##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2007 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from:  to Commission File Number: 000-50417 RBC Life Sciences, Inc.
(Exact name of registrant as specified in its charter) Nevada
    
    91-2015186(State or other Jurisdiction of Incorporation)
    
    (IRS Employer Identification No.) 2301 Crown Court, Irving, Texas
    
    75038(Address of Principal Executive Offices)
    
    (Zip Code) 972-893-4000(Registrants telephone number, including area code)(Former name or former address if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes þ No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one): Large accelerated filer o
    
    Accelerated filer  o
    
    Non-accelerated filer  þ Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ Number of shares of common stock, par value $0.001, outstanding at October 31, 2007: 20,425,244
  2




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##### 



TABLE OF CONTENTS PART I  FINANCIAL INFORMATION
    
    Page NumberItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23Exhibit Index
    
    
    24Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
    3




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PART 1  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,262,067
    
    
    $
    3,219,503Accounts receivable, net
    
    
    476,824
    
    
    
    331,834Inventories
    
    
    4,160,221
    
    
    
    2,651,082Deferred income taxes
    
    
    388,080
    
    
    
    231,680Prepaid expenses
    
    
    345,030
    
    
    
    499,267Total current assets
    
    
    10,632,222
    
    
    
    6,933,366Property and equipment, net
    
    
    3,481,386
    
    
    
    3,584,415Goodwill, net
    
    
    2,095,054
    
    
    
    2,095,054Intangible assets, net
    
    
    162,368
    
    
    
    194,173Other assets
    
    
    600,704
    
    
    
    708,187$
    16,971,734
    
    
    $
    13,515,195LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable, trade
    
    $
    1,824,735
    
    
    $
    850,143Accrued liabilities
    
    
    2,454,427
    
    
    
    1,165,247Current maturities of long-term obligations
    
    
    295,343
    
    
    
    379,635Line of credit
    
    
    
    
    
    
    100,000Deferred revenue
    
    
    2,679,289
    
    
    
    2,503,638Total current liabilities
    
    
    7,253,794
    
    
    
    4,998,663Long-term obligations, less current maturities
    
    
    2,095,107
    
    
    
    2,543,964Deferred income taxes
    
    
    517,902
    
    
    
    489,810Shareholders equity:Common stock, $0.001 par value;
50,000,000 shares authorized;
20,425,244 and 20,188,294 shares
issued and outstanding at September 30,
2007 and  December 31, 2006,
respectively
    
    
    20,425
    
    
    
    20,188Additional paid-in capital
    
    
    13,004,357
    
    
    
    12,916,035Accumulated deficit
    
    
    (5,905,393
    )
    
    
    (7,412,250
    )Accumulated other comprehensive loss
    
    
    (14,458
    )
    
    
    (41,215
    )7,104,931
    
    
    
    5,482,758$
    16,971,734
    
    
    $
    13,515,195
 See notes to condensed consolidated financial statements. - 3 -  4




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RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) For the Quarters Ended September 30,2007
    
    
    2006Net sales
    
    $
    7,857,424
    
    
    $
    5,404,869Cost of sales
    
    
    3,701,943
    
    
    
    2,301,883Gross profit
    
    
    4,155,481
    
    
    
    3,102,986Operating expenses:General and administrative
    
    
    2,296,243
    
    
    
    2,125,289Distributor commissions
    
    
    600,753
    
    
    
    649,402Depreciation and amortization
    
    
    80,499
    
    
    
    159,998Total operating expenses
    
    
    2,977,495
    
    
    
    2,934,689Operating profit
    
    
    1,177,986
    
    
    
    168,297Interest expense
    
    
    51,429
    
    
    
    62,993Earnings before income taxes
    
    
    1,126,557
    
    
    
    105,304Provision for income taxes
    
    
    455,000
    
    
    
    25,000Net earnings
    
    $
    671,557
    
    
    $
    80,304Earnings per share:Basic
    
    $
    0.03
    
    
    $
    0.00Diluted
    
    
    0.03
    
    
    
    0.00Weighted average common shares outstanding:Basic
    
    
    20,424,861
    
    
    
    20,166,294Diluted
    
    
    22,802,804
    
    
    
    22,177,336
 See notes to condensed consolidated financial statements. - 4 -  5




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RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) For the Nine Months Ended September 30,2007
    
    
    2006Net sales
    
    $
    20,396,989
    
    
    $
    16,416,310Cost of sales
    
    
    9,143,861
    
    
    
    6,483,475Gross profit
    
    
    11,253,128
    
    
    
    9,932,835Operating expenses:General and administrative
    
    
    6,463,102
    
    
    
    6,435,653Distributor commissions
    
    
    1,898,906
    
    
    
    2,301,937Depreciation and amortization
    
    
    254,672
    
    
    
    484,292Total operating expenses
    
    
    8,616,680
    
    
    
    9,221,882Operating profit
    
    
    2,636,448
    
    
    
    710,953Interest expense
    
    
    164,591
    
    
    
    191,432Earnings before income taxes
    
    
    2,471,857
    
    
    
    519,521Provision for income taxes
    
    
    965,000
    
    
    
    185,000Net earnings
    
    $
    1,506,857
    
    
    $
    334,521Earnings per share:Basic
    
    $
    0.07
    
    
    $
    0.02Diluted
    
    
    0.07
    
    
    
    0.01Weighted average common shares outstanding:Basic
    
    
    20,293,038
    
    
    
    20,155,294Diluted
    
    
    22,440,420
    
    
    
    22,370,099
 See notes to condensed consolidated financial statements. - 5 -  6




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RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Nine Months Ended September 30,2007
    
    
    2006Cash flows from operating activities:Net earnings
    
    $
    1,506,857
    
    
    $
    334,521Adjustment for non-cash items:Depreciation and amortization
    
    
    275,185
    
    
    
    495,317Stock-based compensation
    
    
    53,945
    
    
    
    77,350Deferred income taxes
    
    
    (120,000
    )
    
    
    185,000Loss on disposition of assets
    
    
    19,402
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (144,991
    )
    
    
    (197,139
    )Inventories
    
    
    (1,491,822
    )
    
    
    488,822Prepaid expenses
    
    
    155,086
    
    
    
    (10,826
    )Other assets
    
    
    108,908
    
    
    
    (222,677
    )Accounts payable and accrued liabilities
    
    
    2,242,093
    
    
    
    (182,930
    )Deferred revenue
    
    
    175,651
    
    
    
    (193,821
    )Net cash provided by operating activities
    
    
    2,780,314
    
    
    
    773,617Cash flows from investing activities:Purchase of property and equipment
    
    
    (154,528
    )
    
    
    (421,414
    )Net cash used by investing activities
    
    
    (154,528
    )
    
    
    (421,414
    )Cash flows from financing activities:Net payments of lines of credit
    
    
    (100,000
    )
    
    
    (22,249
    )Payments of long-term obligations
    
    
    (533,150
    )
    
    
    (120,723
    )Proceeds from the exercise of stock options
    
    
    34,614
    
    
    
    19,140Net cash used by financing activities
    
    
    (598,536
    )
    
    
    (123,832
    )Effect of exchange rate changes on cash flows
    
    
    15,314
    
    
    
    10,484Net increase in cash and cash equivalents
    
    
    2,042,564
    
    
    
    238,855Cash and cash equivalents, beginning of period
    
    
    3,219,503
    
    
    
    1,697,966Cash and cash equivalents, end of period
    
    $
    5,262,067
    
    
    $
    1,936,821
 See notes to condensed consolidated financial statements.  - 6 -  7




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RBC LIFE SCIENCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A  Unaudited Condensed Consolidated Financial Statements: The accompanying unaudited condensed consolidated financial statements of RBC Life Sciences, Inc. (sometimes
hereinafter referred to collectively as we, our, RBC or the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and disclosures that are normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to these rules and regulations. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 (the 2006 Form 10-K),
previously filed with the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for
a fair presentation of the Companys results for the interim periods have been included. The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the full year. Note B  Nature of Operations and Organization: The Company is principally engaged in the marketing of nutritional supplements and personal care products (collectively
Nutritional Products) under the RBC Life Sciences 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 Associate network in the licensed territory. Under
these arrangements, the independent Associate network in a licensed territory is compensated by the licensee according
to the same or a similar compensation plan as the one used by RBC for its Associates in North America. In February 2006, RBC began marketing its Nutritional Products in South Korea through an Associate network. This
business was conducted by its wholly owned subsidiary in South Korea. On October 31, 2006, RBC consummated the sale of
this subsidiary and, as part of the sale agreement, entered into a five-year exclusive license agreement with the
purchaser. Under the terms of the license agreement, the purchaser distributes RBC products in this market as a
licensee. In addition to its Nutritional Products, RBC also markets a line of wound care and oncology products throughout the
United States under the MPM Medical brand name. Medical Products are distributed to hospitals, nursing homes, clinics
and pharmacies through traditional medical/surgical supply dealers and pharmaceutical distributors. - 7 -  8




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Note C  Inventories: Inventories at September 30, 2007 and December 31, 2006 consist of the following: September 30, 2007
    
    
    December 31, 2006Raw materials and bulk products
    
    $
    488,137
    
    
    $
    411,880Packaging materials
    
    
    477,790
    
    
    
    422,063Finished goods
    
    
    3,194,294
    
    
    
    1,817,139$
    4,160,221
    
    
    $
    2,651,082
 Note D  Prepaid Expenses: Prepaid expenses at September 30, 2007 and December 31, 2006 consist of the following: September 30, 2007
    
    
    December 31, 2006Advance payment to suppliers
    
    $
    156,619
    
    
    $
    368,536Prepaid insurance and other
    
    
    188,411
    
    
    
    130,731$
    345,030
    
    
    $
    499,267
 Note E  Property and Equipment: Property and equipment at September 30, 2007 and December 31, 2006 consists of the following: September 30, 2007
    
    
    December 31, 2006Building and improvements
    
    $
    2,775,109
    
    
    $
    2,775,109Computer software and office equipment
    
    
    1,555,265
    
    
    
    3,050,784Warehouse equipment
    
    
    325,481
    
    
    
    271,309Automotive equipment
    
    
    55,392
    
    
    
    55,392Leasehold improvements
    
    
    21,947
    
    
    
    18,7584,733,194
    
    
    
    6,171,352Less  accumulated depreciation
    
    
    (2,392,981
    )
    
    
    (3,728,110
    )2,340,213
    
    
    
    2,443,242Land
    
    
    1,141,173
    
    
    
    1,141,173$
    3,481,386
    
    
    $
    3,584,415
 Note F  Goodwill and Other Intangible Assets: The Company measures its goodwill for impairment at the end of each year or in the event of an impairment indicator.
No impairment losses have been recognized as a result of this testing. Goodwill consists of the following: September 30, 2007
    
    December 31, 2006Gross
    
    
    
    
    
    
    Grosscarrying
    
    
    Accumulated
    
    
    carrying
    
    
    Accumulatedvalue
    
    
    amortization
    
    
    value
    
    
    amortizationGoodwill
    
    $
    3,222,349
    
    
    $
    (1,127,295
    )
    
    $
    3,222,349
    
    
    $
    (1,127,295
    )
 - 8 -  9




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Other intangible assets consist of the following: September 30, 2007
    
    December 31, 2006Average
    
    
    Gross
    
    
    
    
    
    
    Grosslife
    
    
    carrying
    
    
    Accumulated
    
    
    carrying
    
    
    Accumulated(years)
    
    
    value
    
    
    amortization
    
    
    value
    
    
    amortizationDistribution contracts
    
    
    8
    
    
    $
    277,369
    
    
    $
    (203,337
    )
    
    $
    277,369
    
    
    $
    (178,625
    )Copyrights,
trademarks and other
registrations
    
    
    19
    
    
    
    99,100
    
    
    
    (32,372
    )
    
    
    99,100
    
    
    
    (28,409
    )Other
    
    
    11
    
    
    
    47,600
    
    
    
    (25,992
    )
    
    
    47,600
    
    
    
    (22,862
    )$
    424,069
    
    
    $
    (261,701
    )
    
    $
    424,069
    
    
    $
    (229,896
    )
 Amortization expense related to other intangible assets totaled approximately $10,600 for the quarters ended September
30, 2007 and 2006 and $31,800 for the nine months ended September 30, 2007 and 2006. The aggregate estimated
amortization expense for intangible assets remaining as of September 30, 2007 is as follows: Remainder of 2007
    
    $
    10,6022008
    
    
    42,4072009
    
    
    24,0492010
    
    
    21,6262011
    
    
    13,791Thereafter
    
    
    49,893Total
    
    $
    162,368
 Note G  Accrued Liabilities: Accrued liabilities at September 30, 2007 and December 31, 2006 consist of the following: September 30, 2007
    
    
    December 31, 2006Salaries and wages
    
    $
    827,719
    
    
    $
    556,058Income taxes
    
    
    1,079,938
    
    
    
    Distributor commissions
    
    
    349,179
    
    
    
    415,474Sales and property taxes
    
    
    78,272
    
    
    
    73,060Interest
    
    
    15,517
    
    
    
    20,312Other
    
    
    103,802
    
    
    
    100,343$
    2,454,427
    
    
    $
    1,165,247
 Note H  Share-Based Compensation: On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment(SFAS 123R) using the modified-prospective transition method. As a result, the Company records compensation
expense for all share-based payments based on the grant date fair value estimated in accordance with the provisions of
SFAS 123R. Share-based compensation expense for the quarters ended September 30, 2007 and 2006 were approximately
$15,900 and $27,400, respectively, and for the nine months ended September 30, 2007 and 2006 were approximately $53,900
and $77,300, respectively. Share-based compensation is classified as a general and administrative expense. There were
no tax benefits related to this expense because virtually all share-based compensation resulted from grants of
incentive stock options. - 9 -  10




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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: Quarters ended September 30,
    
    Nine Months Ended September 30,2007(1)
    
    
    2006(1)
    
    
    2007(1)
    
    
    2006Expected life (years)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.0Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.67
    %Expected volatility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135.0
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
  
 (1)
    
    There were no option grants during this period. A summary of stock option activity for the nine months ended September 30, 2007 is as follows: Weighted-AverageWeighted-
    
    
    Remaining
    
    
    AggregateAverage Exercise
    
    
    Contractual Term
    
    
    IntrinsicOptions
    
    
    Price per Share
    
    
    (in years)
    
    
    ValueOutstanding on January 1, 2007
    
    
    3,757,150
    
    
    $
    0.22Granted
    
    
    
    
    
    
    Exercised
    
    
    (236,950
    )
    
    
    0.15Forfeited/canceled
    
    
    (36,060
    )
    
    
    0.21Outstanding on September 30, 2007
    
    
    3,484,140
    
    
    $
    0.22
    
    
    
    4.4
    
    
    $
    1,830,631Exercisable on September 30, 2007
    
    
    2,999,820
    
    
    $
    0.23
    
    
    
    4.1
    
    
    $
    1,553,406
 A summary of the status of the Companys non-vested stock options as of September 30, 2007, and changes during the nine
months then ended, is presented below: Weighted-AverageGrant Date FairShares
    
    
    Value per ShareNon-vested stock options at January 1, 2007
    
    
    1,109,370
    
    
    $
    0.15Non-vested stock options granted
    
    
    
    
    
    
    Vested stock options
    
    
    (594,000
    )
    
    
    0.14Forfeited stock options
    
    
    (31,050
    )
    
    
    0.20Non-vested stock options at September 30, 2007
    
    
    484,320
    
    
    
    0.16
 As of September 30, 2007, there was approximately $68,000 of total unrecognized compensation cost related to stock
option grants. Note I  Long-Term Obligations and Credit Lines: At September 30, 2007 and December 31, 2006 long-term obligations consist of the following: September 30, 2007
    
    
    December 31, 2006Mortgage note payable bearing interest
at  7.75%, payable in monthly
installments of  $25,797
through April 2019, collateralized
 by land and building, and
personally guaranteed by the
Companys Chief Executive Officer
    
    $
    2,361,963
    
    
    $
    2,453,855
 - 10 -  11




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September 30, 2007
    
    
    December 31, 2006Note payable to bank bearing interest at 7.96%
    
    
    
    
    
    
    339,848Convertible notes (original amount $730,000)
 bearing interest at 10% payable
quarterly,  originally due two years
from the date of  issuance (1997),
notes are convertible into common
stock any time prior to maturity at
the option of the holder based on a per
share conversion price of $1.32
    
    
    25,000
    
    
    
    121,500Capital lease obligation
    
    
    3,487
    
    
    
    8,3962,390,450
    
    
    
    2,923,599Less  current maturities
    
    
    (295,343
    )
    
    
    (379,635
    )$
    2,095,107
    
    
    $
    2,543,964
 In May 2005, the Company financed the purchase of certain equipment in the amount of approximately $18,000 through a
capital lease.  This capital lease has a term ending in 2008 and an interest rate approximating 10%. In March 2007, the Company paid off, and did not renew, a line of credit borrowing arrangement in the amount of
$100,000. The Company continues to maintain a $900,000 line of credit against which there were no borrowings
outstanding at September 30, 2007. Borrowings under this line of credit bear interest at prime plus 1.0% and are
limited to a borrowing base, as defined in the line of credit agreement. The borrowing base, which was $900,000 at
September 30, 2007, is calculated as a specified percentage of eligible collateral up to a maximum of $900,000. This
line of credit is collateralized by accounts receivable, inventory and equipment, and is personally guaranteed by the
Companys Chief Executive Officer. In addition, the Company is required to maintain minimum amounts of working
capital, cash flow and tangible net worth, as defined in the line of credit agreement. The Company was in compliance
with these covenants at September 30, 2007. Note J  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 markets 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 Sciences brand name. These products
are distributed by a network of independent Associates in certain markets, primarily the U.S. and Canada, and by
licensees in certain other international markets. For the most part, licensees also market the Nutritional Products in
their respective territories through a network of independent Associates. The Medical Products segment markets a line
of approximately 28 wound care and oncology products in the United States under the MPM Medical brand name. The wound
care products are distributed to hospitals, nursing homes and home health care agencies through a network of
medical/surgical supply dealers. The oncology products are distributed to hospitals, cancer treatment clinics and
pharmacies through pharmaceutical distributors. The Company evaluates the performance of its segments primarily based on operating profit. All intercompany
transactions have been eliminated, and intersegment revenues are not significant. In calculating operating profit for
these two segments, administrative expenses incurred that are common to the two segments are allocated on a usage
basis. - 11 -  12




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##### Table of Contents



Segment information is as follows (in thousands): Nutritional Products
    
    
    Medical Products
    
    
    ConsolidatedQuarter ended September 30, 2007Net sales
    
    $
    6,705
    
    
    $
    1,152
    
    
    $
    7,857Depreciation and amortization
    
    
    65
    
    
    
    22
    
    
    
    87Operating profit
    
    
    1,101
    
    
    
    77
    
    
    
    1,178Capital expenditures
    
    
    60
    
    
    
    2
    
    
    
    62Total assets
    
    
    15,483
    
    
    
    1,489
    
    
    
    16,972Quarter ended September 30, 2006Net sales
    
    $
    4,380
    
    
    $
    1,025
    
    
    $
    5,405Depreciation and amortization
    
    
    151
    
    
    
    13
    
    
    
    164Operating profit
    
    
    16
    
    
    
    152
    
    
    
    168Capital expenditures
    
    
    51
    
    
    
    
    
    
    
    51Total assets
    
    
    11,393
    
    
    
    1,424
    
    
    
    12,817Nine Months ended September 30, 2007Net sales
    
    $
    17,124
    
    
    $
    3,273
    
    
    $
    20,397Depreciation and amortization
    
    
    206
    
    
    
    69
    
    
    
    275Operating profit
    
    
    2,382
    
    
    
    254
    
    
    
    2,636Capital expenditures
    
    
    153
    
    
    
    2
    
    
    
    155Total assets
    
    
    15,483
    
    
    
    1,489
    
    
    
    16,972Nine Months ended September 30, 2006Net sales
    
    $
    13,741
    
    
    $
    2,675
    
    
    $
    16,416Depreciation and amortization
    
    
    455
    
    
    
    40
    
    
    
    495Operating profit
    
    
    357
    
    
    
    354
    
    
    
    711Capital expenditures
    
    
    421
    
    
    
    
    
    
    
    421Total assets
    
    
    11,393
    
    
    
    1,424
    
    
    
    12,817
 Financial information summarized geographically for the quarters and nine months ended September 30, 2007 and 2006 is
listed below (in thousands): Quarter ended
    
    Quarter endedSeptember 30, 2007
    
    September 30, 2006Net sales
    
    
    Long-Lived assets
    
    
    Net sales
    
    
    Long-Lived assetsDomestic
    
    $
    2,447
    
    
    $
    5,958
    
    
    $
    2,498
    
    
    $
    5,763Former Soviet Union
    
    
    4,898
    
    
    
    
    
    
    
    2,336
    
    
    
    Canada
    
    
    335
    
    
    
    382
    
    
    
    357
    
    
    
    386South Korea
    
    
    14
    
    
    
    
    
    
    
    115
    
    
    
    572All others
    
    
    163
    
    
    
    
    
    
    
    99
    
    
    
    Totals
    
    $
    7,857
    
    
    $
    6,340
    
    
    $
    5,405
    
    
    $
    6,721
 Nine Months ended
    
    Nine Months endedSeptember 30, 2007
    
    September 30, 2006Net sales
    
    
    Long-Lived assets
    
    
    Net sales
    
    
    Long-Lived assetsDomestic
    
    $
    7,529
    
    
    $
    5,958
    
    
    $
    7,539
    
    
    $
    5,763Former Soviet Union
    
    
    11,314
    
    
    
    
    
    
    
    6,462
    
    
    
    Canada
    
    
    1,045
    
    
    
    382
    
    
    
    1,226
    
    
    
    386South Korea
    
    
    14
    
    
    
    
    
    
    
    543
    
    
    
    572All others
    
    
    495
    
    
    
    
    
    
    
    646
    
    
    
    Totals
    
    $
    20,397
    
    
    $
    6,340
    
    
    $
    16,416
    
    
    $
    6,721
 - 12 -  13




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##### Table of Contents



Significant Customers The Company recorded sales of Nutritional Products to Coral Club International, Inc., a licensee of the Company, in the
amounts of $4,898,000 and $2,336,000 during the quarters ended September 30, 2007 and 2006, respectively, and
$11,314,000 and $6,462,000 for the nine months ended September 30, 2007 and 2006, respectively. These sales accounted
for more than 10% of net sales in these periods. In no other case did a customer of the Company account for more than
10% of net sales during the quarters or nine months ended September 30, 2007 and 2006. Note K  Earnings Per Share: Summarized basic and diluted earnings per common share was calculated as follows: WeightedAverageNet Earnings
    
    
    Shares
    
    
    Per ShareQuarter ended September 30, 2007Basic earnings per common share
    
    $
    671,557
    
    
    
    20,424,861
    
    
    $
    0.03Effect of dilutive stock options
    
    
    
    
    
    
    2,377,943Diluted earnings per common share
    
    $
    671,557
    
    
    
    22,802,804
    
    
    $
    0.03Quarter ended September 30, 2006Basic earnings per common share
    
    $
    80,304
    
    
    
    20,166,294
    
    
    $
    0.00Effect of dilutive stock options
    
    
    
    
    
    
    2,011,042Diluted earnings per common share
    
    $
    80,304
    
    
    
    22,177,336
    
    
    $
    0.00Nine Months ended September 30, 2007Basic earnings per common share
    
    $
    1,506,857
    
    
    
    20,293,038
    
    
    $
    0.07Effect of dilutive stock options
    
    
    
    
    
    
    2,147,382Diluted earnings per common share
    
    $
    1,506,857
    
    
    
    22,440,420
    
    
    $
    0.07Nine Months ended September 30, 2006Basic earnings per common share
    
    $
    334,521
    
    
    
    20,155,294
    
    
    $
    0.02Effect of dilutive stock options
    
    
    
    
    
    
    2,214,805Diluted earnings per common share
    
    $
    334,521
    
    
    
    22,370,099
    
    
    $
    0.01
 The number of stock options that were outstanding but not included in the computation of diluted earnings per common
share because their exercise price was greater than the average market price of the common stock, or were otherwise
anti-dilutive, was 300,000 and 600,000 for the quarters ended September 30, 2007 and 2006, respectively, and 300,000
and 500,000 for the nine months ended September 30, 2007 and 2006, respectively. The assumed conversion of the convertible notes would have an anti-dilutive effect on diluted earnings per common share
for the quarters and nine months ended September 30, 2007 and 2006, and accordingly have been excluded from the
computation. Note L  Comprehensive Income: Comprehensive income is net earnings adjusted for other comprehensive income (loss), which, for the periods presented,
consists of the change in the foreign currency translation adjustment. The following table provides information
regarding comprehensive income: - 13 -  14




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##### Table of Contents



Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings
    
    $
    671,557
    
    
    $
    80,304
    
    
    $
    1,506,857
    
    
    $
    334,521Other comprehensive income (loss):Foreign currency translation
    
    
    10,939
    
    
    
    (3,278
    )
    
    
    26,757
    
    
    
    27,341adjustmentComprehensive income
    
    $
    682,496
    
    
    $
    77,026
    
    
    $
    1,533,614
    
    
    $
    361,862
 Note M  Legal Proceedings: 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. - 14 -  15




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this
report and the audited consolidated financial statements and notes thereto included in the 2006 Form 10-K. FORWARD-LOOKING STATEMENTS The statements, other than statements of historical or present facts, included in this report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. All statements, other than statements of historical or present facts, that address activities, events,
outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate
or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements.
Forward-looking statements can be identified by the use of the words may, will, expect, intend, estimate,
anticipate, objective, projection, forecast, goal, believe, and similar expressions. These forward-looking
statements are based on managements current belief, based on currently available information, as to the outcome and
time of future events. We believe that the expectations and assumptions reflected in these forward-looking statements
are reasonable. However, we cannot assure you that such expectations will occur. Our actual future performance could
differ materially from such statements. When considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this Form 10-Q and those previously disclosed in Item 1A to Part I of the
2006 Form 10-K. Many of these factors are beyond the Companys ability to control or predict. We caution you not to
put undue reliance on forward-looking statements or to project any future results based on such statements or on
present or prior earnings levels. We do not undertake any obligation to publicly release any revisions to any
forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence
of unanticipated events. Please consider our forward-looking statements in light of those risks as you read this
report. OVERVIEW We operate in two industry segments, Nutritional Products and Medical Products.  
    
    Through the Nutritional Products segment, we distribute products in four broad categories: (i) wellness
products, (ii) weight loss products, (iii) fitness products and (iv) 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 other markets, we distribute Nutritional Products through exclusive license arrangements with third
parties, who, for the most part, distribute our products through an independent Associate network in the licensed
territory.  
    
    Through the Medical Products segment, we distribute wound care and oncology products. These products are
distributed in the United States to hospitals, nursing homes, clinics and pharmacies through traditional
medical/surgical supply dealers and pharmaceutical distributors. Consolidated net sales in dollars and as a percentage of consolidated net sales are as follows: Quarters Ended September 30,2007
    
    2006(U.S. dollars in 000s)Nutritional Products:Associate network
    
    $
    1,630
    
    
    
    21
    %
    
    $
    1,946
    
    
    
    36
    %Licensees
    
    
    5,075
    
    
    
    64
    %
    
    
    2,434
    
    
    
    45
    %6,705
    
    
    
    85
    %
    
    
    4,380
    
    
    
    81
    %Medical Products
    
    
    1,152
    
    
    
    15
    %
    
    
    1,025
    
    
    
    19
    %$
    7,857
    
    
    
    100
    %
    
    $
    5,405
    
    
    
    100
    %
 - 15 -  16




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##### Table of Contents



Nine Months Ended September 30,2007
    
    2006(U.S. dollars in 000s)Nutritional Products:Associate network
    
    $
    5,304
    
    
    
    26
    %
    
    $
    6,636
    
    
    
    41
    %Licensees
    
    
    11,820
    
    
    
    58
    %
    
    
    7,105
    
    
    
    43
    %17,124
    
    
    
    84
    %
    
    
    13,741
    
    
    
    84
    %Medical Products
    
    
    3,273
    
    
    
    16
    %
    
    
    2,675
    
    
    
    16
    %$
    20,397
    
    
    
    100
    %
    
    $
    16,416
    
    
    
    100
    %
 Associate Network. The following table sets forth the Associate network net sales by geographic region as a percentage
of total net sales for the periods indicated: Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    
    79
    %
    
    
    76
    %
    
    
    80
    %
    
    
    73
    %Canada
    
    
    21
    
    
    
    18
    
    
    
    20
    
    
    
    19South Korea
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    8100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 In February 2006, we began distributing Nutritional Products through an Associate network in South Korea. This
business was conducted by our wholly owned subsidiary in South Korea. On October 31, 2006, we sold this subsidiary and
as part of the sale agreement, entered into a five-year license agreement with the purchaser. Under the terms of the
license agreement, the purchaser distributes our products in this market as a licensee.

 
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 the licensed territory through network marketing. Net sales
in this distribution channel are mainly dependent upon the licensees success in building a distribution network in the
licensed territory.

 

Our principal licensee is Coral Club International (CCI). CCI, which accounted for 96% and 91% of licensee net sales
in the nine months ended September 30, 2007 and 2006, respectively, distributes products in a territory comprised
mainly of the former Soviet Union and Eastern Europe. The President of CCI is a former member of our Board of Directors
and beneficially owns approximately 20% of our outstanding common stock.

 
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. In some cases, wholesalers maintain their own sales forces to market products that they supply, which
include our products.

 

This segments largest customer, a medical/surgical dealer, accounted for 57% of Medical Products net sales in the nine
months ended September 30, 2007 and 2006.

 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements and related disclosures in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and judgments that affect the amounts reported
in our financial statements and accompanying footnotes. On an on-going basis, we evaluate these estimates and
assumptions based on historical experience and various other factors and circumstances. Our management believes that
the estimates and assumptions are reasonable in the circumstances; however, actual results may vary from these
estimates and assumptions under different future circumstances. - 16 -  17




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##### Table of Contents



Management believes that there have been no significant changes during the nine months ended September 30, 2007 to the
items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of
Financial Condition and Results of Operations in the 2006 Form 10-K. RESULTS OF OPERATIONS

 

The following table sets forth our operating results as a percentage of net sales for the periods indicated: Quarters Ended September 30,
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    47.1
    
    
    
    42.6
    
    
    
    44.8
    
    
    
    39.5Gross profit
    
    
    52.9
    
    
    
    57.4
    
    
    
    55.2
    
    
    
    60.5Operating expenses:General and administrative
    
    
    29.2
    
    
    
    39.3
    
    
    
    31.7
    
    
    
    39.2Distributor commissions
    
    
    7.7
    
    
    
    12.0
    
    
    
    9.3
    
    
    
    14.0Depreciation and amortization
    
    
    1.0
    
    
    
    3.0
    
    
    
    1.3
    
    
    
    3.0Total operating expenses
    
    
    37.9
    
    
    
    54.3
    
    
    
    42.3
    
    
    
    56.2Operating profit
    
    
    15.0
    
    
    
    3.1
    
    
    
    12.9
    
    
    
    4.3Interest expense
    
    
    0.7
    
    
    
    1.1
    
    
    
    0.8
    
    
    
    1.2Earnings before income taxes
    
    
    14.3
    
    
    
    2.0
    
    
    
    12.1
    
    
    
    3.1Provision for income taxes
    
    
    5.8
    
    
    
    0.5
    
    
    
    4.7
    
    
    
    1.1Net earnings
    
    
    8.5
    %
    
    
    1.5
    %
    
    
    7.4
    %
    
    
    2.0
    %
 Quarter ended September 30, 2007 compared with quarter ended September 30, 2006 Net sales.Net sales for the quarter ended September 30, 2007 were $7,857,000 compared with net sales for the prior
year of $5,405,000, an increase of $2,452,000 or 45%. This increase was due to a $2,325,000 increase in net sales of
Nutritional Products and a $127,000 increase in net sales of Medical Products. Net sales of Nutritional Products to our
licensees increased $2,641,000 while net sales of Nutritional Products to our Associate network decreased $316,000.

 
Associate Network. We began distribution of our Nutritional Products in South Korea through an Associate network in
February 2006 and recorded net sales of $115,000 during the quarter ended September 30, 2006. As described above under
the caption Overview  Associate Network, on October 31, 2006, we sold the South Korean operations and entered into
an exclusive license arrangement with the purchaser pursuant to which our products continue to be sold in this market. Net sales in the North American market declined approximately $200,000 during the third quarter of 2007. We attribute
this decrease to a continued decline in the number of active Associates, which resulted from low levels of sponsorship
of new Associates by the current Associate network. During the first nine months of 2007, we implemented new marketing
programs and modified existing marketing programs in our continuing effort to encourage greater levels of sponsorship
by the Associate network in North America. While we believe these marketing initiatives and other actions we may
undertake in the future will ultimately increase the sponsorship of new Associates, we can give no assurance that the
decline of active Associates will not continue.

 
Licensees. The growth in net sales to our licensees is primarily the result of the growth of CCI. Sales to CCI
increased $2,562,000 in the third quarter of 2007. CCIs sales growth is attributed to the continued expansion of the
independent Associate network in CCIs territory. However, sales to CCI may vary significantly from quarter to quarter
irrespective of the sales demand of CCIs independent Associate network. Under our arrangement with CCI, CCI orders
products from us and pays for them when we segregate them in our warehouse for CCIs account. We then store these
products until CCI provides shipping instructions. Because we do not recognize revenue until we ship products to CCI,
our sales to CCI will fluctuate from quarter to quarter depending on a number of logistical considerations, only one of
which is the sales demand of CCIs independent Associate network. Backlog related to CCIs account was $5,828,000 and
$2,718,000 at September 30, 2007 and 2006, respectively. - 17 -  18




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##### Table of Contents



Medical products.  The growth in net sales of Medical Products is related to an increase in the customer base for our
wound care products and increased sales to the largest customer in this segment.   Sales to this customer, which
distributes wound care products to the nursing home market, increased $70,000 during the third quarter of 2007 compared
to the third quarter of 2006. We attribute this distributors sales increase to the increase of its nursing home
customer base, which was achieved through expansion of its sales force. Cost of sales.Cost of sales for the quarter ended September 30, 2007 was $3,702,000 compared with cost of sales in the
third quarter of 2006 of $2,302,000, an increase of $1,400,000 or 61%. As a percentage of net sales, cost of sales was
47% in the third quarter of 2007 and 43% in the third quarter of 2006. As a percentage of net sales, gross profit
decreased 4% mainly because of a change in sales mix. During the third quarter of 2007, a smaller percentage of our
sales was contributed by sales of Nutritional Products to the Associate network, which sales have a higher gross
margin.

 
General and administrative.General and administrative expenses for the quarter ended September 30, 2007, were
$2,296,000 compared with expenses in the third quarter of 2006 of $2,125,000, an increase of $171,000 or 8%. As a
percentage of net sales, general and administrative expenses were 29% and 39% in the quarters ended September 30, 2007
and 2006, respectively. General and administrative expenses in the third quarter of 2006 included $322,000 of expenses
associated with operations in South Korea. The elimination of these expenses for the third quarter of 2007 was more
than offset by increases in other general and administrative expenses, mainly marketing expenses related to both
Nutritional Products sales in North America and Medical Products sales, and salaries and benefits required to support
our growth. General and administrative expenses in the third quarter of 2007 also included a charge of approximately
$134,000 related to an adjustment of the fair value of the long-term receivable we received in connection with the sale
of our South Korean subsidiary in October 2006. This receivable was recorded at its fair value based on the timing of
expected payments. Based on historical trends, we adjusted the timing of expected payments and recalculated the fair
value accordingly.

 
Distributor commissions.Distributor commissions for the quarter ended September 30, 2007 were $601,000 compared with
distributor commissions in the same quarter of 2006 of $649,000, a decrease of $48,000 or 7%. With regard to our
Associate network, distributor commissions as a percentage of commissionable sales increased approximately 2% in the
third quarter of 2007 compared to the same period in 2006. On a consolidated basis, distributor commissions as a
percentage of net sales declined to 8% in the third quarter of 2007 compared with 12% in the third quarter of 2006.
This percentage decline was related to the change in sales mix described above. Most of our distributor commissions
are associated with sales to the Associate network.

 
Income taxes.We recorded a provision for income taxes of $455,000 during the quarter ended September 30, 2007 based
on our estimate of the effective annual income tax rate. We have no U.S. net operating loss carryforwards available to
offset taxable income. Net earnings.As a result of the factors described above, the net earnings for the quarter ended September 30, 2007
were $672,000, or $0.03 per share, compared with net earnings in the third quarter of 2006 of $80,000, or $0.00 per
share. Nine months ended September 30, 2007 compared with nine months ended September 30, 2006

 
Net sales.Net sales for the nine months ended September 30, 2007 were $20,397,000 compared with net sales for the same
period in the prior year of $16,416,000, an increase of $3,981,000 or 24%. This increase was due to a $3,383,000
increase in net sales of Nutritional Products and a $598,000 increase in net sales of Medical Products. Net sales of
Nutritional Products to our licensees increased $4,715,000 while net sales of Nutritional Products to our Associate
network decreased $1,332,000.

 
Associate Network. We began distribution of our Nutritional Products in South Korea through an Associate network in
February 2006 and recorded net sales of $543,000 during the nine months ended September 30, 2006. As described above
under the caption Overview  Associate Network, on October 31, 2006, we sold the South Korean operations and entered
into an exclusive license arrangement with the purchaser pursuant to which our products continue to be sold in this
market. - 18 -  19




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##### Table of Contents



Net sales in the North American market declined approximately $789,000 during the first nine months of 2007. We
attribute this decrease to a continued decline in the number of active Associates, which resulted from low levels of
sponsorship of new Associates by the current Associate network. During the first nine months of 2007, we implemented
new marketing programs and modified existing marketing programs in our continuing effort to encourage greater levels of
sponsorship by the Associate network in North America. While we believe these marketing initiatives and other actions
we may undertake in the future will ultimately increase the sponsorship of new Associates, we can give no assurance
that the decline of active Associates will not continue.

 
Licensees. The growth in net sales to our licensees is the result of the growth of CCI. Sales to CCI increased
$4,852,000 in the first nine months of 2007 as compared to the same period in 2006. CCIs sales growth is attributed to
the continued expansion of the independent Associate network in CCIs territory. However, sales to CCI may vary
significantly from quarter to quarter irrespective of the sales demand of CCIs independent Associate network. Under
our arrangement with CCI, CCI orders products from us and pays for them when we segregate them in our warehouse for
CCIs account. We then store these products until CCI provides shipping instructions. Because we do not recognize
revenue until we ship products to CCI, our sales to CCI will fluctuate from quarter to quarter depending on a number of
logistical considerations, only one of which is the sales demand of CCIs independent Associate network. Backlog
related to CCIs account was $5,828,000 and $2,718,000 at September 30, 2007 and 2006, respectively.

 
Medical products.  The growth in net sales of Medical Products is related to an increase in the customer base for our
wound care products and increased sales to the largest customer in this segment.   Sales to this customer, which
distributes wound care products to the nursing home market, increased $349,000 during the first nine months of 2007
compared to the first nine months of 2006. We attribute this distributors sales increase to the increase of its
nursing home customer base, which was achieved through expansion of its sales force. Cost of sales.Cost of sales for the nine months ended September 30, 2007 was $9,144,000 compared with cost of sales in
the first nine months of 2006 of $6,483,000, an increase of $2,661,000 or 41%. As a percentage of net sales, cost of
sales was 45% in the first nine months of 2007 and 40% in the first nine months of 2006. As a percentage of net sales,
gross profit decreased 5% mainly because of a change in sales mix. During the first nine months of 2007, a smaller
percentage of our sales was contributed by sales of Nutritional Products to the Associate network, which sales have a
higher gross margin.

 
General and administrative.General and administrative expenses for the nine months ended September 30, 2007, were
$6,463,000 compared with expenses in the first nine months of 2006 of $6,436,000, an increase of $27,000 or less than
1%. As a percentage of net sales, general and administrative expenses were 32% and 39% in the nine months ended
September 30, 2007 and 2006, respectively. General and administrative expenses in the first nine months of 2006
included $984,000 of expenses associated with operations in South Korea. The elimination of these expenses for the
first nine months of 2007 was offset mainly by increased marketing expenses related to both Nutritional Products sales
in North America and Medical Products sales, and increased salaries and benefits required to support our growth.
General and administrative expenses in 2007 also included a charge of approximately $134,000 related to an adjustment
of the fair value of the long-term receivable we received in connection with the sale of our South Korean subsidiary in
October 2006. This receivable was recorded at its fair value based on the timing of expected payments. Based on
historical trends, we adjusted the timing of expected payments and recalculated the fair value accordingly. Distributor commissions.Distributor commissions for the nine months ended September 30, 2007 were $1,899,000 compared
with distributor commissions in the same nine months of 2006 of $2,302,000, a decrease of $403,000 or 18%. With regard
to our Associate network, distributor commissions as a percentage of commissionable sales were substantially unchanged
in the first nine months of 2007 compared to 2006. On a consolidated basis, distributor commissions as a percentage of
net sales declined to 9% in the first nine months of 2007 compared with 14% in 2006. This percentage decline was
related to the change in sales mix described above. Most of our distributor commissions are associated with sales to
the Associate network.

 
Income taxes.We recorded a provision for income taxes of $965,000 during the nine months ended September 30, 2007
based on our estimate of the effective annual income tax rate. We have no U.S. net operating loss carryforwards
available to offset taxable income. - 19 -  20




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Net earnings.As a result of the factors described above, the net earnings for the nine months ended September 30,
2007 were $1,507,000, or $0.07 per share, compared with net earnings in the first nine months of 2006 of $335,000, or
$0.01 per share. LIQUIDITY AND CAPITAL RESOURCES

 
Cash and working capital.During the nine months ended September 30, 2007, we had a net increase in cash of $2,043,000
compared with a net increase in cash of $239,000 in the first nine months of 2006. At September 30, 2007, we had
working capital of $3,378,000, a $1,443,000 increase from working capital at December 31, 2006 of $1,935,000. These
increases were mainly attributable to cash flows from operating activities.

 
Operating activities. In the first nine months of 2007, our operating activities provided cash flows of $2,780,000
compared with $774,000 in the first nine months of 2006. This improvement was primarily related to net earnings and the
timing of supplier and other payments. Cash used to increase inventory was mainly used to increase inventory
associated with CCIs product orders. We also used cash to increase our Medical Products inventory in support of sales
increases in this segment. In the first nine months of 2007, net earnings adjusted for non-cash activities, which
mainly include depreciation and amortization, stock-based compensation and deferred income taxes, provided cash flows
of $1,735,000 compared with $1,092,000 in the first nine months of 2006.

 
Investing activities.During the first nine months of 2007, we used cash of $154,000 related to the purchase of
property and equipment.

 
Financing activities. During the first nine months of 2007, we used cash of $533,000 to repay long-term debt, which
included the payment of the remaining balance of our note payable to a bank. We also used $100,000 to pay off our
remaining line of credit borrowings. We continue to maintain a $900,000 line of credit arrangement with a bank, none
of which was used at September 30, 2007. General liquidity and cash flows. We believe that the working capital requirements of our existing operations 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 additional
outside financing or obtain financing on terms we would find acceptable.

 

During the fourth quarter of 2007, we plan to complete a project to affect certain improvements and repairs of our
headquarters building. This project is expected to be completed by year end at a cost of approximately $600,000. We
expect that approximately $400,000 to $500,000 of this amount will represent capital improvements to our building with
the remainder representing a repair expense. Capital improvements relate mainly to improvements in the building
drainage system. Other than the foregoing, we have no plans or requirements for any significant capital expenditures
during the next 12 months. Other than those factors already described, we are not aware of any trends or uncertainties that would significantly
affect our liquidity or capital resources in the future. 
 ITEM 3. Quantitative and Qualitative Disclosure 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 and interest rates that could affect our future results of operations and
financial condition. We manage our exposure to these risks through our regular operating and financing activities. - 20 -  21




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Foreign exchange We have foreign-based operations in Canada that accounted for 5% of net sales during the first nine months of 2007 and
7% during fiscal 2006. We advance funds to and from our foreign subsidiary denominated in U.S. dollars, exposing the
foreign subsidiary to the effect of changes in spot exchange rates of the Canadian dollar relative to the U.S. dollar.
We do not regularly use forward-exchange contracts to hedge these exposures. Based on our foreign currency exchange
rate exposure for intercompany advances of approximately $24,000 to our Canadian operations at September 30, 2007, a
10% adverse change in the currency rate would reduce earnings before income taxes by approximately $2,400. Interest rates Our line of credit arrangement may expose us to fluctuations in interest rates. At September 30, 2007, we maintained a
$900,000 line of credit arrangement that provides for interest to be paid monthly based on a variable rate. Thus,
interest rate changes would result in a change in the amount of interest to be paid each month. We had no borrowings
outstanding against this line at September 30, 2007. 
 ITEM 4. Controls and Procedures. As required by Rule 13a-15(b) and Rule 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 September 30, 2007, the
effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures, as of September 30, 2007, 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. 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) of 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. There has been no change in internal control over financial reporting that occurred during the quarter ended September
30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. - 21 -  22




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PART II  OTHER INFORMATION 
 ITEM 1. Legal Proceedings. None 
 ITEM 1A. Risk Factors. Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition
and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to
the Risk Factors section of the 2006 Form 10-K. In connection with our preparation of this quarterly report,
management has reviewed and considered these risk factors and has determined that there have been no material changes
to our risk factors since the date of filing of the 2006 Form 10-K. 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. None 
 ITEM 3. Defaults Upon Senior Securities. None 
 ITEM 4. Submission of Matters to a Vote of Security Holders. None. 
 ITEM 5. Other Information. None 
 ITEM 6. Exhibits. The Exhibit Index filed herewith is incorporated herein by reference. - 22 -  23




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

Registrant November 12, 2007Date By: /s/ Clinton H. Howard

Its: Chief Executive Officer November 12, 2007Date By: /s/ Steven E. Brown

Its: Vice President-Finance and

Chief Financial Officer

(Principal Financial and Accounting Officer) - 23 -  24




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RBC LIFE SCIENCES, INC. Exhibit Index Exhibit Number
    
    Description31.1
    
    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
  - 24 -  25