UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)


x
                ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2009OR ̈
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      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 incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)2301
      Crown Court, Irving, Texas
            
            75038(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code:   972-893-4000




Securities
registered pursuant to Section 12(b) of the Act:  None




Securities
      registered pursuant to Section 12(g) of the Act:
                Common Stock, $0.001 par
    value(Title
      of class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ̈Noþ.




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes ̈Noþ.




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.  YesþNoo.




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes ̈No ̈.




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈




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





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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     Yes ̈Noþ.




Aggregate
market value of voting and non-voting common equity held by non-affiliates of
the registrant as of June 30, 2009:  $3,156,000




Number of
shares of common stock outstanding as of February 1,
2010:  21,921,934




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the registrant's definitive Proxy Statement to be used in connection with its
2010 Annual Meeting of Shareholders are incorporated by reference into
Part III of this report.









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.  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 time 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. Many important factors that could cause such a difference are
described in this Form 10-K in Part I, Item 1A. Risk Factors and Part II, Item
7A. Quantitative and Qualitative Disclosures About Market Risk, which you should
review carefully. Please consider our forward-looking statements in light of
those risks as you read this report.









TABLE OF
CONTENTS




PAGEPART
      I
                  
                  2Item
      1.
                  Business
                  2Item
      1A.
                  Risk
      Factors
                  15Item
      1B.
                  Unresolved
      Staff Comments
                  23Item
      2.
                  Properties
                  23Item
      3.
                  Legal
      Proceedings
                  23Item
      4.
                  Reserved
                  23PART
      II
                  
                  24Item
      5.
                  Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  24Item
      6.
                  Selected
      Financial Data
                  24Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  25Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  33Item
      8.
                  Financial
      Statements and Supplementary Data
                  33Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  33Item
      9A(T).
                  Controls
      and Procedures
                  33Item
      9B.
                  Other
      Information
                  34PART
      III
                  
                  35Item
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  35Item
      11.
                  Executive
      Compensation
                  35Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and RelatedStockholder
      Matters
                  35Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  35Item
      14.
                  Principal
      Accountant Fees and Services
                  35PART
      IV
                  
                  36Item
      15.
                  Exhibits
      and Financial Statement Schedules
                  36SIGNATURES
                  38




1




PART
I




Item
1.           Business




Overview




RBC Life
Sciences, Inc., a Nevada corporation (along with its subsidiaries, sometimes
hereinafter referred to collectively as “we”, “our”, the “Company” or “RBC”), is
principally engaged in the marketing and distribution of nutritional supplements
and personal care products (collectively “Nutritional Products”) through
subsidiaries in the U.S. and Canada.  This product line is marketed
under the “RBC Life” brand name and may be broadly categorized
as:  (i) wellness products, (ii) fitness products and (iii) skin care
products.  The product line includes herbal formulas, vitamins,
minerals, antioxidants and skin, hair and body care products.





In
certain markets, primarily the U.S. and Canada, we market Nutritional Products
through a network of independent distributors that we refer to as
“Associates.”  We also market Nutritional Products in certain
international markets through license arrangements.  The licensees are
third parties who are granted exclusive rights to distribute Nutritional
Products in their respective territories and, for the most part, distribute
these products through an independent network of Associates in the licensed
territory.





Associates
are independent contractors who purchase products for personal use, purchase
products for resale to retail customers and sponsor other individuals as
Associates.  Associates can derive compensation both from the direct
sales of products and from sales generated by sponsored Associates. The
marketing effort of our Associates involves person-to-person communication of
information related to our products and the system by which they are
marketed.  We believe this feature makes network marketing a more
effective means of marketing our products than in-store retail sales where there
is little or no direct explanation of product benefits. Network marketing
provides financial opportunity to a broad cross-section of people, including
those seeking to simply supplement other income, as well as those who desire a
full-time home-based business.





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




Our
principal offices are located at 2301 Crown Court, Irving, Texas
75038.  We can be reached by phone at 972-893-4000, by fax at
972-893-4111 and by email at webmaster@rbclifesciences.com.  Our
corporate information can be accessed at www.rbclifesciences.com
or www.mpmmedicalinc.com.  In
June 2006, we changed the name of the Company from Royal BodyCare, Inc. to RBC
Life Sciences, Inc.




Industry
Overview





Nutritional
Products.In the Nutritional Products business segment,
we compete within two industries: nutrition and direct selling. The nutrition
industry is highly fragmented and very competitive.  Companies in this
industry manufacture and distribute products generally intended to maintain
and/or enhance the body’s health and general well being.  Products
manufactured and distributed include (i) nutritional supplements, (ii) natural
and organic foods, (iii) functional foods and (iv) natural and organic personal
care and household products.  The majority of our net sales in this
segment are sales of nutritional supplements.





According
to data published by the Nutrition Business Journal(“NBJ”), global nutrition industry sales increased 8% to $270 billion in
2008.  Of that $270 billion, nutritional supplements contributed $77
billion, while natural and organic foods contributed $71 billion, functional
foods $95 billion, and natural and organic personal care and household products
$27 billion.





NBJ
reported that the overall U.S. nutrition market grew 8% in 2008, bringing total
U.S. retail sales to $101.8 billion.  Growth of the U.S. nutritional
supplements category in 2008 was 6.3%.  NBJ also reported that sales
in the region comprised of  Eastern Europe and Russia grew
23%.




2




We
believe that there are a number of demographic, healthcare and lifestyle trends
that drive the continued growth of the nutrition industry:





·
            The
      aging population, particularly the baby-boomer generation, combined with
      the tendency on the part of consumers to purchase
      more  nutritional supplements as they
  age;


·
            The
      continued spread of chronic health ailments such as diabetes and heart
      disease, which are linked to poor nutritional
  habits;


·
            A
      growing consumer interest in self-care and natural therapies to prevent
      illness;


·
            Rising
      health care costs causing many consumers to take preventive measures,
      including alternative medicines and nutritional supplements;
      and


·
            The
      publication of research findings supporting the positive health effects of
      certain nutritional supplements.





In recent
periods some companies have reported sales declines in the nutritional
supplements market citing various reasons including exchange rate fluctuations,
global economic conditions and increased competition.  Our 2009
licensee sales were negatively affected by the global economic downturn as more
fully described below in Part II, Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations of this report.





Nutritional
products are distributed through various market participants, which include the
following:





·
            Mass
      market retailers, including mass merchandisers, drug stores, supermarkets,
      and discount stores;


·
            Natural
      health food retailers;


·
            Network
      marketing;


·
            Mail
      order;


·
            Health
      care professionals and practitioners;
and


·
            The
      Internet.





Our
primary distribution model is a network marketing system, which is a common form
of direct selling. According to the latest data available from the World
Federation of Direct Selling Associations, the direct selling industry generated
approximately $115 billion annually in worldwide retail sales in 2008, with
approximately 66.8 million independent distributors. According to the Direct
Selling Association (“DSA”), the U.S. generated approximately $30 billion in
annual retail sales in 2008 with approximately 15.1 million independent
distributors. Also according to the DSA, wellness products, which include
nutritional supplements, accounted for 23%, and personal care products accounted
for 22%, of U.S. direct retail sales.





Medical Products.  In the Medical Products business segment, we compete in the
wound care industry.  Industry participants in this multi-billion
dollar market are companies of all sizes that manufacture and distribute a wide
range of products related to the treatment and prevention of
wounds.  Products manufactured and distributed in this industry
include:





·
            Wound
      management products such as adhesive bandages and
  gauze;


·
            Wound
      closure products such as staples, various clips and
    sutures;


·
            Advanced
      wound care products, which are represented by a variety of moist wound
      healing dressings such as alginate dressings, film dressings, foam
      dressings, hydrocolloid dressings and hydrogel
  dressings;


·
            Active
      wound healing products such as skin replacements, collagen dressings and
      growth factors;


·
            Debriding
      products including various cleansers;
and


·
            Pressure
      relief devices such as beds,  mattress overlays and other
      support devices.





Wounds
requiring treatment can be either acute or chronic.  Industry data
indicates that acute wounds comprise a large majority of all
wounds.  These are wounds that follow the normal process of healing
and generally include burns, traumatic wounds and surgical
incisions.   Chronic wounds are wounds that do not heal within a
normally expected time frame under standard care and generally include venous,
arterial, pressure and diabetic ulcers.  The increasing prevalence of
chronic wounds is driven by the large and growing elderly, diabetic and obese
populations as these groups are more likely to suffer from conditions that
compromise circulation, which is a primary cause of chronic wounds.




3




Competitive
Strengths





Product Portfolio.   We have developed a line of high-quality health
products based on the demands of the industries within which we
operate.  Our product lines feature proprietary products, newly
developed products and products that have been available for many
years.  We regularly review and if necessary improve our product
formulations based on new scientific data and market demands to ensure our
product portfolio remains current and attractive to our customers.





In-house
Manufacturing.    We manufacture certain proprietary
raw materials for our exclusive use, including the key raw material used in our
top-selling products, Microhydrin® and
MicrohydrinTM Plus,
which are Nutritional Products.  Together, these products accounted
for 16% of consolidated net sales and 22% of Nutritional Products sales in
2009.  We believe that our ability to manufacture these proprietary
raw materials is a competitive advantage for us because it allows us to better
protect our proprietary technology and know-how, and better manage the quality
of and costs associated with the production of our key raw
materials.





Science-based Product
Development.   We emphasize science-based product
development in the fields of nutrition and wound care.  We have
developed substantially all of our products utilizing scientific data as the
basis of product formulation.  Scientific data used includes published
research, in-house and third-party research and sponsored
research.  We maintain an on-going research and development effort
that includes in-house personnel as well as third-party advisors including
medical professionals.





Operating
Flexibility.   Other than the production of certain
proprietary raw materials, we contract the production of all our products to
third-party contract manufacturers.  This arrangement allows us to
minimize capital expenditures, benefit from specialized expertise provided by
contract manufacturer and maintain operating overhead in line with
sales.  We have found the marketplace for quality contract
manufacturers to be competitive and attractive.  We utilize our own
in-house quality control laboratories to monitor the performance of our
third-party manufacturers to ensure they maintain a high quality of
service.





Experienced Management Team.  Our management team includes individuals with expertise in
various managerial disciplines including nutrition, wound care, international
business development, marketing, sales, operations, quality assurance, finance
and information technology.





Business
Strategy





We seek to grow our business by
pursuing the following strategies:





Leverage and Expand our Relationship
with CCI.   Our largest customer is Coral Club
International, Inc. (“CCI”), which is a licensee that distributes Nutritional
Products in a territory comprised mainly of Russia and Eastern
Europe.  Net sales to CCI accounted for approximately 50% of
consolidated net sales in 2009, although, due to difficult  economic
conditions in key geographic markets serviced by CCI, 2009 sales declined 30%
when compared to 2008.  Despite the 2009 sales decline, we believe
that net sales to CCI have the potential to grow as economic conditions
improve.  Our objective is to support this growth by supplying CCI
with new products and providing operational and regulatory
support.  We will continue to implement initiatives to accomplish
these objectives and seek other ways to facilitate growth in this
territory.





Expand our Existing Network Marketing
Associate Base.   We believe that the network marketing
model is the most effective way to sell our Nutritional Products.  Our
objective is to increase sales in this channel by increasing the attraction,
recruitment, retention and productivity of our Associates.  We seek to
accomplish these objectives by (i) providing training and support to new and
existing Associates through various means, including the sponsorship of local,
regional and international events, (ii) introducing new products and (iii)
providing financial incentives through the Associate compensation
plan.





Expand Medical Products in Existing
and New Markets.   We believe there is significant
opportunity to increase net sales of our Medical Products in the U.S. and
international markets.  We have developed and continue to develop new
market opportunities in the U.S. based on our expertise in the wound care
market.  To this end, we will (i) introduce new products, (ii) provide
training and other support to our field sales force and the sales force of key
distributors and (iii) increase the body of clinical data supporting the safety
and efficacy of our products.  In addition, we continue to work with
third parties to facilitate the expansion of Medical Products distribution into
international markets.




4




Develop Improved and New
Products.   As a distributor of health products, it is
vital to improve existing products and to develop new and innovative
products.  We will use our existing resources and, to the extent we
deem prudent, invest additional resources, to identify opportunities for new and
improved products.  Our product development activities will continue
to center around the development and introduction of science-based products in
response to newly released clinical and other scientific data, new technology
and customer preferences.





Products




The
Nutritional Products segment, which accounted for 75%, 79% and 83% of
consolidated net sales in 2009, 2008 and 2007, respectively, markets nutritional
supplements and personal care products under the RBC Life brand
name.  The Medical Products segment markets wound care products under
the MPM Medical brand name.  For additional information related to
these industry segments, please see Note O to our consolidated financial
statements beginning on page F-1 of this report.




Nutritional
Products.  We currently market 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.  These products
may be broadly categorized as: (i) wellness products, (ii) fitness products and
(iii) skin care products.  Featured products include:




·
            Microhydrin
      and Microhydrin Plus – powerful, broad-spectrum
    antioxidants;




·
            NeuroBrightTM –
      introduced in August 2009, this product supports healthy brain function
      and enhances energy and acuity;




·
            Organic
      spirulina – sold in powder, tablet, capsule and , in combination with
      other ingredients, bar forms, a nutritious algae that provides a complete
      range of vital nutrients and a higher percentage of easily digested
      protein than meat;




·
            OliViva® –
      made from freshly harvested olive leaves, an antioxidant beverage that
      supports the immune system, increases energy and supports the
      cardiovascular system;




·
            ColoVada
      Plus®
      –  an effective fourteen-day colon cleansing program that has
      been widely used for more than 20
years;




·
            HydraCel® –
      a product that improves the quality of drinking water by reducing surface
      tension for increased hydration and making water more
      alkaline;




·
            24
      Seven® –
      a daily multivitamin/mineral
supplement;




·
            Immune
      360® –
      a product to nourish and support the function of the immune
      system;




·
            Digestion
      Formula – a combination of digestive enzymes to supplement the decline of
      enzymes that naturally occurs with aging;
and




·
            Cellution
      7TM –
      a science-based skin care product collection that incorporates ingredients
      with unique benefits.




Our
primary products are antioxidant products marketed under the trade names
Microhydrin and Microhydrin Plus, which collectively accounted for approximately
16% and 15% of consolidated net sales in 2009 and 2008,
respectively.  No other product accounted for more than 10% of our
sales.  Our finished products are produced according to our
specifications and/or formulas by manufacturers and suppliers that we do not
control.  We maintain quality control of our products through our
in-house laboratories as well as through the manufacturing and laboratory
facilities of our third-party suppliers.  Our manufacturing and
distribution practices are in compliance with current Good Manufacturing
Practices as established by FDA regulations.




5




Substantially
all of our product line has been developed utilizing scientific data as the
basis of product formulation.  Scientific data includes published
research, in-house and third-party research and sponsored
research.  Most of our product formulations feature one or more of the
following key ingredients:




·
            Silica
      mineral hydride, a nutritional antioxidant manufactured by us using our
      proprietary formula and process and used as an ingredient in the
      formulation of nutritional supplement and personal care
      products;




·
            Organic
      spirulina sourced from the highest quality producers, sold as a
      stand-alone product and combined as an ingredient in many other
      nutritional supplement formulations;
and




·
            Organic
      aloe vera specially processed to retain the benefits found in a fresh aloe
      vera leaf and sold as a beverage and as a topical gel and used as an
      ingredient in many of our skin care
products.




We
established a manufacturing facility in June 2002 to produce certain key raw
materials that were formerly sourced from a third-party
supplier.  Through the establishment of this facility, we developed
our own proprietary manufacturing processes, improved the quality of key raw
materials used in our product line and expanded the range of  raw
materials available to us.  We provide raw materials that we produce
to the third-party manufacturers for use in producing our finished
products.  Our proprietary raw materials represent key ingredients
used in our top-selling products, Microhydrin and Microhydrin Plus, as well as
NeuroBright and HydraCel.




Medical
Products.  As is the case with our Nutritional Products,
substantially all of our Medical Products were developed utilizing scientific
data as the basis of product formulation.  Our Medical Products are
produced according to our specifications and/or formulas by manufacturers and
suppliers that we do not control. We maintain quality control of our products
through our in-house laboratories as well as through the manufacturing and
laboratory facilities of our third-party suppliers.




We
currently market a line of approximately 28 wound care
products.  Certain wound care products, which account for
approximately 87% of Medical Products sales, are for the treatment and healing
of wounds such as pressure ulcers, leg ulcers, cuts, burns and
abrasions.  These products include cleansers, dressings, hydrogels,
calcium alginates, moisture barriers, antimicrobials and a unique hydrogel wound
dressing with Lidocaine.  Our other wound care products, which
represent approximately 13% of Medical Products sales, are designed to reduce
destruction to skin and tissue caused by radiation, and to reduce pain and
itching in the skin and the internal mucosa caused by radiation reactions or
reactions to certain cancer medications.




Manufacturing
and Product Sourcing




We
manufacture certain proprietary raw materials used in the production of many of
our Nutritional Products.  Included in the raw materials we produce is
the key ingredient, silica mineral hydride, used in production of our
top-selling products Microhydrin and Microhydrin Plus.  These raw
materials are manufactured according to proprietary formulations and processes
developed by us for our exclusive use.  Our manufacturing operations
are conducted at our headquarters located in Irving, Texas.




We
contract with third-party manufacturers and suppliers, such as Progressive
Laboratories, Inc., Brady Precision Converting, LLC, Merical Vita-Pak, Inc. and
Pacific Nutritional, Inc., to produce all of our finished products according to
our specifications and/or formulas.  This strategy provides operating
flexibility with minimum investment and helps us to control operating
costs.  We believe that our manufacturers and suppliers are
high-quality and are capable of meeting our current and projected demand over
the next several years.  We do not have long-term contracts with any
of our manufacturers or suppliers.  Most of our products can be
manufactured by a number of contract manufacturers at competitive
prices.




Sales
by Geographic Area




For information related to sales by
geographic region for the years ended December 31, 2009, 2008 and 2007, please
see Note O to our consolidated financial statements included beginning on page
F-1 of this report.




6




Independent
Distributor Network




Overview.             We
distribute Nutritional Products in certain markets, primarily the U.S. and
Canada, through a network of independent distributors that we refer to as
“Associates.”  In using this distribution model, we sell substantially
all of our Nutritional Products in these markets through individuals who are not
our employees.  Our Associates generally purchase products from us for
resale to consumers or for personal consumption.  The concept of
network marketing is based on the strength of personal recommendations that
frequently come from friends, neighbors, relatives and close
associates.  We believe that network marketing is an effective method
of distribution because it allows person-to-person interaction about our
products and business, which is not readily available through other distribution
channels.




Our sales
in these markets are dependent upon the number and productivity of our
Associates.  Growth in sales is dependent upon the sponsorship of new
Associates and retention of existing Associates.  We had approximately
9,100 active Associates in North America at December 31, 2009 and
2008.  We consider an Associate active if he/she has placed an order
within the previous 12 months.




We do not
have any significant accounts receivable from our Associates because they are
required to pay for purchases prior to shipment.  Associates pay for
products primarily by credit card, although orders can also be paid with cash,
direct account withdrawal, money orders or checks.  We are not
dependent upon the sales of any individual Associate, the loss of whom would
have a material adverse effect on our business.




Associates.          A
person who wishes to become an Associate must complete an application under the
sponsorship of an existing Associate.  The new Associate then becomes
part of the sponsoring Associate’s organization.  New Associates sign
a written contract and agree to adhere to policies and procedures that govern
the activities of Associates.  Associates are independent contractors
and not our employees.  An Associate has the right to purchase
products at wholesale, sponsor new Associates and earn compensation in
accordance with the Associate compensation plan.  While some
Associates sell products and recruit new Associates on a full-time basis, most
engage in these activities on a part-time basis or only purchase our products
for personal consumption.




Sponsoring.        We
develop and sell sales materials and tools for use by our Associates, who have
the primary responsibility for recruiting and educating new Associates with
respect to our products, the Associate compensation plan and how to build a
successful distributorship.  Because new Associates are linked to
their sponsor, sponsorship of new Associates creates multiple levels in the
network marketing structure.  Persons that an Associate sponsors are
referred to as “downline” or sponsored Associates.




Sponsoring
activities are not required of Associates and we do not pay any commissions for
the act of sponsoring new Associates, although commissions are paid based on the
product sales of downline associates.  Because of the financial
incentives provided to those who succeed in building an Associate network that
purchases and resells products, we believe that many of our Associates attempt,
with varying degrees of effort and success, to sponsor new
Associates.




Compensation.   Our
Associate compensation plan provides several opportunities for Associates to
earn compensation.  We believe our compensation plan provides
financial rewards comparable to those offered by other compensation plans in the
industry.  There are generally two ways in which our Associates earn
compensation:




·
            Through
      retail markups on sales of products purchased at wholesale;
      and




·
            Through
      a series of commissions on product sales generated by the Associate and
      his or her downline Associates.




Commissions
are based on the total monthly sales by the Associate and his or her downline
organization.  As an Associate’s business expands from successfully
sponsoring new Associates into the business, who in turn expand their own
businesses, an Associate can earn higher commissions.  Most
commissions are paid to Associates monthly.




Support.               Associates
are encouraged to assume responsibility for training and motivating other
Associates within their respective downline organizations and to conduct
meetings for potential new Associates.   Associates can purchase
sales and training materials from us, and they generally assume the costs of
advertising and marketing our products to their customers, as well as the direct
cost of sponsoring and training new Associates.




7




In
addition to the development of sales and training materials for use by our
Associates, we also periodically sponsor and conduct local, regional and
international Associate events and training seminars.  Attendance at
these sessions is voluntary, although our experience indicates that the most
effective and successful Associates are those that participate in training
activities.  These live events are supplemented by regular e-mail
communications and corporate conference calls.




We also
use the Internet to support our Associates and enhance communication with
them.  Through our multi media website, Associates can obtain
information about us and our products.  They can also obtain other
current information such as new product announcements, descriptions of product
specials and sales promotions and other marketing and training
materials.   In addition, Associates have the ability to sponsor
new Associates and to place orders through our website.  To help our
Associates effectively manage their businesses, we allow them to obtain a
wide-range of information related to their downline organization directly from
our database, which can be accessed through our website.




Compliance.        On
occasion, Associates fail to adhere to our Associate policies and
procedures.  We systematically review reports of alleged Associate
misconduct.  Infractions of the policies and procedures are reviewed by a
compliance committee that determines what disciplinary action may be warranted
in each case.  If we determine that an Associate has violated any of our
Associate policies and procedures, we may take a number of disciplinary
actions.  For example, we may terminate the Associate’s purchase and
distribution rights completely or impose sanctions, such as warnings or
probation.  We may also withdraw or deny awards, suspend privileges,
withhold commissions until specific conditions are satisfied or take other
appropriate actions at our discretion.




Returns.              Our
product return policy allows retail customers to return the unused portion of
any product to the Associate who sold them the product for a full cash
refund.  We reimburse the Associate with a replacement product or a credit
on account upon receipt of proper documentation and the return of the remaining
product.





Nutritional Products returned by
Associates that are unused and resalable are refunded up to one year from the
date of purchase at 100% of the sales price less a 10% restocking fee and
commissions paid.  Returned product that was damaged during shipment to the
customer is 100% refundable.  Return of product that was not damaged at the
time of receipt by the Associate may result in cancellation of the Associate’s
distributorship according to the terms of the Associate agreement.  For the
years 2009, 2008 and 2007, returns were less than 1% of Nutritional Products
sales.




Licensees




We have
entered into exclusive license arrangements for distribution of our Nutritional
Products in certain international markets.  Under these arrangements,
the licensees purchase products from us for distribution in their territories,
and, in most cases, pay us a monthly royalty based on sales of our products in
their territories.  Most of our sales under these arrangements are to
CCI, which has exclusive distribution rights in a territory comprised mainly of
Russia and Eastern Europe.  Sales to CCI were 50%, 59% and 55% of
consolidated net sales in 2009, 2008 and 2007, respectively.  Under
arrangements with other licensees, our products are also distributed in other
international markets including Western Europe, United Arab Emirates and
Indonesia.





Pursuant
to these arrangements, the licensees, who are unaffiliated third parties, are
granted exclusive rights to sell our products in their respective territories
through, for the most part, network marketing.  The independent
distributor networks of licensees using the network marketing distribution model
have similar characteristics to the Associate network in the U.S. and Canada,
and the distributors are compensated through a similar compensation plan as that
used by us for our Associates.  All of the license agreements with our
licensees require the licensees to purchase minimum annual amounts from us in
order to retain their exclusive rights.




8




Medical
Products Distribution





Sales
force.         At December
31, 2009, the MPM Medical sales force consisted of five full-time sales
representatives and approximately 14 manufacturer representatives assigned to
specific geographic territories within the U.S.  This compares to a
sales force at December 31, 2008 that consisted of eight full-time sales
representatives and approximately 15 manufacturer representatives.





Distribution.       We
distribute our wound care products primarily in the U.S. to hospitals, nursing
homes, clinics, pharmacies and home health care agencies through a traditional,
nationwide network of medical/surgical supply dealers and pharmaceutical
distributors.  Our sales force calls on the customers that use our
wound care products, as well as the dealers and distributors through whom our
customers purchase these products.





Many
potential customers for wound products have become members of group purchasing
organizations (“GPOs”) in an effort to reduce costs.  GPOs negotiate
pricing arrangements with health care product manufacturers and distributors and
offer the negotiated prices to affiliated hospitals and other
members.  We generally do not solicit GPOs because, in most cases, we
do not offer a product range that is broad enough to effectively compete in the
wound care product category, and we do not offer the education and training
services generally expected by GPO members.  However, because our
product line includes certain specialty products that are not generally offered
through GPOs, our sales force calls on GPO members to solicit sales of our
products that they cannot purchase through the GPO.  In addition, our
sales force calls on other potential customers such as specialty distributors,
which include distributors that supply products and services reimbursed under
Part B of Medicare and health care providers that service specialty markets such
as the oncology market. We do not have long-term supply contracts with any of
our customers, dealers or distributors.





Since
2004, a medical/surgical dealer has significantly expanded its business and, as
a result, increased its purchases of our wound care products.  This
dealer distributes our Medical Products and provides services mainly to nursing
homes, which obtain reimbursement for the price of products from
Medicare.  This dealer accounted for 62%, 64% and 57% of Medical
Products net sales in 2009, 2008 and  2007, respectively.




Third-Party Reimbursement.          Most
of our Medical Products are purchased by health care providers for use on
patients in their care.  In most cases, these health care providers
obtain reimbursement for the cost of our products from various third-party
payers, including Medicare, Medicaid, private insurance plans and managed care
organizations.  In response to national attention focused on health
care, significant health care reform initiatives have been proposed that may
affect the availability and amount of third party
reimbursements.  Also, in an effort to control rising health care
costs, there have been, and may continue to be, proposals by legislators,
regulators and third-party payers to curb these costs.  We believe
that presently available third-party reimbursement is adequate to support the
market for our products; however, continued demand for our Medical Products is
partially dependent upon the extent of available reimbursement for these
products.




Returns.              Generally,
unused Medical Products may be returned up to six months from the date of
purchase for a refund equal to 100% of the sales price less a 25% restocking
fee.  Returned product that was damaged during shipment to the
customer is 100% refundable.  For the years 2009, 2008 and 2007, returns
were less than 1% of Medical Products sales.




Trademarks,
Patents or Other Intellectual Property




We have
trademark registrations in the U.S. and certain foreign jurisdictions of our
former name, Royal BodyCare, our logo and the name Microhydrin, and we have
trademark registrations in the U.S. of certain other key product and product
ingredient names as Colo Vada Plus, OliViva, HydraCel, Immune 360,
Regenecare®,
Oramagic®,
RediaPlex® and
Normlshield®.  In
addition, we have trademark applications pending in the U.S. and certain foreign
jurisdictions for the name RBC Life Sciences, RBC Life and other key trade dress
used by us.  As long as we continue to renew our trademarks when
necessary, the trademark protection provided by them is perpetual.  We
also rely on common law trademark rights to protect our unregistered
trademarks.  Common law trademark rights do not provide the same level
of protection as afforded by a U.S. federal registration of a
trademark.  Also, common law trademark rights are limited to the
geographic area in which the trademark is actually used.  These
trademarks are useful in achieving brand recognition within our
industries.




9




During
2002, we developed proprietary formulations and manufacturing processes to
produce certain raw materials, which are principal ingredients in our leading
products.  We have not filed for patent protection related to our
proprietary formulations or manufacturing processes.  Therefore, there
can be no assurance that another company will not replicate one or more of our
products.




Seasonality




Our
business is not subject to significant seasonal
fluctuations.  However, as a practical matter, CCI, whose principal
office is located in Moscow, generally limits its shipping orders during the
winter months due to unfavorable weather conditions.




Inventory
Requirements, Backlogs




Distributors
of our Nutritional Products, except for licensees, and distributors of our
Medical Products generally do not maintain large inventories of our
products.  They depend on us to maintain our inventory at a level that
will allow us to fill their orders or the orders of their customers, as the case
may be, as they are placed.  We generally ship orders within 24 to 72
hours after we receive them so there is no significant backlog of orders related
to these distribution channels.




We do not
maintain inventory in anticipation of product orders from our
licensees.  Under the terms of our license agreements, the licensee is
required to make a cash deposit equal to 50% of the purchase order amount at the
time the purchase order is placed, and must allow two to three months for
delivery.  In addition, under our agreement with CCI, we store
products for CCI in our warehouse and then ship them at a later date to
locations designated by CCI in accordance with its business needs.  As
part of this agreement, CCI accepts ownership of and pays for the products as
they are segregated in our warehouse for CCI’s account.  However, we
do not recognize sales until the products are shipped.  Therefore, we
define backlog as purchase orders received by us that are accompanied by the
requisite deposit, plus the purchase price of CCI products that are stored in
our warehouse pending shipment.  Backlog fluctuates depending on
licensee ordering patterns and the timing of CCI’s shipping
requests.  Backlog was approximately $5,761,000 and $7,872,000 at
December 31, 2009 and 2008, respectively.  We expect substantially all
of the backlog at December 31, 2009 to be filled during 2010.




Industry/Competitors




We market
our Nutritional Products in a highly competitive industry both domestically and
internationally.  We compete against companies that sell heavily
advertised products through retail stores as well as other network marketing
companies.  Many of our competitors are significantly larger than we
are, have far greater financial resources and have broader name
recognition.




In the
distribution of Nutritional Products, we compete with retail outlets, such as
health food stores, supermarkets and department stores, and other network
marketing companies.  We endeavor to compete successfully by offering
a wide selection of products that incorporate proprietary technology, are
science-based and have a reputation for high quality.  We believe that
our products possess features and provide benefits that are desired by consumers
looking for natural health products.  We place a high degree of
emphasis on new product development to ensure our product line remains current
with developing trends in our industry and new scientific
evidence.  We generally do not attempt to compete based on price,
although price is a consideration.  Prices are justified through
product quality and benefits and, to the extent possible, the proprietary
ingredients and unique formulations.




We also
compete against other network marketing companies for the time, attention and
commitment of new and current Associates.  The pool of individuals
interested in the business opportunities presented by network marketing tends to
be limited in each market and is reduced to the extent other network marketing
companies successfully recruit these individuals into their
businesses.  Our ability to remain competitive depends, in significant
part, on our success in sponsoring and retaining Associates.  We
endeavor to compete successfully by offering unique and effective products at
prices competitive with other network marketing companies, a rewarding Associate
compensation plan and attractive Associate support programs.




10




Our
Medical Products also face heavy competition.  In the wound care
product market, we compete against a number of companies, most of which are
significantly larger, have far greater financial resources and have a broader
name recognition.  As with our Nutritional Products, we place a high
degree of emphasis on new product development to ensure our product line remains
current with developing trends and new scientific evidence.  We
endeavor to compete by offering a range of high quality products, which are
unique and effective, at competitive prices.




Research
and Development




From time
to time, we have contracted with scientists at universities, medical colleges
and private research organizations to conduct small studies to evaluate the
safety and functions of our products.  Most of these studies have been
conducted to evaluate the safety and functions of Microhydrin or
Microhydrin-based formulations.  Since 2006, we have initiated several
studies to evaluate the efficacy of certain of our wound care products
distributed to the oncology market.  Amounts expended by us to fund
these studies have not been material.




We
enhance our product line through the development of new products and the
improvement of existing products.  New product ideas are derived from
a number of sources, including in-house personnel with significant experience in
product formulation and development, medical and nutrition professionals, trade
publications, scientific and health journals, product suppliers and other third
parties.  Prior to introducing new products, we investigate product
formulations to ensure that they are backed by sound scientific research and are
in compliance with applicable regulations.




Governmental
Regulations




Products.             One
or more of the following agencies regulates the formulation, manufacture,
packaging, labeling, advertising, distribution and sale of our
products:  the Food and Drug Administration (“FDA”); the Federal Trade
Commission (“FTC”); the Consumer Product Safety Commission; the U.S. Department
of Agriculture; the Environmental Protection Agency; and various agencies of the
states and foreign countries into which our products are shipped or
sold.





We market
both dietary supplements and medical devices.  In the U.S., the FDA
regulates our products under the Federal Food, Drug, and Cosmetic Act (“FDCA”)
and related regulations.  The majority of our products are classified as
dietary supplements, which are defined in the FDCA as products intended to
supplement the diet that contain one or more of certain dietary ingredients,
such as vitamins, minerals, herbs or botanicals, amino acids and other dietary
substances used to supplement diets.  The FDCA has been amended several
times with respect to dietary supplements, most significantly by the Nutrition
Labeling and Education Act of 1990 and the Dietary Supplement Health and
Education Act of 1994 (“DSHEA”). We believe DSHEA generally provides a favorable
regulatory climate to consumers and the dietary supplement industry. This
legislation governs the formulation, manufacturing, marketing and sale of
dietary supplements, including the content and presentation of health-related
information included on the labels or labeling of dietary
supplements.





Pursuant
to the FDCA, a dietary supplement that contains a new dietary ingredient, which
is defined as an ingredient not on the market before October 15, 1994, must have
a history of use or other evidence of safety establishing that it is reasonably
expected to be safe.  The manufacturer must notify the FDA at least 75
days before marketing products containing new dietary ingredients and provide
the FDA with the information upon which the manufacturer based its conclusion
that the product has a reasonable expectation of safety.





The FDCA
provides that a dietary supplement is adulterated if it is or it contains a
dietary ingredient that poses a significant or unreasonable risk of illness or
injury when used as directed on the label, or under normal conditions of use if
there are no directions.  We do not believe that any of our dietary
supplement products contain any dietary ingredient that poses a significant or
unreasonable risk of illness or injury.





The FDCA
permits dietary supplement products to include truthful, non-misleading and
substantiated statements of nutritional support.  Such claims include:
(i) statements that claim a benefit related to a classical nutrient deficiency
disease and disclose the prevalence of such disease in the United States; (ii)
statements describing general well-being resulting from consumption of a dietary
ingredient; (iii) statements that describe the role of a nutrient or dietary
ingredient intended to affect the structure or function of the body; and (iv)
statements that characterize the documented mechanism by which a dietary
ingredient acts to maintain such structure or function.  These claims
are also known as “structure/function” claims.  A dietary supplement
that includes a structure/function claim on its labeling is required to include
a disclaimer stating that the FDA has not evaluated the claim, and the
manufacturer must notify the FDA of the use of such claim.




11




FDA
distinguishes between statements of nutritional support, including
structure/function claims, which do not require prior FDA approval, and claims
that a product is intended to prevent, treat, cure, mitigate or diagnose
disease, otherwise known as a “drug claims,” which do require prior FDA
approval.  It is the intended use of a product that is determinative,
and intended use can come from various sources, including labeling and
advertising claims.  The making of a drug claim in relation to a
dietary supplement may result in the product being declared an unapproved new
drug in violation of the FDCA.  The FDA has issued a regulation
intended to clarify the distinction between permissible structure/function and
impermissible drug claims.  While in some cases there is no clear
distinction between the two, we believe that the labeling and advertising of our
dietary supplements complies with these regulations.  We do not make
drug claims for any of our dietary supplements.





The FDCA
requires that manufacturers possess substantiation demonstrating that
structure/function claims made for dietary supplements are truthful and not
misleading.  The agency has issued a Guidance Document describing the
amount and type of evidence it would consider adequate to support
structure/function claims.  According to the FDA Guidance, marketers
should possess the type of evidence that experts in the relevant area of study
would consider to be competent and reliable.  Competent and reliable
scientific evidence adequate to substantiate a claim, according to the Guidance,
would consist of information derived primarily from human
studies.  Failure of a company to possess competent and reliable
scientific evidence to substantiate structure/function claims made for its
dietary supplement products may result in enforcement action and the FDA
requiring that such claims be deleted or amended.  We believe we
possess competent and reliable scientific evidence to support structure/function
claims made for our dietary supplement products.





In June
2007, as authorized by DSHEA, the FDA adopted good manufacturing practice
regulations (“GMPs”) specifically for dietary supplements. These new
GMPs are more onerous than the GMPs that previously applied to dietary
supplements and require, among other things, dietary supplements to be prepared,
packaged and held in compliance with specific rules, and require quality control
provisions similar to those in the GMPs for drugs.  Under the new
regulations, we are classified as a small business; accordingly, our effective
compliance date was June 2009.  We believe our manufacturing and
distribution practices are in compliance with these GMPs, but there can be no
assurance that our operations or those of our suppliers will be in compliance in
all respects at all times.  Additionally, there is a potential risk of
increased audits as the FDA and other regulators seek to ensure compliance with
the GMPs.  We have experienced increases in some product costs as a
result of the necessary increase in testing of raw ingredients and finished
products and compliance with higher quality standards.





In
December 2006, Congress passed the Dietary Supplement and Nonprescription
Drug Consumer Protection Act, which amended the FDCA and became effective in
December 2007.  These regulations, among other things, require
companies that manufacture, pack or distribute nonprescription drugs or dietary
supplements to report serious adverse events allegedly associated with their
products to the FDA and institute recordkeeping requirements for all adverse
events whether serious or non-serious.  We believe that we have the
necessary systems in place to comply with these regulations.





Most of
our Medical Products are regulated under the FDCA as medical
devices.  Under the FDCA, medical devices are classified
into one of three classes—Class I, Class II or
Class III—depending on the degree of risk associated with each medical
device and the extent of control needed to ensure safety and effectiveness.
 The class to which a device is assigned determines, among other things,
the type of premarket submission or application required for
marketing.  Device classification depends on the intended use of the
device and upon a product’s indications for use.  Most of our medical
devices are classified as Class I, and we do not now nor intend to market any
Class III medical devices.




12




Class I
devices are those for which safety and effectiveness can be assured by adherence
to a set of regulatory guidelines called General Controls.  General
Controls are the only level of controls that apply to Class I devices and
include provisions of the FDCA pertaining to adulteration, misbranding, device
registration and listing, premarket notification, banned devices, notification
and repair/replacement/refund, records and reports, restricted devices, and
GMPs.  Class II devices are those for which General Controls alone are
insufficient to provide reasonable assurance of its safety and effectiveness and
there is sufficient information to establish Special Controls the FDA deems
necessary to provide such assurance.  Special Controls may include
special labeling requirements, mandatory performance standards and postmarket
surveillance.  Most Class I devices are exempt from premarket
notification (510(k)) requirements, and while a few Class II devices are exempt,
most Class II devices require 510(k) premarket notification.  A
510(k) premarket notification requires demonstration of substantial equivalence
to another legally U.S. marketed device.  Substantial equivalence
means that the new device is at least as safe and effective as the predicate
device. In accordance with the Medical Device User Fee and Modernization
Act of 2002, as of October 2002 unless a specific exemption applies, 510(k)
premarket notification submissions are subject to user fees.  The
process of obtaining a 510(k) clearance typically can take several months to a
year or longer and may involve the submission of limited clinical data
supporting assertions that the product is substantially equivalent to an already
approved device or to a device that was on the market before the enactment of
the Medical Device Amendments of 1976.  We believe that our medical
devices are manufactured and marketed in accordance with these statutory
requirements and the FDA’s related regulations.





To help
ensure compliance with the provisions of the FDCA and FDA’s regulations, the FDA
has numerous enforcement tools, including the ability to issue warning letters,
initiate product seizures and injunctions, order product withdrawals and recalls
and pursue fines and criminal penalties.





Advertising
of products in the U.S. is subject to regulation by the FTC under the FTC
Act.  The FTC Act prohibits unfair methods of competition and unfair
or deceptive acts or practices in or affecting commerce.  The FTC Act also
provides that the dissemination of any false advertisement pertaining to drugs
or foods, which would include dietary supplements, is an unfair or deceptive act
or practice.  Under the FTC’s substantiation doctrine, an advertiser is
required to have a “reasonable basis” for all objective product claims before
the claims are made.  Failure to adequately substantiate claims may be
considered either deceptive or unfair practices.  The FTC typically
requires claims concerning the efficacy or safety of drugs and foods, including
dietary supplements, to be supported by competent and reliable scientific
evidence which is defined as tests, analyses, research, studies, or other
evidence based on the expertise of professionals in the relevant area, that have
been conducted and evaluated in an objective manner by persons qualified to do
so, using procedures generally accepted in the profession to yield accurate and
reliable results.  Generally, the amount and type of evidence that
will be sufficient is what experts in the relevant area of study would consider
to be adequate.  The FTC has issued a Dietary Supplement Advertising
Guide for Industry that describes the amount and type of evidence the FTC will
consider adequate for a dietary supplement.  We believe that we have
the necessary documentation to support our advertising and promotional
claims.




In
October 2009, the FTC issued new Guides Concerning the Use of Endorsements and
Testimonials in Advertising ("Guides"). These new Guides significantly extend
the scope of potential liability associated with the use of testimonials,
endorsements and new media methods, such as blogging, in advertising. As of the
December 1, 2009 effective date of the Guides, advertisers are required
either to substantiate that the experiences conveyed by testimonials or
endorsements represent typical consumer experiences with the advertised product
or clearly and conspicuously disclose the typical consumer experience with the
advertised product. In many instances, this will require advertisers to possess
"competent and reliable scientific evidence" to substantiate the consumer or
endorser representations.




Under the
new Guides, advertisers also may be liable for statements made by consumers in
the context of "new media," including blogs, depending on the relationship
between the consumer and the advertiser. Although an advertiser's control over
the consumer's comments will be relevant to a determination regarding liability
for false or misleading statements, it will not necessarily be
dispositive.




The FTC
may enforce compliance with the law in a variety of ways, both administratively
and judicially, including orders requiring limits on advertising, corrective
advertising, consumer redress, divestiture of assets, rescission of contracts,
cease and desist orders, injunctions and such other relief as the agency deems
necessary to protect the public.





Self-regulatory
agencies under the umbrella of the National Advertising Review Council, such as
the National Advertising Division (“NAD”) of the Council of the Better Business
Bureaus and the Electronic Retailing Self-Regulation Program (“ERSP”), may
initiate investigations into product claims either on their own or upon the
request of a complainant.  Non-compliance with the recommendations of
either the NAD or ERSP may result in referral of the matter to the
FTC.




13




Advertising
of FDA-regulated products are also regulated by state and local authorities
under the various state consumer protection and consumer fraud
acts.  Further, the Lanham Act confers a private right of action on
any person who is or believes he or she is likely to be damaged by a false
statement or misrepresentation regarding the nature, characteristics or
qualities of his /her or another person’s products.





In
Canada, most of our Nutritional Products are classified as natural health
products (“NHPs”).  The safety, quality, manufacturing, packaging,
labeling, storage, importation, advertising, distribution and sale of NHPs are
subject to regulation by Health Canada, which regulates NHPs pursuant to the
Canadian Food and Drugs Act, the Canadian Food and Drug Regulations, the Natural
Health Product Regulations and related Health Canada Guidance Documents and
Policies.




Effective January 1,
2004, NHPs in Canada became subject to new requirements under the Natural Health
Product Regulations. Under these regulations, each NHP must
have a product license issued by Health Canada before it can be sold in Canada,
subject to certain transition periods.  Health Canada assigns a
natural health product number ("NPN") to each NHP once Health Canada issues the
license for that NHP. The Canadian regulations require that all drugs and NHPs
be manufactured, packaged, labeled, imported, distributed and stored under
Canadian GMPs, and that all premises used for manufacturing, packaging, labeling
and importing drugs and NHPs have a site license, which requires GMP compliance.
The Canadian Regulations also set out requirements for labeling, packaging,
clinical trials and adverse reaction reporting.





Health
Canada approval for marketing authorization can take time. The approval time for
NHPs and drugs can vary depending on the product and the application or
submission. For NHPs, the Canadian regulations indicate that certain product
licenses should be processed within 60 days. However, the regulations also
include provisions to extend this time frame if, for example, more information
is required. There can be significant delays, and Health Canada has publicly
acknowledged that there has been a delay in processing NHP
licenses.  If Health Canada refuses to issue a product license, the
NHP can no longer be sold in Canada until Health Canada issues such a license.
We have adopted a compliance strategy to adhere to Health Canada's regulations
although there is no assurance that product licenses will ultimately be issued
for our products, the applications for most of which are still under review by
Health Canada.





Health
Canada can perform routine and unannounced inspections of companies in the
industry to ensure compliance with the Canadian regulations. The overall risk
factors and market prospects for Canada, in general, are similar to those in the
United States, as outlined above. Health Canada can suspend or revoke licenses
for lack of compliance. In addition, if Health Canada perceives the product to
present an unacceptable level of risk, they can also impose fines and jail
terms.





In some
international markets, there has been adverse publicity concerning products that
contain substances generally referred to as genetically modified organisms
(“GMOs”). In some markets, the possibility of health risks or perceived consumer
preference thought to be associated with GMOs has prompted proposed or actual
governmental regulation.  We are also aware of regulations in some
international markets affecting the use of irradiated raw ingredients or the
labeling of products containing irradiated raw ingredients.  To date,
these regulations have not significantly affected our business; however, we
cannot anticipate the extent to which future regulations will restrict the use
of GMOs or irradiated raw materials in our products or the impact any such
regulations may have on our business. In response to any applicable regulations,
we would, where practicable, reformulate and/or re-label our products to satisfy
the regulations. We believe, based upon currently available information, that
compliance with regulatory requirements in these areas should not have a
material adverse effect on us or our business. However, because these are
evolving areas of regulation, there can be no assurance in this
regard.





We cannot
predict the nature of any future laws, regulations, interpretations or
applications that may be administered by any federal, state or foreign
regulatory authority, nor can we determine what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on our
business in the future. They could include, however, requirements for the
reformulation of certain products to meet new standards, the recall or
discontinuation of certain products that cannot be reformulated, additional
record keeping, expanded documentation of the properties of certain products,
expanded or different labeling and additional scientific substantiation. 
Any or all of these requirements could have a material adverse effect on our
business, financial condition and results of operations.




14




Network
Marketing.          Our
network marketing program is subject to laws and regulations in each country in
which we operate.  Generally these laws are directed at ensuring that
product sales ultimately are made to consumers and that advancement within a
sales organization is based on sales of the enterprise’s products, rather than
investments in the organization or other non-retail sales related
criteria.   These laws include anti-pyramiding, securities, lottery,
referral selling, anti-fraud and business opportunity statutes, regulations and
court cases.  In addition to federal regulation by the FTC in the
U.S., each state has enacted its own “Little FTC Act” to regulate sales and
advertising.  We actively strive to comply with all applicable state,
federal and foreign laws and regulations affecting this distribution
channel.  We believe that our network marketing system satisfies the
standards and case law defining a legal marketing system; however, the
regulatory and legal requirements concerning network marketing systems do not
include “bright line” rules and are inherently fact-based.




We cannot
predict the nature of any future law, regulation, interpretation or application,
nor can we predict what effect additional governmental legislation or
regulations, judicial decisions or administrative orders, when and if
promulgated, would have on our business in the future.  It is possible that
future developments may require that we revise our network marketing
program.  Any or all of these requirements could have a material adverse
effect on our business, results of operations and financial
condition.




Transfer
Pricing.                In
the U.S. and other countries, we are subject to transfer pricing and other tax
regulations designed to ensure that appropriate levels of income are reported as
earned by our U.S. or local entities and are taxed accordingly. In addition, our
operations are subject to regulations designed to ensure that appropriate levels
of customs duties are assessed on the importation of our products. We have
adopted transfer pricing arrangements with our subsidiaries that we believe are
in compliance with all applicable transfer pricing laws. If the U.S. Internal
Revenue Service or the taxing authorities of any other jurisdiction were to
successfully challenge these arrangements or require changes in our transfer
pricing practices, we could be required to pay higher taxes and our earnings
would be adversely affected if our foreign tax credit was limited on our U.S.
return. There can be no assurance that we will continue to be found to be
operating in compliance with transfer pricing laws, or that those laws will not
be modified, which as a result, may require changes in our operating
procedures.





Employees




As of
December 31, 2009 and 2008, we had 78 and 79 employees,
respectively.  We do not foresee a significant change in the number of
our employees during 2010.




Additional
Available Information




We are subject to the informational
requirements of the Securities Exchange Act of 1934, and, accordingly, file
reports, proxy statements and other information with the Securities and Exchange
Commission (“SEC”).  We make available free of charge through our
website at www.rbclifesciences.com, as soon as reasonably practicable after such
material is electronically filed with the SEC, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports.  This information may also be obtained from the
SEC’s on-line database located at www.sec.gov, which
contains material regarding issuers that file electronically with the
SEC.  You may also obtain copies of any of our reports filed with, or
furnished to, the SEC, free of charge, at the SEC’s public reference room at 100
F Street, NE, Washington, DC 20549 on official business days during the hours of
10:00 am to 3:00 pm.  Information regarding the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.




Item
      1A.
            Risk
      Factors.




Please
carefully consider the following risk factors, which could materially adversely
affect us.  The fact that some of these risk factors may be the same or
similar to those that we have filed with the Securities and Exchange Commission
in past reports means only that the risks are present in multiple periods. We
believe that many of the risks that are described here are part of doing
business in the industries in which we operate and will likely be present in all
periods. The fact that certain risks are endemic to these industries does not
lessen their significance.  Among others, risks and uncertainties that may
affect our business, financial condition, performance, development, and results
of operations include the following:




15




If
we lose existing Associates more rapidly than we recruit new Associates, net
sales from our Associate network will decrease.




In 2009,
2008 and 2007 net sales from our Associates contributed 24%, 19% and 25%,
respectively, of our consolidated net sales.  In this channel, we
distribute all of our products through independent Associates and we depend on
them to generate all of our net sales. Our Associates may terminate their
services at any time, and, like most network marketing companies, we experience
high turnover among Associates from year to year. As a result, in order to
maintain sales in the future, we need to retain existing Associates and recruit
additional Associates. To increase net sales, we must increase the number of
and/or the productivity of our Associates.




Net sales
from our Associate network increased 4% in 2009, but declined 17% and 19% in
2008 and 2007, respectively, mainly as a result of a decline in the number of
active Associates.  While we take many steps to help train, motivate
and retain Associates, we cannot accurately predict how the number and
productivity of Associates may fluctuate because we rely primarily upon our
Associates to recruit, train and motivate new Associates. Operating results
could be adversely affected if our existing and new business opportunities and
products do not generate sufficient economic incentive or interest to retain
existing Associates and to attract new Associates.  Several factors
affect our ability to attract and retain Associates, including:




•
            on-going motivation of our
      Associates;





•
            general business and economic
      conditions;





•
            significant changes in the amount
      of commissions paid;





•
            public perception and acceptance
      of the nutritional supplement
industry;





•
            public perception and acceptance
      of network marketing;





•
            public perception and acceptance
      of RBC and our products;





•
            the limited number of people
      interested in pursuing network marketing as a
    business;





•
            our ability to provide products
      that satisfy market demands;
and





•
            competition in recruiting and
      retaining active Associates





The
new Associate compensation plan may not attract new Associates and may increase
the turnover of existing Associates.





In
September 2009, we introduced a new Associate compensation
plan.  While we believe the new compensation plan is more attractive
to potential Associates than our previous plan, there is no assurance that the
new plan will encourage increased sponsorship of new Associates or that existing
Associates, who were previously compensated under the former plan, will receive
the new plan favorably and, accordingly, continue to participate as active
Associates of the Company.  To affect the transition of existing
Associates from the former compensation plan to the new compensation plan, we
implemented a 12-month commission subsidy program that allows existing
Associates to become accustomed to the new plan without a significant decrease
in commission income.  Accordingly, the rate of acceptance of the new
plan will not be known until this 12-month period ends.  The increase
in turnover of existing Associates or the failure of the new compensation plan
to increase sponsorship of new Associates would adversely affect our results of
operations and financial condition.




16




Two of our customers constitute a
significant portion of our sales.





In 2009,
two of our customers accounted for approximately 65% of consolidated net sales.
One customer, CCI, a licensee that distributes Nutritional Products primarily in
Russia and Eastern Europe, accounted for approximately 50% of consolidated net
sales in 2009.  The other customer, a medical/surgical dealer that
distributes Medical Products and provides services to the long-term care market,
accounted for approximately 15% of consolidated net sales in
2009.  Sales to CCI in 2009 declined approximately 30% because the
global economic downturn adversely affected CCI’s business in certain key
markets.  As more fully described below in Management’s Discussion and
Analysis of Financial Condition and Results of Operations, this decline in sales
to CCI was one of the primary reasons we reported a net loss in
2009.   Accordingly, the failure of CCI sales to increase, or a
further loss of significant business from, or adverse performance by, either of
these customers would be harmful to our business, results of operations and
financial condition.  Factors that could adversely affect our sales to
these customers include, but are not limited to, the continued negative effects
of the global economic downturn, additional unfavorable changes in market
conditions in the markets serviced by these customers, changes in government
regulations that affect sales in markets serviced by these customers,
competition from other entities that sell similar products in markets serviced
by these customers or an unfavorable change in our business relationship with
these customers.  The president of CCI beneficially holds
approximately 18% of our outstanding common stock and served as a member of our
Board of Directors until June 2004.




Two
of our products constitute a significant portion of our net sales.





Two of
our Nutritional Products, Microhydrin and Microhydrin Plus, constitute a
significant portion of our sales, accounting for approximately 16%, 15% and 16%
of net sales in 2009, 2008 and 2007, respectively. If the demand for these
products decreases significantly, government regulation restricts the sale of
these products, we are unable to adequately source or deliver these products or
we cease offering these products for any reason without a suitable replacement,
then our financial condition and operating results would be harmed.





Net sales of our Nutritional Products
are dependent upon an independent sales force and third-party licensees, and we
do not have direct control over the marketing of our Nutritional
Products.




We rely
on non-employee, independent Associates and third-party licensees to purchase,
market and sell our Nutritional Products. Licensees, which accounted for 52%,
60% and 58% of our consolidated net sales in 2009, 2008 and 2007, respectively,
are third parties that have entered into license agreements with us pursuant to
which they purchase products for distribution in the licensed territories.
License agreements generally require licensees to market our products using the
RBC brand and impose minimum sales requirements throughout the term that the
licensee must meet to retain the distribution rights conveyed by the license
agreements.  Licensees are responsible for satisfying all regulatory
requirements in the licensed territories related to the importation, labeling,
storage, distribution and sale of our products.  Licensees are also
responsible for all marketing and sales activities in the licensed
territories.  Accordingly, net sales to licensees are directly
dependent upon the efforts of the licensees and future sales volume will depend
in large part upon their success in the importation, marketing and distribution
of our products in the licensed territories.




Associates
are independent contractors who purchase products directly for their own use or
for resale. Associates typically engage in the distribution of our products on a
part-time basis and will likely engage in other business activities, some of
which may compete with us. We have a large number of Associates in relation to
the size of the corporate staff that implements our marketing programs and
provides motivational support to our Associates. We undertake minimal effort to
provide individual training to Associates.  Accordingly, there can be
no assurance that our distributors will participate in our marketing strategies
or plans or accept our introduction of new products.  Associates may
voluntarily terminate their agreements with us at any time and there is
typically significant turnover in Associates from year to year. Because of this
high turnover, we must continually recruit new Associates. Associate net sales
are directly dependent upon the efforts of these non-employee, independent
Associates and future sales volume will depend in large part upon our success in
maintaining or increasing the number of new Associates and improving the
productivity of the Associates.




Adverse
economic conditions may harm our business.





In 2009,
the global economic conditions continued to decline in many
countries.  This global economic downturn and the related
uncertainty with respect to the timing and extent of economic recovery pose a
risk as consumers and businesses, including healthcare providers, may postpone
spending, or seek new ways to eliminate spending, in response to uncertain and
challenging economic conditions.  Other risks related to this economic
downturn include foreign currency exchange rate fluctuations, insolvency of key
suppliers and customer insolvencies.  We cannot predict the timing or
duration of any economic slowdown or recession or the timing or strength of a
subsequent recovery, or the markets that may continue to be impacted by these
general economic conditions. If the markets for our products significantly
deteriorate due to these economic conditions, our business, financial condition
and results of operations may be materially and adversely affected.




17




Changes in customer preferences and
demand could negatively impact our operating results.




Our
business is subject to changing customer preferences and demand.  The
industries in which we operate are characterized by changes in demand for
existing products and demand for new products and enhancements.  Our
success depends in part on our ability to anticipate and respond to these
changes.  Our failure to accurately predict these trends could
negatively impact customer opinion of our products, which in turn could harm our
customer relationships and cause the loss of sales. The success of our new
product offerings and enhancements depends upon a number of factors, including
our ability to:




•
            accurately
      anticipate customer needs;





•
            innovate
      and develop new products or product enhancements that meet these
      needs;





•
            successfully
      commercialize new products or product enhancements in a timely
      manner;





•
            price
      our products competitively;





•
            manufacture
      and deliver our products in sufficient volumes and in a timely
      manner;





•
            differentiate
      our product offerings from those of our competitors;
  and





•
            satisfy
      government regulations related to the manufacture, labeling, sale and
      distribution of the products




If
we do not introduce new products or make enhancements to meet the changing needs
of our customers in a timely manner, some of our products could be rendered
obsolete, which could negatively impact our business, financial condition and
operating results.




Demand
for our products could also be adversely affected by changes in demographic
trends, changes in government regulations or policies and particularly with
regard to Nutritional Products, changes in disposable consumer
income.




Our
Associate network business is subject to the effects of adverse publicity and
negative public perception.




Our
ability to attract and retain Associates and to sustain and enhance sales
through our Associates may be affected by adverse publicity or public perception
regarding our industry, our competition or our business generally. This adverse
public perception may include publicity regarding the legality of network
marketing despite the fact that U.S. courts have established standards defining
a legal network marketing system.  This adverse public perception may
also include publicity regarding the quality or efficacy of nutritional
supplement products or ingredients in general or our products or ingredients
specifically, and regulatory investigations, regardless of whether those
investigations involve us or our Associates or the business practices or
products of our competitors or other network marketing companies. There can be
no assurance that we will not be subject to adverse publicity or negative public
perception in the future or that such adverse publicity will not have a material
adverse effect on our business, financial condition and results of
operations.




We
may have to obtain regulatory approvals before we market and sell certain new
Medical Products.





Most of
our Medical Products are classified as medical devices under FDA
regulations.  Before certain medical devices can be sold, they require
premarket review and clearance by the FDA, which is generally accomplished
through the 510(k) premarket notification procedure. Clearance through this
procedure requires demonstration that a new device is substantially equivalent
to another device with 510(k) clearance or grandfather status.  There
is no assurance that the FDA will act favorably or quickly in its review of our
pending or planned 510(k) submissions, or that we will not encounter significant
difficulties and costs in our efforts to obtain FDA clearance or approval, all
of which could delay or preclude the sale of new products in the
U.S.  Any delays or failure to obtain FDA clearance or approvals of
new products we develop, or the costs of obtaining FDA clearance or approvals,
could have an adverse effect on our business, financial condition and results of
operations.




18




Growth
of Medical Products sales depends in part upon the availability of adequate
third-party reimbursement.





The
continued growth of our Medical Products segment will depend in part on the
availability of adequate reimbursement to health care providers who use our
products from third-party health care payers, such as Medicare, Medicaid,
private insurance plans and managed care organizations. At present, third-party
payers increasingly are challenging the pricing of medical products and
services. Also, in response to national attention focused on health care,
significant health care reform initiatives have been proposed that may affect
the availability and amount of third party reimbursements. Accordingly,
reimbursement may not be at, or remain at, price levels adequate to allow health
care providers to realize an appropriate return on the purchase of our products.
In addition, third-party payers may not cover all or a portion of the cost of
our products and related services, or they may place significant restrictions on
the circumstances in which coverage will be available.  Should
adequate reimbursement from third-party payers become restricted or unavailable,
our business, financial condition and results of operations could be adversely
affected.




We
must rely on independent third parties for the supply of our
products.




We depend
on outside suppliers to supply certain raw materials used in the manufacture of
our products.  In addition, all of our finished products are
manufactured by independent third parties. There is no assurance that our
current suppliers and manufacturers will continue to reliably supply products to
us at the level of quality or quantity we require. If any of our third-party
suppliers and manufacturers become unable or unwilling to continue to provide
the products in required volumes and quality levels at acceptable prices, we
will be required to identify and obtain acceptable replacement suppliers and
manufacturing sources. Although we believe that we could establish alternate
sources for most of our products, any delay in locating and establishing
relationships with other sources could result in product shortages and back
orders for the products, with a resulting loss of net sales. In addition, any
actual or perceived degradation of product quality as a result of our reliance
on third-party manufacturers may have an adverse effect on net sales or result
in increased product returns.




As
a product manufacturer and distributor we may be subject to product liability
claims.




As a
manufacturer of ingredients used in and a distributor of products produced for
human consumption and topical application, we could become exposed to product
liability claims and litigation to prosecute such claims. Additionally, the
distribution of these products involves the risk of injury to consumers as a
result of tampering by unauthorized third parties or product contamination. To
date, we have had a very limited product claims history and such matters have
not materially affected our business, financial condition or results of
operations. We are not aware of any instance in which any of our products are or
have been defective in any way that could give rise to material losses or
expenditures related to product liability claims. Although we maintain product
liability insurance, which we believe to be adequate for our needs, there can be
no assurance that we will not be subject to claims in the future or that our
insurance coverage will be adequate or that we will be able to maintain adequate
insurance coverage.




A
violation of marketing or advertising laws by Associates in connection with the
sale of our products or the promotion of our Associate compensation plan could
adversely affect our business.




New
Associates sign a written contract and agree to adhere to our Associate policies
and procedures. Although these policies and procedures prohibit Associates from
making certain claims regarding products or income potential from the
distribution of the products, Associates may from time to time, without our
knowledge and in violation of our policies, create promotional materials or
otherwise provide information that does not accurately describe our products or
our marketing program. They also may make statements regarding potential
earnings, product claims or other matters in violation of our policies or
applicable laws and regulations concerning these matters. These violations may
result in legal action against us by regulatory agencies or state attorneys
general. We take what we believe to be commercially reasonable steps to monitor
Associate activities to guard against misrepresentation and other illegal or
unethical conduct by Associates. There can be no assurance that our efforts in
this regard will be sufficient to accomplish this objective. Publicity resulting
from these Associate activities can also make it more difficult for us to
attract and retain Associates and may have an adverse effect on our business,
financial condition and results of operations.




19




Laws and regulations may prohibit or
severely restrict our sales efforts and could adversely affect our ability to do
business.




The
formulation, manufacturing, packaging, labeling, distribution, importation,
sale, marketing and storage of our products are subject to extensive regulation
by various federal agencies, including the FDA, the FTC, the Consumer Product
Safety Commission, the U.S. Department of Agriculture the Environmental
Protection Agency and by various agencies of the states, localities and foreign
countries in which our products are manufactured, distributed and sold. Failure
by us to comply with those regulations could lead to the imposition of
significant penalties or claims, including civil penalties, product recalls or
product seizures, cease and desist orders, injunctions, criminal sanctions,
limits on advertising, consumer redress, divestitures of assets, and rescission
of contracts and could materially and adversely affect our business. In
addition, the adoption of new regulations or changes in the interpretation of
existing regulations may result in significant compliance costs or
discontinuation of product sales and may adversely affect the marketing of our
products, resulting in a significant loss of net sales.




The FDA
has adopted new GMPs relating to the manufacture, packaging and holding of
dietary supplements.  The new GMPs, which became effective for us in
June 2009, establish standards to ensure that dietary supplements and dietary
ingredients are not adulterated with contaminants or impurities and are labeled
to accurately reflect the active ingredients and other ingredients in the
products. These GMPs also include requirements for designing and constructing
physical plants, establishing quality control procedures, and testing
manufactured dietary ingredients and dietary supplements, as well as
requirements for maintaining records and for handling consumer complaints
related to GMPs.  The adoption of these GMPs has increased the cost of
our products and may result in additional cost increases in the
future.  In addition, there is no assurance that all of our current
suppliers will be able to comply with these GMPs.  To the extent any
current supplier is unable to comply, we will be required to find an alternate
source of supply.  As suppliers comply with these new regulations they
may incur additional compliance costs that will be passed on to
us.  These factors could affect our business, financial condition and
results of operations.




In
markets outside the U.S., we, or a licensee, as the case may be, may be required
to obtain approvals, licenses or certifications from a country's ministry of
health or a comparable agency prior to importing our products. Approvals or
licensing may be conditioned on reformulation of products or may be unavailable
with respect to certain products or product ingredients.  In addition,
changes to laws, regulations or standards governing the issuance of these
approvals and licenses may adversely affect ability of our products to be
imported, which could affect on our business, financial condition and results of
operations.




Network
marketing systems such as ours are subject to laws and regulations directed at
ensuring that product sales are made to consumers of the products and that
compensation, recognition and advancement within the marketing organization are
based on the sale of products rather than investment in the sponsoring company.
We are subject to the risk that, in one or more of our present or future
markets, our marketing system could be found not to comply with these laws and
regulations or may be prohibited. Failure to comply with these laws and
regulations or such a prohibition could have a material adverse effect on our
business, financial condition and results of operations.




Our
business is subject to the risks associated with intense competition from
larger, wealthier and more established competitors.




We face
intense competition in the business of distributing and marketing Nutritional
Products and Medical Products.  Numerous competitors compete actively
for customers and, in the case of other network marketing companies, for
Associates.  Many of our competitors have longer operating histories,
significantly greater financial, technical, product development, marketing and
sales resources, greater name recognition, larger established customer bases and
better-developed distribution channels than we do. We currently do not have
significant patent or other proprietary protection, and our competitors may
introduce products with the same or similar ingredients that we use in our
products. There can be no assurance that we will be able to compete in this
intensely competitive environment.




We are
also subject to significant competition from other network marketing
organizations for the time, attention and commitment of new and existing
Associates. Because the network marketing industry is not particularly
capital-intensive or otherwise subject to high barriers to entry, it is
relatively easy for new competitors to emerge who compete with us for our
Associates. In addition, the fact that our Associates may easily enter and exit
our network marketing program contributes to the level of competition that we
face.  The pool of individuals interested in the business
opportunities presented by network marketing tends to be limited in each market,
and it is reduced to the extent other network marketing companies successfully
recruit these individuals into their businesses. Although we believe we offer an
attractive opportunity for Associates, there can be no assurance that other
network marketing companies will not be able to recruit our existing Associates
or deplete the pool of potential Associates in a given market.




20




Our
business is subject to intellectual property risks.




Patent
protection for Nutritional Supplements and our Medical Products generally is
impractical given the large number of manufacturers who produce similar products
having many ingredients in common. To the extent we deem commercially
reasonable, we endeavor to seek trade dress protection for our products, which
protection has been sought in the U.S., Canada and certain other countries in
which we are either presently operating or may operate in the future.
Notwithstanding these efforts, there can be no assurance that our efforts to
protect our trade secrets and trademarks will be successful. Nor can there be
any assurance that third parties will not assert claims against us for
infringement of the proprietary rights of others. Litigation with respect to
protection of our intellectual property or claims of others against us could
result in substantial costs and diversion of management and other resources and
could have a material adverse effect on our business, financial condition and
operating results.




During
2002, we developed proprietary formulations and manufacturing processes to
produce certain raw materials, which are principal ingredients in our leading
products.  We have not filed for patent protection related to our
proprietary formulations or manufacturing processes.  Therefore, there
can be no assurance that another company will not replicate one or more of our
products and thereby adversely affect our business, results of operating results
or financial condition.




We
are subject to risks associated with our reliance upon information technology
systems.




Our
success is dependent in part on the accuracy, reliability and proper use of
sophisticated and dependable information processing systems and management
information technology. Our information technology systems are designed and
selected in order to facilitate order entry and customer billing, maintain
customer records, accurately track purchases and incentive payments, manage
accounting, finance and manufacturing operations, generate reports and provide
customer service, technical support and an interactive website for use by our
Associates.  We have encountered, and may encounter in the future,
errors in our software or our enterprise network, or inadequacies in the
software and services supplied by our vendors. Any such errors or inadequacies
that we may encounter in the future may result in interruptions to our services
and may damage our relationships with, or cause us to lose, our Associates,
licensees or customers, which would harm our financial condition and operating
results. Such errors may be expensive or difficult to correct in a timely
manner, and we may have little or no control over whether any inadequacies in
software or services supplied to us by third parties are corrected, if at all.
Despite our precautions, the occurrence of a natural disaster or other
unanticipated problems could result in interruptions in services and reduce our
net sales and profits.





Our
future financial results could be adversely impacted by asset
impairments.




We test
our goodwill, which is related to the Nutritional Products segment, for
impairment at the end of each year, or on an interim basis if certain events
occur or circumstances change that might indicate a reduction of the fair value
of the reporting unit below its carrying value.   No impairment
losses have been recognized as a result of this testing; however, no assurance
can be given that an impairment charge will not be required in future
periods.  The amount of any such annual or interim impairment charge
could be significant, and could have a material adverse effect on reported
financial results for the period in which the charge is taken.




Changes
in conditions in foreign territories and exchange rate fluctuations affect our
foreign operations and could reduce our net sales and earnings.




In 2009,
approximately 56% of consolidated net sales came from foreign
territories.  Of this 56%, 4% was generated from our Canadian
operation, while the remainder came from foreign territories through export
sales primarily to our licensees who are subject to licensee agreements with
us.  We intend to continue to expand foreign sales of our products,
exposing us to risks of changes in social, political and economic conditions in
foreign countries, including changes in the laws, regulations and policies that
govern the importation, distribution and sale of foreign-made
products.  While transactions with our licensees are denominated in
U.S. dollars, exchange rate fluctuations can have a significant impact on the
ability of our licensees to conduct successful businesses in the licensed
territories.  Given our inability to predict the degree of exchange rate
fluctuations, we cannot estimate the effect these fluctuations may have upon
future reported results, product pricing or overall financial
condition.




21




Taxation
and transfer pricing considerations affect our international
operations.




Our
principal domicile is the U.S. Under tax treaties, we are eligible to receive
foreign tax credits in the U.S. for taxes actually paid
abroad.  Because we have foreign operations, taxes paid to foreign
taxing authorities may exceed amounts of the credits available to us, resulting
in the payment of a higher overall effective tax rate on our worldwide
operations. We have adopted transfer pricing arrangements with our subsidiaries
to regulate intercompany transfers, which arrangements are subject to transfer
pricing laws that regulate the flow of funds between the subsidiaries and the
parent corporation for product purchases, management services and contractual
obligations, such as the payment of Associate incentives. If the U.S. Internal
Revenue Service or the taxing authorities of any other jurisdiction were to
successfully challenge these arrangements or require changes in our transfer
pricing practices, we could be required to pay higher taxes and our earnings
would be adversely affected. We believe that we operate in compliance with all
applicable transfer pricing laws. However, there can be no assurance that we
will continue to be found to be operating in compliance with transfer pricing
laws, or that those laws will not be modified, which, as a result, may require
changes in our operating procedures.




We
may be held responsible for certain taxes relating to our
distributors.





Our
Associates are subject to taxation, and in some instances, legislation or
governmental agencies impose an obligation on us to collect taxes, such as sales
taxes or value added taxes, and to maintain appropriate records. In addition,
under current law, our Associates in the U.S. and Canada are treated for income
tax purposes as independent contractors and compensation paid to them is not
subject to withholding by us. The definition of independent contractor has been
challenged in the past and any changes to the definition of an independent
contractor could possibly jeopardize the exempt status enjoyed by direct sellers
and impose on us the responsibility for social security and similar taxes. There
is no assurance that future legislation at the federal or state level, or in
countries other than the U.S., affecting direct sellers will not be enacted,
which could harm our financial condition and results of operations.





Our
stock price has been volatile and subject to various market conditions, and
there is a limited public trading market for our common stock.




The
trading price of our common stock has been subject to wide fluctuations. The
price of the common stock may fluctuate in the future in response to
quarter-to-quarter variations in operating results, material announcements by us
or our competitors, scientific discoveries or technological innovations,
governmental regulatory action, conditions in the industry segments in which we
operate or other events or factors.  The price of our common stock
could fluctuate based upon factors that have little or nothing to do with us or
that are outside of our control. These fluctuations could cause our stock price
to decline materially.




Our
common stock trades on the OTC Bulletin Board and there is a limited public
trading market for our common stock.  There can be no assurance that
an active public trading market for our common stock will be sustained. If for
any reason an active public trading market does not continue, purchasers of the
shares of our common stock may have difficulty in selling their securities
should they desire to do so and the price of our common stock may
decline.




The
beneficial ownership of a significant percentage of our common stock gives
Clinton H. Howard effective control and limits the influence of other
shareholders on important policy and management issues.




My
Garden, Ltd., a limited partnership controlled by Clinton H. Howard who is the
Company’s founder and Chairman of the Board, owned 43% of our outstanding common
stock at December 31, 2009. Including this stock ownership, Mr. Howard
beneficially owned 44% of our outstanding common stock at December 31,
2009.  By virtue of this stock ownership, Mr. Howard is able to
exert significant influence over the election of the members of our Board of
Directors and our business affairs. This concentration of ownership could also
have the effect of delaying, deterring or preventing a change in control that
might otherwise be beneficial to shareholders. Since Mr. Howard currently serves
on the Board of Directors, there can be no assurance that conflicts of interest
will not arise with respect to this directorship or that conflicts will be
resolved in a manner favorable to other shareholders of the
Company.


22




If our shareholders sell a
substantial number of shares of our common stock in the public market, the
market price of our common stock could fall.




Two of
our principal shareholders hold a large number of shares of our outstanding
common stock. Any decision by either of our principal shareholders to
aggressively sell their shares could depress the market price of our common
stock.




We depend on our key personnel, and
the loss of the services provided by any of our executive officers or other key
employees could harm our business and results of operations.




Our
success depends to a significant degree upon the continued contributions of our
senior management, many of whom would be difficult to replace. These employees
may voluntarily terminate their employment with us at any time. We may not be
able to successfully retain existing personnel or identify, hire and integrate
new personnel. We do not carry key person insurance for any of our
personnel.  If we lose the services of our executive officers or key
employees for any reason, our business, financial condition and results of
operations could be harmed.




Item
1B.        Unresolved Staff
Comments.




None.




Item
2.           Properties.




We own an
approximately 119,000 square foot facility that houses our executive offices,
manufacturing operations and U.S. warehousing and distribution
operations.  This facility is located in Irving, Texas, and is subject
to a deed of trust as collateral on a term loan with a balance of approximately
$2.1 million as of December 31, 2009.  Under an agreement expiring on
June 30, 2010, we lease distribution facilities in Burnaby, British Columbia to
support distribution operations in Canada at an annual rental of approximately
$89,000.  We are presently reviewing alternative distribution
arrangements for the Canadian operation and expect to have them in place prior
to the expiration of the current lease agreement.  We use our U.S.
facilities for both the Nutritional Products and Medical Products business
segments, while the Canadian facility is used only for the Nutritional Products
business segment.  We believe these facilities are suitable and
adequate in relation to our present and immediate future needs.




Item
3.           Legal
Proceedings.




From time
to time we are involved in litigation arising out of our operations. We maintain
liability insurance, including product liability coverage, in amounts we believe
is adequate. We also believe that Associate compliance is critical to the
integrity of our business; we therefore actively enforce our agreements with
Associates.  As a result, we periodically become involved in Associate
compliance actions and consider these actions routine and incidental to our
business.  These compliance actions may from time to time involve
litigation. We are not currently engaged in any legal proceedings that we expect
would materially harm our business or financial condition.




Item
4.           Reserved.




23


PART
II




Item 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases ofEquity Securities.




Our
common stock is traded on the OTC Bulletin Board.  The following
reflects the range of high and low bid quotes for our common stock for each
calendar quarter during each of the past two years.  Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.




QUARTER ENDED
                      
                      3/31/09
                      
                      
                      6/30/09
                      
                      
                      9/30/09
                      
                      
                      12/31/09HIGH
                      
                      $
                      0.50
                      
                      
                      $
                      0.42
                      
                      
                      $
                      0.41
                      
                      
                      $
                      0.35LOW
                      
                      
                      0.24
                      
                      
                      
                      0.15
                      
                      
                      
                      0.27
                      
                      
                      
                      0.11QUARTER ENDED
                      
                      3/31/08
                      
                      
                      6/30/08
                      
                      
                      9/30/08
                      
                      
                      12/31/08HIGH
                      
                      $
                      1.00
                      
                      
                      $
                      0.72
                      
                      
                      $
                      0.70
                      
                      
                      $
                      0.70LOW
                      
                      
                      0.59
                      
                      
                      
                      0.49
                      
                      
                      
                      0.45
                      
                      
                      
                      0.26





As of
March 1, 2010 there were approximately 583 holders of our common
stock.  Since our inception, we have paid no dividends on our
stock.  We do not anticipate that we will pay dividends in the
foreseeable future.




We did
not sell any of our equity securities that were not registered under the
Securities Act of 1933 during 2009.  We also did not repurchase any of
our equity securities during the fourth quarter of 2009.




For
information concerning securities authorized for issuance under our equity
compensation plans, refer to Part III, Item 12.





Item
6.          Selected Financial
Data.





The
financial data included in the table shown below has been selected by us and has
been derived from the financial statements for the periods
indicated.  The following financial data should be read together with
the information in Part II, Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and our consolidated financial
statements, including the notes thereto.





Years
      Ended December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(In
      thousands, except per share data)Statement
      of Earnings Data:Net
      sales
                
                $
                24,925
                
                
                $
                30,409
                
                
                $
                27,029
                
                
                $
                21,697
                
                
                $
                19,361Earnings
      (loss) before income taxes
                
                
                (324
                )
                
                
                2,677
                
                
                
                2,689
                
                
                
                714
                
                
                
                619Net
      earnings (loss)
                
                
                (335
                )
                
                
                1,616
                
                
                
                1,692
                
                
                
                436
                
                
                
                592Net
      earnings (loss) per commonshare
      – diluted
                
                
                (0.02
                )
                
                
                0.07
                
                
                
                0.08
                
                
                
                0.02
                
                
                
                0.03Balance
      Sheet Data:Cash
      and cash equivalents
                
                
                3,972
                
                
                
                4,973
                
                
                
                6,369
                
                
                
                3,220
                
                
                
                1,698Working
      capital
                
                
                4,676
                
                
                
                5,275
                
                
                
                3,539
                
                
                
                1,935
                
                
                
                1,140Total
      assets
                
                
                18,613
                
                
                
                19,766
                
                
                
                19,158
                
                
                
                13,639
                
                
                
                12,811Long-term
      obligations
                
                
                2,052
                
                
                
                2,196
                
                
                
                2,332
                
                
                
                2,924
                
                
                
                3,106Shareholders'
      equity
                
                
                9,219
                
                
                
                9,387
                
                
                
                7,578
                
                
                
                5,607
                
                
                
                5,021


24


Item
7.           Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.





The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the audited consolidated financial
statements and notes thereto appearing elsewhere in 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. and Canada, we distribute
      Nutritional Products directly through a network of independent Associates.
      In certain international 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 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.





Net
sales.              Consolidated
net sales in dollars and as a percentage of consolidated net sales are as
follows:





Years
      Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007(U.S.
      dollars in 000’s)Nutritional
      Products:Licensees
                    
                    $
                    12,839
                    
                    
                    
                    51
                    %
                    
                    $
                    18,375
                    
                    
                    
                    60
                    %
                    
                    $
                    15,632
                    
                    
                    
                    58
                    %Associate
      network
                    
                    
                    5,940
                    
                    
                    
                    24
                    %
                    
                    
                    5,686
                    
                    
                    
                    19
                    %
                    
                    
                    6,891
                    
                    
                    
                    25
                    %18,779
                    
                    
                    
                    75
                    %
                    
                    
                    24,061
                    
                    
                    
                    79
                    %
                    
                    
                    22,523
                    
                    
                    
                    83
                    %Medical
      Products
                    
                    
                    6,146
                    
                    
                    
                    25
                    %
                    
                    
                    6,348
                    
                    
                    
                    21
                    %
                    
                    
                    4,506
                    
                    
                    
                    17
                    %$
                    24,925
                    
                    
                    
                    100
                    %
                    
                    $
                    30,409
                    
                    
                    
                    100
                    %
                    
                    $
                    27,029
                    
                    
                    
                    100
                    %





Licensees.             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 their territories
through network marketing.   We do not maintain inventory to
fulfill licensee orders; licensees are required to pay us a 50% deposit with
their orders and then pay the balance when products are ready to ship. We
recognize sales when we ship products to the licensees.  In general,
licensees also pay us a monthly royalty based on sales in their
territories.  We record these royalties as sales.  Our net
sales in this distribution channel are dependent upon the licensee’s success in
building the market for our products in the licensed territory.  Gross
profit on net sales to licensees is significantly less than on sales to our
Associate network because we do not pay Associate commissions or incur other
expenses related to marketing or distribution in the licensed
territory.




Our
principal licensee is CCI.  In July 2004, we entered into a ten-year
exclusive license agreement, which replaced the expiring five-year license
agreement, giving CCI distribution rights in 31 countries, including mainly
Russia and countries in Eastern Europe.  CCI accounted for 97%, 97%
and 96% of licensee net sales in 2009, 2008 and 2007,
respectively.  The President of CCI is a former member of our Board of
Directors and beneficially owns approximately 18% of our outstanding common
stock.




The decline in net sales through the
Licensee channel is attributable to a decline in sales to CCI.  This
is discussed further below under the caption “Results of Operations – 2009
Compared with 2008 – Net sales.”


25





Associate
network.             We
sell Nutritional Products to Associates who purchase products for personal
consumption or for resale to retail customers; Associates also sponsor new
Associates who also engage in these activities.  Consequently, sales
in this distribution channel are dependent upon the number and productivity of
our Associates.  Associates pay for product purchases prior to
shipment, mainly through the use of credit cards, and we recognize sales when we
ship products to the Associates.  We compensate Associates for their
sales activities through our Associate compensation plan.  This plan
allows Associates to earn higher commissions as their sales and the sales of
their downline Associates increase.




The
following table sets forth the Associate network net sales by geographic region
as a percentage of total Associate network net sales for the periods
indicated:




Years Ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007U.S.
                        
                        
                        82
                        %
                        
                        
                        80
                        %
                        
                        
                        80
                        %Canada
                        
                        
                        18
                        
                        
                        
                        20
                        
                        
                        
                        20100
                        %
                        
                        
                        100
                        %
                        
                        
                        100
                        %




Medical
Products.             We
sell Medical Products primarily 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.  Our sales force, which is comprised of employed sales
representatives and independent manufacturer representatives, markets our
products to both wholesalers and health care providers.  In some
cases, wholesalers maintain their own sales forces, including health care
professionals, to market and provide services related to products that they
supply, which include our products.  We sell to wholesalers on terms
that generally require payment within 30 to 60 days.  We recognize
sales when products are shipped.  Manufacturer representatives receive
a percentage of sales as compensation, which percentage varies by
product.




Since
2004, a medical/surgical dealer, which distributes our products and provides
services to the long-term care market, has significantly expanded its business
and, as a result, increased its purchases of our Medical
Products.  This dealer accounted for 62%, 64% and 57% of Medical
Products net sales in 2009, 2008 and 2007, respectively.




Cost of
Sales.              Cost
of sales primarily consists of costs related to (i) raw materials, labor and
overhead directly associated with in-house production activities, (ii) product
components, products and sales materials purchased from third-party
manufacturers and suppliers, (iii) quality control testing performed by our
in-house quality control laboratory and by outside testing laboratories, (iv)
import duties, (v) freight and (vi) provisions for slow moving or obsolete
inventory.  Cost of sales and gross profit vary based on the sales mix
of products sold within a distribution channel as well as the mix of product
sales among distribution channels.




Distributor
Commissions.             We
pay sales incentives to Associates that are calculated in accordance with our
Associate compensation plan.  A portion of these sales incentives are
rebates and, accordingly, are recorded as a reduction of
sales.  Associates earn rebates based on their personal monthly sales
and the level at which they qualify under the Associate compensation
plan.




Most
sales incentives paid to Associates are classified as distributor
commissions.  These commissions are calculated based on the total
monthly sales by the Associate and his or her downline organization, and
Associates can qualify to receive additional commissions as sales in their
organizations expand.  Most commissions are paid to Associates
monthly.




In
September 2009, we adopted a new Associate compensation plan by which all of our
Associates are now compensated.  We do not expect this new
compensation plan to materially change total sales incentives paid to
Associates. However, we do expect the portion of sales incentives classified as
rebates to decrease and the portion of sales incentives classified as
distributor commissions to increase.  Under the former compensation
plan, distributor commissions averaged approximately 33% to 35% of net sales in
this distribution channel.  Under the new compensation plan, we expect
distributor commission to average approximately 38% to 40% of net
sales.




26




We also
classify commissions paid to manufacturer representatives who sell Medical
Products as distributor commissions.  Total commissions to
manufacturer representatives average less than 2% of Medical Products net
sales.




General and
Administrative.              General
and administrative expenses include wages and benefits, rents and utilities,
travel, professional fees, promotion and advertising, along with other marketing
and administrative expenses.  Wages and benefits represent the largest
component of selling, general and administrative expenses.





Critical
Accounting Polices and Estimates




Our
consolidated financial statements included in this report have been prepared in
accordance with accounting principles generally accepted in the U.S. (“US
GAAP”). Our significant accounting policies are described in Note B to the
consolidated financial statements included elsewhere in this report. The
preparation of financial statements in accordance with US GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying footnotes.  Those
estimates and assumptions are based on historical experiences and changes in the
business environment. However, actual results may sometimes differ materially
from estimates under different conditions. Critical accounting policies and
estimates are defined as both those that are material to the portrayal of our
financial condition and results of operations and that require management’s most
subjective judgments.  We believe our most critical accounting policies and
estimates are as described in this section.




Revenue
Recognition.              We
recognize revenue at the point products are shipped, which is the point the
risks and rewards of ownership pass to the customer.  Under the terms
of our license agreements, our licensees are required to make a cash deposit
equal to 50% of the purchase order amount at the time the purchase order is
placed, and allow two to three months for delivery.  In addition,
under our agreement with CCI, we segregate and store products for CCI in our
warehouse and then ship them at a later date to locations designated by CCI in
accordance with its business needs.  As part of this agreement, CCI
accepts ownership of and pays for the products as they are segregated in our
warehouse for CCI’s account; however, we do not recognize revenue until the
products are shipped.  Deposits and payments received for unshipped
products are recorded as deferred revenue.  Amounts billed to
customers for shipping and handling are classified as sales.  Also,
sales are recorded net of the rebate portion of sales incentives paid to
Associates.




Intangible
Assets.              We
review the carrying value of our goodwill and other intangible assets at the end
of each year and at other times if events and circumstances warrant such a
review. One of the methods used for this review is performed using estimates of
future cash flows. If the carrying value of our goodwill or other intangible
assets is considered impaired, an impairment charge is recorded for the amount
by which the carrying value of the goodwill or intangible assets exceeds its
fair value. We believe that the estimates of future cash flows and fair value
are reasonable. Changes in estimates of these cash flows and fair value,
however, could affect the evaluation.




Income
Taxes.              The
process by which we calculate income taxes in each of the jurisdictions in which
we operate involves estimating the actual current tax liability together with
assessing temporary differences in recognition of income (loss) for tax and
accounting purposes. Based on our estimates of the expected future tax
consequences related to these differences, we record deferred tax assets and
liabilities in our consolidated balance sheet. We then assess the likelihood
that the deferred tax assets will be recovered from future taxable income and,
to the extent we believe that recovery is not likely, we establish a valuation
allowance against the deferred tax asset.





Effective
January 1, 2007, we adopted a new accounting standard that clarified the
required accounting for uncertainty in income tax positions. In accordance with
this standard, we recognize in our financial statements the impact of a tax
position if that position is “more likely than not” to be sustained on audit,
based on the technical merits of the position. This standard also provided
guidance on the measurement, derecognition, classification and disclosure of tax
positions in the financial statements.





Actual
income taxes could differ significantly from these estimates due to future
changes in income tax law or changes or adjustments resulting from final review
of our tax returns by taxing authorities.  These differences could
have an impact on the income tax provision and operating results in the period
in which such determination is made.


27




Share-based
Payments.             We
recognize share-based compensation expense based on the fair value of
share-based awards.  Share-based compensation is estimated at the
grant date based on the fair value of the awards expected to vest and recognized
as expense ratably over the requisite service period of the award.





We use the Black-Scholes option-pricing
model to estimate the fair value of share-based awards. Option valuation models
require the input of assumptions, including the expected life of the share-based
awards, the expected stock price volatility, the risk-free interest rate and the
expected dividend yield. The expected life is based on the term of the
award.  The expected volatility is based on historical volatility
rates. The risk-free interest rate is based on U.S. Treasury issues whose term
is consistent with the expected life of the share-based award. Expected dividend
yield is 0.0% since we do not pay dividends and have no current plans to do so
in the future.  We recognized share-based compensation expense of
approximately $139,000, $122,000 and $72,000 for the years ended December 31,
2009, 2008 and 2007, respectively.





Results
of Operations





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




Years Ended December 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Net
      sales
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100.0
                                  %Cost
      of sales
                                  
                                  
                                  48.6
                                  
                                  
                                  
                                  49.0
                                  
                                  
                                  
                                  44.9Gross
      profit
                                  
                                  
                                  51.4
                                  
                                  
                                  
                                  51.0
                                  
                                  
                                  
                                  55.1Operating
      expenses:General
      and administrative
                                  
                                  
                                  40.4
                                  
                                  
                                  
                                  32.9
                                  
                                  
                                  
                                  33.8Distributor
      commissions
                                  
                                  
                                  10.0
                                  
                                  
                                  
                                  7.6
                                  
                                  
                                  
                                  9.3Depreciation
      and amortization
                                  
                                  
                                  1.6
                                  
                                  
                                  
                                  1.1
                                  
                                  
                                  
                                  1.3Total
      operating expenses
                                  
                                  
                                  52.0
                                  
                                  
                                  
                                  41.6
                                  
                                  
                                  
                                  44.4Operating
      profit (loss)
                                  
                                  
                                  (0.6
                                  )
                                  
                                  
                                  9.4
                                  
                                  
                                  
                                  10.7Interest
      expense
                                  
                                  
                                  0.7
                                  
                                  
                                  
                                  0.6
                                  
                                  
                                  
                                  0.7Earnings
      (loss) before income taxes
                                  
                                  
                                  (1.3
                                  )
                                  
                                  
                                  8.8
                                  
                                  
                                  
                                  10.0Income
      tax expense (benefit)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3.5
                                  
                                  
                                  
                                  3.7Net
      earnings (loss)
                                  
                                  
                                  (1.3
                                  )
      %
                                  
                                  
                                  5.3
                                  %
                                  
                                  
                                  6.3
                                  %





2009
Compared with 2008





Net
sales.             Net
sales for the year ended December 31, 2009 were $24,925,000 compared with net
sales for the prior year of $30,409,000, a decrease of $5,484,000 or
18%.  This decrease was due to decreases of $5,282,000 and $202,000 in
net sales of Nutritional Products and Medical Products,
respectively.  While net sales of Nutritional Products to our
Associate Network increased $254,000, net sales of Nutritional Products to our
licensees declined $5,536,000.  The decline in net sales to licensees
is the main reason we reported a net loss in 2009.




The
decline in net sales to our licensees of $5,536,000 primarily resulted from a
decline in sales to CCI.  Net sales to CCI decreased $5,322,000, or
30%, in 2009 compared with 2008.  This decline is attributable to a
decline in CCI’s sales to its independent Associates during this period, which
were negatively affected by the global economic recession that began in late
2008.  After several years of increasing purchases of our products to
build inventory in support of rapid growth, CCI was forced to significantly
reduce its purchases from us in 2009 to appropriately align its inventories with
the reduced sales volumes.


28


Net sales
through the Associate network channel increased $254,000, or 4%, during 2009
compared with 2008.  This increase is primarily attributable to an
increase in the rate of sponsorship of new Associates by the current Associate
network in the U.S. market.  While we believe the marketing
initiatives and other actions we have undertaken led to this increase in the
sponsorship of new Associates, we can give no assurance that the number of
active Associates will continue to increase.





The
decline in net sales of Medical Products of $202,000 resulted from decreased
sales to the largest customer in this segment.   Sales to this
customer, which distributes wound care products and provides services to the
long-term care market, decreased $236,000 during 2009 compared with
2008.  We attribute the decline in sales to efforts by this
distributor to align inventory with projected demand.





Cost of
sales.              Cost
of sales for the year ended December 31, 2009 was $12,123,000 compared with cost
of sales in the prior year of $14,915,000, a decrease of $2,792,000 or
19%.  As a percentage of net sales, cost of sales was 49% in 2009 and
2008.





General and
administrative.             General
and administrative expenses for the year ended December 31, 2009, were
$10,061,000 compared with 2008 expenses of $10,012,000, an increase of $49,000
or less than one-half of one percent.  As a percentage of net sales,
general and administrative expenses increased to 40% in 2009 compared with 33%
in 2008.  During 2009, we had increases in marketing, operations and
information technology expenses related to initiatives undertaken to increase
sales and information technology support for the Associate network and to comply
with FDA-mandated GMP regulations.  These expense increases were
mainly associated with wages and benefits, training, outside consulting, repairs
and maintenance and software development.  These increases in general
and administrative expenses were almost entirely offset by reduced employee
bonuses in 2009 compared with 2008.  No employee bonuses were earned
in 2009 as a result of the reported net loss.





Distributor
commissions.              Distributor
commissions increased in 2009 mainly as a result of the increase in sales to our
Associate network.  Distributor commissions for the year ended
December 31, 2009 were $2,498,000 compared with distributor commissions in 2008
of $2,294,000, an increase of $204,000 or 9%.  With regard to our
Associate network, distributor commissions as a percentage of commissionable
sales, exclusive of rebates, which are recorded as a reduction of sales, were
38% in 2009 compared with 35% in 2008.  This increase in distributor
commissions as a percentage of commissionable sales primarily resulted from a
new Associate compensation plan that became effective for the entire Associate
network in September 2009.  Under the new Associate compensation plan,
the portion of sales incentives classified as rebates decreased while the
portion of sales incentives classified as distributor commissions expense
increased.  On a consolidated basis, distributor commissions as a
percentage of net sales increased to 10% in 2009 compared with 8% in
2008.





Income taxes.We
recorded income tax expense of $11,000 in 2009 even though we reported a loss
before income taxes of $324,000. We recorded income tax expense in 2009 because
adjustments to the statutory federal income tax rate more than offset tax
benefits related to the consolidated loss before income taxes.  The
most significant of these adjustments was the increase in the valuation
allowance related to net operating loss carryforwards in Canada and share-based
compensation expense.  In 2008, we recorded income tax expense of
$1,061,000.  Our effective income tax rate for 2008 was
39.6%.





Net earnings
(loss).              The
loss for the year ended December 31, 2009 was $335,000, or $0.02 per diluted
share, compared with net earnings in the prior year of $1,616,000, or $0.07 per
diluted share.  This decrease resulted from the factors described
above, mainly the decline in net sales to licensees.





2008
Compared with 2007





Net
sales.             Net
sales for the year ended December 31, 2008 were $30,409,000 compared with net
sales for the prior year of $27,029,000, an increase of $3,380,000 or
13%.  This increase was due to increases of $1,538,000 and $1,842,000
in net sales of Nutritional Products and Medical Products,
respectively.  While net sales of Nutritional Products to our
licensees increased $2,743,000, net sales of Nutritional Products to our
Associate network declined $1,205,000.




We
attribute the decline in net sales to our Associate Network to a decline in the
number of active Associates.  We consider an Associate active if he or
she has placed an order during the previous 12 months.  The decline in
the number of active Associates results primarily from low levels of sponsorship
of new Associates by the current Associate network.  While we develop
marketing and sales materials for use by our Associates, and sponsor corporate
events that Associates can use to introduce prospective Associates to RBC,
Associates are primarily responsible for recruiting new Associates to join
RBC.  Our experience in this industry indicates that once an Associate
loses motivation and confidence in a company and/or its products, it is
extremely difficult to re-motivate that individual to engage in sponsoring
activities.


29





We
undertook a number of actions over a period of years in an attempt to overcome
the reduced sponsorship activity among our Associate network:





·
            Marketing
      message – We modified our marketing message to focus on our core products
      and their benefits, and the business opportunity and desirable lifestyle
      available to a successful Associate.  In addition, we developed,
      introduced and promoted new sponsoring systems that are simple and easy to
      explain to prospective Associates.


·
            Product
      strategy – We first categorized our diverse product line into three major
      product groups.  We then developed and introduced new products
      in each product group, allowing us, in some cases, to eliminate redundant
      products from the product line.  We continued to develop and
      introduce new products to support sales in each product
      category.


·
            Marketing
      materials – We developed and introduced new marketing tools in a variety
      of media that make it easy and simple for Associates to expose our
      products and business to prospective new
  Associates.


·
            Associate
      compensation plan – We introduced changes to our Associate compensation
      plan to make it financially rewarding at all levels and to encourage
      sponsoring.


·
            Corporate
      support – We significantly increased the support, including financial
      support, we provide to Associates who are actively engaged in sponsoring
      activities.  We also undertook various advertising and direct
      mail initiatives to attract new prospects and increase communication with
      existing Associates.





The
growth in net sales to our licensees relates to the growth of
CCI.  Net sales to CCI increased $2,849,000 in 2008.  CCI’s
sales growth is attributed to the continued expansion of the independent
distributor network in CCI’s territory.




Since
2004, a medical/surgical dealer, which distributes our products and provides
services to the long-term care market, has significantly expanded its business
and, as a result, increased its purchases of our Medical
Products.  The increase in sales to this dealer in 2008 accounted for
approximately 80% of the total net sales increase in the Medical Products
segment.




Cost of
sales.              Cost
of sales for the year ended December 31, 2008 was $14,915,000 compared with cost
of sales in the prior year of $12,130,000, an increase of $2,785,000 or
23%.  As a percentage of net sales, cost of sales was 49% in 2008 and
45% in 2007.  As a percentage of net sales, gross margin declined 4%
in 2008 mainly because of the change in sales mix of Nutritional Products
between sales to the Associate network and sales to licensees.  The
gross margin for products sold to licensees is lower than the gross margin for
products sold to the Associate network because we sell to licensees at lower
prices.  Sales prices to licensees are lower since we do not pay
Associate commissions or incur other expenses related to marketing and
distribution in the licensed territory.  In addition, the sales mix of
Medical Products in 2008 contributed a lower gross margin than the sales mix in
2007.  Most of the sales growth in this segment in 2008 was
attributable to lower margin products.





General and
administrative.              General
and administrative expenses for the year ended December 31, 2008, were
$10,012,000 compared with 2007 expenses of $9,143,000, an increase of $869,000
or 10%.  As a percentage of net sales, general and administrative
expenses declined to 33% in 2008 compared with 34% in 2007.  Of the
increase in expenses, approximately $410,000 was associated with the Nutritional
Products segment and $459,000 with the Medical Products segment.  The
increase in Nutritional Products general and administrative expenses resulted
from (i) increased operational expenses, particularly wages and benefits,
required to support licensee sales growth and (ii) repair and maintenance
expenses associated with the Company’s headquarters
facility.  Increased general and administrative expenses in the
Medical Products segment related to increased marketing, operational and
administrative expenses, particularly wages and benefits, required to support
sales growth in this segment.


30





Distributor
commissions.              Distributor
commissions for the year ended December 31, 2008 declined as a result of the
decline in sales to our Associate network.  Distributor commissions
for the year ended December 31, 2008 were $2,294,000 compared with distributor
commissions in 2007 of $2,523,000, a decrease of $229,000 or 9%.  With
regard to our Associate network, distributor commissions as a percentage of
commissionable sales, exclusive of rebates, which are recorded as a reduction of
sales were 35% in 2008 compared with 34% in 2007.  This increase in
distributor commissions as a percentage of commissionable sales primarily
resulted from changes made to the Associate compensation plan that became
effective January 2008.  On a consolidated basis, distributor
commissions as a percentage of net sales declined to 8% in 2008 compared with 9%
in 2007.





Income taxes.We
recorded income tax expense of $1,061,000 in 2008 compared to $997,000 in
2007.  Our effective income tax rates for 2008 and 2007 were 39.6% and
37.1%, respectively.  The increase in the effective income tax rate
was primarily due to the weighted average effect of the adjustments to the
statutory federal income tax rate.





Net
earnings.              Net
earnings for the year ended December 31, 2008 were $1,616,000, or $0.07 per
diluted share, compared with net earnings in the prior year of $1,692,000, or
$0.08 per diluted share.  This decrease resulted from the factors
described above.





Liquidity
and Capital Resources




Historically,
our principal need for funds has been for operating expenses, working capital
and capital expenditures.  We have funded our cash requirements
through equity financing, debt financing and cash flow from
operations.  We have also used operating leases to finance the use of
certain buildings and equipment required for our operations.  We
require working capital primarily to fund inventory purchases and, to a lesser
extent, accounts receivable balances associated with sales of our Medical
Products.  We do not rely on lines of credit or other similar
short-term financing arrangements to finance working capital
needs.  At December 31, 2009, all of our cash and cash equivalents
were maintained in accounts that were fully insured by federal government
agencies.




Cash and working
capital.              During
the year ended December 31, 2009, we had a net decrease in cash of
$1,001,000.  This compares to a net decrease in cash in 2008 of
$1,395,000.  At December 31, 2009, we had working capital of
$4,676,000, a $599,000 decline from working capital at December 31, 2008 of
$5,275,000.  This decrease in working capital was the result of a
decrease in current assets of $1,695,000 and a decrease in current liabilities
of $1,096,000.  The reasons for the changes in cash and working
capital are further described below.




Operating
activities.             In
2009, our operating activities provided cash flows of $158,000 compared with
using cash flows of $872,000 in 2008.  In 2009, net earnings (loss)
adjusted for non-cash activities, mainly depreciation and amortization,
share-based compensation, and deferred taxes, provided cash flows of $506,000
compared with $2,228,000 in 2008.




Operating
activities include the management of working capital accounts such as accounts
receivable, inventories, prepaid expenses and other current assets, accounts
payable, accrued operating expenses and deferred revenues.  Because
net sales to licensees represent over 50% of consolidated net sales, one of the
most significant factors affecting our working capital accounts is the
arrangement we maintain with our licensees, principally CCI.  In
accordance with our license agreements, product orders from licensees are
accompanied by a cash deposit equal to 50% of the value of the
order.  These deposits are used in part to make deposits with our
suppliers against orders we place to fulfill licensee product
orders.  In addition, in accordance with our license agreement with
CCI, we segregate and store finished products for CCI in our warehouse and then
ship them at a later date based on CCI’s business needs.  CCI pays the
remaining 50% due on its product orders when goods are segregated in our
warehouse for CCI’s account.  Accordingly, because we do not recognize
a sale to CCI until products are shipped from our warehouse, there can be a
significant difference in timing between the date we receive cash from CCI and
the date we recognize the related gross profit in our statement of
operations.  Cash received as deposits for product orders and as
payment for stored products are recorded as deferred
revenue.  Deposits we make with our suppliers are recorded as prepaid
expenses.  Inventory held in our warehouse for CCI’s account is
reported as inventory in our financial statements until it is shipped to
CCI.  The $387,000 of cash provided by a decrease in inventory in 2009
was related to decreased inventory held for CCI.


31





Our prepaid expenses and other current
assets decreased during 2009 primarily as a result of the release of a $500,000
in certificate of deposit that was used to collateralize a line of credit
arrangement.   The $500,000 bank line of credit matured in
October 2009 and was not renewed.





Investing
activities.              During
2009, we used cash of $1,135,000 to purchase property and
equipment.  Of this amount, approximately $930,000 was used to upgrade
our network marketing computer software.  This upgrade was
substantially completed by December 31, 2009.





Financing
activities.             During
2009, financing activities used net cash flows of $143,000, which mainly related
to repayment of long-term debt.  As described above, we did not renew
our $500,000 line of credit upon maturity in October 2009.




General liquidity and cash
flows.             We
believe that our working capital requirements can be met through available cash
and cash generated from operating activities for the 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, other types of debt or equity
financings.  We can give no assurance, however, that we would be able
to obtain any 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.




Contractual
Cash Obligations




The table below summarizes our
contractual obligations outstanding as of December 31, 2009:




Payments
      Due by Period (000’s)Contractual Obligations
                  
                  Total
                  
                  
                  2010
                  
                  
                  
                  2011 - 2012
                  
                  
                  
                  2013 - 2014
                  
                  
                  2015 and
                    BeyondLong-term
      debt
                  
                  $
                  2,052
                  
                  
                  $
                  156
                  
                  
                  $
                  351
                  
                  
                  $
                  409
                  
                  
                  $
                  1,136Operating
      leases
                  
                  
                  377
                  
                  
                  
                  182
                  
                  
                  
                  188
                  
                  
                  
                  7
                  
                  
                  
                  -Purchase
      obligations (1)
                  
                  
                  3,727
                  
                  
                  
                  3,727
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Employment
      agreements
                  
                  
                  3,138
                  
                  
                  
                  1,506
                  
                  
                  
                  1,459
                  
                  
                  
                  173
                  
                  
                  
                  -







(1)
Purchase obligations consist of outstanding purchase orders issued in the
ordinary course of our business.  These purchase orders are primarily
related to the purchase of inventory.




Off-Balance
Sheet Arrangements





As of December 31, 2009, we had no
material off-balance sheet arrangements, other than the operating leases and
certain purchase commitments described above.




Inflation




We do not believe that inflation has
had a material impact on our operating results.  Substantial increases
in costs, however, could have an impact on us and the industries in which we
operate.  We believe that, to the extent inflation affects our costs
in the future, we could generally offset inflation by increasing prices if
competitive conditions permit.




Recent
Accounting Pronouncements





See Note B to the consolidated
financial statements included elsewhere in this report for information regarding
recent accounting pronouncements.


32


Item
7A.            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 which 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
have foreign-based operations in Canada which accounted for 4% of 2009 net
sales.  From time to time, we make advances to our Canadian subsidiary
denominated in U.S. dollars, exposing the Canadian subsidiary 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 to our Canadian subsidiary of approximately $710,000
at December 31, 2009, a 10% adverse change in the currency rate would reduce
earnings before tax by approximately $71,000.




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 successful
businesses.




Item
8.          Financial
Statements and Supplementary Data.




The
financial statements and supplementary data are listed in the Index to Financial
Statements on Page F-1 of this report.




Item
9.          Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure.




None.




Item
9A(T). Controls
and Procedures.




Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures




As required by Rules 13a-15(b) and
15d-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"), our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated as of December 31, 2009, the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures, as of
December 31, 2009, 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.




Management’s
Annual Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.  Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of published financial statements in
accordance with generally accepted accounting principles.  We believe,
however, that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls systems
are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud or error, if any, within a company have
been detected.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of
December 31, 2009 based on the framework in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.


33





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





Changes
in Internal Control over Financial Reporting





There has
been no change in internal control over financial reporting that occurred during
the quarter ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Item
      9B.
            Other
      Information.




None.




34





PART
III




Certain information required by Part
III is omitted from this report as we will file a definitive proxy statement for
the Annual Meeting of Shareholders to be held on June 17, 2010, pursuant to
Regulation 14A under the Exchange Act not later than 120 days after the end of
the fiscal year covered by this report, and certain information included in such
proxy statement is incorporated herein by reference. Only those sections of the
proxy statement that specifically address the items set forth herein are
incorporated by reference.




Item
10.            Directors,
Executive Officers and Corporate Governance.




The
information for this Item is incorporated herein by reference to our proxy
statement to be filed with the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this report.





Item
11.            Executive
Compensation.




The
information for this Item is incorporated herein by reference to our proxy
statement to be filed with the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this report.





Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




The
information for this Item is incorporated herein by reference to our proxy
statement to be filed with the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this report.





Item
13.            Certain
Relationships and Related Transactions, and Director Independence.




The
information for this Item is incorporated herein by reference to our proxy
statement to be filed with the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this report.




Item
14.            Principal
Accountant Fees and Services.




The
information for this Item is incorporated herein by reference to our proxy
statement to be filed with the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this report.




35


PART
IV





Item
15.            Exhibits,
Financial Statement Schedules.




(a)(1)     Financial
Statements.  The following financial statements and related
documents are filed as part of this report:




Report of Independent Registered Public
Accounting Firm – Lane Gorman Trubitt, L.L.P.




Consolidated
Balance Sheets




Consolidated
Statements of Operations




Consolidated
Statements of Shareholders’ Equity




Consolidated
Statements of Cash Flows




Notes to
Consolidated Financial Statements




(a)(2)     Financial Statement
Schedules.  None.




(a)(3)     Exhibits.  The
following exhibits are filed as part of this report:




Ex. No.
              
              Description3.1
              
              Articles
      of Incorporation(2)3.2
              
              Bylaws(2)3.3
              
              Amendment
      No. 1 to Bylaws(6)4.1
              
              Specimen
      copy of Certificate for Common Stock(2)4.2
              
              The
      2003 Stock Incentive Plan(4)4.3
              
              The
      2006 Stock Incentive Plan(11)10.1
              
              Form
      of Member Agreement and Policies with Distributors(1)10.2
              
              Form
      of Indemnification Agreement(2)10.3
              
              Lease
      Agreement dated August 23, 1994, by and between Royal BodyCare Canada,
      Inc. (f/k/a Pure Life International Products, Inc.) and Mott Electric
      Motor Repair Ltd.(10)10.4
              
              Purchase
      and Sale Agreement, dated as of August 21, 2000, between CIIF Associates
      II Limited Partnership and Royal BodyCare, Inc.(3)10.5
              
              Mortgage
      Note, dated March 15, 2001, in the principal amount of $3,000,000,
      executed by Royal BodyCare, Inc. and Clinton H. Howard in favor of
      Allstate Life Insurance Company(13)10.6
              
              Deed
      of Trust, Assignment of Leases, Rents and Contracts, Security Agreement
      and Fixture Filing, dated March 16, 2001, between Royal BodyCare, Inc., as
      Trustor, Robin R. Green, as Trustee and Allstate Life Insurance Company,
      as Beneficiary(13)10.7
              
              Employment
      Agreement, dated November 20, 2003, between Royal BodyCare, Inc. and
      Clinton H. Howard(7)10.8
              
              Exclusive
      Distributorship Agreement, dated as of July 14, 2004, between Royal
      BodyCare, Inc. and Coral Club International, Inc.(9)10.9
              
              Agreement
      to Renew Lease dated May 26, 2005, by and between Royal BodyCare Canada,
      Inc. and Mott Electric Motor Repair Ltd.(10)10.10
              
              Line
      of Credit Promissory Note, dated November 1, 2007, in the principal amount
      of $500,000, executed by RBC Life Sciences, Inc. in favor of Independent
      Bank of Texas (12)


36




10.11
              
              Business
      Loan Agreement, dated November 1, 2007, between RBC Life Sciences, Inc.
      and Independent Bank of Texas, associated with $500,000 Line of Credit
      Promissory Note (12)10.12
              
              Line
      of Credit Promissory Note, dated October 22 2008, in the principal amount
      of $500,000, executed by RBC Life Sciences, Inc. in favor of Independent
      Bank of Texas (13)10.13
              
              Amended
      and Restated Employment Agreement, executed December 31, 2008, between RBC
      Life Sciences, Inc. and John W. Price (13)10.14
              
              Employment
      Agreement, executed December 11, 2009 to be effective January 1, 2010,
      between RBC Life Sciences, Inc. and Steven E. Brown *10.15
              
              Employment
      Agreement, executed December 22, 2009 to be effective January 1, 2010,
      between RBC Life Sciences, Inc. and Kenneth L. Sabot*14.1
              
              Code
      of Ethics(8)21.1
              
              List
      of company subsidiaries*23.1
              
              Consent
      of Lane Gorman Trubitt, L.L.P., independent registered public accountants
      to incorporation of report by reference*23.2
              
              Consent
      of  Gardere Wynne Sewell LLP, legal counsel(5)24.1
              
              Power
      of Attorney(5)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*







* Filed
herewith





(1)
Incorporated by reference to the Annual Report on Form 10-K/A filed May 7,
1999


(2)
Incorporated by reference to the Annual Report on Form 10-K filed April 26,
2000


(3)
Incorporated by reference to the Quarterly Report on Form 10-Q filed November
13, 2000


(4)
Incorporated by reference to the Current Report on Form 8-K filed September 29,
2003


(5)
Incorporated by reference to the registration statement filed on Form S-8 filed
October 15, 2003


(6)
Incorporated by reference to the Quarterly Report on Form 10-Q filed November
14, 2003


(7)
Incorporated by reference to the Current Report on Form 8-K filed December 3,
2003


(8)
Incorporated by reference to the Annual Report on Form 10-K filed April 14,
2004


(9)
Incorporated by reference to the Current Report on Form 8-K filed July 27,
2004


(10)
Incorporated by reference to the Current Report on Form 8-K filed June 1,
2005


(11)  Incorporated
by reference to the registration statement filed on Form S-8 filed December 22,
2006


(12)  Incorporated
by reference to the Annual Report on Form 10-K filed March 18, 2008


(13)  Incorporated
by reference to the Annual Report on Form 10-K filed March 13, 2009




37


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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.,a
      Nevada corporationDate:  March
      11, 2010
              By:
              /s/ John W. PriceJohn
      W. Price, Chief Executive
Officer




Pursuant
to the requirements to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.




Signature
                    
                    Title
                    
                    Date/s/ John W. Price
                    
                    Director,
      President andJohn
      W. Price
                    
                    Chief
      Executive Officer(principal
      executive officer)
                    
                    March
      11, 2010/s/ Steven E. Brown
                    
                    Director,
      Vice President-Finance andSteven
      E. Brown
                    
                    Chief
      Financial Officer(principal
      financial and accountingofficer)
                    
                    March
      11, 2010/s/ Clinton H. Howard
                    
                    Chairman
      of the Board of Directors
                    
                    March
      11, 2010Clinton
      H. Howard/s/ Kenneth L. Sabot
                    
                    Director
      and Senior Vice President-Kenneth
      L. Sabot
                    
                    Operations
                    
                    March
      11, 2010/s/ Paul R. Miller
                    
                    Director
      and President-Paul
      R. Miller
                    
                    MPM
      Medical, Inc.
                    
                    March
      11, 2010/s/ Robert A. Kaiser
                    
                    Director
                    
                    March
      11, 2010Robert
      A. Kaiser/s/ Joseph. P. Philipp
                    
                    Director
                    
                    March
      11, 2010Joseph
      P. Philipp




38


INDEX
TO FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Financial StatementsConsolidated
      Balance Sheets
                F-3Consolidated
      Statements of Operations
                F-4Consolidated
      Statements of Shareholders’ Equity
                F-5Consolidated
      Statements of Cash Flows
                F-6Notes
      to Consolidated Financial Statements
                F-7




F-1





Report
of Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


RBC Life
Sciences, Inc. and Subsidiaries





We have
audited the accompanying consolidated balance sheets of RBC Life Sciences, Inc.
and Subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2009.  The
Company’s management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.




In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of RBC Life Sciences, Inc. and Subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and its
consolidated cash flows for each of the three years in the period ended December
31, 2009, in conformity with accounting principles generally accepted in the
United States of America.




LANE
GORMAN TRUBITT, L.L.P.





Dallas,
Texas


March 11,
2010




F-2


RBC
Life Sciences, Inc. and Subsidiaries





CONSOLIDATED
BALANCE SHEETS





December
31,





2009
                
                
                2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                3,972,111
                
                
                $
                4,973,405Accounts
      receivable, net of allowance for doubtful accounts of $28,030 and $36,573,
      respectively
                
                
                576,125
                
                
                
                465,311Inventories
                
                
                5,344,259
                
                
                
                5,706,613Deferred
      income taxes
                
                
                449,254
                
                
                
                405,286Prepaid
      expenses and other current assets
                
                
                888,303
                
                
                
                1,374,805Total
      current assets
                
                
                11,230,052
                
                
                
                12,925,420Property
      and equipment, net of accumulated depreciation
                
                
                5,037,890
                
                
                
                4,330,451Goodwill,
      net of accumulated amortization
                
                
                2,271,977
                
                
                
                2,197,082Other
      intangible assets, net of accumulated amortization
                
                
                61,808
                
                
                
                109,347Other
      assets
                
                
                10,897
                
                
                
                203,816$
                18,612,624
                
                
                $
                19,766,116LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable, trade
                
                $
                1,803,997
                
                
                $
                1,961,579Accrued
      liabilities
                
                
                925,060
                
                
                
                1,266,167Current
      maturities of long-term obligations
                
                
                155,994
                
                
                
                144,397Deferred
      revenue
                
                
                3,668,907
                
                
                
                4,278,503Total
      current liabilities
                
                
                6,553,958
                
                
                
                7,650,646Long-term
      obligations, less current maturities
                
                
                1,896,077
                
                
                
                2,052,071Deferred
      income taxes
                
                
                943,235
                
                
                
                676,495Commitments
      and contingenciesShareholders'
      equityPreferred
      stock, $0.10 par value; authorized 20,000,000 shares; none
      outstanding
                
                
                -
                
                
                
                -Common
      stock, $.001 par value; authorized 50,000,000 shares; 21,921,934 and
      21,915,004 shares issued and outstanding in 2009 and 2008,
      respectively
                
                
                21,922
                
                
                
                21,915Additional
      paid-in capital
                
                
                13,504,874
                
                
                
                13,364,308Accumulated
      deficit
                
                
                (4,439,094
                )
                
                
                (4,104,241
                )Accumulated
      other comprehensive income
                
                
                131,652
                
                
                
                104,9229,219,354
                
                
                
                9,386,904$
                18,612,624
                
                
                $
                19,766,116





The
accompanying notes are an integral part of these consolidated financial
statements.


F-3


RBC
Life Sciences, Inc. and Subsidiaries





CONSOLIDATED
STATEMENTS OF OPERATIONS





Years
Ended December 31,





2009
                
                
                2008
                
                
                2007Net
      sales
                
                $
                24,924,581
                
                
                $
                30,409,293
                
                
                $
                27,028,529Cost
      of sales
                
                
                12,122,702
                
                
                
                14,914,840
                
                
                
                12,129,963Gross
      profit
                
                
                12,801,879
                
                
                
                15,494,453
                
                
                
                14,898,566Operating
      expensesGeneral
      and administrative
                
                
                10,061,487
                
                
                
                10,012,438
                
                
                
                9,142,624Distributor
      commissions
                
                
                2,497,651
                
                
                
                2,293,841
                
                
                
                2,522,978Depreciation
      and amortization
                
                
                402,358
                
                
                
                336,522
                
                
                
                334,445Total
      operating expenses
                
                
                12,961,496
                
                
                
                12,642,801
                
                
                
                12,000,047Operating
      profit (loss)
                
                
                (159,617
                )
                
                
                2,851,652
                
                
                
                2,898,519Interest
      expense
                
                
                164,236
                
                
                
                175,055
                
                
                
                209,770Earnings
      (loss) before income taxes
                
                
                (323,853
                )
                
                
                2,676,597
                
                
                
                2,688,749Income
      tax expense
                
                
                11,000
                
                
                
                1,060,837
                
                
                
                996,500Net
      earnings (loss)
                
                $
                (334,853
                )
                
                $
                1,615,760
                
                
                $
                1,692,249Basic
      earnings (loss) per share
                
                $
                (0.02
                )
                
                $
                0.08
                
                
                $
                0.08Basic
      weighted average shares outstanding
                
                
                21,920,779
                
                
                
                21,464,832
                
                
                
                20,396,420Diluted
      earnings (loss) per share
                
                $
                (0.02
                )
                
                $
                0.07
                
                
                $
                0.08Diluted
      weighted average shares outstanding
                
                
                21,920,779
                
                
                
                22,838,858
                
                
                
                22,206,382





The
accompanying notes are an integral part of these consolidated financial
statements.


F-4


RBC
Life Sciences, Inc. and Subsidiaries





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY





Additional
                  
                  
                  
                  
                  
                  Accumulated other
                  
                  
                  TotalCommon
      stock
                  
                  
                  paid-in
                  
                  
                  Accumulated
                  
                  
                  comprehensive
                  
                  
                  shareholders’Shares
                  
                  
                  Amount
                  
                  
                  capital
                  
                  
                  deficit
                  
                  
                  income
                  
                  
                  equityBalance
      at January 1, 2007
                  
                  
                  20,188,294
                  
                  
                  $
                  20,188
                  
                  
                  $
                  12,916,035
                  
                  
                  $
                  (7,412,250
                  )
                  
                  $
                  83,028
                  
                  
                  $
                  5,607,001Comprehensive
      incomeNet
      earnings
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,692,249
                  
                  
                  
                  -
                  
                  
                  
                  1,692,249Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  108,052
                  
                  
                  
                  108,052Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,800,301Exercise
      of common stock options
                  
                  
                  675,430
                  
                  
                  
                  676
                  
                  
                  
                  97,874
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  98,550Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72,273
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72,273Balance
      at December 31, 2007
                  
                  
                  20,863,724
                  
                  
                  
                  20,864
                  
                  
                  
                  13,086,182
                  
                  
                  
                  (5,720,001
                  )
                  
                  
                  191,080
                  
                  
                  
                  7,578,125Comprehensive
      income (loss)Net
      earnings
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,615,760
                  
                  
                  
                  -
                  
                  
                  
                  1,615,760Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (86,158
                  )
                  
                  
                  (86,158
                  )Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,529,602Exercise
      of common stock options
                  
                  
                  1,051,280
                  
                  
                  
                  1,051
                  
                  
                  
                  156,549
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  157,600Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  121,577
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  121,577Balance
      at December 31, 2008
                  
                  
                  21,915,004
                  
                  
                  
                  21,915
                  
                  
                  
                  13,364,308
                  
                  
                  
                  (4,104,241
                  )
                  
                  
                  104,922
                  
                  
                  
                  9,386,904Comprehensive
      income (loss)Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (334,853
                  )
                  
                  
                  -
                  
                  
                  
                  (334,853
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  26,730
                  
                  
                  
                  26,730Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (308,123
                  )Exercise
      of common stock options
                  
                  
                  6,930
                  
                  
                  
                  7
                  
                  
                  
                  1,448
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,455Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  139,118
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  139,118Balance
      at December 31, 2009
                  
                  
                  21,921,934
                  
                  
                  $
                  21,922
                  
                  
                  $
                  13,504,874
                  
                  
                  $
                  (4,439,094
                  )
                  
                  $
                  131,652
                  
                  
                  $
                  9,219,354





The
accompanying notes are an integral part of these consolidated financial
statements.


F-5





RBC
Life Sciences, Inc. and Subsidiaries





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
Ended December 31,





2009
                              
                              
                              2008
                              
                              
                              2007Cash
      flows from operating activitiesNet
      earnings (loss)
                              
                              $
                              (334,853
                              )
                              
                              $
                              1,615,760
                              
                              
                              $
                              1,692,249Adjustments
      to reconcile net earnings (loss) to net cash provided by (used in)
      operating activitiesDepreciation
      and amortization
                              
                              
                              455,603
                              
                              
                              
                              373,811
                              
                              
                              
                              362,809Losses
      on disposition of assets and write off of note receivable
                              
                              
                              23,504
                              
                              
                              
                              -
                              
                              
                              
                              536,069Deferred
      income taxes
                              
                              
                              222,772
                              
                              
                              
                              117,339
                              
                              
                              
                              (104,260
                              )Share-based
      compensation
                              
                              
                              139,118
                              
                              
                              
                              121,577
                              
                              
                              
                              72,273Change
      in operating assets and liabilitiesAccounts
      receivable
                              
                              
                              (111,076
                              )
                              
                              
                              222,194
                              
                              
                              
                              (355,671
                              )Inventories
                              
                              
                              386,558
                              
                              
                              
                              (1,011,530
                              )
                              
                              
                              (2,055,759
                              )Prepaid
      expenses and other current assets
                              
                              
                              499,473
                              
                              
                              
                              (1,081,026
                              )
                              
                              
                              194,775Other
      assets
                              
                              
                              -
                              
                              
                              
                              (7,417
                              )
                              
                              
                              (4,591
                              )Accounts
      payable, trade
                              
                              
                              (161,422
                              )
                              
                              
                              37,475
                              
                              
                              
                              1,076,737Accrued
      liabilities
                              
                              
                              (351,129
                              )
                              
                              
                              (1,215,469
                              )
                              
                              
                              1,291,382Deferred
      revenue
                              
                              
                              (610,228
                              )
                              
                              
                              (44,813
                              )
                              
                              
                              1,819,678Net
      cash provided by (used in) operating activities
                              
                              
                              158,320
                              
                              
                              
                              (872,099
                              )
                              
                              
                              4,525,691Cash
      flows from investing activitiesPurchase
      of property and equipment
                              
                              
                              (1,134,752
                              )
                              
                              
                              (590,907
                              )
                              
                              
                              (827,884
                              )Proceeds
      from insurance policy
                              
                              
                              194,278
                              
                              
                              
                              -
                              
                              
                              
                              -Net
      cash used in investing activities
                              
                              
                              (940,474
                              )
                              
                              
                              (590,907
                              )
                              
                              
                              (827,884
                              )Cash
      flows from financing activitiesExercise
      of common stock options
                              
                              
                              1,455
                              
                              
                              
                              157,600
                              
                              
                              
                              98,550Payments
      of long-term debt
                              
                              
                              (144,397
                              )
                              
                              
                              (135,428
                              )
                              
                              
                              (566,703
                              )Net
      payments against lines of credit
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (100,000
                              )Net
      cash provided by (used in) financing activities
                              
                              
                              (142,942
                              )
                              
                              
                              22,172
                              
                              
                              
                              (568,153
                              )Effect
      of exchange rate changes on cash flows
                              
                              
                              (76,198
                              )
                              
                              
                              45,354
                              
                              
                              
                              19,728Net
      increase (decrease) in cash
                              
                              
                              (1,001,294
                              )
                              
                              
                              (1,395,480
                              )
                              
                              
                              3,149,382Cash
      and cash equivalents at beginning of year
                              
                              
                              4,973,405
                              
                              
                              
                              6,368,885
                              
                              
                              
                              3,219,503Cash
      and cash equivalents at end of year
                              
                              $
                              3,972,111
                              
                              
                              $
                              4,973,405
                              
                              
                              $
                              6,368,885Supplemental
      cash flow disclosuresInterest
      paid
                              
                              $
                              165,169
                              
                              
                              $
                              175,934
                              
                              
                              $
                              212,662Income
      taxes paid
                              
                              
                              69,621
                              
                              
                              
                              2,181,912
                              
                              
                              
                              45,947





The
accompanying notes are an integral part of these consolidated financial
statements.




F-6


RBC
Life Sciences, Inc. and Subsidiaries
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007




NOTE A –
NATURE OF OPERATIONS AND ORGANIZATION





RBC Life
Sciences, Inc. (along with its subsidiaries, sometimes hereinafter referred to
collectively as “RBC” or the “Company”) is principally engaged in the marketing
and distribution of nutritional supplements and personal care products
(collectively “Nutritional Products”) through subsidiaries in the U.S. and
Canada.  This product line is marketed under the “RBC Life” brand
name.  In certain markets, primarily the U.S. and Canada, 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.  Associates can derive
compensation both from the direct sales of products and from sales generated by
sponsored Associates.





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 distributor
network in a licensed territory.  Under these arrangements, the
independent distributor 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 North America.





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 primarily distributed 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.





NOTE B –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation and Reporting- The consolidated financial statements
include the accounts of RBC and its wholly owned subsidiaries, RBC Life Sciences
USA, Inc., RBC Life Sciences Canada, Inc., RBC Life Sciences Korea Co., Ltd. and
MPM Medical, Inc.  All significant intercompany accounts and
transactions have been eliminated.  Subsequent events were evaluated
through the issuance date of the financial statements.





Cash and Cash
Equivalents - The Company holds cash deposits in foreign bank accounts
from time to time.  At December 31, 2009 and 2008, $6,000 and $62,000
were held in a Canadian bank, respectively.  For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.





Accounts
Receivable -The
Company’s accounts receivable arise in the normal course of business and
primarily relate to sales of Medical Products to various businesses and
individuals.  Accounts receivable are generally due within 30, 45 or
60 days and are stated at amounts due from customers net of an allowance for
doubtful accounts.





Accounts
outstanding longer than the contractual payment terms are considered past
due.  The Company determines its allowance by considering a number of
factors,  including the  length of time accounts are past
due, the Company’s previous loss history, the customer’s current ability to pay
its obligation to the Company, and the industry as a whole.  The
Company charges accounts receivable against the allowance when they become
uncollectible, and any payments subsequently received on such accounts are
credited to the allowance for doubtful accounts.




F-7




RBC
Life Sciences, Inc. and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE B –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued





Inventories- Inventories consisting of raw materials and bulk products, packaging
materials and finished goods are stated at the lower of cost or
market.  The cost of inventories is determined using the first in,
first out method.





Property and
Equipment - Property and equipment are recorded at cost. Depreciation and
amortization are provided over the estimated useful lives of the related assets,
principally on the straight-line method, ranging from three to 25
years.





Intangible Assets
and Amortization - Goodwill and other intangible assets with indefinite
useful lives are not amortized, but are reviewed annually for impairment or when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Intangible assets with finite lives are
amortized over their useful lives.  At December 31, 2009, the
Company’s intangible assets with finite lives consisted of copyrights,
trademarks, other registrations and other intangibles, which are amortized over
an average life of 19 years.  At December 31, 2008, the Company’s
intangible assets with finite lives consisted of distribution contracts;
copyrights, trademarks and other registrations; and other intangibles, which
were amortized over average lives of eight, 19 and 11 years,
respectively.





The
Company has designated year end as the date of its annual goodwill impairment
test.  The Company tests goodwill for impairment by comparing the
carrying value of a reporting unit, including goodwill, to the fair value of the
unit.  Fair value is determined by estimating the present value of
future cash flows.  An impairment loss would be recognized if the
carrying value of a reporting unit exceeds the implied fair value.  To
date, the Company has not recognized any impairment losses related to the
carrying value of its goodwill.





Impairment of
Long-Lived Assets - Long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.





Revenue
Recognition and Deferred Revenue- Sales are recorded when products are
shipped, which is the point the risks and rewards of ownership pass to the
customer. Sales include amounts billed to customers for shipping and handling
and are recorded net of sales taxes.  Payments received for unshipped
products are recorded as “deferred revenue.”  The Company generally
requires  a cash  or credit card payment at the point of
sale for Nutritional Products sold to its Associates.  With regard to
orders received from its third-party licensees, the Company generally requires
the licensee to make a cash deposit equal to 50% of the order at the time an
order is placed, and to pay the remaining 50% when the Company is ready to ship
products in fulfillment of the order.





The
Company’s agreements with its third-party licensees generally provide that
licensees pay to the Company a monthly royalty, which is calculated as a
specified percentage of the licensees’ sales, as defined, in the territories
covered by the license agreements.  Royalties paid by licensees are
recorded as sales and amounted to $2,427,000, $2,638,000 and $2,039,000 in 2009,
2008 and 2007, respectively.




F-8




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE B –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued





Distributor
Commissions -
Distributor commissions consist primarily of commissions paid to Associates in
accordance with the Associate compensation plan.  These commissions
are calculated based on the total monthly sales by the Associate and his or her
downline organization.  Most commissions are paid to Associates
monthly.  Sales incentives paid to Associates that represent rebates
are recorded as a reduction of sales rather than distributor commission
expense.  Associates can earn rebates if the amount of their personal
monthly sales exceeds a threshold amount set forth under the Associate
compensation plan.  In September 2009, the Company adopted changes to
its Associate compensation plan, which had the effect of reducing the portion of
Associate incentives that are classified as rebates while increasing the portion
of Associate incentives that are classified as distributor commission
expense.  Associate rebates recorded as a reduction of sales were
$609,000, $884,000 and $619,000 in 2009, 2008 and 2007,
respectively.





Income Taxes -The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income tax assets and liabilities are
provided based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the currently enacted tax rates in
effect for the years in which these differences are expected to reverse.
Deferred tax expense or benefit is the result of changes in deferred tax assets
and liabilities. An allowance against deferred tax assets is recorded in whole
or in part when it is more likely than not that such tax benefits will not be
realized.





Earnings (Loss)
Per Share - Basic earnings (loss) per common share is based upon the
weighted average number of common shares outstanding during each period
presented. Diluted earnings (loss) per share is based upon the weighted average
number of common shares outstanding and, when dilutive, common shares issuable
for stock options, warrants and convertible debt.





Accounting
Estimates - In preparing financial statements in conformity with
accounting principles generally accepted in the U.S., management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues during the reporting
period.  Actual results could differ from those
estimates.





Financial
Instruments - The carrying value of cash, interest-bearing deposits,
accounts receivable and payable, accrued liabilities and lines of credit
approximate fair value due to the short-term maturities of these assets and
liabilities. 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 December 31, 2009, fair
value of fixed-rate long-term debt was $2,139,000, which was $87,000 above the
carrying value of $2,052,000.  At December 31, 2008, fair value of
fixed-rate long-term debt was $2,386,000, which was $190,000 above the carrying
value of $2,196,000.





Segment
Information - The Company’s operations involve two operating
segments:  the Nutritional Products segment and the Medical Products
segment.  Nutritional Products are developed and distributed to a
network of independent Associates operating primarily in North America and to
licensees operating in certain other countries outside of North
America.  Medical Products are developed and sold primarily throughout
the U.S. through medical/surgical supply dealers and pharmaceutical distributors
to medical institutions such as hospitals, nursing homes and
pharmacies.




F-9




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE B –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued


Product Return
Policy– Up to one year from the date of purchase, Nutritional Products
that are unused and resalable may be returned by an Associate for a refund equal
to 100% of the sales price to the Associate less a 10%
restocking fee and commissions paid. Return of product by an Associate, other
than product damaged at the time of receipt, constitutes potential cancellation
of the distributorship. Generally, unused Medical Products may be
returned up to six months from date of purchase for a refund equal to 100% of
the sales price less a 25% restocking fee.  Returned products damaged
during shipment are replaced by the Company.  Nutritional Products
purchased by licensees may not be returned to the Company for a refund except in
the case of a product defect.





Advertising
- Advertising expense is charged to operations when
incurred.  Advertising expenses were $100,000, $114,000 and $261,000
in 2009, 2008 and 2007, respectively.





Translation of
Foreign Currencies - All assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at the exchange rate in effect at the balance
sheet date.  Revenue and expense accounts are translated at weighted
average exchange rates. Translation gains and losses are reflected as a
component of other comprehensive income (loss) in shareholders'
equity.  Gains and losses on foreign currency transactions are
included in the consolidated statements of earnings.





Other
Comprehensive Income (Loss) – Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under accounting principles generally
accepted in the U.S. are included in comprehensive income (loss) but are
excluded from net earnings (loss) as the amounts are recorded directly as an
adjustment to shareholders’ equity.  The Company’s other comprehensive
income (loss) is attributed to translation gains or losses of foreign
currencies.





Share-Based
Payment – The Company recognizes share-based compensation expense based
on the fair value of share-based awards.  Share-based compensation is estimated at the grant date based on the fair
value of the awards expected to vest and recognized as expense ratably over the
requisite service period of the award. The Company uses the Black-Scholes
valuation model to estimate fair value of share-based awards, which requires
various assumptions including estimating stock price volatility, risk-free
interest rate and expected life.





Recent Accounting
Pronouncements –In May 2009, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.
165,later
codified in Accounting Standards Codification (“ASC”) 855, Subsequent Events (“ASC
855”), which provides guidance on events that occur after the balance sheet date
but prior to the issuance of the financial statements. ASC 855 distinguishes
events requiring recognition in the financial statements and those that may
require disclosure in the financial statements. These requirements were
effective for interim and annual periods ending after June 15, 2009, and
their adoption did not have a material impact on our consolidated financial
statements. In February 2010, the FASB issued Accounting Standards Update
(“ASU”) 2009-10, “Amendments
to Certain Recognition and Disclosure Requirements.” which removed the
requirement for SEC filers to disclose the date through which subsequent events
have been evaluated to alleviate potential conflicts with current SEC
guidance.  In accordance with this standard, SEC filers are required
to evaluate subsequent events through the date that the financial statements are
issued.  We adopted this standard upon issuance with no material
impact to our consolidated financial statements.




In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). SFAS 168, which is now codified in ASC 105,
Generally Accepted Accounting
Principles, identifies the ASC as the authoritative source of generally
accepted accounting principles in the U.S. (“US GAAP”). Rules and interpretive
releases of the SEC under federal securities laws are also sources of
authoritative US GAAP for SEC registrants. This standard is effective for
financial statements for interim or annual reporting periods ending after
September 15, 2009.  The adoption of




F-10




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE B –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued




In
June 2009, the FASB issued a new standard relating to the accounting for
transfers of financial assets. The new standard, which was issued as SFAS
No. 166, Accounting for
Transfers of Financial Assets, an amendment to SFAS No.140,
was adopted into the ASC in December 2009 through the issuance of ASU 2009-16. The new standard eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures in order to enhance
information reported to users of financial statements by providing greater
transparency about transfers of financial assets, including securitization
transactions, and an entity’s continuing involvement in and exposure to the
risks related to transferred financial assets. This standard is effective for
fiscal years beginning after November 15, 2009. The Company does not expect
the adoption of this standard to have a material impact on its consolidated
financial statements.





In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (“SFAS 167”). SFAS 167 was adopted into the ASC in
December 2009 through the issuance ASU 2009-17. The new standard requires a
qualitative approach to identifying a controlling financial interest in a
variable interest entity (“VIE”), and requires ongoing assessment of whether an
entity is a VIE and whether an interest in a VIE makes the holder the primary
beneficiary of the VIE. This standard is effective for fiscal years beginning
after November 15, 2009. The Company does not expect the adoption of this
standard to have a material impact on its consolidated financial
statements.





In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements(“ASU 2009-13”). The new standard changes the requirements
for establishing separate units of accounting in a multiple element arrangement
and requires the allocation of arrangement consideration to each deliverable
based on the relative selling price. The selling price for each deliverable is
based on vendor-specific objective evidence (“VSOE”) if available, third-party
evidence if VSOE is not available, or estimated selling price if neither VSOE or
third-party evidence is available. ASU 2009-13 is effective for revenue
arrangements entered into in fiscal years beginning on or after June 15,
2010. The Company does not expect the adoption of this standard to have a
material impact on its consolidated financial statements.





Reclassifications
– Certain prior year balances have been reclassified to conform to the current
year presentation.




F-11




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE C –
ACCOUNTS RECEIVABLE





At December 31, 2009 and 2008,
accounts receivable consist of the following:


2009
                      
                      
                      2008Accounts
      receivableTrade
                      
                      $
                      600,363
                      
                      
                      $
                      495,164Other
                      
                      
                      3,792
                      
                      
                      
                      6,720Total
                      
                      
                      604,155
                      
                      
                      
                      501,884Less
      allowance for doubtful accounts
                      
                      
                      28,030
                      
                      
                      
                      36,573Net
      accounts receivable
                      
                      $
                      576,125
                      
                      
                      $
                      465,311





Changes
in the Company’s allowance for doubtful accounts for the years ended December
31, 2009 and 2008 are as follows:





2009
                    
                    
                    2008Beginning
      balance
                    
                    $
                    36,573
                    
                    
                    $
                    34,169Bad
      debt provision
                    
                    
                    4,066
                    
                    
                    
                    5,706Accounts
      written off
                    
                    
                    (12,609
                    )
                    
                    
                    (3,302
                    )Ending
      balance
                    
                    $
                    28,030
                    
                    
                    $
                    36,573





NOTE D –
INVENTORIES





At
December 31, 2009 and 2008, inventories consist of the following:





2009
                    
                    
                    2008Raw
      materials and bulk products
                    
                    $
                    403,616
                    
                    
                    $
                    384,376Packaging
      materials
                    
                    
                    488,545
                    
                    
                    
                    584,842Finished
      goods
                    
                    
                    4,452,098
                    
                    
                    
                    4,737,395$
                    5,344,259
                    
                    
                    $
                    5,706,613





NOTE E –
PREPAID EXPENSES AND OTHER CURRENT ASSETS





At
December 31, 2009 and 2008, prepaid expenses and other current assets consist of
the following:





2009
                    
                    
                    2008Advance
      payments to suppliers
                    
                    $
                    177,415
                    
                    
                    $
                    415,699Prepaid
      income taxes
                    
                    
                    453,177
                    
                    
                    
                    172,824Certificates
      of deposit – restricted
                    
                    
                    81,252
                    
                    
                    
                    569,445Prepaid
      insurance and other
                    
                    
                    176,459
                    
                    
                    
                    216,837Total
                    
                    $
                    888,303
                    
                    
                    $
                    1,374,805





At
December 31, 2009 and 2008, the Company held certificates of deposit in the
amount of $81,252 and $69,445, respectively, which were pledged to secure surety
bonds.  At December 31, 2008, the Company held a certificate of
deposit in the amount of $500,000 that was pledged as collateral to secure a
$500,000 bank line of credit, which matured in October 2009.  This
line of credit arrangement was not renewed upon maturity and, accordingly, the
collateral was released.




F-12




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE F –
PROPERTY AND EQUIPMENT





At
December 31, 2009 and 2008, property and equipment consist of the
following:




2009
              
              
              2008Building
      and improvements
              
              $
              3,523,428
              
              
              $
              3,523,428Computer
      software and office equipment
              
              
              2,314,849
              
              
              
              1,625,205Warehouse
      equipment
              
              
              286,731
              
              
              
              367,285Automotive
      equipment
              
              
              15,228
              
              
              
              55,392Leasehold
      improvements
              
              
              20,894
              
              
              
              17,8586,161,130
              
              
              
              5,589,168Less
      accumulated depreciation and amortization
              
              
              2,264,413
              
              
              
              2,399,8903,896,717
              
              
              
              3,189,278Land
              
              
              1,141,173
              
              
              
              1,141,173$
              5,037,890
              
              
              $
              4,330,451





NOTE G –
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
                      AmortizationBalance,
      December 31, 2007
                    
                    $
                    3,443,512
                    
                    
                    $
                    (1,141,286
                    )Currency
      translation adjustment
                    
                    
                    (205,170
                    )
                    
                    
                    100,026Balance,
      December 31, 2008
                    
                    
                    3,238,342
                    
                    
                    
                    (1,041,260
                    )Currency
      translation adjustment
                    
                    
                    146,145
                    
                    
                    
                    (71,250
                    )Balance,
      December 31, 2009
                    
                    $
                    3,384,487
                    
                    
                    $
                    (1,112,510
                    )





At December 31, 2009 and 2008, other
intangible assets consist of the following:





December 31, 2009
                          
                          
                          December 31, 2008Average
                            Life
                            (years)
                          
                          
                          Gross
                            Carrying
                            Value
                          
                          
                          Accumulated
                            Amortization
                          
                          
                          Average
                            Life
                            (years)
                          
                          
                          Gross
                            Carrying
                            Value
                          
                          
                          Accumulated
                            AmortizationDistribution
      contracts
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          8
                          
                          
                          $
                          277,369
                          
                          
                          $
                          (244,536
                          )Copyrights,trademarks
      andother
      registrations
                          
                          
                          19
                          
                          
                          
                          99,100
                          
                          
                          
                          (44,264
                          )
                          
                          
                          19
                          
                          
                          
                          99,100
                          
                          
                          
                          (38,979
                          )Other
                          
                          
                          19
                          
                          
                          
                          12,600
                          
                          
                          
                          (5,628
                          )
                          
                          
                          11
                          
                          
                          
                          47,600
                          
                          
                          
                          (31,207
                          )$
                          111,700
                          
                          
                          $
                          (49,892
                          )
                          
                          
                          
                          
                          
                          $
                          424,069
                          
                          
                          $
                          (314,722
                          )




F-13




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE G –
GOODWILL AND OTHER INTANGIBLE ASSETS – continued





Amortization
expense related to other intangible assets totaled approximately $24,000 and
$42,000 for the years ended December 31, 2009 and 2008,
respectively.  In addition, during the fourth quarter of 2009, the
Company determined that certain distribution contracts no longer retained any
value since they pertained to markets in which the Company no longer has
operations.  Accordingly, the Company recorded a charge of
approximately $23,500 to write off the unamortized carrying value of these
assets.  The aggregate estimated amortization expense for other
intangible assets remaining as of December 31, 2009 is as follows:





2010
                    
                    $
                    5,9572011
                    
                    
                    5,9572012
                    
                    
                    5,9572013
                    
                    
                    5,9572014
                    
                    
                    5,957Thereafter
                    
                    
                    32,023$
                    61,808





NOTE H –
ACCRUED LIABILITIES





At
December 31, 2009 and 2008, accrued liabilities consist of the
following:





2009
                    
                    
                    2008Distributor
      commissions
                    
                    $
                    317,562
                    
                    
                    $
                    297,570Salaries
      and wages
                    
                    
                    436,916
                    
                    
                    
                    798,913Sales
      and property taxes
                    
                    
                    40,684
                    
                    
                    
                    32,759Interest
                    
                    
                    13,253
                    
                    
                    
                    14,186Other
                    
                    
                    116,645
                    
                    
                    
                    122,739Total
                    
                    $
                    925,060
                    
                    
                    $
                    1,266,167





NOTE I –
LINE OF CREDIT





The
Company maintained a $500,000 bank line of credit that matured in October
2009.  This line of credit was not renewed upon maturity.




F-14




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE J –
LONG-TERM OBLIGATIONS





At
December 31, 2009 and 2008, long-term obligations consist of the
following:





2009
                        
                        
                        2008Mortgage
      note payable bearing interest at7.75%,
      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
                        
                        $
                        2,052,071
                        
                        
                        $
                        2,196,468Less
      – current maturities
                        
                        
                        155,994
                        
                        
                        
                        144,397$
                        1,896,077
                        
                        
                        $
                        2,052,071





Long-term
obligation payments payable in the next five years are as follows:





December 31,2010
                      
                      $
                      155,9942011
                      
                      
                      168,5222012
                      
                      
                      182,0562013
                      
                      
                      196,6782014
                      
                      
                      212,474Thereafter
                      
                      
                      1,136,347$
                      2,052,071





NOTE K –
SHARE-BASED COMPENSATION





Stock
incentive plans





On July
1, 1998, the Company’s shareholders adopted the 1998 Stock Option Plan (the
“1998 Plan”) and reserved 500,000 shares of common stock for issuance under the
1998 Plan.  The 1998 Plan provided for the issuance of both
non-qualified stock options and incentive stock options (“ISOs”), and permitted
grants to employees, non-employee directors and consultants of the
Company.  Effective September 4, 2003, the Company’s shareholders
adopted an amendment and restatement of the 1998 Plan in the form of the 2003
Stock Incentive Plan (the “2003 Plan”).  The purpose of this amendment
and restatement was, among other things, to reserve 3,500,000 shares of common
stock for issuance under the 2003 Plan, an increase from the 500,000 shares of
common stock issuable under the 1998 Plan, and to add restricted stock as
available for awards under the 2003 Plan.





On June
1, 2006, the Company’s shareholders adopted the 2006 Stock Incentive Plan (the
“2006 Plan”) under which 2,500,000 shares of common stock were reserved for
issuance.  The 2006 Plan provides for the issuance of non-qualified
stock options, ISOs, restricted stock awards and stock appreciation rights, and
permits grants to employees, non-employee directors and consultants of the
Company.





Generally,
stock options granted under these plans vest over a period from four to five
years and have a term of nine years.  Certain stock options granted
under these plans were fully vested upon grant and certain options have terms of
five years.




F-15




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE K –
SHARE-BASED COMPENSATION - continued





Stock
Option Accounting





The
Company recognizes share-based compensation expense based on the fair value of
share-based awards as estimated at the grant date.  Share-based
compensation expense for 2009, 2008 and 2007 was approximately $139,000,
$122,000 and $72,000, respectively, and is classified as a general and
administrative expense.  Tax benefits related to this expense were
immaterial because virtually all share-based compensation resulted from grants
of ISOs.  No tax benefit is recorded for an ISO unless upon exercise a
disqualifying disposition occurs.  The Company will prospectively
record any excess tax benefits from the exercise of stock options as cash flows
from financing activities. There were no material excess tax benefits in 2009,
2008 or 2007.





Fair
Value





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:





Year
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Weighted
      average expected life (years)
                  
                  
                  7.2
                  
                  
                  
                  8.6
                  
                  
                  
                  8.7Risk-free
      interest rate
                  
                  
                  2.70
                  %
                  
                  
                  2.95
                  %
                  
                  
                  4.29
                  %Expected
      volatility
                  
                  
                  113.05
                  %
                  
                  
                  128.07
                  %
                  
                  
                  136.79
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %





The
weighted average expected life is based on the option term.  The
risk-free interest rate is based on U.S. Treasury issues with a term equal to
the expected life of the option.  Expected volatility is based on
historical volatility rates.  Expected dividend yield is 0.0% since
the Company has no history of paying dividends and currently has no plans to do
so.




F-16




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE K –
SHARE-BASED COMPENSATION - continued





Stock
Option Activity





A summary
of stock option activity for the three years ended December 31, 2009 is as
follows:




Options
              
              Weighted-
                Average Exercise
                Price per Share
              
              Weighted-Average
                Remaining
                Contractual Term
                (in years)
              
              Aggregate
                Intrinsic
                ValueOutstanding
      on January 1, 2007
              3,757,150
              
              $
              0.22Granted
              512,950
              
              
              0.80Exercised
              (675,430)
              
              
              0.15Forfeited/Canceled
              (99,720)
              
              
              0.17Outstanding
      on December 31, 2007
              3,494,950
              
              
              0.32Granted
              420,650
              
              
              0.58Exercised
              (1,051,280)
              
              
              0.15Forfeited/Canceled
              (571,435)
              
              
              0.23Outstanding
      on December 31, 2008
              2,292,885
              
              
              0.46Granted
              401,885
              
              
              0.44Exercised
              (6,930)
              
              
              0.21Forfeited/Canceled
              (557,400)
              
              
              0.67Outstanding
      on December 31, 2009
              2,130,440
              
              $
              0.40
              
              4.9
              
              $
              61,803Exercisable
      on December 31, 2009
              1,258,690
              
              $
              0.28
              
              4.1
              
              $
              61,491





A summary of the status of the
Company’s non-vested stock options as of December 31, 2009, and changes during the year then
ended, is presented below:





Shares
                  
                  
                  Weighted Average
                    Grant Date Fair
                    Value per ShareNon-vested
      stock options January 1, 2009
                  
                  
                  819,075
                  
                  
                  $
                  0.60Non-vested
      stock options granted
                  
                  
                  375,000
                  
                  
                  
                  0.40Vested
      stock options
                  
                  
                  (207,930
                  )
                  
                  
                  0.54Forfeited
      stock options
                  
                  
                  (114,395
                  )
                  
                  
                  0.41Non-vested
      stock options at December 31, 2009
                  
                  
                  871,750
                  
                  
                  
                  0.55




F-17




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE K –
SHARE-BASED COMPENSATION - continued





Additional
information related to stock options granted, vested and exercised for the three
years ended December 31, 2009 is a follows:





Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Grant
      date fair value of stock options granted
                  
                  $
                  153,276
                  
                  
                  $
                  226,230
                  
                  
                  $
                  394,779Grant
      date fair value of stock options vested
                  
                  
                  116,206
                  
                  
                  
                  120,350
                  
                  
                  
                  112,507Intrinsic
      value of stock options exercised
                  
                  
                  1,178
                  
                  
                  
                  611,190
                  
                  
                  
                  481,030





As of
December 31, 2009, there was approximately $432,000 of total unrecognized
compensation cost related to stock option grants. That cost is expected to be
recognized over a weighted average period of 3.0 years.





NOTE L –
INCOME TAXES





The
income tax provision reconciled to the tax computed at the statutory Federal
rate of 34% is as follows:





Year Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Federal
      income tax expense (benefit) at statutory rate
                    
                    $
                    (110,110
                    )
                    
                    $
                    910,043
                    
                    
                    $
                    914,175State
      income taxes, net of federal benefit
                    
                    
                    13,582
                    
                    
                    
                    5,559
                    
                    
                    
                    (3,309
                    )Share-based
      compensation
                    
                    
                    44,060
                    
                    
                    
                    38,296
                    
                    
                    
                    21,554Effect
      of foreign operations, net of foreign tax credits
                    
                    
                    (10,023
                    )
                    
                    
                    (17,130
                    )
                    
                    
                    (6,775
                    )Change
      in valuation allowance
                    
                    
                    135,733
                    
                    
                    
                    65,504
                    
                    
                    
                    69,284Other,
      net
                    
                    
                    (62,242
                    )
                    
                    
                    58,565
                    
                    
                    
                    1,571Income
      tax expense
                    
                    $
                    11,000
                    
                    
                    $
                    1,060,837
                    
                    
                    $
                    996,500




F-18




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE L –
INCOME TAXES - continued





Deferred
tax assets and liabilities at December 31, 2009 and 2008 are comprised of the
following:





December 31,2009
                      
                      
                      2008Deferred
      tax assets related to:Inventories
                      
                      $
                      391,524
                      
                      
                      $
                      361,791Accounts
      receivable and other assets
                      
                      
                      9,811
                      
                      
                      
                      11,051Accrued
      liabilities
                      
                      
                      75,685
                      
                      
                      
                      44,964Tax
      loss and tax credit carryforwards
                      
                      
                      318,479
                      
                      
                      
                      206,477Other
                      
                      
                      7,490
                      
                      
                      
                      5,478802,989
                      
                      
                      
                      629,761Valuation
      allowance
                      
                      
                      (318,721
                      )
                      
                      
                      (182,988
                      )Net
      deferred tax assets
                      
                      
                      484,268
                      
                      
                      
                      446,773Deferred
      tax liabilities related to:Property
      and equipment
                      
                      
                      (485,857
                      )
                      
                      
                      (298,517
                      )Intangible
      assets
                      
                      
                      (492,392
                      )
                      
                      
                      (419,465
                      )Deferred
      tax liabilities
                      
                      
                      (978,249
                      )
                      
                      
                      (717,982
                      )Net
      deferred tax liabilities
                      
                      $
                      (493,981
                      )
                      
                      $
                      (271,209
                      )Net
      current deferred tax assets
                      
                      $
                      449,254
                      
                      
                      $
                      405,286Net
      long-term deferred tax liabilities
                      
                      
                      (943,235
                      )
                      
                      
                      (676,495
                      )$
                      (493,981
                      )
                      
                      $
                      (271,209
                      )





The
Company’s valuation allowance relates to deferred tax assets of its Canadian
subsidiary.  This valuation allowance was increased approximately
$136,000 during 2009 as it was determined more likely than not that the related
deferred tax assets will not be realized.





The Company adopted the provisions of a
new FASB standard related to uncertain tax positions on January 1,
2007.  The implementation of this standard did not have a material
impact on the Company’s consolidated financial statements, results of operations
or cash flows.At December 31, 2009 and 2008, the
Company had no unrecognized tax benefits.The
Company’s policy is to record any interest and penalties related to gross
unrecognized tax benefits within its provision for income
taxes.





The
Company files income tax returns in the U.S. on a federal basis, in certain U.S.
state jurisdictions and in Canada on a federal basis; the most significant
taxing jurisdiction is the U.S. federal jurisdiction.  The Company’s
2006, 2007 and 2008 tax years remain subject to examination by the IRS for U.S. federal tax purposes.  As of December 31,
2009, there were no examinations by any taxing jurisdiction in
progress.




F-19




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE L –
INCOME TAXES - continued





Income
tax expense (benefit) for continuing operations consists of the
following:





Year Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007CurrentFederal
                    
                    $
                    (211,772
                    )
                    
                    $
                    943,498
                    
                    
                    $
                    1,100,760Foreign
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -DeferredFederal
                    
                    
                    222,772
                    
                    
                    
                    117,339
                    
                    
                    
                    (104,260
                    )Foreign
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Income
      tax expense
                    
                    $
                    11,000
                    
                    
                    $
                    1,060,837
                    
                    
                    $
                    996,500





NOTE M –
COMMITMENTS AND CONTINGENCIES





Leases





The
Company leases office and warehouse space and certain equipment using operating
leases for various periods through 2011.  Rental expense under
non-cancelable operating leases totaled $266,000, $232,000 and $198,000 in 2009,
2008 and 2007, respectively.  Future minimum payments under
non-cancelable operating leases are as follows:





December
      31,2010
                    
                    $
                    182,2342011
                    
                    
                    112,8822012
                    
                    
                    75,2242013
                    
                    
                    6,500$
                    376,840





Employee
Arrangements





In
December 2009, the Company entered into employment agreements with five of its
key executives, replacing employment agreements that expired December 31,
2009.  An employment agreement that expired February 18, 2010 was not
renewed.  Four of the December 2009 employment agreements were for
one-year terms ending on December 31, 2010; one December 2009 employment
agreement was for a three-year term expiring December 31, 2012.  The
three-year agreement automatically renews for an additional one-year term unless
either party provides notice to the other 30 days prior to the last day of the
then current term.  The December 2009 agreements provide that if
employment is terminated for certain reasons set forth in the agreement, which
reasons do not include a change of control, the Company will be required to make
a severance payment in an amount equal to the greater of (i) the remaining
compensation due through the end of the current term or (ii) one-half of the
annual base salary, in addition to other compensation due under the terms of the
agreement.




F-20




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE M –
COMMITMENTS AND CONTINGENCIES – continued




for an
additional two-year term unless either party provides notice to the other 90
days prior to the last day of the then current term.  This agreement
provides for a minimum base salary and additional cash incentive compensation if
certain performance measures are attained.  In addition, the agreement
provides that if employment is terminated as a result of a change of control of
the Company, as defined, the Company will be required to make a severance
payment in an amount equal to the greater of the annual base salary or the base
salary for the remaining term, in addition to other compensation due under the
terms of the agreement.  The agreement also provides that if
employment is terminated for certain other reasons set forth in the agreement,
the Company will be required to make a severance payment in an amount equal to
the greater of the annual base salary increased by two weeks for each year of
service or the base salary for the remaining term, in addition to other
compensation due under the terms of the agreement.  Also under the
agreement, the Company granted to its new CEO a nine-year option to purchase
200,000 shares of the Company’s common stock at $0.53 per share, which was the
market price of the common stock on the date of grant.  This option
vests ratably over a four-year period.





In
accordance with the terms of the employment agreement between the Company and
its former CEO, the former CEO will receive a percentage of his base salary for
consulting services for a period of five years following the date of his
retirement, which was December 31, 2008.





The
Company’s employees can participate in an employee benefit plan under Section
401(k) of the Internal Revenue Code offered through its Professional Employer
Organization.  This plan covers employees in the U.S. who are at least
18 years of age and have been employed by the Company longer than three
months.  The Company makes discretionary matching contributions equal
to 10% of the employees’ contributions.  Total matching contributions
made by the Company during 2009, 2008 and 2007 were approximately $22,000,
$22,000 and $17,000, respectively.





Litigation





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.





NOTE N –
SOUTH KOREA OPERATIONS





On
October 31, 2006, the Company completed a restructuring of its South Korea
operations through the sale of all of the capital stock of its wholly owned
subsidiary, RBC Korea, to a private South Korean corporation, Merry
Key.  Merry Key was wholly owned by the individual who was the
executive in charge of the Company’s South Korean operations prior to the
sale.  In connection with the sale, the Company recorded a one-time
loss on disposition of assets in 2006 of approximately $170,000.





In
accordance with the terms of the sale agreement, Merry Key paid the Company
$100,000 in cash at closing and issued a note payable, the fair value of which
was $520,000 at the date of sale.  The Company concluded that this
receivable was uncollectible as of December 31, 2007 and, accordingly, recorded
an aggregate write off of $516,000 during 2007.




F-21




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009, 2008 and 2007


NOTE O –
SEGMENTS AND GEOGRAPHIC AREA




The
Company's segments are based on the organization 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  These  products  are distributed by a
network of  independent Associates in certain markets, primarily in
the U.S. and Canada, and by licensees operating 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.





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.  The 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
accounting policies of the segments are the same as those described in Note B.
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 (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 (in thousands):





Nutritional Products
                  
                  
                  Medical Products
                  
                  
                  ConsolidatedYear
      ended December 31, 2009Net
      sales
                  
                  $
                  18,779
                  
                  
                  $
                  6,146
                  
                  
                  $
                  24,925Depreciation
      and amortization
                  
                  
                  386
                  
                  
                  
                  70
                  
                  
                  
                  456Operating
      profit (loss)
                  
                  
                  (504
                  )
                  
                  
                  344
                  
                  
                  
                  (160
                  )Capital
      expenditures
                  
                  
                  1,116
                  
                  
                  
                  19
                  
                  
                  
                  1,135Total
      assets
                  
                  
                  15,787
                  
                  
                  
                  2,826
                  
                  
                  
                  18,613Year
      ended December 31, 2008Net
      sales
                  
                  $
                  24,061
                  
                  
                  $
                  6,348
                  
                  
                  $
                  30,409Depreciation
      and amortization
                  
                  
                  277
                  
                  
                  
                  97
                  
                  
                  
                  374Operating
      profit
                  
                  
                  2,523
                  
                  
                  
                  329
                  
                  
                  
                  2,852Capital
      expenditures
                  
                  
                  560
                  
                  
                  
                  31
                  
                  
                  
                  591Total
      assets
                  
                  
                  17,247
                  
                  
                  
                  2,519
                  
                  
                  
                  19,766Year
      ended December 31, 2007Net
      sales
                  
                  $
                  22,523
                  
                  
                  $
                  4,506
                  
                  
                  $
                  27,029Depreciation
      and amortization
                  
                  
                  272
                  
                  
                  
                  91
                  
                  
                  
                  363Operating
      profit
                  
                  
                  2,645
                  
                  
                  
                  254
                  
                  
                  
                  2,899Capital
      expenditures
                  
                  
                  806
                  
                  
                  
                  22
                  
                  
                  
                  828Total
      assets
                  
                  
                  17,309
                  
                  
                  
                  1,849
                  
                  
                  
                  19,158




F-22




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE O –
SEGMENTS AND GEOGRAPHIC AREA – continued





Financial
information summarized geographically based on the customer’s ordering location
for the years ended December 31, 2009, 2008 and 2007 is listed below (in
thousands):





Net Sales
                  
                  
                  Long-lived AssetsYear
      ended December 31, 2009Domestic
                  
                  $
                  11,015
                  
                  
                  $
                  6,831Russia/Eastern
      Europe
                  
                  
                  12,477
                  
                  
                  
                  -Canada
                  
                  
                  1,071
                  
                  
                  
                  552All
      others
                  
                  
                  362
                  
                  
                  
                  -Totals
                  
                  $
                  24,925
                  
                  
                  $
                  7,383Year
      ended December 31, 2008Domestic
                  
                  $
                  10,818
                  
                  
                  $
                  6,365Russia/Eastern
      Europe
                  
                  
                  17,799
                  
                  
                  
                  -Canada
                  
                  
                  1,115
                  
                  
                  
                  476All
      others
                  
                  
                  677
                  
                  
                  
                  -Totals
                  
                  $
                  30,409
                  
                  
                  $
                  6,841Year
      ended December 31, 2007Domestic
                  
                  $
                  10,011
                  
                  
                  $
                  6,133Russia/Eastern
      Europe
                  
                  
                  14,950
                  
                  
                  
                  -Canada
                  
                  
                  1,382
                  
                  
                  
                  597South
      Korea
                  
                  
                  14
                  
                  
                  
                  -All
      others
                  
                  
                  672
                  
                  
                  
                  -Totals
                  
                  $
                  27,029
                  
                  
                  $
                  6,730





Significant
Customers





The
Company recorded sales to CCI, a licensee of the Company, in the amount of
$12,477,000, $17,799,000 and $14,950,000 for the years ended December 31, 2009,
2008 and 2007, respectively.  The Company also recorded sales to a
medical/surgical dealer in the amount of $3,824,000 and $4,060,000 for the years
ended December 31, 2008 and 2009, respectively.  These sales accounted
for more than 10% of net sales in these years.  In no other case did a
customer of the Company account for more than 10% of net sales for the years
ended December 31, 2009, 2008 or 2007.




F-23




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE P –
EARNINGS (LOSS) PER SHARE





Summarized basic and diluted earnings
(loss) per common share were calculated as follows:





Net Earnings (Loss)
                  
                  
                  Shares
                  
                  
                  Per ShareYear
      ended December 31, 2009Basic
      loss per common share
                  
                  $
                  (334,853
                  )
                  
                  
                  21,920,779
                  
                  
                  $
                  (0.02
                  )Effect
      of dilutive stock options
                  
                  
                  —
                  
                  
                  
                  -Diluted
      loss per common share
                  
                  $
                  (334,853
                  )
                  
                  
                  21,920,779
                  
                  
                  $
                  (0.02
                  )Year
      ended December 31, 2008Basic
      earnings per common share
                  
                  $
                  1,615,760
                  
                  
                  
                  21,464,832
                  
                  
                  $
                  0.08Effect
      of dilutive stock options
                  
                  
                  —
                  
                  
                  
                  1,374,026Diluted
      earnings per common share
                  
                  $
                  1,615,760
                  
                  
                  
                  22,838,858
                  
                  
                  $
                  0.07Year
      ended December 31, 2007Basic
      earnings per common share
                  
                  $
                  1,692,249
                  
                  
                  
                  20,396,420
                  
                  
                  $
                  0.08Effect
      of dilutive stock options
                  
                  
                  —
                  
                  
                  
                  1,809,962Diluted
      earnings per common share
                  
                  $
                  1,692,249
                  
                  
                  
                  22,206,382
                  
                  
                  $
                  0.08





For 2009,
2008 and 2007, 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 2,130,440, 897,180 and 400,000,
respectively.





NOTE Q –
RELATED PARTY TRANSACTIONS





Debt
Guarantees – The Company’s Chairman of the Board has guaranteed a
mortgage note of the Company.  The balance of this note was $2,052,000
at December 31, 2009.





Customer
Arrangement –In July 2004, the Company entered into a ten-year exclusive
license agreement with CCI, which replaced an expiring five-year exclusive
license agreement.  In connection therewith, the Company received a
license fee of $65,000, which was recorded as deferred revenue and is being
recognized as sales over the term of the agreement.  Deferred revenue
associated with CCI’s account, which included (i) deposits received against
purchase orders issued to the Company by CCI, (ii) payments received for
products held by the Company for shipment to CCI at a later date, and (ii) the
unrecognized portion of the license fee, totaled $3,645,000 and $4,221,000 at
December 31, 2009 and 2008, respectively. The Company recorded sales to CCI in
the amount of $12,477,000, $17,799,000 and $14,950,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.  Pursuant to the
license agreement between CCI and the Company, CCI also paid royalties to the
Company for the years ended December 31, 2009, 2008 and 2007 in the amount of
$2,409,000, $2,609,000 and $2,025,000, respectively, which are included in
sales.  The president of CCI beneficially owned approximately 18% of
the Company’s outstanding common stock at December 31, 2009 and was a member of
the Company’s Board of Directors until June 2004.




F-24




RBC
Life Sciences, Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2009, 2008 and 2007


NOTE R –
QUARTERLY FINANCIAL DATA (UNAUDITED)





Quarterly
financial data for the years ended December 31, 2009 and 2008 is summarized
as follows:





Quarter EndedMarch 31
                  
                  
                  June 30
                  
                  
                  September 30
                  
                  
                  December 31(Unaudited
      - In thousands, except per share data)2009:Net
      sales
                  
                  $
                  6,016
                  
                  
                  $
                  6,759
                  
                  
                  $
                  6,487
                  
                  
                  $
                  5,663Gross
      profit
                  
                  
                  3,139
                  
                  
                  
                  3,521
                  
                  
                  
                  3,215
                  
                  
                  
                  2,927Net
      earnings (loss)
                  
                  
                  (171
                  )
                  
                  
                  277
                  
                  
                  
                  (152
                  )
                  
                  
                  (289
                  )Earnings
      (loss) per share:Basic
                  
                  
                  (0.01
                  )
                  
                  
                  0.01
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )Diluted
                  
                  
                  (0.01
                  )
                  
                  
                  0.01
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )2008:Net
      sales
                  
                  $
                  6,348
                  
                  
                  $
                  6,887
                  
                  
                  $
                  9,925
                  
                  
                  $
                  7,249Gross
      profit
                  
                  
                  3,503
                  
                  
                  
                  3,696
                  
                  
                  
                  4,710
                  
                  
                  
                  3,585Net
      earnings
                  
                  
                  355
                  
                  
                  
                  276
                  
                  
                  
                  846
                  
                  
                  
                  139Earnings
      per share:Basic
                  
                  
                  0.02
                  
                  
                  
                  0.01
                  
                  
                  
                  0.04
                  
                  
                  
                  0.01Diluted
                  
                  
                  0.02
                  
                  
                  
                  0.01
                  
                  
                  
                  0.04
                  
                  
                  
                  0.01




F-25




Exhibit
Index





Exhibit Number
                    
                    Description10.14
                    
                    Employment
      Agreement, executed December 11, 2009 to be effective January 1, 2010,
      between RBC Life Sciences, Inc. and Steven E. Brown10.15
                    
                    Employment
      Agreement, executed December 22, 2009 to be effective January 1, 2010,
      between RBC Life Sciences, Inc. and Kenneth L. Sabot21.1
                    
                    List
      of company subsidiaries23.1
                    
                    Consent
      of Lane Gorman Trubitt, L.L.P., independent registered public accountants
      to incorporation of report by reference31.1
                    
                    Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                    
                    Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                    
                    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
      200232.2
                    
                    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