005,229

 
$
17,533,510

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable, trade
$
1,875,423

 
$
1,608,000

Accrued liabilities
1,949,450

 
1,156,818

Current maturities of long-term obligations
225,148

 
212,474

Deferred revenue
1,916,233

 
3,677,893

Total current liabilities
5,966,254

 
6,655,185

Long-term obligations, less current maturities
965,866

 
1,136,347

Deferred income taxes
584,550

 
727,660

Commitments and contingencies


 


Shareholders’ equity:
 
 
 

Common stock, $0.001 par value; 50,000,000 shares authorized; 2,212,350 shares issued and outstanding at September 30, 2014 and December 31, 2013.
2,212

 
2,212

Additional paid-in capital
13,713,630

 
13,711,522

Accumulated deficit
(5,322,453
)
 
(4,814,281
)
Accumulated other comprehensive income
95,170

 
114,865

 
8,488,559

 
9,014,318

 
$
16,005,229

 
$
17,533,510


See notes to condensed consolidated financial statements.

- 3 -


RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
7,514,574

 
$
6,639,767

 
$
21,112,784

 
$
19,025,267

Cost of sales
3,232,259

 
3,603,644

 
9,526,103

 
10,045,641

Gross profit
4,282,315

 
3,036,123

 
11,586,681

 
8,979,626

Operating expenses:
 

 
 

 
 
 
 
General and administrative
2,867,937

 
2,301,086

 
8,267,648

 
6,799,783

Distributor commissions
1,363,060

 
746,805

 
3,475,870

 
2,112,672

Depreciation and amortization
129,367

 
126,752

 
380,216

 
380,123

Total operating expenses
4,360,364

 
3,174,643

 
12,123,734

 
9,292,578

Operating loss
(78,049
)
 
(138,520
)
 
(537,053
)
 
(312,952
)
Interest expense
23,424

 
27,436

 
73,348

 
85,156

Loss before income taxes
(101,473
)
 
(165,956
)
 
(610,401
)
 
(398,108
)
Provision (benefit) for income taxes
22,167

 
(22,985
)
 
(102,229
)
 
(100,157
)
Net loss
(123,640
)
 
(142,971
)
 
(508,172
)
 
(297,951
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(13,970
)
 
(11,077
)
 
(19,695
)
 
16,907

Comprehensive loss
$
(137,610
)
 
$
(154,048
)
 
$
(527,867
)
 
$
(281,044
)

Net loss per share:
 
 
 
 
 
 
 
  Basic
$
(0.06
)
 
$
(0.06
)
 
$
(0.23
)
 
$
(0.13
)
  Diluted
$
(0.06
)
 
$
(0.06
)
 
$
(0.23
)
 
$
(0.13
)

Weighted average common shares outstanding:
 
 
 
 
 
 
 
  Basic
2,212,350

 
2,217,044

 
2,212,350

 
2,220,916

  Diluted
2,212,350

 
2,217,044

 
2,212,350

 
2,220,916


See notes to condensed consolidated financial statements.




- 4 -


RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(508,172
)
 
$
(297,951
)
Adjustment for non-cash items:
 
 
 
Depreciation and amortization
451,194

 
441,593

Stock-based compensation
2,107

 
14,289

Deferred income taxes and other
(104,470
)
 
(86,349
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
(341,765
)
 
(131,190
)
Inventories
120,398

 
120,317

Prepaid expenses and other current assets
89,991

 
(616,625
)
Other assets
(318,867
)
 
(235,650
)
Accounts payable and accrued liabilities
1,077,740

 
281,655

Deferred revenue
(1,763,098
)
 
1,085,001

Net cash used in operating activities
(1,294,942
)
 
575,090

Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(870,588
)
 
(11,292
)
Purchase of intangible assets
(40,508
)
 
—

Net cash used in investing activities
(911,096
)
 
(11,292
)
Cash flows from financing activities:
 

 
 

Payments of long-term obligations
(157,807
)
 
(146,075
)
Purchase of common stock
—

 
(17,824
)
Net cash used in financing activities
(157,807
)
 
(163,899
)
Effect of exchange rate changes on cash flows
16,488

 
35,187

Net increase (decrease) in cash and cash equivalents
(2,347,357
)
 
435,086

Cash and cash equivalents, beginning of period
3,745,684

 
3,896,087

Cash and cash equivalents, end of period
$
1,398,327

 
$
4,331,173


See notes to condensed consolidated financial statements.

- 5 -


RBC LIFE SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Unaudited Condensed Consolidated Financial Statements:

The accompanying unaudited condensed consolidated financial statements, including the notes thereto, of RBC Life Sciences, Inc. (sometimes hereinafter referred to collectively as “we”, “our”, "us", “RBC” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the U.S. (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Certain information and disclosures that are normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to these rules and regulations.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”), previously filed with the Securities and Exchange Commission.

In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the Company's results for the interim periods have been included.  The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period.  Actual results could differ from those estimates.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.  Subsequent events were evaluated through the issuance date of the condensed consolidated financial statements.

New Accounting Pronouncements:

There were no new accounting pronouncements that are anticipated to have a material impact on the Company's financial statements.


Note B – Nature of Operations and Organization:

The Company is principally engaged in the marketing of nutritional supplements and personal care products (collectively “Nutritional Products”) through subsidiaries and affiliates in North America and Southeast Asia.  This product line is marketed under the “RBC Life®” brand name.  In these markets, the Company markets its products through a network of distributors that are referred to as “Associates.”  The Associates are independent contractors who purchase products for personal use, purchase products for resale to retail customers and sponsor other individuals as Associates.  Accordingly, Associates may be product consumers only or they may also seek to derive compensation both from the direct sales of products and from sales generated by sponsored Associates. In certain other markets in Southeast Asia and Australia, the Company sells its products through a not-for-resale ("NFR") program. Individuals who participate in the NFR program function similarly to other Associates in that they can sponsor others and derive compensation from sales generated by individuals they sponsor. However, they may only order products for personal use and may not resell products to retail customers.

RBC also markets its Nutritional Products in certain international markets through license arrangements.  The licensees are third parties who are granted exclusive rights to distribute RBC products in their respective territories and, for the most part, distribute these products through an independent Associate network in the licensed territory.  Under these arrangements, the independent Associate network in a licensed territory is compensated by the licensee.

In addition to its Nutritional Products, RBC markets a line of wound care products (“Medical Products”) under the "MPM MedicalTM" brand name through a U.S. subsidiary.  Medical Products are distributed primarily in the U.S. to hospitals, nursing homes, clinics and pharmacies through traditional medical/surgical supply dealers, pharmaceutical distributors and our own sales representatives.  Medical Products are used to treat and manage pain associated with wounds in the acute care, long-term care and oncology markets.


- 6 -


Note C – Inventories:

Inventories consist of the following:
 
September 30, 2014
 
December 31, 2013
Raw materials and bulk products
$
837,028

 
$
371,863

Packaging materials
267,260

 
135,138

Finished goods
3,906,564

 
4,634,508

 
$
5,010,852

 
$
5,141,509


Note D – Prepaid Expenses and Other Current Assets:

Prepaid expenses and other current assets consist of the following:
 
September 30, 2014
 
December 31, 2013
Advance payment to suppliers
$
215,407

 
$
202,682

Prepaid insurance and other
343,961

 
164,005

Certificates of deposit - restricted
75,846

 
79,909

Prepaid income taxes
37,430

 
7,349

Advances to Associates
—

 
339,603

 
$
672,644

 
$
793,548


At September 30, 2014 and December 31, 2013, the Company held certificates of deposit in the amounts of approximately $75,800 and $79,900, respectively, which were pledged to secure surety bonds.

In 2013, the Company entered into agreements with an Associate to market Nutritional Products in Australia and certain Southeast Asia markets (the "Asia Marketing Agreements"). Pursuant to the Asia Marketing Agreements, the Company made cash advances to this Associate to support marketing and sales activities and establish product distribution facilities. These advances did not bear interest, and were to be recovered from monthly marketing fees calculated as a percentage of sales that were generated in the Associate's markets.

On July 30, 2013, the Associate notified the Company that he was unable to fulfill his financial obligations under the Asia Marketing Agreements, which constituted a breach of such agreements. On the date of the breach, the Company had advanced approximately $403,000 to this Associate. Following notice of the breach, the Company continued to fund the Asia operations initiated by this Associate and charged the funding to general and administrative expenses in the periods in which the expenses were incurred.

On March 31, 2014, the Company formally terminated the Asia Marketing Agreements and, in lieu of payment due from the Associate on the outstanding advances, took possession of property and equipment and lease deposits valued at approximately $104,000 and $43,000, respectively. The balance of the advances outstanding at March 31, 2014 was charged to general and administrative expenses.



- 7 -


Note E – Property and Equipment:

Property and equipment consists of the following:
 
September 30, 2014
 
December 31, 2013
Building and improvements
$
4,049,223

 
$
3,912,449

Computer software and office equipment
3,376,264

 
2,592,382

Warehouse equipment
254,034

 
254,034

Automotive equipment
14,717

 
14,717

 
7,694,238

 
6,773,582

Less – accumulated depreciation
(4,200,081
)
 
(3,745,677
)
 
3,494,157

 
3,027,905

Land
1,141,173

 
1,141,173

 
$
4,635,330

 
$
4,169,078


Depreciation expense totaled approximately $137,100 and $145,500 for the quarters ended September 30, 2014 and 2013, respectively, and $424,400 and $437,100 for the nine months ended September 30, 2014 and 2013, respectively.

Note F – Goodwill and Other Intangible Assets:

The Company measures its goodwill for impairment at the end of each year or in the event of an impairment indicator.  No impairment losses have been recognized as a result of this testing.  Goodwill balances are summarized as follows:
 
Gross Carrying Value
 
Accumulated Amortization
Balance, December 31, 2013
$
3,367,863

 
$
(1,104,405
)
Currency translation adjustment
(50,293
)
 
24,519

Balance, September 30, 2014
$
3,317,570

 
$
(1,079,886
)
 

 Other intangible assets consist of the following:
 
 
 
September 30, 2014
 
December 31, 2013
 
Average
Life
(years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Gross
Carrying
Value
 
Accumulated
Amortization
Copyrights, trademarks and other registrations
19
 
$
99,100

 
$
(69,369
)
 
$
99,100

 
$
(65,405
)
Business license
1
 
39,650

 
(21,820
)
 
—

 
—

Other
19
 
12,600

 
(8,820
)
 
12,600

 
(8,316
)
 
 
 
$
151,350

 
$
(100,009
)
 
$
111,700

 
$
(73,721
)

Amortization expense related to other intangible assets totaled approximately $10,600 and $1,500 for the quarters ended September 30, 2014 and 2013, respectively, and $26,300 and $4,500 for the nine months ended September 30, 2014 and 2013, respectively. The aggregate estimated amortization expense for intangible assets remaining as of September 30, 2014 is as follows:
Remainder of 2014
$
10,841

2015
14,435

2016
5,957

2017
5,957

2018
5,957

Thereafter
8,194

 
$
51,341



- 8 -


Note G – Accrued Liabilities:

Accrued liabilities consist of the following:
 
September 30, 2014
 
December 31, 2013
Distributor commissions and awards
$
1,280,559

 
$
507,365

Salaries and wages
518,744

 
502,303

Sales and property taxes
82,712

 
83,159

Medical products sales rebates
22,521

 
35,340

Interest
7,692

 
8,711

Other
37,222

 
19,940

 
$
1,949,450

 
$
1,156,818


Note H – Long-Term Obligations:

Long-term obligations consist of the following:
 
September 30, 2014
 
December 31, 2013
Mortgage note payable bearing interest at 7.75%, payable in monthly installments of $25,797 through April 2019, collateralized by land and building, and personally guaranteed by the Company’s Chairman of the Board of Directors and Chief Executive Officer
$
1,191,014

 
$
1,348,821

Less – current maturities
(225,148
)
 
(212,474
)
 
$
965,866

 
$
1,136,347


The fair value of long-term debt is estimated based on interest rates for the same or similar instruments offered having the same or similar maturities and collateral requirements.  At September 30, 2014, the fair value of fixed-rate long-term debt was approximately $1,359,000, which was $168,000 above the carrying value of approximately $1,191,000.  At December 31, 2013, the fair value of fixed-rate long-term debt was approximately $1,469,000, which was $120,000 above the carrying value of approximately$1,349,000.


Note I – Share-Based Compensation:

The Company records compensation expense for all share-based payments based on the estimated grant date fair value.  There was no share-based compensation expense recognized for the quarter ended September 30, 2014; share-based compensation expense was approximately $4,800 for the quarter ended September 30, 2013, and $2,100 and $14,300 for the nine months ended September 30, 2014 and 2013, respectively.  Share-based compensation is classified as a general and administrative expense.  There were no material tax benefits related to this expense because virtually all share-based compensation resulted from grants of incentive stock options.
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(1)
 
(1)
 
(1)
 
(1)
Weighted average expected life (years)
—

 
—

 
—

 
—

Risk-free interest rate
—
%
 
—
%
 
—
%
 
—
%
Expected volatility
—
%
 
—
%
 
—
%
 
—
%
Expected dividend yield
—
%
 
—
%
 
—
%
 
—
%
__________________
(1) There were no option grants during these periods.


- 9 -


All share numbers and per share amounts presented reflect the reverse and forward stock splits of the Company's common stock that were affected by the Company on August 9, 2013. A summary of stock option activity for the nine months ended September 30, 2014 is as follows:
 
Options
 
Weighted-Average Exercise Price per Share
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding on December 31, 2013
69,396

 
$
4.00

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
—

 
—

 
 
 
 
Forfeited/canceled
(15,500
)
 
3.20

 
 
 
 
Outstanding on September 30, 2014
53,896

 
$
4.20

 
4.0
 
$
—

Exercisable on September 30, 2014
53,896

 
$
4.20

 
3.2
 
$
—

 
A summary of the status of the Company's non-vested stock options as of September 30, 2014 and changes during the nine months then ended are presented below:
 
Shares
 
Weighted-Average Grant Date Fair Value per Share
Non-vested stock options at December 31, 2013
14,750

 
$
2.68

Non-vested stock options granted
—

 
—

Vested stock options
—

 
—

Forfeited stock options
(14,750
)
 
2.68

Non-vested stock options at September 30, 2014
—

 
$
—


As of September 30, 2014, there was no unrecognized compensation cost related to stock option grants.
 

Note J – Segments and Geographic Area:

The Company's segments are based on the organizational structure that is used by management for making operating and investment decisions and for assessing performance.  Based on this structure, the Company has two operating segments: Nutritional Products and Medical Products.

The Nutritional Products segment manufactures and distributes a line of approximately 100 nutritional supplements and personal care products, including herbs, vitamins and minerals, as well as natural skin, hair and body care products.  Nutritional Products are marketed under the "RBC Life" brand name through subsidiaries in North America and Southeast Asia.  These products are distributed by a network comprised of independent Associates and NFR program participants in certain markets, primarily the U.S., Canada and Southeast Asia, and by licensees in other international markets.  For the most part, licensees also market the Nutritional Products in their respective territories through a network of independent Associates.

The Medical Products segment markets a line of over 35 wound care products under the "MPM Medical" brand name through a subsidiary operating primarily in the U.S.  These wound care products are distributed to hospitals, nursing homes, home health care agencies, clinics and pharmacies through a network of medical/surgical supply dealers, pharmaceutical distributors and our own sales representatives.  Medical Products are used to treat and manage pain associated with wounds, in the acute care, long-term care and oncology markets.

The Company evaluates the performance of its segments primarily based on operating profit.  All intercompany transactions have been eliminated, and intersegment revenues are not significant.  In calculating operating profit for these two segments, administrative expenses incurred that are common to the two segments are allocated on a usage basis.
 





- 10 -



Segment information is as follows (U.S. dollars in 000s):
 
Nutritional Products
 
Medical Products
 
Consolidated
Quarter Ended September 30, 2014
 

 
 

 
 

  Net sales
$
5,980

 
$
1,535

 
$
7,515

  Depreciation and amortization
146

 
15

 
161

  Operating loss
(76
)
 
(2
)
 
(78
)
  Capital expenditures
235

 
—

 
235

  Total assets
13,307

 
2,698

 
16,005

Quarter Ended September 30, 2013
 

 
 

 
 

  Net sales
$
5,000

 
$
1,640

 
$
6,640

  Depreciation and amortization
132

 
15

 
147

  Operating income (loss)
(203
)
 
64

 
(139
)
  Capital expenditures
—

 
—

 
—

  Total assets
15,683

 
3,157

 
18,840

Nine Months Ended September 30, 2014
 

 
 

 
 

Net sales
$
16,494

 
$
4,619

 
$
21,113

Depreciation and amortization
405

 
46

 
451

Operating income (loss)
(572
)
 
35

 
(537
)
Capital expenditures
871

 
—

 
871

Total assets
13,307

 
2,698

 
16,005

Nine Months Ended September 30, 2013
 

 
 

 
 

Net sales
$
14,431

 
$
4,594

 
$
19,025

Depreciation and amortization
396

 
46

 
442

Operating income (loss)
(360
)
 
47

 
(313
)
Capital expenditures
11

 
—

 
11

Total assets
15,683

 
3,157

 
18,840


- 11 -



Financial information summarized geographically is as follows (U.S. dollars in 000s):

 
Quarter Ended September 30, 2014
 
Quarter Ended September 30, 2013
 
Net sales
 
Long-Lived assets
 
Net sales
 
Long-Lived assets
Domestic
$
2,200

 
$
6,381

 
$
2,455

 
$
5,859

Russia/Eastern Europe
2,796

 
—

 
3,079

 
—

Canada
294

 
481

 
374

 
528

Southeast Asia
2,167

 
425

 
707

 
258

All others
58

 
—

 
25

 
—

Totals
$
7,515

 
$
7,287

 
$
6,640

 
$
6,645

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
Net sales
 
Long-Lived assets
 
Net sales
 
Long-Lived assets
Domestic
$
6,733

 
$
6,381

 
$
7,129

 
$
5,859

Russia/Eastern Europe
8,148

 
—

 
8,856

 
—

Canada
955

 
481

 
1,184

 
528

Southeast Asia
5,095

 
425

 
1,747

 
258

All others
182

 
—

 
109

 
—

Totals
$
21,113

 
$
7,287

 
$
19,025

 
$
6,645


Significant Customers

The Company recorded sales of Nutritional Products to Coral Club International, Inc. ("CCI"), a licensee of the Company, in the amounts of $2,796,000 and $3,079,000 during the quarters ended September 30, 2014 and 2013, respectively, and $8,148,000 and $8,856,000 during the nine months ended September 30, 2014 and 2013, respectively.  The President of CCI is a former member of our Board of Directors and beneficially owns approximately 18% of our common stock. The Company also recorded sales of Medical Products to a medical/surgical dealer (see Note L for additional information related to this dealer) in the amounts of $700,000 and $672,000 during the quarters ended September 30, 2014 and 2013, respectively, and $2,091,000 and $1,960,000 during the nine months ended September 30, 2014 and 2013, respectively.  In no other case did a customer of the Company account for more than 10% of net sales during the quarters or the nine months ended September 30, 2014 and 2013.



- 12 -



Note K – Loss Per Share:

Summarized basic and diluted loss per common share was calculated as follows:
 
Net Loss
 
Weighted
Average
Shares
 
Per Share
Quarter Ended September 30, 2014
 

 
 

 
 

  Basic loss per common share
$
(123,640
)
 
2,212,350

 
$
(0.06
)
  Effect of dilutive stock options
—

 
—

 
 

  Diluted loss per common share
$
(123,640
)
 
2,212,350

 
$
(0.06
)
Quarter Ended September 30, 2013
 

 
 

 
 

  Basic loss per common share
$
(142,971
)
 
2,217,044

 
$
(0.06
)
  Effect of dilutive stock options
—

 
—

 
 

  Diluted loss per common share
$
(142,971
)
 
2,217,044

 
$
(0.06
)
Nine Months Ended September 30, 2014
 

 
 

 
 

Basic loss per common share
$
(508,172
)
 
2,212,350

 
$
(0.23
)
Effect of dilutive stock options
—

 
—

 
 

Diluted loss per common share
$
(508,172
)
 
2,212,350

 
$
(0.23
)
Nine Months Ended September 30, 2013
 

 
 

 
 

Basic loss per common share
$
(297,951
)
 
2,220,916

 
$
(0.13
)
Effect of dilutive stock options
—

 
—

 
 

Diluted loss per common share
$
(297,951
)
 
2,220,916

 
$
(0.13
)

The average number of stock options that were outstanding, but not included in the computation of diluted loss per common share because their exercise price was greater than the average market price of the common stock, or were otherwise anti-dilutive, was approximately 61,400 and 71,000 for the quarters ended September 30, 2014 and 2013, respectively, and 61,400 and 76,000 for the nine months ended September 30, 2014 and 2013, respectively.

Note L – Legal Proceedings:

Medical/Surgical Dealer

One medical/surgical dealer accounts for a significant portion of our Medical Products sales. This dealer distributes our Medical Products and provides services primarily to nursing homes and obtains reimbursement for the price of our products from Medicare. This dealer accounted for approximately $2,091,000 and $1,960,000 of the Company's net sales during the nine months ended September 30, 2014 and 2013, respectively, which was approximately 10% of consolidated net sales in both periods.

On February 27, 2012, we were notified that this dealer filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Central District of California in Santa Ana, California on February 24, 2012. According to its bankruptcy petition, this dealer filed its petition as the most effective means of stabilizing its finances as it resolves a reimbursement guidelines dispute with Medicare, which the dealer believes is improperly withholding payments. The petition states that this dealer relies on Medicare payments for more than 90% of its revenue and that Medicare had suspended payments to the dealer. In a press release issued by the dealer at the time of the filing, the dealer stated that the Chapter 11 filing will allow it to continue operating without interruption while it resolves its payment dispute with Medicare as expeditiously as possible. As of December 31, 2013, this dealer owed to the Company approximately $240,000 in pre-petition accounts receivable. In July 2014, pursuant to an arrangement approved by the Bankruptcy Court, this pre-petition accounts receivable balance was paid in full. We continue to fill this dealer's post-petition orders, with payments received in accordance with our normal terms.

Environmental Research Center

On April 4, 2014, the Company received a notice from Environmental Research Center, a California non-profit corporation, alleging that the Company failed to include a warning notice related to lead content on labels of certain nutritional products sold in California

- 13 -


as required under California's Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"). Sales of products identified in this notice totaled approximately $60,000 for the period covered by the notice.

This non-profit organization seeks an agreement from the Company to reformulate or label the listed products distributed in California in accordance with Proposition 65 and pay an appropriate civil penalty related to sales in California of allegedly improperly labeled products since April 4, 2011.

The Company is currently assessing this matter and is unable at this time to reasonably estimate the related financial impact.

From time to time, we are a party to claims, litigation or other legal or administrative proceedings that we consider to arise in the ordinary course of our business. No assurances can be given regarding the outcome of these or any other pending proceedings, or the ultimate effect such outcomes may have. However, other than as stated above, we do not believe we are a party to any legal or administrative proceedings which, if determined adversely to us, individually or in the aggregate, would have a material effect on our financial position, results of operations or cash flows.

- 14 -


ITEM 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 the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the 2013 Form 10-K.

FORWARD-LOOKING STATEMENTS
 
The statements, other than statements of historical or present facts, included in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  All statements, other than statements of historical or present facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements.  Forward-looking statements can be identified by the use of the words “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “objective,” “projection,” forecast,” “goal,” “believe,” and similar expressions.  These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and time of future events.  We believe that the expectations and assumptions reflected in these forward-looking statements are reasonable.  However, we cannot assure you that such expectations will occur.  Our actual future performance could differ materially from such statements.  When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and those previously disclosed in Item 1A to Part I of the 2013 Form 10-K.  Many of these factors are beyond the Company's ability to control or predict. We caution you not to put undue reliance on forward-looking statements or to project any future results based on such statements or on present or prior earnings levels. We do not undertake any obligation to publicly release any revisions to, and disclaim any duty to update, any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.  Please consider our forward-looking statements in light of those risks as you read this report.

OVERVIEW
 
We operate in two industry segments, Nutritional Products and Medical Products.
 
•
Through the Nutritional Products segment, we distribute products in three broad categories: wellness products, fitness products and personal care products.   Products include herbal formulas, vitamins, minerals, antioxidants and personal care products.  In certain markets, principally in North America and Southeast Asia, we distribute Nutritional Products directly through a network comprised of independent Associates and individuals who participate in our NFR program. In certain other markets, we distribute Nutritional Products through exclusive license arrangements with third parties who, for the most part, distribute our products through an independent Associate network in the licensed territory.
 
•
Through the Medical Products segment, we distribute wound care products.  These products are distributed mainly in the U.S. to hospitals, nursing homes, clinics and pharmacies through traditional medical/surgical supply dealers, pharmaceutical distributors and our own sales representatives.  Medical Products are used to treat and manage pain associated with wounds, in the acute care, long-term care and oncology markets.


- 15 -


Sales by segment in dollars and as a percentage of consolidated net sales are as follows:
 
Quarters Ended September 30,
 
2014
 
2013
 
(U.S. dollars in 000’s)
Nutritional Products:
 
 
 
 
 
 
 
Licensees
$
2,809

 
37
%
 
$
3,080

 
46
%
Associate network
3,171

 
42
%
 
1,920

 
29
%
 
5,980

 
79
%
 
5,000

 
75
%
Medical Products
1,535

 
21
%
 
1,640

 
25
%
 
$
7,515

 
100
%
 
$
6,640

 
100
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
(U.S. dollars in 000’s)
Nutritional Products:
 

 
 

 
 

 
 

       Licensees
$
8,223

 
39
%
 
$
8,886

 
47
%
       Associate network
8,271

 
39
%
 
5,545

 
29
%
 
16,494

 
78
%
 
14,431

 
76
%
Medical Products
4,619

 
22
%
 
4,594

 
24
%
 
$
21,113

 
100
%
 
$
19,025

 
100
%

Licensees. Historically, our highest revenue distribution channel is the licensee channel.  In this channel we sell Nutritional Products to third parties who purchase products from us in accordance with a license arrangement that gives the licensee exclusive rights to distribute our products in the licensed territory. For the most part, licensees are required to distribute our products in the licensed territory through network marketing. Net sales in this distribution channel are mainly dependent upon the licensee's success in building a distribution network in the licensed territory.
 
Our principal licensee is CCI, which accounted for virtually all of our licensees' net sales in the nine months ended September 30, 2014 and 2013, respectively. On August 22, 2014, the Company entered into a two-year exclusive distributorship agreement effective as of August 1, 2014 (the “Agreement”) with CCI. This Agreement replaced the ten-year exclusive distributorship agreement between the parties ( the "Former Agreement") that automatically renewed for a one-year term following expiration of the initial term on July 1, 2014. Pursuant to the Agreement, CCI’s exclusive territory now includes Russia and other countries located primarily in Europe and Central Asia, which represents an expansion of the territory set forth in the Former Agreement. Under the Former Agreement, CCI distributed products in a territory comprised mainly of Russia and Eastern Europe. In consideration of the rights granted to CCI under the Agreement, CCI is required to purchase certain minimum amounts of products from the Company each year, which minimum amounts are consistent with the Former Agreement. The President of CCI is a former member of our Board of Directors and beneficially owns approximately 18% of our common stock.

Under both the Agreement and the Former Agreement, CCI orders products from the Company and pays for products when they are segregated in the Company's warehouse for CCI’s account. Once segregated, products are stored until CCI provides shipping instructions; segregated products are not subject to return except in the case of a manufacturing defect.  The Company's sales to CCI may fluctuate from quarter to quarter, based on changes in sales demand through CCI's Associate network, regulatory changes and other logistical considerations. The backlog related to CCI’s account was $4,096,000 at September 30, 2014 compared to $5,983,000 at September 30, 2013.

Under the Former Agreement, CCI was required to pay the Company a monthly royalty calculated as a percentage of its sales of the Company's products. Under the Agreement, in lieu of a royalty, the prices at which products are sold to CCI were marked up as of the effective date of the Agreement to include the royalty so that no additional royalty will be due upon the sale of the Company's products by CCI. To affect the transition of royalty calculations under the Former Agreement and the Agreement, the Company recognized royalties of $941,000 on a one-time basis, which royalties will be paid over an 18-month period beginning October 2014 in the amount of approximately $52,000 per month. Of this $941,000 in royalties, approximately $476,000 was recorded as royalty revenue in the third quarter of 2014 while the remainder was recorded as deferred revenue pending shipment of the related products.

- 16 -




Associate Network.  Sales in this channel are dependent upon the number and productivity of our Associates.  Accordingly, growth in sales is generally dependent upon the sponsorship of new Associates and retention of existing Associates.  Factors affecting the number of new recruits and active Associates include entry into new geographic markets, introduction of new products, and promotional activities.

The following table sets forth our Associate networks' net sales (including NFR sales) by geographic region as a percentage of total net sales for the periods indicated:
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
U.S.
23
%
 
44
%
 
27
%
 
47
%
Canada
9

 
19

 
11

 
21

Southeast Asia
68

 
37

 
62

 
32

 
100
%
 
100
%
 
100
%
 
100
%

Medical Products. We sell Medical Products primarily in the U.S. to wholesalers such as medical/surgical dealers and pharmaceutical distributors and directly to various health care providers such as hospitals, nursing homes, clinics and pharmacies through our own sales representatives. In some cases, wholesalers and distributors maintain their own sales forces to market products that they supply, which include our products.
 
This segment's largest customer, a medical/surgical dealer, accounted for 45% and 43% of the net sales of our Medical Products during the nine months ended September 30, 2014 and 2013, respectively. On February 24, 2012, this dealer filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Central District of California in Santa Ana, California. See Part I, Item 1, Note L - Legal Proceedings of this report for further information related to these proceedings.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The preparation of our financial statements and related disclosures in conformity with US GAAP requires us to make estimates and judgments that affect the amounts reported in our financial statements and accompanying footnotes. On an on-going basis, we evaluate these estimates and assumptions based on historical experience and various other factors and circumstances. Our management believes that the estimates and assumptions are reasonable in the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.
 
Management believes that there have been no significant changes during the nine months ended September 30, 2014 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2013 Form 10-K.



- 17 -


RESULTS OF OPERATIONS
 
The following table sets forth our operating results as a percentage of net sales for the periods indicated:

Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
43.0

 
54.3

 
45.1

 
52.8

Gross profit
57.0

 
45.7

 
54.9

 
47.2

Operating expenses:
 

 
 

 
 

 
 

General and administrative
38.2

 
34.7

 
39.1

 
35.7

Distributor commissions
18.1

 
11.2

 
16.5

 
11.1

Depreciation and amortization
1.7

 
1.9

 
1.8

 
2.0

Total operating expenses
58.0

 
47.8

 
57.4

 
48.8

Operating loss
(1.0
)
 
(2.1
)
 
(2.5
)
 
(1.6
)
Interest expense
0.3

 
0.4

 
0.4

 
0.5

Loss before income taxes
(1.3
)
 
(2.5
)
 
(2.9
)
 
(2.1
)
Provision (benefit) for income taxes
0.3

 
(0.3
)
 
(0.5
)
 
(0.5
)
Net loss
(1.6
)%
 
(2.2
)%
 
(2.4
)%
 
(1.6
)%


Quarter ended September 30, 2014 compared with the quarter ended September 30, 2013 (U.S. dollars in 000s except per share amounts)
 
Net sales. Net sales for the quarter ended September 30, 2014 were $7,515 compared with net sales for the same period in 2013 of $6,640, an increase of $875, or 13%. This increase resulted from a $980 increase in net sales of Nutritional Products that was partially offset by a $105 decrease in net sales of Medical Products. The increase in net sales of Nutritional Products resulted from a $1,251 increase in net sales through our Associate network that was partially offset by a $271 decrease in net sales to our licensees.

Licensees.  Net sales to our licensees decreased as a result of decreased shipments to CCI; sales to CCI decreased $283, or 9%, during the third quarter of 2014.  Net sales for the quarter include one-time royalty revenue of $467 recognized in connection with the execution of the new distributorship agreement with CCI in August 2014 as described above under the heading Overview, Licensees. Sales to CCI are impacted by a variety of factors including global economic trends, regulatory changes and logistical considerations, which can impact the timing of shipments into CCI's markets.

Associate Network.  Overall, net sales through the Associate network channel increased by $1,251 during the third quarter of 2014 compared to the same period in 2013. The increase in sales was attributable to sales growth in our Southeast Asia markets, primarily Malaysia, which opened in February 2014 and reported third quarter sales of $1,234, and Hong Kong, which reported third quarter sales growth of $107. Sales growth in Southeast Asia was partially offset by a $209 decline in North American sales.

Medical products.  Sales to the largest customer in this segment, which distributes wound care products and provides services to the nursing home market, improved by $28 during the third quarter of 2014 compared to the third quarter of 2013.  Sales to this dealer in the third quarter of 2014 were approximately $700, or 46%, of the net sales of our Medical Products. In February 2012, this customer filed for Chapter 11 bankruptcy protection. See Part I, Item 1, Note L - Legal Proceedings of this report for further information related to these proceedings. The increase in sales to this distributor was more than offset by a decrease in sales to other customers of $133. This sales decline was attributable to purchasing adjustments made by certain customers in order to better align their operations with Medicare reimbursement policies.

Cost of sales.  Cost of sales for the quarter ended September 30, 2014 was $3,232 compared with $3,604 for the quarter ended September 30, 2013, a decrease of $372, or 10%. As a percentage of net sales, cost of sales was approximately 43% in the third quarter of 2014 and 54% in the third quarter of 2013. The decrease in cost of sales as a percentage of net sales was primarily the result of a shift in the mix of sales toward lower cost Associate network sales as well as decreased expense for product obsolescence and expirations. Also, the one-time royalty revenue of $467 recognized in connection with the execution of the new distributorship agreement with CCI also positively affected gross margin during the period because royalty revenue has no associated cost.
 

- 18 -


General and administrative. General and administrative expenses for the quarter ended September 30, 2014 were $2,868 compared with expenses in the third quarter of 2013 of $2,301, an increase of $567, or 25%. The increase in cost was attributable to our entry into the Hong Kong, Malaysia and Indonesia markets in July 2013, February 2014 and June 2014, respectively, higher sales incentive and promotional expenses, and foreign exchange losses. As a percentage of net sales, general and administrative expenses were 38% and 35% in the quarters ended September 30, 2014 and 2013, respectively.
 
Distributor commissions. Distributor commissions were $1,363 for the quarter ended September 30, 2014 compared with $747 in the third quarter of 2013, an increase of $616, or 82%.  With respect to our Associate network, distributor commissions as a percentage of commissionable sales (exclusive of rebates that are recorded as a reduction of sales) increased to approximately 42% in the third quarter of 2014 compared to 37% in the same period in 2013.  This increase was primarily attributable to higher commissions paid in connection with the sales growth generated during the quarter. On a consolidated basis, distributor commissions as a percentage of net sales were 18% and 11% in the quarters ended September 30, 2014 and 2013, respectively.

Income taxes.  We recorded a provision for income taxes of $22 and an income tax benefit of $23 during the quarters ended September 30, 2014 and 2013, respectively, based on our estimate of the effective annual income tax rate for the applicable period.

Net loss.  As a result of the factors described above, the net loss for the quarter ended September 30, 2014 was $124, or $0.06 per share, compared with a net loss in the third quarter of 2013 of $143, or $0.06 per share.

Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013 (U.S. dollars in 000s except per share amounts)
 
Net sales. Net sales for the nine months ended September 30, 2014 were $21,113 compared with net sales for the same period in 2013 of $19,025, an increase of $2,088, or 11%. This increase resulted from a $2,063 increase in net sales of Nutritional Products and a $25 increase in net sales of Medical Products. The increase in net sales of Nutritional Products resulted from a $2,726 increase in net sales through our Associate network that was partially offset by a $663 decrease in net sales to our licensees.

Licensees.  Net sales to our licensees decreased as a result of decreased shipments to CCI; sales to CCI decreased $708, or 8%, during the first nine months of 2014.  Net sales for the period include one-time royalty revenue of $467 recognized in connection with the execution of the new distributorship agreement with CCI in August 2014 as described above under the heading Overview, Licensees. Sales to CCI are impacted by a variety of factors including global economic trends, regulatory changes and logistical considerations, which can impact the timing of shipments into CCI's markets.

Associate Network.  Overall, net sales through the Associate network channel increased by $2,726 during the nine months ended September 30, 2014 compared to the same period in 2013. The increase in sales was attributable to sales growth in our Southeast Asia markets, primarily Malaysia, which opened in February 2014 and reported sales during the first nine months of 2014 of $2,560, and Hong Kong, which opened in July 2013 and reported sales growth during the first nine months of 2014 of $703. Sales growth in Southeast Asia was partially offset by a $622 decline in North American sales.

Medical products.  Sales to the largest customer in this segment, which distributes wound care products and provides services to the nursing home market, improved by $131 during the first nine months of 2014 compared to the first nine months of 2013.  Sales to this dealer in the first nine months of 2014 were approximately $2,091, or 45%, of the net sales of our Medical Products. In February 2012, this customer filed for Chapter 11 bankruptcy protection. See Part I, Item 1, Note L - Legal Proceedings of this report for further information related to these proceedings. Sales to other customers decreased $106 during the first nine months of 2014. This sales decline was attributable to purchasing adjustments made by certain customers in order to better align their operations with Medicare reimbursement policies.

Cost of sales.  Cost of sales for the nine months ended September 30, 2014 was $9,526 compared with $10,046 for the nine months ended September 30, 2013, a decrease of $520, or 5%. As a percentage of net sales, cost of sales was approximately 45% in the first nine months of 2014 and 53% in the first nine months of 2013. The decrease in cost of sales as a percentage of net sales was primarily the result of a shift in the mix of sales toward the lower cost Associate network and Medical Products sales as well as lower product testing costs and decreased expense for product obsolescence and expirations. Also, the one-time royalty revenue of $467 recognized in connection with the execution of the new distributorship agreement with CCI also positively affected gross margin during the period because royalty revenue has no associated cost.
 
General and administrative. General and administrative expenses for the nine months ended September 30, 2014 were $8,268 compared with expenses in the first nine months of 2013 of $6,800, an increase of $1,468, or 22%. The increase in cost was attributable to our entry into the Hong Kong, Malaysia and Indonesia markets in July 2013, February 2014 and June 2014,

- 19 -


respectively, higher sales incentive and promotional expenses and foreign exchange losses. As a percentage of net sales, general and administrative expenses were 39% and 36% in the nine months ended September 30, 2014 and 2013, respectively.
 
Distributor commissions. Distributor commissions were $3,476 for the nine months ended September 30, 2014 compared with $2,113 in the first nine months of 2013, an increase of $1,363, or 65%.  With respect to our Associate network, distributor commissions as a percentage of commissionable sales (exclusive of rebates that are recorded as a reduction of sales) increased to approximately 41% in the first nine months of 2014 compared to 38% in the same period in 2013.  This increase was primarily attributable to higher commissions paid in connection with the sales growth generated during the period. On a consolidated basis, distributor commissions as a percentage of net sales were 17% and 11% in the nine months ended September 30, 2014 and 2013, respectively.

Income taxes.  We recorded income tax benefits of $102 and $100 during the nine months ended September 30, 2014 and 2013, respectively, based on our estimate of the effective annual income tax rate for the applicable period.

Net loss.  As a result of the factors described above, the net loss for the nine months ended September 30, 2014 was $508, or $0.23 per share, compared with a net loss in the first nine months of 2013 of $298, or $0.13 per share.


LIQUIDITY AND CAPITAL RESOURCES (U.S. dollars in 000s)
 
Cash and working capital. During the first nine months of 2014, we had a net decrease in cash of $2,347 compared with a net increase in cash of $435 in the first nine months of 2013.  At September 30, 2014, we had working capital of $2,752, a $1,610 decrease from working capital at December 31, 2013 of $4,362.   The reasons for these changes in cash and working capital are described below.
 
Operating activities. In the first nine months of 2014, our operating activities used cash flow of $1,295.  In the first nine months of 2013, our operating activities provided cash flow of $575.  The net loss adjusted for non-cash activities, including depreciation and amortization, share-based compensation and deferred taxes, used cash flows of $159 in the first nine months of 2014, compared to generating cash flows of $72 during the same period in 2013. Cash was also used during the first nine months of 2014 to increase accounts receivable and other assets by $661 attributable to royalties due from CCI. In connection with the execution of the distributorship agreement with CCI in August 2014, which is described above under the heading Overview, Licensees, CCI agreed to pay the Company approximately $941 in royalties over an 18-month period beginning October 2014. The portion of these royalties due beyond 12 months from September 30, 2014 is classified as other assets in the accompanying condensed consolidated balance sheets. In addition, cash was used by a decrease in deferred revenues of $1,763 in the first nine months of 2014 reflecting a decrease in CCI's order deposits and its inventory held for later shipment.

The decreases in cash identified above were partially offset by an increase in cash related to a $1,078 increase in accounts payable and accrued liabilities during the first nine months of 2014. This increase was primarily due to an increase in accrued distributor commissions and awards associated with sales growth generated by our Associate network and the normal fluctuation in timing of billings from and payments to our suppliers.

Investing activities. During the first nine months of 2014, we used $871 for capital expenditures. Approximately $612 was incurred for the replacement of our Associate Sales and Marketing System and approximately $254 was incurred to build out and furnish office facilities in Malaysia and Indonesia. In December 2013, the Company engaged GSAT, Inc. to develop the new Associate Sales and Marketing System. The founder and CEO of GSATi is a member of our Board of Directors.
 
Financing activities. During the first nine months of 2014, financing activity included the repayment of long-term debt in the amount of $158. During the first nine months of 2013, financing activity included the repayment of long-term debt in the amount of $146.

Share repurchase program. On August 28, 2013, the Company announced that the Board of Directors had authorized a plan to repurchase, at management's discretion, up to 111,000 shares of common stock, representing 5% of the Company's outstanding common stock. The Company's repurchase plan was effective as of that date and expires on February 28, 2015. No common stock repurchase transactions were executed as a result of the share repurchase program during 2013 or the first nine months of 2014.

General liquidity and cash flows. Presently, the Company is considering alternative sources of capital, including bank borrowings, real estate financing and other types of debt or equity financings to (i) facilitate our expansion in Asia, (ii) complete the replacement of our Associate Sales and Marketing system and (iii) provide flexibility in the event of a decrease in demand for our products, including a decrease in demand from our licensees, which could adversely affect our liquidity. We can give no assurance, however,

- 20 -


that we will be able to obtain any additional outside financing or obtain financing on terms we would find commercially acceptable.  During the next 12 months, we anticipate expending approximately $100 for the completion of our Associate Sales and Marketing system.
 
Other than those factors described above, we are not aware of any trends or uncertainties that would significantly affect our liquidity or capital resources in the future.

ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.

The following discussion about our market risk includes “forward-looking statements” that involve risks and uncertainties.  Actual results could differ materially from those projected in the forward-looking statements. We do not use derivative financial instruments for speculative or trading purposes.  We are exposed to market risk from changes in foreign currency exchange rates that could affect our future results of operations and financial condition.  We manage our exposure to these risks through our regular operating and financing activities.
 
Foreign exchange
 
We conduct foreign-based operations in local currency in Canada, Taiwan, Hong Kong, Malaysia and Indonesia that accounted for 27% of net sales during the first nine months of 2014 and 14% of net sales in 2013.  

We advance funds to and receive funds from our foreign-based operations denominated in U.S. dollars, exposing our foreign operations to the effect of changes in spot exchange rates of the local currency relative to the U.S. dollar.  We do not regularly use forward-exchange contracts to hedge these exposures.  Based on exchange rate exposure for aggregate intercompany advances of $2,935 related to our foreign-based operations at September 30, 2014, a 10% adverse change in the currency rates would reduce future earnings before income taxes by approximately $294.

All transactions with our licensees are denominated in U.S. dollars resulting in the licensee bearing the currency exchange risk.  Accordingly, exchange rate fluctuations in international markets served by our licensees do not directly affect our results of operations.  However, exchange rate fluctuations against the U.S. dollar in these markets may affect the ability of our licensees to profitably conduct their business operations.


- 21 -


ITEM 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer (as our principal executive officer and principal financial officer, respectively), evaluated as of September 30, 2014, the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer (as our principal executive officer and principal financial officer, respectively) concluded that our disclosure controls and procedures, as of September 30, 2014, were effective.

Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting (as defined in Rule 13(a)-15 or Rule 15d-15 of the Exchange Act) that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION
 
ITEM 1.
Legal Proceedings.


On February 24, 2012, a medical/surgical dealer that accounted for approximately $2,091,000 and $1,960,000 of the Company's sales during the nine months ended September 30, 2014 and 2013, respectively, filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Central District of California in Santa Ana, California. See Part I, Item 1, Note L - Legal Proceedings of this report for additional information related to these proceedings, which is incorporated herein by reference.

On April 4, 2014, the Company received a notice from Environmental Research Center, a California non-profit corporation alleging that the Company failed to include a warning notice related to lead content on labels of certain Nutritional Products sold in California as required under California's Safe Drinking Water and Toxic Enforcement Act of 1986. See Part I, Item 1, Note L - Legal Proceedings of this report for additional information related to this notice, which is incorporated herein by reference.


ITEM 1A.
Risk Factors.
 
Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the “Risk Factors” section of the 2013 Form 10-K. In connection with our preparation of this report, management has reviewed and considered these risk factors and has determined that there has been material changes to our risk factors since the date of the filing of the 2013 Form 10-K, which are as follows:

Sales to CCI may be impacted by geopolitical events in Russia and Ukraine.

In March 2014, the Crimean region of Ukraine was annexed by Russia. In response, other nations, including the U.S., imposed certain economic sanctions on Russia. Since that date, concerns related to Russia's continued involvement in hostilities in Ukraine have prompted other nations, including the U.S., to impose additional economic sanctions amid calls for even stronger levels of economic sanctions to be imposed.

A significant part of CCI's sales are generated within Russia and Ukraine. Additional economic sanctions imposed by either the U.S. or the world community may result in serious economic challenges in Russia and Ukraine, and imposition of trade restrictions may delay or prevent shipment of products to those countries, resulting in a significant decline in the Company's sales to CCI. A loss of significant business from CCI would be harmful to our business, results of operations and financial condition.

Additional capital may be required to continue our expansion in Asian markets, improve our systems and provide flexibility in the event of a decrease in sales to CCI .

Presently, the Company is considering alternative sources of capital, including bank borrowings, real estate financing and other types of debt or equity financings to (i) facilitate our expansion in Asia, (ii) complete the replacement of our Associate Sales and

- 22 -


Marketing System and (iii) provide flexibility in the event of a decrease in demand for our products, including a decrease in demand from CCI, which could adversely affect our liquidity. We can give no assurance, however, that we will be able to obtain any additional outside financing or obtain financing on terms we would find commercially acceptable. In the event that we are unable to obtain additional capital and experience a decrease in demand for our products, our liquidity will be impacted, resulting in harm to our business, results of operation and financial condition.

Other than as identified above, management has determined that there have been no material changes to our risk factors since the date of the filing of the 2013 Form 10-K. The risks described above are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.




ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable

ITEM 3.
Defaults Upon Senior Securities.
 
Not applicable

ITEM 4.
Mine Safety Disclosures.

Not applicable
 
ITEM 5.
Other Information.
 
Not applicable

ITEM 6.
Exhibits.

The Exhibit Index filed herewith is incorporated herein by reference.


- 23 -


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.

 
 
RBC Life Sciences, Inc.
 
 
Registrant
 
 
 
 
November 12, 2014
 
By:
/s/             Clinton H. Howard
Date
 
Its:
Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
November 12, 2014
 
By:
/s/              Daley L. Seeker
Date
 
Its:
Vice President-Finance and Chief Financial Officer
 
 
 
(principal financial and accounting officer)


- 24 -


RBC LIFE SCIENCES, INC.

Exhibit Index

Exhibit Number
Description
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 
101.INS
XBRL Instance Document *v
 
 
101.SCH
XBRL Taxonomy Extension Schema Document *v
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document * v
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document * v
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document * v
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document * v

* Filed or furnished electronically herewith.

v Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections. The financial information contained in the XBRL (eXtensible Business Reporting Language)-related documents is unaudited and unreviewed.



- 25 -




EXHIBIT 31.1
 
SECTION 302 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
 
I, Clinton H. Howard, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of RBC Life Sciences, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Date: November 12, 2014
 

 
/s/           Clinton H. Howard
 
Clinton H. Howard
 
Chief Executive Officer
 








EXHIBIT 31.2
 
SECTION 302 - CERTIFICATION OF CHIEF FINANCIAL OFFICER

 
I, Daley L. Seeker, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of RBC Life Sciences, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Date: November 12, 2014
 

 
/s/            Daley L. Seeker
 
Daley L. Seeker
 
Vice President-Finance and Chief Financial Officer

 







EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of RBC Life Sciences, Inc. (the “Company”) for the quarter ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clinton H. Howard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


 
/s/             Clinton H. Howard
 
Clinton H. Howard
 
Chief Executive Officer
 
November 12, 2014

 








EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of RBC Life Sciences, Inc. (the “Company”) for the quarter ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daley L. Seeker, Vice President-Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


 
/s/             Daley L. Seeker
 
Daley L. Seeker
 
Vice President-Finance and Chief Financial Officer
 
November 12, 2014




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