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 June 30, 2015

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)
 
 
 
(972) 893-4000
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 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 the 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 August 1, 2015
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 4.
Controls and Procedures
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
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

 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
915,047

 
$
1,921,349

Accounts receivable, net of allowance for doubtful accounts of $37,000 and $35,000, respectively
1,096,800

 
1,285,843

Inventories
5,106,377

 
4,799,083

Deferred income taxes
383,279

 
376,925

Prepaid expenses and other current assets
581,825

 
464,020

Total current assets
8,083,328

 
8,847,220

Property and equipment, net
4,456,894

 
4,683,496

Goodwill, net
2,192,931

 
2,221,347

Intangible assets, net
29,043

 
39,975

Other assets, net
97,825

 
203,906

 
$
14,860,021

 
$
15,995,944

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable, trade
$
2,264,817

 
$
2,310,192

Accrued liabilities
1,317,122

 
1,420,050

Current maturities of long-term obligations
238,578

 
229,538

Deferred revenue
2,448,188

 
2,147,290

Total current liabilities
6,268,705

 
6,107,070

Long-term obligations, less current maturities
785,336

 
906,809

Deferred income taxes
243,851

 
556,440

Commitments and contingencies


 


Shareholders’ equity:
 
 
 

Common stock, $0.001 par value; 50,000,000 shares authorized; 2,212,350 shares issued and outstanding at June 30, 2015 and December 31, 2014
2,212

 
2,212

Additional paid-in capital
13,713,630

 
13,713,630

Accumulated deficit
(6,212,710
)
 
(5,417,092
)
Accumulated other comprehensive income
58,997

 
126,875

 
7,562,129

 
8,425,625

 
$
14,860,021

 
$
15,995,944


See notes to condensed consolidated financial statements.

- 3 -


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

 
Quarters Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
6,192,404

 
$
7,885,090

 
$
11,552,214

 
$
13,598,210

Cost of sales
2,692,626

 
3,762,809

 
5,003,272

 
6,293,844

Gross profit
3,499,778

 
4,122,281

 
6,548,942

 
7,304,366

Operating expenses:
 
 
 
 
 
 
 
General and administrative
2,632,296

 
2,679,105

 
5,248,935

 
5,399,711

Distributor commissions
1,041,888

 
1,278,347

 
2,156,830

 
2,112,810

Depreciation and amortization
130,955

 
131,639

 
225,112

 
250,849

Total operating expenses
3,805,139

 
4,089,091

 
7,630,877

 
7,763,370

Operating income (loss)
(305,361
)
 
33,190

 
(1,081,935
)
 
(459,004
)
Interest expense
20,205

 
24,456

 
41,503

 
49,924

Earnings (loss) before income taxes
(325,566
)
 
8,734

 
(1,123,438
)
 
(508,928
)
Provision (benefit) for income taxes
(79,938
)
 
15,378

 
(327,820
)
 
(124,396
)
Net loss
(245,628
)
 
(6,644
)
 
(795,618
)
 
(384,532
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
17,853

 
8,627

 
(67,878
)
 
(5,725
)
Comprehensive income (loss)
$
(227,775
)
 
$
1,983

 
$
(863,496
)
 
$
(390,257
)

Net loss per share:
 
 
 
 
 
 
 
  Basic
$
(0.11
)
 
$
(0.00
)
 
$
(0.36
)
 
$
(0.17
)
  Diluted
$
(0.11
)
 
$
(0.00
)
 
$
(0.36
)
 
$
(0.17
)

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

 
2,212,350

 
2,212,350

 
2,212,350

  Diluted
2,212,350

 
2,212,350

 
2,212,350

 
2,212,350


See notes to condensed consolidated financial statements.




- 4 -


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

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(795,618
)
 
$
(384,532
)
Adjustment for non-cash items:
 
 
 
Depreciation and amortization
262,238

 
290,300

Stock-based compensation
—

 
2,107

Deferred income taxes and other
(329,441
)
 
(137,621
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
188,808

 
67,300

Inventories
(324,306
)
 
(411,417
)
Prepaid expenses and other current assets
(40,247
)
 
(56,962
)
Other assets
104,268

 
(56,092
)
Accounts payable and accrued liabilities
(207,666
)
 
1,027,201

Deferred revenue
305,200

 
(1,203,766
)
Net cash used in operating activities
(836,764
)
 
(863,482
)
Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(37,649
)
 
(636,170
)
Net cash used in investing activities
(37,649
)
 
(636,170
)
Cash flows from financing activities:
 

 
 

Payments of long-term obligations
(112,433
)
 
(104,186
)
Net cash used in financing activities
(112,433
)
 
(104,186
)
Effect of exchange rate changes on cash flows
(19,456
)
 
(28,675
)
Net decrease in cash and cash equivalents
(1,006,302
)
 
(1,632,513
)
Cash and cash equivalents, beginning of period
1,921,349

 
3,745,684

Cash and cash equivalents, end of period
$
915,047

 
$
2,113,171


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, 2014 (the “2014 Form 10-K”), previously filed with the Securities and Exchange Commission. All references to dollars shall mean U.S. dollars.

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:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company does not believe ASU No. 2014-09 will have a material effect on its financial position and results of operations.
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern. ASU No. 2014-15 provides guidance regarding management’s responsibility to evaluate whether there exists substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. The Company does not believe ASU No. 2014-15 will have a material effect on its financial position and results of operations.


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 in North America and Southeast Asia.  This product line is marketed under the “RBC Life®” brand name.  In most of 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 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.

- 6 -



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.


- 7 -


Note C – Inventories:

Inventories consist of the following:
 
June 30, 2015
 
December 31, 2014
Raw materials and bulk products
$
417,779

 
$
370,333

Packaging materials
256,319

 
253,700

Finished goods
4,432,279

 
4,175,050

 
$
5,106,377

 
$
4,799,083


Note D – Prepaid Expenses and Other Current Assets:

Prepaid expenses and other current assets consist of the following:
 
June 30, 2015
 
December 31, 2014
Advance payment to suppliers
$
109,125

 
$
151,365

Prepaid insurance and other
403,909

 
239,385

Certificates of deposit - restricted
68,791

 
73,270

 
$
581,825

 
$
464,020


At June 30, 2015 and December 31, 2014, the Company held certificates of deposit in the amounts of approximately $68,800 and $73,300, respectively, which were pledged to secure surety bonds.

Note E – Property and Equipment:

Property and equipment consists of the following:
 
June 30, 2015
 
December 31, 2014
Building and improvements
$
4,032,944

 
$
4,042,897

Computer software and office equipment
2,467,924

 
3,536,399

Warehouse equipment
254,034

 
254,034

Automotive equipment
14,717

 
14,717

 
6,769,619

 
7,848,047

Less – accumulated depreciation
(3,453,898
)
 
(4,305,724
)
 
3,315,721

 
3,542,323

Land
1,141,173

 
1,141,173

 
$
4,456,894

 
$
4,683,496


Depreciation expense totaled approximately $146,000 and $149,400 for the quarters ended June 30, 2015 and 2014, respectively, and $251,600 and $287,300 for the six months ended June 30, 2015 and 2014, respectively.

On July 15, 2015, the Company completed the previously announced sale of its headquarters building and related parcel of land in Irving, Texas for approximately $5.18 million. After repayment of outstanding mortgage debt of approximately $1.13 million secured by this facility and payment of other closing costs and adjustments, the Company received net cash proceeds of approximately $3.75 million. Effective upon closing of this sale, the Company entered into an agreement to lease back the facility from the purchaser under a lease that provides, among other things, a lease term ending April 30, 2016 and rent of approximately $35,000 per month.








- 8 -




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, 2014
$
3,285,689

 
$
(1,064,343
)
Currency translation adjustment
(55,448
)
 
27,033

Balance, June 30, 2015
$
3,230,241

 
$
(1,037,310
)
 

 Other intangible assets consist of the following:
 
 
 
June 30, 2015
 
December 31, 2014
 
Average
Life
(years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Gross
Carrying
Value
 
Accumulated
Amortization
Copyrights, trademarks and other registrations
19
 
$
99,100

 
$
(73,333
)
 
$
99,100

 
$
(70,690
)
Business license
1
 
34,398

 
(34,398
)
 
37,193

 
(29,240
)
Other
19
 
12,600

 
(9,324
)
 
12,600

 
(8,988
)
 
 
 
$
146,098

 
$
(117,055
)
 
$
148,893

 
$
(108,918
)

Amortization expense related to other intangible assets totaled approximately $3,300 and $11,100 for the quarters ended June 30, 2015 and 2014, respectively, and $10,600 and $15,700 for the six months ended June 30, 2015 and 2014, respectively. The aggregate estimated amortization expense for intangible assets remaining as of June 30, 2015 is as follows:
Remainder of 2015
$
2,978

2016
5,957

2017
5,957

2018
5,957

2019
5,957

Thereafter
2,237

 
$
29,043


Note G – Accrued Liabilities:

Accrued liabilities consist of the following:
 
June 30, 2015
 
December 31, 2014
Distributor commissions and awards
$
785,263

 
$
867,336

Salaries and wages
432,956

 
468,192

Sales and property taxes
79,034

 
73,954

Interest
6,612

 
7,339

Other
13,257

 
3,229

 
$
1,317,122

 
$
1,420,050








- 9 -




Note H – Long-Term Obligations:

Long-term obligations consist of the following:
 
June 30, 2015
 
December 31, 2014
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
$
1,023,914

 
$
1,136,347

Less – current maturities
(238,578
)
 
(229,538
)
 
$
785,336

 
$
906,809


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 June 30, 2015, the fair value of fixed-rate long-term debt was approximately $1,095,000, which was $71,000 above the carrying value of approximately $1,024,000.  At December 31, 2014, the fair value of fixed-rate long-term debt was approximately $1,226,000, which was $90,000 above the carrying value of approximately $1,136,000.

As more fully described in Note E, this mortgage note was fully paid in July 2015 in connection with the sale of the land and building that secured the note.


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 quarters ended June 30, 2015 or 2014, or the six months ended June 30, 2015. Share-based compensation was $2,100 for the six months ended June 30, 2014.  There were no material tax benefits related to share-based compensation expense because virtually all share-based compensation resulted from grants of incentive stock options.
 
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. There were no option grants during the quarters or six months ended June 30, 2015 or 2014.
 
 
A summary of stock option activity for the six months ended June 30, 2015 is as follows:
 
Options
 
Weighted-Average Exercise Price per Share
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding on December 31, 2014
50,896

 
$
4.35

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
—

 
—

 
 
 
 
Forfeited/canceled
(5,080
)
 
3.83

 
 
 
 
Outstanding on June 30, 2015
45,816

 
$
4.41

 
2.2
 
$
900

Exercisable on June 30, 2015
45,816

 
$
4.41

 
2.2
 
$
900

 
There were no non-vested stock options as of June 30, 2015 or changes to non-vested stock options during the six months then ended.
 
 
 
 
As of June 30, 2015, there was no unrecognized compensation cost related to stock option grants.
 


Note J – Segments and Geographic Area:


- 10 -


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 North America 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 income (loss).  All intercompany transactions have been eliminated, and intersegment revenues are not significant.  In calculating operating income (loss) for these two segments, administrative expenses incurred that are common to the two segments are allocated on a usage basis.

Segment information is as follows (U.S. dollars in 000s):
 
Nutritional Products
 
Medical Products
 
Consolidated
Quarter Ended June 30, 2015
 

 
 

 
 

  Net sales
$
4,560

 
$
1,632

 
$
6,192

  Depreciation and amortization
134

 
15

 
149

Operating income (loss)
(387
)
 
82

 
(305
)
  Capital expenditures
—

 
—

 
—

  Total assets
12,171

 
2,689

 
14,860

Quarter Ended June 30, 2014
 

 
 

 
 

  Net sales
$
6,392

 
$
1,493

 
$
7,885

  Depreciation and amortization
135

 
16

 
151

  Operating income (loss)
48

 
(15
)
 
33

  Capital expenditures
333

 
—

 
333

  Total assets
13,655

 
3,089

 
16,744

Six Months Ended June 30, 2015
 

 
 

 
 

Net sales
$
8,409

 
$
3,143

 
$
11,552

Depreciation and amortization
232

 
30

 
262

Operating income (loss)
(1,158
)
 
76

 
(1,082
)
Capital expenditures
38

 
—

 
38

Total assets
12,171

 
2,689

 
14,860

Six Months Ended June 30, 2014
 

 
 

 
 

Net sales
$
10,514

 
$
3,084

 
$
13,598

Depreciation and amortization
259

 
31

 
290

Operating income (loss)
(496
)
 
37

 
(459
)
Capital expenditures
636

 
—

 
636

Total assets
13,655

 
3,089

 
16,744


- 11 -



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

 
Quarter Ended June 30, 2015
 
Quarter Ended June 30, 2014
 
Net sales
 
Long-Lived assets
 
Net sales
 
Long-Lived assets
Domestic
$
2,311

 
$
6,043

 
$
2,219

 
$
6,087

Russia/Eastern Europe
1,865

 
—

 
3,342

 
—

Canada
202

 
437

 
328

 
505

Southeast Asia
1,735

 
297

 
1,937

 
456

All others
79

 
—

 
59

 
—

Totals
$
6,192

 
$
6,777

 
$
7,885

 
$
7,048

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
Net sales
 
Long-Lived assets
 
Net sales
 
Long-Lived assets
Domestic
$
4,368

 
$
6,043

 
$
4,533

 
$
6,087

Russia/Eastern Europe
2,929

 
—

 
5,352

 
—

Canada
412

 
437

 
661

 
505

Southeast Asia
3,702

 
297

 
2,928

 
456

All others
141

 
—

 
124

 
—

Totals
$
11,552

 
$
6,777

 
$
13,598

 
$
7,048


Significant Customers

The Company recorded sales of Nutritional Products to Coral Club International, Inc. ("CCI"), a licensee of the Company, in the amounts of $1,865,000 and $3,342,000 during the quarters ended June 30, 2015 and 2014, respectively, and $2,929,000 and $5,352,000 during the six months ended June 30, 2015 and 2014, 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 $574,000 and $711,000 during the quarters ended June 30, 2015 and 2014, respectively, and $1,081,000 and $1,391,000 during the six months ended June 30, 2015 and 2014, respectively.  In no other case did a customer of the Company account for more than 10% of net sales during the quarters or six months ended June 30, 2015 and 2014.

Foreign Currency Translation

The local currency is the functional currency for the Company’s foreign operations. Related assets and liabilities are translated into United States dollars at exchange rates existing at the balance sheet date, and revenues and expenses are translated at weighted-average exchange rates. The foreign currency translation adjustment is recorded as a separate component of shareholders’ equity and is included in accumulated other comprehensive income (loss).

















- 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 June 30, 2015
 

 
 

 
 

  Basic loss per common share
$
(245,628
)
 
2,212,350

 
$
(0.11
)
  Effect of dilutive stock options
—

 
—

 
 

  Diluted loss per common share
$
(245,628
)
 
2,212,350

 
$
(0.11
)
Quarter Ended June 30, 2014
 

 
 

 
 

  Basic loss per common share
$
(6,644
)
 
2,212,350

 
$
(0.00
)
  Effect of dilutive stock options
—

 
—

 
 

  Diluted loss per common share
$
(6,644
)
 
2,212,350

 
$
(0.00
)
Six Months Ended June 30, 2015
 

 
 

 
 

Basic loss per common share
$
(795,618
)
 
2,212,350

 
$
(0.36
)
Effect of dilutive stock options
—

 
—

 
 

Diluted loss per common share
$
(795,618
)
 
2,212,350

 
$
(0.36
)
Six Months Ended June 30, 2014
 

 
 

 
 

Basic loss per common share
$
(384,532
)
 
2,212,350

 
$
(0.17
)
Effect of dilutive stock options
—

 
—

 
 

Diluted loss per common share
$
(384,532
)
 
2,212,350

 
$
(0.17
)

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 46,000 and 61,400 for the quarters and six months ended June 30, 2015 and 2014, 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 $1,081,000 and $1,391,000, or 9% and 10%, of the Company's net sales during the six months ended June 30, 2015 and 2014, respectively.

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 resolved a reimbursement guidelines dispute with Medicare, which the dealer believed was improperly withholding payments. In July 2014, pursuant to an arrangement approved by the Bankruptcy Court, this dealer's pre-petition accounts receivable balance was paid in full. In May 2015, this dealer emerged from bankruptcy following the Bankruptcy Court's confirmation of its plan of reorganization.

Environmental Research Center - On April 4, 2014, the Company received a notice from Environmental Research Center ("ERC"), a California non-profit corporation, alleging that the Company failed to include a warning notice related to lead content on labels

- 13 -


of certain nutritional products sold in California as required under California's Safe Drinking Water and Toxic Enforcement Act of 1986 (commonly known as Proposition 65).

During the first quarter of 2015, the Company and ERC entered into a settlement agreement, which was approved by the Court having jurisdiction over this matter, pursuant to which the Company agreed to modify its labeling of the affected products and pay certain settlement costs. These settlement costs have been recognized in the accompanying condensed consolidated financial statements.

Mannatech - On April 28, 2015, Mannatech, Incorporated, a distributor of nutritional supplement products, filed suit against the Company alleging patent infringement with respect to sales of two of the Company's products. In July 2015, the parties entered into a settlement agreement and the suit was dismissed.

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 2014 Form 10-K.

FORWARD-LOOKING STATEMENTS
 
The statements included in this report, other than statements of historical or present facts, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 generally can be identified by the use of forward-looking terminology such as, but not limited to, “may”, “will”, “expect", “intend”, “estimate”, “anticipate” or “believe.”  These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events.  Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond our control. Our forward-looking statements speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance, or achievements will likely differ from the anticipated results, performance, or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders.  

We may experience variations in our actual results, performance, or achievements from quarter to quarter and/or year to year as a result of factors that include the following:

•
The level of recruiting and retention of our Associates in the North America and Southeast Asia markets and territories served by our licensees;
•
Variations in the level of business activity generated by our key customers;
•
The opening of new markets;
•
The timing and efficacy of Company-sponsored events, promotions, and other marketing and sales initiatives;
•
New product introductions;
•
The negative impact of new regulations or changes in existing regulations domestically and/or internationally that may limit or restrict the sale of certain products;
•
The integration and operation of new information technology systems;
•
The inability to introduce new products or the introduction of new products by competitors;
•
Entry into one or more of our markets by competitors;
•
General conditions in the nutritional supplement industry, the network marketing industry, and the wound care industry; and
•
General economic conditions globally and/or in markets where we or our licensees conduct business.

As a result of these and other risks and uncertainties, sales, expenses, and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. The foregoing list of risks and uncertainties may not contain all of the risks and uncertainties that could affect us. Please consider our forward-looking statements in light of these risks and uncertainties as you read this report.

OVERVIEW

The following discussion should be read in conjunction with management’s discussion and analysis contained in the 2014 Form 10-K, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
 
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.

- 15 -


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.

Sales by segment in dollars and as a percentage of consolidated net sales are as follows:
 
Quarters Ended June 30,
 
2015
 
2014
 
(U.S. dollars in 000’s)
Nutritional Products:
 
 
 
 
 
 
 
Associate network
$
2,647

 
43
%
 
$
3,016

 
38
%
Licensees
1,912

 
31
%
 
3,376

 
43
%
 
4,559

 
74
%
 
6,392

 
81
%
Medical Products
1,633

 
26
%
 
1,493

 
19
%
 
$
6,192

 
100
%
 
$
7,885

 
100
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2015
 
2014
 
(U.S. dollars in 000’s)
Nutritional Products:
 

 
 

 
 

 
 

Associate network
$
5,403

 
47
%
 
$
5,100

 
37
%
Licensees
3,006

 
26
%
 
5,414

 
40
%
 
8,409

 
73
%
 
10,514

 
77
%
Medical Products
3,143

 
27
%
 
3,084

 
23
%
 
$
11,552

 
100
%
 
$
13,598

 
100
%

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 that affect 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:
 
Six Months Ended June 30,
 
2015
 
2014
U.S.
24
%
 
30
%
Canada
8

 
13

Southeast Asia
68

 
57

 
100
%
 
100
%

Licensees. 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 six months ended June 30, 2015 and 2014. Following the completion of a ten-year exclusive distributorship agreement between the parties, in August 2014, the Company entered into a new two-year exclusive distributorship agreement with CCI. Under the new agreement, CCI’s exclusive

- 16 -


territory includes Russia and other countries located primarily in Europe and Central Asia. 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 previous agreement. The President of CCI is a former member of our Board of Directors and beneficially owns approximately 18% of our common stock.

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 $3,093,000 and $3,907,000 at June 30, 2015 and 2014, respectively.

Under the previous 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 new agreement, in lieu of a royalty, the prices at which products are sold to CCI were marked up to include the royalty so that no additional royalty is due upon the sale of the Company's products by CCI. To affect the transition of royalty calculations under the previous agreement and the new agreement, the Company recognized royalties of $941,000 on a one-time basis in August 2014. Of this amount, 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. These royalties are being paid over an 18-month period which began October 2014 in the approximate amount of $52,000 per month.

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 34% and 45% of the net sales of our Medical Products during the six months ended June 30, 2015 and 2014, respectively. In May 2015, this dealer emerged from bankruptcy after having filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in February 2012. See Note L - Legal Proceedings in the accompanying condensed consolidated financial statements 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 six months ended June 30, 2015 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 2014 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
43.5

 
47.7

 
43.3

 
46.3

Gross profit
56.5

 
52.3

 
56.7

 
53.7

Operating expenses:
 

 
 

 
 

 
 

General and administrative
42.5

 
34.0

 
45.5

 
39.8

Distributor commissions
16.8

 
16.2

 
18.7

 
15.5

Depreciation and amortization
2.1

 
1.7

 
1.9

 
1.8

Total operating expenses
61.4

 
51.9

 
66.1

 
57.1

Operating income (loss)
(4.9
)
 
0.4

 
(9.4
)
 
(3.4
)
Interest expense
0.4

 
0.3

 
0.3

 
0.3

Earnings (loss) before income taxes
(5.3
)
 
0.1

 
(9.7
)
 
(3.7
)
Provision (benefit) for income taxes
(1.3
)
 
0.2

 
(2.8
)
 
(0.9
)
Net loss
(4.0
)%
 
(0.1
)%
 
(6.9
)%
 
(2.8
)%

Quarter ended June 30, 2015 compared with the quarter ended June 30, 2014 (U.S. dollars in 000s except per share amounts)
 
Net sales. Net sales for the quarter ended June 30, 2015 were $6,192 compared with net sales for the same period in 2014 of $7,885, a decrease of $1,693, or 21%. This decrease resulted from a $1,833 decrease in net sales of Nutritional Products that was partially offset by a $140 decrease in net sales of Medical Products. The decrease in net sales of Nutritional Products resulted from a $369 decrease in net sales through our Associate network and a $1,464 decrease in net sales to our licensees.

Associate Network.  Overall, net sales through the Associate network channel decreased by $369 during the second quarter of 2015 compared to the same period in 2014. This decrease in sales was primarily attributable to a $198 decline in Taiwan sales and a $167 decline in North American sales. Associate network sales during the second quarter of 2015 were negatively affected by certain operating issues that arose in connection with the deployment of a new computer system in April 2015. These operating issues were largely resolved by the end of the second quarter.

Licensees.  Net sales to our licensees decreased as a result of decreased shipments to CCI; sales to CCI decreased $1,477, or 44%, during the second quarter of 2015.  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.

Medical products.  Sales to the largest customer in this segment, which distributes wound care products and provides services to the nursing home market, declined $137 during the second quarter of 2015 compared to the second quarter of 2014.  Sales to this dealer in the second quarter of 2015 were approximately $574, or 35%, of the net sales of our Medical Products. In May 2015, the dealer emerged from bankruptcy after having filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in February 2012. See Note L - Legal Proceedings for further information related to these proceedings. The decrease in sales to this distributor was more than offset by an increase in sales to other customers of $277. This sales increase was primarily attributable to increased sales of certain collagen-based wound care products.

Cost of sales.  Cost of sales for the quarter ended June 30, 2015 was $2,693 compared with $3,763 for the quarter ended June 30, 2014, a decrease of $1,070, or 28%. As a percentage of net sales, cost of sales was approximately 44% in the second quarter of 2015 and 48% in the second quarter of 2014. 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 and Medical Products sales from higher cost licensee sales.
 

- 18 -


General and administrative. General and administrative expenses for the quarter ended June 30, 2015 were $2,632 compared with expenses in the second quarter of 2014 of $2,679, a decrease of $47, or 2%. This decrease was primarily attributable to lower incentive and promotional expenses that was partially offset by higher foreign exchange losses. As a percentage of net sales, general and administrative expenses were 43% and 34% in the quarters ended June 30, 2015 and 2014, respectively.
 
Distributor commissions. Distributor commissions were $1,042 for the quarter ended June 30, 2015 compared with $1,278 in the second quarter of 2014, a decrease of $236, or 18%.  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) decreased to approximately 39% in the second quarter of 2015 compared to 42% in the same period in 2014.  This decrease was primarily attributable to lower commissions paid as a result of the sales decline during the quarter. On a consolidated basis, distributor commissions as a percentage of net sales were 17% and 16% in the quarters ended June 30, 2015 and 2014, respectively.

Income taxes.  We recorded a benefit for income taxes of $80 and a provision for income taxes of $15 during the quarters ended June 30, 2015 and 2014, 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 June 30, 2015 was $246, or $0.11 per share, compared with a net loss in the second quarter of 2014 of $7, or $0.00 per share.

Six months ended June 30, 2015 compared with the six months ended June 30, 2014 (U.S. dollars in 000s except per share amounts)
 
Net sales. Net sales for the six months ended June 30, 2015 were $11,552 compared with net sales for the same period in 2014 of $13,598, a decrease of $2,046, or 15%. This decrease resulted from a $2,105 decrease in net sales of Nutritional Products that was partially offset by a $59 increase in net sales of Medical Products. The decrease in net sales of Nutritional Products resulted from a $2,408 decrease in net sales to our licensees that was partially offset by a $303 increase in net sales through our Associate network.

Associate network.  Net sales through the Associate network channel increased by $303 during the six months ended June 30, 2015 compared to the same period in 2014. The increase in sales was due to sales growth in our Southeast Asia markets, which reported increased sales during the first six months of 2015 of $774. Sales growth in Asia was attributable to the opening of offices in Malaysia and Indonesia in February 2014 and June 2014, respectively. Sales growth in Southeast Asia was partially offset by a $471 decline in North American sales.

Licensees.  Net sales to our licensees decreased as a result of decreased shipments to CCI; sales to CCI decreased $2,423, or 45%, during the first six months of 2015.  Sales to CCI are impacted by a variety of factors including global economic and political factors, regulatory changes and logistical considerations, which can impact the timing of shipments into CCI's markets.

Medical Products.  Sales to the largest customer in this segment, which distributes wound care products and provides services to the nursing home market, declined by $310 during the first six months of 2015 compared to the first six months of 2014.  Sales to this dealer in the first six months of 2015 were approximately $1,081, or 34%, of the net sales of our Medical Products. In May 2015, the dealer emerged from bankruptcy after having filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in February 2012. See Note L - Legal Proceedings in the accompanying condensed consolidated financial statements for further information related to these proceedings. Sales to other customers increased $369 during the first six months of 2015 primarily due to increased sales of certain collagen-based wound care products.

Cost of sales.  Cost of sales for the six months ended June 30, 2015 was $5,003 compared with $6,294 for the six months ended June 30, 2014, a decrease of $1,291, or 21%. As a percentage of net sales, cost of sales was approximately 43% in the first six months of 2015 and 46% in the first six months of 2014. 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 and Medical Products from higher cost licensee sales.
 
General and administrative. General and administrative expenses for the six months ended June 30, 2015 were $5,249 compared with expenses in the first six months of 2014 of $5,400, a decrease of $151, or 3%. This decrease was attributable to the one-time write off of certain start up costs associated with our entry into Hong Kong in the first quarter of 2014 that did not recur in 2015 and lower sales and marketing expenses in North America. These expense reductions were partially offset by increased expenses associated with our Malaysia and Indonesia offices that opened in February 2014 and June 2014, respectively. As a percentage of net sales, general and administrative expenses were 46% and 40% in the six months ended June 30, 2015 and 2014, respectively.
 
Distributor commissions. Distributor commissions were $2,157 for the six months ended June 30, 2015 compared with $2,113 in the first six months of 2014, an increase of $44, or 2%.  With respect to our Associate network, distributor commissions as a

- 19 -


percentage of commissionable sales (exclusive of rebates that are recorded as a reduction of sales) were approximately 39% in the first six months of 2015 and 41% in the first six months 2014.  On a consolidated basis, distributor commissions as a percentage of net sales were 19% and 16% in the six months ended June 30, 2015 and 2014, respectively.

Income taxes.  We recorded income tax benefits of $328 and $124 during the six months ended June 30, 2015 and 2014, 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 six months ended June 30, 2015 was $796, or $0.36 per share, compared with a net loss in the first six months of 2014 of $385, or $0.17 per share.

LIQUIDITY AND CAPITAL RESOURCES (U.S. dollars in 000s)
 
Cash and working capital. During the first six months of 2015, we had a net decrease in cash of $1,006 compared with a net decrease in cash of $1,633 in the first six months of 2014.  At June 30, 2015, we had working capital of $1,815, a $925 decrease from working capital at December 31, 2014 of $2,740.  During the first six months of 2015, working capital and cash fluctuated significantly due to the timing of cash receipts from customers, payments to vendors, and the reasons described below.
 
Operating activities. In the first six months of 2015, our operating activities used cash flow of $837.  In the first six months of 2014, our operating activities used cash flow of $863.  The net loss adjusted for non-cash activities, including depreciation and amortization, share-based compensation and deferred taxes, used cash flows of $863 and $230 in the first six months of 2015 and 2014, respectively. Cash was also used during the first six months of 2015 to increase inventories by $324, which was primarily related to additional inventory in Southeast Asia required to support current sales levels, and reduce accounts payable and accrued liabilities by $208, which is generally attributable to the normal fluctuation in timing of billings from and payments to suppliers. These uses of cash were partially offset by cash flow provided by an increase in deferred revenue of $305 in the first six months of 2015, which was primarily related to an increase in inventory held for later shipment to CCI, and a decline in accounts receivable of $189, which is generally attributable to the normal fluctuation in timing of billings to and payments from customers.

Investing activities. During the first six months of 2015, we used $38 for capital expenditures, which was related to the replacement of our Associate Sales and Marketing computer system with a new computer system that was deployed in April 2015. In December 2013, the Company engaged GSAT, Inc. to develop the new Associate Sales and Marketing computer system. The founder and CEO of GSAT, Inc. is a member of our Board of Directors.

On July 15, 2015, we completed the previously announced sale of our headquarters office/warehouse facility located in Irving, Texas for approximately $5.18. After repayment of outstanding mortgage debt of approximately $1.13 secured by this facility and payment of other closing costs and adjustments, we received net cash proceeds of approximately $3.75. Effective upon closing of this sale, we entered into an agreement to lease back the facility from the purchaser under a lease that expires on April 30, 2016.

Financing activities. During the first six months of 2015, financing activity included the repayment of long-term debt in the amount of $112. During the first six months of 2014, financing activity included the repayment of long-term debt in the amount of $104.

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 expired on February 28, 2015. No common stock repurchase transactions were executed as a result of the share repurchase program.

General liquidity and cash flows. Presently, the Company is considering alternative sources of capital, including bank borrowings, and other types of debt or equity financings to facilitate our expansion in Asia and 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, 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 have no significant capital expenditures planned.
 
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 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures


- 20 -


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 June 30, 2015, 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 June 30, 2015, were effective to provide reasonable assurance that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely discussions regarding required disclosure.

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 June 30, 2015 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 $1,081,000 and $1,391,000 of the Company's sales during the six months ended June 30, 2015 and 2014, 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. During the first quarter of 2015, the Company and ERC entered into a settlement agreement, which was approved by the Court having jurisdiction over this matter, pursuant to which the Company agreed to modify its labeling of the affected products and pay certain settlement costs. 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.

On April 28, 2015, Mannatech, Incorporated, a distributor of nutritional supplement products, filed suit against the Company alleging patent infringement with respect to sales of two of the Company's products. In July 2015, the parties entered into a settlement agreement and the suit was dismissed.



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.

- 21 -




- 22 -


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
 
 
 
 
August 14, 2015
 
By:
/s/             Steven E. Brown
Date
 
Its:
Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
August 14, 2015
 
By:
/s/              Daley L. Seeker
Date
 
Its:
Vice President-Finance and Chief Financial Officer
 
 
 
(principal financial and accounting officer)


- 23 -


RBC LIFE SCIENCES, INC.

Exhibit Index

Exhibit Number
Description
3.1
Amended Articles of Incorporation of the Company (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 27, 2014)
 
 
3.2
Amended By-laws of the Company (incorporated by reference to the Company’s Annual Report on Form 10-K filed March 27, 2014)
 
 
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 *
 
 
101.SCH
XBRL Taxonomy Extension Schema Document *
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document *

* Filed or furnished electronically herewith.




- 24 -




EXHIBIT 31.1
 
SECTION 302 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
 
I, Steven E. Brown, 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: August 14, 2015
 

 
/s/           Steven E. Brown
 
Steven E. Brown
 
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: August 14, 2015
 

 
/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 June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven E. Brown, 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/             Steven E. Brown
 
Steven E. Brown
 
Chief Executive Officer
 
August 14, 2015

 








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 June 30, 2015, 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
 
August 14, 2015




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