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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 March 31, 2012

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 April 27, 2012
Common Stock, $0.001 par value per share
 
22,228,834 shares





TABLE OF CONTENTS

 
Page Number
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
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.
Reserved
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

 
March 31,
2012
 
December 31,
2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,584,839

 
$
3,858,544

Accounts receivable, net
1,128,406

 
585,593

Inventories
5,780,650

 
6,448,934

Deferred income taxes
406,868

 
460,868

Prepaid expenses and other current assets
923,617

 
623,288

Total current assets
10,824,380

 
11,977,227

Property and equipment, net
4,366,594

 
4,486,771

Goodwill, net
2,296,295

 
2,286,859

Intangible assets, net
48,404

 
49,894

Other assets
49,050

 
24,995

 
$
17,584,723

 
$
18,825,746

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable, trade
$
1,385,457

 
$
2,170,690

Accrued liabilities
1,087,320

 
1,065,840

Current maturities of long-term obligations
185,607

 
182,056

Deferred revenue
2,651,293

 
2,990,333

Total current liabilities
5,309,677

 
6,408,919

Long-term obligations, less current maturities
1,497,744

 
1,545,499

Deferred income taxes
991,952

 
1,007,977

Shareholders’ equity:
 
 
 

Common stock, $0.001 par value; 50,000,000 shares authorized; 22,228,834 shares issued and outstanding at March 31, 2012 and December 31, 2011
22,229

 
22,229

Additional paid-in capital
13,659,342

 
13,650,414

Accumulated deficit
(4,025,780
)
 
(3,952,842
)
Accumulated other comprehensive income
129,559

 
143,550

 
9,785,350

 
9,863,351

 
$
17,584,723

 
$
18,825,746


See notes to condensed consolidated financial statements.

- 3 -



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

 
Quarters Ended March 31,
 
2012
 
2011
Net sales
$
6,068,379

 
$
6,537,883

Cost of sales
2,939,595

 
3,221,718

Gross profit
3,128,784

 
3,316,165

Operating expenses:
 
 
 
General and administrative
2,319,945

 
2,110,015

Distributor commissions
773,158

 
834,564

Depreciation and amortization
122,717

 
110,043

Total operating expenses
3,215,820

 
3,054,622

Operating profit (loss)
(87,036
)
 
261,543

Interest expense
32,902

 
36,209

Earnings (loss) before income taxes
(119,938
)
 
225,334

Provision (benefit) for income taxes
(47,000
)
 
82,000

Net earnings (loss)
(72,938
)
 
143,334

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(13,991
)
 
(3,212
)
Comprehensive income (loss)
$
(86,929
)
 
$
140,122


Net earnings (loss) per share:
 
 
 
  Basic
$
(0.00
)
 
$
0.01

  Diluted
$
(0.00
)
 
$
0.01


Weighted average common shares outstanding:
 
 
 
  Basic
22,228,834

 
22,228,834

  Diluted
22,228,834

 
22,540,810


See notes to condensed consolidated financial statements.




- 4 -



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

 
Quarters Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(72,938
)
 
$
143,334

Adjustment for non-cash items:
 
 
 
Depreciation and amortization
139,358

 
127,300

Stock-based compensation
8,928

 
10,369

Deferred income taxes
39,000

 
38,500

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(542,776
)
 
(71,598
)
Inventories
674,613

 
604,199

Prepaid expenses and other current assets
(298,783
)
 
(142,819
)
Other assets
(23,442
)
 
(27,120
)
Accounts payable and accrued liabilities
(767,714
)
 
(63,184
)
Deferred revenue
(339,077
)
 
704,852

Net cash provided by (used in) operating activities
(1,182,831
)
 
1,323,833

Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(16,709
)
 
(33,413
)
Net cash used in investing activities
(16,709
)
 
(33,413
)
Cash flows from financing activities:
 

 
 

Payments of long-term obligations
(44,204
)
 
(40,918
)
Net cash used in financing activities
(44,204
)
 
(40,918
)
Effect of exchange rate changes on cash flows
(29,961
)
 
(21,924
)
Net increase (decrease) in cash and cash equivalents
(1,273,705
)
 
1,227,578

Cash and cash equivalents, beginning of period
3,858,544

 
4,220,152

Cash and cash equivalents, end of period
$
2,584,839

 
$
5,447,730


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 of RBC Life Sciences, Inc. (sometimes hereinafter referred to collectively as “we”, “our”, “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 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, 2011 (the “2011 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 Pronouncement

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income ("ASU 2011-05"). ASU 2011-05 requires an entity to present components of net income and other comprehensive income either in one continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be applied retrospectively. The Company adopted the provisions of ASU 2011-05 as of January 1, 2012 using the single continuous statement presentation. The adoption of this guidance did not have a material effect on the Company's consolidated 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 in the U.S. and Canada and branch operations in Taiwan.  This product line is marketed under the “RBC Life” brand name.  In certain markets, primarily the U.S., Canada and Taiwan, 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 markets in Southeast Asia 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 accordance with a compensation plan similar to the one used by RBC for its Associates.

In addition to its Nutritional Products, RBC also markets a line of wound care products (“Medical Products”) under the MPM Medical 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 and pharmaceutical distributors.  Medical Products are used to prevent and treat wounds, 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:
 
March 31, 2012
 
December 31, 2011
Raw materials and bulk products
$
302,130

 
$
373,409

Packaging materials
329,153

 
346,844

Finished goods
5,149,367

 
5,728,681

 
$
5,780,650

 
$
6,448,934


Note D – Prepaid Expenses and Other Current Assets:

Prepaid expenses consist of the following:
 
March 31, 2012
 
December 31, 2011
Advance payment to suppliers
$
325,482

 
$
290,373

Prepaid income taxes
166,110

 
76,557

Certificates of deposit - restricted
85,085

 
83,598

Prepaid insurance and other
346,940

 
172,760

 
$
923,617

 
$
623,288


At March 31, 2012 and December 31, 2011, the Company held certificates of deposit in the amounts of approximately $85,000 and $84,000, respectively, which were pledged to secure surety bonds.

Note E – Property and Equipment:

Property and equipment consists of the following:
 
March 31, 2012
 
December 31, 2011
Building and improvements
$
3,523,428

 
$
3,523,428

Computer software and office equipment
2,399,168

 
2,381,345

Warehouse equipment
235,632

 
235,632

Automotive equipment
14,717

 
14,717

 
6,172,945

 
6,155,122

Less – accumulated depreciation
(2,947,524
)
 
(2,809,524
)
 
3,225,421

 
3,345,598

Land
1,141,173

 
1,141,173

 
$
4,366,594

 
$
4,486,771


Depreciation expense totaled approximately $137,900 and $125,800 for the quarters ended March 31, 2012 and 2011, 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, 2011
$
3,413,527

 
$
(1,126,668
)
Currency translation adjustment
18,412

 
(8,976
)
Balance, March 31, 2012
$
3,431,939

 
$
(1,135,644
)
  

- 7 -



Other intangible assets consist of the following:
 
 
 
March 31, 2012
 
December 31, 2011
 
Average
Life
(years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Gross
Carrying
Value
 
Accumulated
Amortization
Copyrights, trademarks and other registrations
19
 
$
99,100

 
$
(56,156
)
 
$
99,100

 
$
(54,834
)
Other
19
 
12,600

 
(7,140
)
 
12,600

 
(6,972
)
 
 
 
$
111,700

 
$
(63,296
)
 
$
111,700

 
$
(61,806
)

Amortization expense related to other intangible assets totaled approximately $1,500 for the quarters ended March 31, 2012 and 2011.  The aggregate estimated amortization expense for intangible assets remaining as of March 31, 2012 is as follows:
Remainder of 2012
$
4,468

2013
5,957

2014
5,957

2015
5,957

2016
5,957

Thereafter
20,108

 
$
48,404


Note G – Accrued Liabilities:

Accrued liabilities consist of the following:
 
March 31, 2012
 
December 31, 2011
Distributor commissions
$
469,657

 
$
511,360

Salaries and wages
487,254

 
485,927

Sales and property taxes
31,347

 
31,923

Interest
10,872

 
11,157

Other
88,190

 
25,473

 
$
1,087,320

 
$
1,065,840


Note H – Long-Term Obligations:

Long-term obligations consist of the following:
 
March 31, 2012
 
December 31, 2011
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 and Chief Executive Officer
$
1,683,351

 
$
1,727,555

Less – current maturities
(185,607
)
 
(182,056
)
 
$
1,497,744

 
$
1,545,499


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 March 31, 2012, the fair value of fixed-rate long-term debt was approximately $1,872,000, which was $189,000 above the carrying value of approximately $1,683,000.  At December 31, 2011, the fair value of fixed-rate long-term debt was approximately $1,931,000, which was $203,000 above the carrying value of approximately $1,728,000.

Note I – Share-Based Compensation:

The Company records compensation expense for all share-based payments based on the estimated grant date fair value.  Share-based compensation expense was approximately $8,900 and $10,400 for the quarters ended March 31, 2012 and 2011,

- 8 -



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 March 31,
 
2012
 
2011
 
(1)
 
 
Weighted average expected life (years)

 
8.4

Risk-free interest rate
%
 
3.32
%
Expected volatility
%
 
96.23
%
Expected dividend yield
%
 
%
__________________
(1) There were no option grants during this period.

A summary of stock option activity for the three months ended March 31, 2012 is as follows:
 
Options
 
Weighted-Average Exercise Price per Share
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding on December 31, 2011
1,190,570

 
$
0.33

 
                                      
 
 
Granted

 

 
 
 
 
Exercised

 

 
 
 
 
Forfeited/canceled
(11,240
)
 
0.62

 
 
 
 
Outstanding on March 31, 2012
1,179,330

 
$
0.33

 
3.1

 
$
8,881

Exercisable on March 31, 2012
1,010,660

 
$
0.30

 
2.7

 
$
8,881

 
A summary of the status of the Company's non-vested stock options as of March 31, 2012 and changes during the three months then ended are presented below:
 
Shares
 
Weighted-Average Grant Date Fair Value per Share
Non-vested stock options at December 31, 2011
179,910

 
$
0.44

Non-vested stock options granted

 

Vested stock options

 

Forfeited stock options
(11,240
)
 
0.60

Non-vested stock options at March 31, 2012
168,670

 
0.43


As of March 31, 2012, there was approximately $71,900 of total 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 management approach, the Company has two operating segments: Nutritional Products and Medical Products.

The Nutritional Products segment manufactures and distributes a line of over 75 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 the U.S. and Canada and branch operations in Taiwan.  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 certain other international markets.  For the most part, licensees also market the Nutritional Products in their respective territories through a network of independent Associates.

- 9 -




The Medical Products segment markets a line of approximately 28 wound care products under the MPM Medical brand name through a U.S. 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 and pharmaceutical distributors.  Medical Products are used to prevent and treat wounds, 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.
 
Segment information is as follows (in thousands):
 
Nutritional Products
 
Medical Products
 
Consolidated
Quarter Ended March 31, 2012
 

 
 

 
 

Net sales
$
4,621

 
$
1,447

 
$
6,068

Depreciation and amortization
119

 
20

 
139

Operating profit (loss)
(112
)
 
25

 
(87
)
Capital expenditures
17

 

 
17

Total assets
14,716

 
2,869

 
17,585

Quarter Ended March 31, 2011
 

 
 

 
 

Net sales
$
4,815

 
$
1,723

 
$
6,538

Depreciation and amortization
109

 
18

 
127

Operating profit
158

 
104

 
262

Capital expenditures
33

 

 
33

Total assets
16,381

 
2,627

 
19,008


Financial information summarized geographically is as follows (in thousands):

 
Quarter Ended March 31, 2012
 
Quarter Ended March 31, 2011
 
Net sales
 
Long-Lived assets
 
Net sales
 
Long-Lived assets
Domestic
$
2,552

 
$
6,139

 
$
2,958

 
$
6,476

Russia/Eastern Europe
2,736

 

 
3,057

 

Canada
367

 
542

 
318

 
558

Southeast Asia
305

 
79

 
155

 

All others
108

 

 
50

 

Totals
$
6,068

 
$
6,760

 
$
6,538

 
$
7,034


Significant Customers

The Company recorded sales of Nutritional Products to Coral Club International, Inc. ("CCI"), a licensee of the Company, in the amounts of $2,736,000 and $3,057,000 during the quarters ended March 31, 2012 and 2011, respectively.  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 $790,000 and $1,070,000 during the quarters ended March 31, 2012 and 2011, respectively .  In no other case did a customer of the Company account for more than 10% of net sales during the quarters ended March 31, 2012 and 2011.



- 10 -



Note K – Earnings (Loss) Per Share:

Summarized basic and diluted earnings (loss) per common share were calculated as follows:
 
Net Earnings (Loss)
 
Weighted
Average
Shares
 
Per Share
Quarter Ended March 31, 2012
 

 
 

 
 

Basic loss per common share
$
(72,938
)
 
22,228,834

 
$
(0.00
)
Effect of dilutive stock options

 

 
 

Diluted loss per common share
$
(72,938
)
 
22,228,834

 
$
(0.00
)
Quarter Ended March 31, 2011
 

 
 

 
 

Basic earnings per common share
$
143,334

 
22,228,834

 
$
0.01

Effect of dilutive stock options

 
311,976

 
 

Diluted earnings per common share
$
143,334

 
22,540,810

 
$
0.01


The number of stock options that were outstanding, but not included in the computation of diluted earnings (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 1,179,000 and 534,000 for the quarters ended March 31, 2012 and 2011, respectively.

Note L – Legal Proceedings:

On February 24, 2012, a medical/surgical dealer, which accounted for $790,000 and $1,070,000 of the Company's sales during the quarters ended March 31, 2012 and 2011, 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. According to its bankruptcy petition, the dealer filed its petition as the most effective means of stabilizing its finances as it seeks to resolve a reimbursement guidelines dispute with Medicare. The dealer believes that Medicare is improperly withholding payments. While the reimbursement dispute does not involve products supplied by the Company, it has negatively affected the Company's sales to this dealer. The petition states that this dealer relies on Medicare payments for more than 90% of its revenue. On March 9, 2012, the Bankruptcy Court approved a "standstill" agreement between the dealer and Medicare, which agreement provides that Medicare would pay the dealer for certain claims it was withholding and that it would process and pay certain additional claims while the parties attempted to resolve the issues underlying the dispute. In a press release issued by the dealer, the dealer indicated that this agreement would provide it with the cash it requires to continue operations in the ordinary course of business and service its customers without interruption. As of the date of the bankruptcy filing, the Company had approximately $436,000 in accounts receivable that was owed by this dealer, and it has continued to fill this dealer's post-petition purchase orders. The accounts receivable balance as of April 30, 2012 was approximately $639,000. While the Company believes that the amounts due from this dealer will be collected in full, it intends to monitor these proceedings as they progress in order to appropriately assess and enforce its rights in this matter.

The Company is from time to time engaged in routine litigation.  The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters.




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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 2011 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 (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 Form 10-Q and those previously disclosed in Item 1A to Part I of the 2011 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 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: (i) wellness products, (ii) fitness products and (iii) skin care products.   Products include herbal formulas, vitamins, minerals, antioxidants and personal care products.  In certain markets, principally in the U.S., Canada 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 and pharmaceutical distributors.  Medical Products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care and oncology markets.
  
Consolidated net sales in dollars and as a percentage of consolidated net sales are as follows:
 
Quarters Ended March 31,
 
2012
 
2011
 
(U.S. dollars in 000’s)
Nutritional Products:
 

 
 

 
 

 
 

       Licensees
$
2,832

 
47
%
 
$
3,089

 
47
%
       Associate network
1,789

 
29
%
 
1,726

 
27
%
 
4,621

 
76
%
 
4,815

 
74
%
Medical Products
1,447

 
24
%
 
1,723

 
26
%
 
$
6,068

 
100
%
 
$
6,538

 
100
%

Licensees. 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

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distribution network in the licensed territory.
 
Our principal licensee is CCI, which accounted for 97% and 99% of licensee net sales in the three months ended March 31, 2012 and 2011, respectively. CCI distributes products in a territory comprised mainly of Russia and Eastern Europe. The President of CCI is a former member of our Board of Directors and beneficially owns approximately 18% of our outstanding common stock. Under our arrangement with CCI, 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.  Because we do not recognize revenue until products are shipped to CCI, the Company's sales to CCI fluctuate from quarter to quarter depending on a number of logistical considerations, only one of which is the sales demand of CCI’s Associate network. 
 
Net sales in this channel decreased $257,000, or 8%, during the three months ended March 31, 2012 compared with net sales for the same period in 2011 as a result of a decrease in net sales to CCI.  Net sales to CCI decreased $321,000, or 11%, for the three months ended March 31, 2012 compared to the same period in 2011.  We attribute this decline primarily to the logistical considerations affecting the timing of shipments to CCI as well as decreased in-territory demand. Reduced in-territory demand generally results in a disproportionate reduction of sales to CCI as CCI adjusts its inventory to a level commensurate with expected future sales. Backlog related to CCI’s account was $5,547,000 at March 31, 2012 compared to $6,307,000 at March 31, 2011.

Associate Network.  Sales in this channel are dependent upon the number and productivity of our Associates.  Accordingly, growth in sales is dependent upon the sponsorship of new Associates and retention of existing Associates.  Net sales through the Associate network channel increased approximately 4% during the first three months of 2012 compared to the same period in 2011 primarily as a result of an increase in the number of active Associates, which averaged 15,100 and 11,100 for the quarters ended March 31, 2012 and 2011, respectively. We attribute the increase in the number of active Associates to the launch of a new dietary supplement product, Stem-KineTM, in May 2011. Stem-Kine is a dietary supplement that has been shown in published human clinical studies to nutritionally enable bone marrow and other stem cell-producing tissues to increase their production of stem cells, which form the natural repair and renewal system of the body.

The following table sets forth the Associate network net sales by geographic region as a percentage of total net sales for the periods indicated:
 
Quarters Ended March 31,
 
2012
 
2011
U.S.
62
%
 
73
%
Canada
21

 
18

Southeast Asia
17

 
9

 
100
%
 
100
%
 
Although we are unable to quantify the amount, we believe that certain sales made in the U.S. in the first quarter of 2011 were made to Associates with business relationships in Southeast Asia and that products initially shipped to U.S. addresses were then re-shipped by the Associates to the Southeast Asia region. We believe that this practice was much less prevalent in the first quarter of 2012 with the opening of branch operations in Taiwan on October 1, 2011 and as Associates in NFR markets have become more familiar with our NFR program.
 
Medical Products. We sell Medical Products primarily in the U.S. to wholesalers such as medical/surgical dealers and pharmaceutical distributors. These wholesalers supply various health care providers such as hospitals, nursing homes, clinics and pharmacies. In some cases, wholesalers 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 55% and 62% of Medical Products net sales during the three months ended March 31, 2012 and 2011. 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. According to its bankruptcy petition, the dealer filed its petition as the most effective means of stabilizing its finances as it seeks to resolve a reimbursement guidelines dispute with Medicare. The dealer believes that Medicare is improperly withholding payments. While the reimbursement dispute does not involve products we supply to this dealer, it has negatively affected our sales to this dealer. The petition states that this dealer relies on Medicare payments for more than 90% of its revenue. On March 9, 2012, the Bankruptcy Court approved a "standstill" agreement between the dealer and Medicare, which agreement provides that Medicare would pay the dealer for certain claims it was withholding and that it would process and pay certain additional claims while the parties attempted to resolve the issues underlying the dispute. In a press release issued by the dealer, the dealer

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indicated that this agreement would provide it with the cash it requires to continue operations in the ordinary course of business and service its customers without interruption. As of the date of the bankruptcy filing, we had approximately $436,000 in accounts receivable that was owed by this dealer, and we have continued to fill this dealer's post-petition purchase orders. The accounts receivable balance as of April 30, 2012 was approximately $639,000. While we believe the amounts due from this dealer will be collected in full, we will monitor these proceedings as they progress in order to appropriately assess and enforce our rights in this matter.


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 three months ended March 31, 2012 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 2011 Form 10-K.

RESULTS OF OPERATIONS
 
The following table sets forth our operating results as a percentage of net sales for the periods indicated:
 
Quarters Ended March 31,
 
2012
 
2011
Net sales
100.0
 %
 
100.0
%
Cost of sales
48.4

 
49.3

Gross profit
51.6

 
50.7

Operating expenses:
 

 
 

General and administrative
38.2

 
32.3

Distributor commissions
12.8

 
12.8

Depreciation and amortization
2.0

 
1.6

Total operating expenses
53.0

 
46.7

Operating profit (loss)
(1.4
)
 
4.0

Interest expense
0.6

 
0.6

Earnings (loss) before income taxes
(2.0
)
 
3.4

Provision (benefit) for income taxes
(0.8
)
 
1.2

Net earnings (loss)
(1.2
)%
 
2.2
%

Quarter ended March 31, 2012 compared with quarter ended March 31, 2011 (000’s except per share amounts)
 
Net sales. Net sales for the quarter ended March 31, 2012 were $6,068 compared with net sales for the same period in 2011 of $6,538, a decrease of $470, or 7%. This decrease resulted from a $194 decrease in net sales of Nutritional Products and a $276 decrease in net sales of Medical Products. The decrease in net sales of Nutritional Products resulted from a decrease in net sales to our licensees of $257, which was partially offset by an increase in net sales to our Associate network of $63.
 
Licensees.  Net sales to our licensees decreased as a result of decreased shipments to CCI; sales to CCI decreased $321, or 11%, during the first quarter of 2012. We attribute this decline primarily to the logistical considerations affecting the timing of shipments to CCI as well as decreased in-territory demand. Sales to CCI can vary from quarter to quarter due to various logistical factors, sometimes significantly, irrespective of the sales demand of CCI’s Associate network.
  
Associate Network.  Net sales to our Associate network increased approximately $63, or 4%, during the first quarter of 2012 primarily as a result of an increase in the number of active Associates, which averaged 15,100 and 11,100 for the quarters ended March 31, 2012 and 2011, respectively.


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Medical products.  The decline in net sales of Medical Products resulted from decreased sales to the largest customer in this segment.   Sales to the largest customer in this segment, which distributes wound care products and provides services to the nursing home market, decreased $280 during the first quarter of 2012 compared to the first quarter of 2011.  Sales to this distributor in the first quarter of 2012 were approximately $790, or 55% of Medical Products net sales. On February 24, 2012, this dealer filed for Chapter 11 bankruptcy protection as described above under the section "Overview - Medical Products."

Cost of sales.  Cost of sales for the quarter ended March 31, 2012 was $2,940 compared with cost of sales in the first quarter of 2011 of $3,222, a decrease of $282 or 9%. As a percentage of net sales, cost of sales was 48% in the first quarter of 2012 and 49% in the first quarter of 2011. As a percentage of net sales, gross profit decreased 1%. During the first quarter of 2012, we recorded a charge of approximately $140,000 to write off certain inventory that, although it met all basic product specifications, it did not satisfy our palatability standards, which we have adopted to help ensure a positive customer experience.
 
General and administrative. General and administrative expenses for the quarter ended March 31, 2012 were $2,320 compared with expenses in the first quarter of 2011 of $2,110, an increase of $210 or 10%. This increase was primarily attributable to expenses associated with the Taiwan branch, which opened October 1, 2011, and expenses associated with product stability testing. As a percentage of net sales, general and administrative expenses were 38% and 32% in the quarters ended March 31, 2012 and 2011, respectively.
 
Distributor commissions. Distributor commissions were $773 for the quarter ended March 31, 2012 compared with distributor commissions of $835 in the first quarter of 2011, a decrease of $62, or 7%.  With respect to our Associate network, distributor commissions as a percentage of commissionable sales exclusive of rebates, which are recorded as a reduction of sales, decreased to approximately 43% in the first quarter of 2012 compared to 47% in the same period in 2011.  This decrease was mainly attributable to certain changes to our Associate compensation plan implemented in the first quarter of 2012, which were adopted to better balance commissions earned on sales to new Associates and sales to existing Associates. On a consolidated basis, distributor commissions as a percentage of net sales were 13% in the quarters ended March 31, 2012 and 2011.
 
Income taxes.  We recorded a benefit for income taxes of $47 during the quarter ended March 31, 2012, and a provision for income taxes of $82 during the quarter ended March 31, 2011, based on our estimate of the effective annual income tax rate for the applicable period.

Net earnings (loss).  As a result of the factors described above, the net loss for the quarter ended March 31, 2012 was $73, or $0.00 per share, compared with net earnings in the first quarter of 2011 of $143, or $0.01 per share.


LIQUIDITY AND CAPITAL RESOURCES (000’s)
 
Cash and working capital. During the first three months of 2012, we had a net decrease in cash of $1,274 compared with a net increase in cash of $1,228 in the first three months of 2011.  At March 31, 2012, we had working capital of $5,515, a $53 decrease from working capital at December 31, 2011 of $5,568.   The reasons for these changes in cash and working capital are described below.
 
Operating activities. In the first three months of 2012, our operating activities used cash flows of $1,183.  In the first three months of 2011, our operating activities provided cash flows of $1,324.  The primary uses of cash by operating activities during the first three months of 2012 were a $768 decrease in accounts payable and accrued liabilities, which primarily relates to the timing of payments due to suppliers, and a $543 increase in accounts receivable, which primarily relates to the Medical Products dealer that filed for bankruptcy protection on February 24, 2012, as described above in the section "Overview - Medical Products." Also during the first quarter of 2012, the Company generated $675 of cash through a decrease in inventory. A significant portion of this decrease was related to a reduction in inventory held for shipment to CCI, which was also the primary reason for the decrease in deferred revenue of $339. In the first three months of 2012, net earnings (loss) adjusted for non-cash activities, which includes depreciation and amortization, stock-based compensation and deferred income taxes, provided cash flows of $114 compared with providing cash flows of $320 in the first three months of 2011.
 
Investing activities. During the first three months of 2012, we used cash of $17 to purchase property and equipment.
 
Financing activities. The only financing activity during the first three months of 2012 was the repayment of long-term debt in the amount of $44.

General liquidity and cash flows. We believe that the working capital requirements of our existing operations, including the start-up of branch operations in Taiwan, can be met through available cash and cash generated from operating activities for the

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foreseeable future; however, an overall decrease in demand for our products could adversely affect our liquidity. In the event of a significant decrease in cash provided by our operating activities, we may seek outside sources of capital including bank borrowings or other types of debt or equity financings. We can give no assurance, however, that we would be able to obtain any additional outside financing or obtain financing on terms we would find acceptable.  We have no plans or requirements for any significant capital expenditures during the next 12 months.
 
Other than those factors already described, 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 and Taiwan that accounted for 10% of net sales during the first three months of 2012 and 6% of net sales in 2011.  Sales transactions in Southeast Asian markets other than Taiwan are denominated in U.S. dollars.

We advance funds to and 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 our foreign currency exchange rate exposure for intercompany advances of approximately $823,000 and $767,000 to our Canadian operations and Taiwan operations, respectively, at March 31, 2012, a 10% adverse change in the currency rate would reduce earnings before income taxes by approximately $159,000.

All transactions with our licensees are denominated in U.S. dollars so the licensee bears 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 in these markets may affect the ability of our licensees to conduct their business operations profitably.

ITEM 4.
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, evaluated as of March 31, 2012, 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 concluded that our disclosure controls and procedures, as of March 31, 2012, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures.

There has been no change in internal control over financial reporting that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

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PART II – OTHER INFORMATION
 
ITEM 1.
Legal Proceedings.

On February 24, 2012, a medical/surgical dealer, which accounted for $790,000 and $1,070,000 of the Company's sales during the quarters ended March 31, 2012 and 2011, 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. According to its bankruptcy petition, the dealer filed its petition as the most effective means of stabilizing its finances as it seeks to resolve a reimbursement guidelines dispute with Medicare. The dealer believes that Medicare is improperly withholding payments. While the reimbursement dispute does not involve products supplied by the Company, it has negatively affected the Company's sales to this dealer. The petition states that this dealer relies on Medicare payments for more than 90% of its revenue. On March 9, 2012, the Bankruptcy Court approved a "standstill" agreement between the dealer and Medicare, which agreement provides that Medicare would pay the dealer for certain claims it was withholding and that it would process and pay certain additional claims while the parties attempted to resolve the issues underlying the dispute. In a press release issued by the dealer, the dealer indicated that this agreement would provide it with the cash it requires to continue operations in the ordinary course of business and service its customers without interruption. As of the date of the bankruptcy filing, the Company had approximately $436,000 in accounts receivable that was owed by this dealer, and it has continued to fill this dealer's post-petition purchase orders. The accounts receivable balance as of April 30, 2012 was approximately $639,000. While the Company believes that the amounts due from this dealer will be collected in full, it intends to monitor these proceedings as they progress in order to appropriately assess and enforce its rights in this matter.

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 2011 Form 10-K. In connection with our preparation of this quarterly report, management has reviewed and considered these risk factors and has determined that there have been no material changes to our risk factors since the date of filing of the 2011 Form 10-K.

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

None

ITEM 3.
Defaults Upon Senior Securities.
 
None

ITEM 4.
Reserved.
 
ITEM 5.
Other Information.
 
None

ITEM 6.
Exhibits.

The Exhibit Index filed herewith is incorporated herein by reference.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
RBC Life Sciences, Inc.
 
 
Registrant
 
 
 
 
May 11, 2012
 
By:
/s/             Clinton H. Howard
Date
 
Its:
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
May 11, 2012
 
By:
/s/              Steven E. Brown
Date
 
Its:
Executive Vice President and Chief Financial Officer
 
 
 
(principal financial and accounting officer)


- 18 -



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 **
 
 
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 electronically herewith

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