UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | |
| x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
| | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to ________________
Commission file number: 000-50417
RBC Life Sciences, Inc.
(Exact name of registrant as specified in its charter)
| | |
| Nevada | | 91-2015186 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | | |
| 2301 Crown Court, Irving, Texas | | 75038 |
| (Address of principal executive offices) | | (Zip Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
&nb sp;
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | |
| Large accelerated filer | o | | Accelerated filer | o |
| Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date .
| | |
| Class | | Outstanding at October 29, 2010 |
| Common Stock, $0.001 par value per share | | 21,921,934 shares |
TABLE OF CONTENTS
| | |
| | Page Number |
| PART I – FINANCIAL INFORMATION | |
| | | |
| Item 1. | Financial Statements | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. | Controls and Procedures | |
| | | |
| PART II – OTHER INFORMATION | |
| | | |
| Item 1. | Legal Proceedings | |
| Item 1A. | Risk Factors | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. | Defaults Upon Senior Securities | |
| Item 4. | Reserved | |
| Item 5. | Other Information | |
| Item 6. | Exhibits | |
| | | |
| Signatures | |
| | |
| Exhibit Index | |
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | |
| | September 30,
2010 | | December 31,
2009 |
| | (Unaudited) | | |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 4,813,841 | | | $ | 3,972,111 | |
| Accounts receivable, net | 513,812 | | | 576,125 | |
| Inventories | 5,235,756 | | | 5,344,259 | |
| Deferred income taxes | 420,292 | | | 449,254 | |
| Prepaid expenses | 742,658 | | | 888,303 | |
| Total current assets | 11,726,359 | | | 11,230,052 | |
| Property and equipment, net | 4, 759,406 | | | 5,037,890 | |
| Goodwill, net | 2,280,389 | | | 2,271,977 | |
| Intangible assets, net | 57,340 | | | 61,808 | |
| Other assets | 13,672 | | | 10,897 | |
| | $ | 18,837,166 | | | $ | 18,612,624 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
| Current liabilities: | | | | | |
| Accounts payable, trade | $ | 1,511,680 | | | $ | 1,803,997 | |
| Accrued liabilities | 1,026,1 43 | | | 925,060 | |
| Current maturities of long-term obligations | 165,299 | | | 155,994 | |
| Deferred revenue | 3,646,790 | | | 3,668,907 | |
| Total current liabilities | 6,349,912 | | | 6,553,958 | |
| Long-term obligations, less current maturities | 1,770,914 | | | 1,896,077 | |
| Deferred income taxes | 946,174 | | | 943,235 | |
| Shareholders’ equity: | | | | | |
| Common stock, $0.001 par value; 50,000,000 shares authorized; 21,921,934 shares issued and outstanding at September 30, 2010 and December 31, 2009 | 21,922 | | | 21,922 | |
| Additional paid-in capital | 13,539,666 | | | 13,504,874 | |
| Accumulated deficit | (3,922,474 | ) | | (4,439,094 | ) |
| Accumulated other comprehensive income | 131,052 | | | 131,652 | |
| | 9,770,166 | | | 9,219,354 | |
| | $ | 18,837,166 | | | $ | 18,612,624 | |
See notes to condensed consolidated financial statements.
RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | |
| | For the Quarters Ended September 30, |
| | 2010 | | 2009 |
| Net sales | $ | 6,126,488 | | | $ | 6,487,110 | |
| Cost of sales | 2,836,499 | | | 3,272,153 | |
| Gross profit | 3,289,989 | | | 3,214,957 | |
| Operating expenses: | | | | | |
| General and administrative | 2,240,966 | | | 2,645,550 | |
| Distributor commissions | 758,509 | | | 637,389 | |
| Depreciation and amortization | 119,422 | | | 86,441 | |
| Total operating expenses | 3,118,897 | | | 3,369,380 | |
| Operating profit (loss) | 171,092 | | | (154,423 | ) |
| Interest expense | 37,769 | | | 40,715 | |
| Earnings (loss) before income taxes | 133,323 | | | (195,138 | ) |
| Provision (benefit) for income taxes | — | | | (43,000 | ) |
| Net earnings (loss) | $ | 133,323 | | | $ | (152,138 | ) |
| | | | | | | |
| Earnings (loss) per share: | | | |
| Basic | $ | 0.01 | | | $ | (0.01 | ) |
| Diluted | 0.01 | | | (0.01 | ) |
| | | | | |
| Weighted average common shares outstanding: | | | |
| Basic | 21,921,934 | | | 21,921,934 | |
| Diluted | 22,468,717 | | | 21,921,934 | &nbs p; |
See notes to condensed consolidated financial statements.
RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2010 | | 2009 |
| Net sales | $ | 20,946,381 | | | $ | 19,262,207 | |
| Cost of sales | 10,611,715 | | | 9,386,910 | |
| Gross profit | 10,334,666 | | | 9,875,297 | |
| Operating expenses: | | | | | |
| General and administrative | 6,998,293 | | | 7,567,442 | |
| Distributor commissions | 2,045 ,747 | | | 1,839,814 | |
| Depreciation and amortization | 362,339 | | | 275,724 | |
| Total operating expenses | 9,406,379 | | | 9,682,980 | |
| Operating profit | 928,287 | | | 192,317 | |
| Interest expense | 115,567 | | | 124,236 | |
| Earnings before income taxes | 812,720 | | | 68,081 | |
| Provision for income taxes | 296,100 | | | 114,000 | |
| Net earnings (loss) | $ | 516,620 | | | $ | (45,919 | ) |
| | | | | | | |
| Earnings (loss) per share: | | | |
| Basic | $ | 0.02 | | | $ | (0.00 | ) |
| Diluted | 0.02 | | | (0.00 | ) |
| | | | | |
| Weighted average common shares outstanding: | | | |
| Basic | 21,921,934 | | | 21,920,394 | |
| Diluted | 22,386,287 | | | 21,920,394 | |
See notes to condensed consolidated financial statements.
RBC LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2010 | | 2009 |
| Cash flows from operating activities: | | | |
| Net earnings (loss) | $ | 516,620 | | | $ | (45,919 | ) |
| Adjustment for non-cash items: | | | |
| Depreciation and amortization | 408,957 | | | 317,091 | |
| Stock-based compensation | 34,791 | | | 102,039 | |
| Deferred income taxes | 32,842 | | | 101,493 | |
| Loss on disposition of equipment | 22,874 | | | — | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable | 62,321 | | | 144,281 | |
| Inventories | 110,689 | | | 838,697 | |
| Prepaid expenses | 147,020 | | | (58,006 | ) |
| Other assets | (2,595 | ) | | — | |
| Accounts payable and accrued liabilities | (192,712 | ) | | (495,464 | ) |
| Deferred revenue | (22,144 | ) | | (1,439,025 | ) |
| Net cash provided by (used in) operating activities | 1,118,663 | | | (534,813 | ) |
| Cash flows from investing activities: | | | | | |
| Purchase of property and equipment | (155,768 | ) | | (948,943 | ) |
| Proceeds from surrender of insurance policy | — | | | 194,277 | |
| Proceeds from sale of equipment | 7,034 | | | — | |
| Net cash used in investing activities | (148,734 | ) | | (754,666 | ) |
| Cash flows from financing activities: | | | | | |
| Payments of long-term obligations | (115,858 | ) | | (107,245 | ) |
| Proceeds from the exercise of stock options | — | | | 1,455 | |
| Net cash used in financing activities | (115,858 | ) | | (105,790 | ) |
| Effect of exchange rate changes on cash flows | (12,341 | ) | | (60,181 | ) |
| Net increase (decrease) in cash and cash equivalents | 841,730 | | | (1,455,450 | ) |
| Cash and cash equivalents, beginning of period | 3,972,111 | | | 4,973,405 | |
| Cash and cash equivalents, end of period | $ | 4,813,841 | | | $ | 3,517,955 | |
See notes to condensed consolidated financial statements.
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 pre pared in accordance with accounting principles generally accepted in the U.S. (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and disclosures that are normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to these rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”), previously filed wi th the Securities and Exchange Commission.
In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the Company's results for the interim periods have been included. The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. ;Subsequent events were evaluated through the issuance date of the consolidated financial statements.
Note B – Nature of Operations and Organization:
The Company is principally engaged in the marketing of nutritional supplements and personal care products (collectively “Nutritional Products”) through subsidiaries in the U.S. and Canada. 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. Accordingly, Associates may be product consumers only or they may also seek to derive compensation both from the direct sales of products and from sales generated by sponsored Associates.
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 t hrough an independent Associate network in the licensed territory. Under these arrangements, the independent Associate network in a licensed territory is compensated by the licensee in accordance with a compensation plan similar to the one used by RBC for its Associates in 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 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.
Note C – Inventories:
Inventories consist of the following:
| | | | | | | |
| | September 30, 2010 | | December 31, 2009 |
| Raw materials and bulk products | $ | 476,938 | | | $ | 403,616 | |
| Packaging materials | 341,163 | | | 488,545 | |
| Finished goods | 4,417,655 | | | 4,452,098 | |
| | $ | 5,235,756 | | | $ | 5,344,259 | |
Note D – Prepaid Expenses:
Prepaid expenses consist of the following:
| | | | | | | |
| | September 30, 2010 | | December 31, 2009 |
| Advance payment to suppliers | $ | 233,467 | | | $ | 177,415 | |
| Prepaid income taxes | 196,423 | | | 453,177 | |
| Certificates of deposit - restricted | 82,578 | | | 81,252 | |
| Prepaid insurance and other | 230,190 | | | 176,459 | |
| | $ | 742,658 | | | $ | 888,303 | |
Note E – Property and Equipment:
Property and equipment consists of the following:
| | | | | | | |
| | September 30, 2010 | | December 31, 2009 |
| Building and improvements | $ | 3,523,428 | | | $ | 3,523,428 | |
| Computer software and office equipment | 2,055,988 | | | 2,314,849 | |
| Warehouse equipment | 219,030 | | | 286,731 | |
| Automotive equipment | 15,228 | | | 15,228 | |
| Leasehold improvements | — | | | 20,894 | |
| | 5,813,674 | | | 6,161,130 | |
| Less – accumulated depreciation | (2,195,441 | ) | | (2,264,413 | ) |
| | 3,618,233 | | | 3,896,717 | |
| Land | 1,141,173 | | | 1,141,173 | |
| | $ | 4,759,406 | | | $ | 5,037,890 | |
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.&nb sp; No impairment losses have been recognized as a result of this testing. Goodwill balances are summarized as follows:
| | | | | | | |
| | Gross Carrying Value | | Accumulated Amortization |
| Balance, December 31, 2009 | $ | 3,384,487 | | | $ | (1,112,510 | ) |
| Currency translation adjustment | 16,414 | | | (8,002 | ) |
| Balance, September 30, 2010 | $ | 3,400,901 | | | $ | (1,120,512 | ) |
Other intangible assets consist of the following:
| | | | | | | | | | | | | | | | | |
| | | | September 30, 2010 | | December 31, 2009 |
| | Average Life (years) | | Gross Carrying Value | | Accumulated Amortization | | Gross Carrying Value | | Accumulated Amortization |
| Copyrights, trademarks and other registrations | 19 | | $ | 99,100 | | | $ | (48,228 | ) | | $ | 99,100 | | | $ | (44,264 | ) |
| Other | 19 | | 12,600 | | | (6,132 | ) | | 12,600 | | | (5,628 | ) |
| | | | $ | 111,700 | | | $ | (54,360 | ) | | $ | 111,700 | | | $ | (49,892 | ) |
Amortization expense related to other intangible assets totaled approximately $1,500 and $5,400 for the quarters ended September 30, 2010 and 2009, respectively, and $4,500 and $18,600 for the nine months ended September 30, 2010 and 2009, respectively. The aggregate estimated amortization expense for intangible assets remaining as of September 30, 2010 is as follows:
| | | |
| Remainder of 2010 | $ | 1,489 | |
| 2011 | 5,957 | |
| 2012 | 5,957 | |
| 2013 | 5,957 | |
| 2014 | 5,957 | |
| Thereafter | 32,023 | |
| Total | $ | 57,340 | |
Note G – Accrued Liabilities:
Accrued liabilities consist of the following:
| | | | | | | |
| | September 30, 2010 | | December 31, 2009 |
| Salaries and wages | $ | 394,065 | | | $ | 436,916 | |
| Distributor commissions | 446,316 | | | 317,562 | |
| Sales and property taxes | 64,540 | | | 40,684 | |
| Interest | 12,505 | | | 13,253 | |
| Other | 108,717 | | | 116,645 | |
| | $ | 1,026,143 | | | $ | 925,060 | |
Note H – Share-Based Compensation:
The Company records compensation expense for all share-based payments based on the estimated grant date fair value. Share-based compensation expense was approximately $9,300 and $32,000 for the quarters ended September 30, 2010 and 2009, respectively, and $34,800 and $102,000 for the nine months ended September 30, 2010 and 2009, respectively. Share-based compensation is classified as a general and administrative expense. There were no material tax benefits related to this expense because virtually all share-based compensation resulted from grants of incentive stock options.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | | | | | | | | | |
| | Quarters Ended September 30, | | Nine Months Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | (1) | | | | |
| Weighted average expected life (years) | 9.0 | | | — | | | 9.0 | | | 7.3 | |
| Risk-free interest rate | 3.09 | % | | — | % | | 3.09 | % | | 2.67 | % |
| Expected volatility | 105.02 | % | | — | % | | 105.02 | % | | 114.92 | % |
| Expected dividend yield | — | % | | — | % | | — | % | | — | % |
__________________
(1) There were no option grants during this period.
A summary of stock option activity for the nine months ended September 30, 2010 is as follows:
| | | | | | | | | | | | | |
| | Options | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Contractual T erm (in years) | | Aggregate Intrinsic Value |
| Outstanding on January 1, 2010 | 2,130,440 | | | $ | 0.40 | | | | | |
| Granted | 25,000 | | | 0.36 | | | | | |
| Exercised | — | | | — | | | | | |
| Forfeited/canceled | (616,267 | ) | | 0.64 | | | | | |
| Outstanding on September 30, 2010 | 1,539,173 | | | $ | 0.31 | | | 3.3 | | | $ | 214,752 | |
| Exercisable on September 30, 2010 | 1,125,360 | | | $ | 0.23 | | | 2.4 | | | $ | 206,518 | |
A summary of the status of the Company's non-vested stock options as of September 30, 2010 and changes during the nine months then ended are presented below:
| | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value per Share |
| Non-vested stock options at January 1, 2010 | 871,750 | | | $ | 0.55 | |
| Non-vested stock options granted | 25,000 | | | 0.32 | |
| Vested stock options | (70,000 | ) | | 0.56 | |
| Forfeited stock options | (412,937 | ) | | 0.61 | |
| Non-vested stock option s at September 30, 2010 | 413,813 | | | 0.47 | |
As of September 30, 2010, there was approximately $152,000 of total unrecognized compensation cost related to stock option grants.
Note I – Long-Term Obligations and Credit Lines:
Long-term obligations consist of the following:
| | | | | | | |
| | September 30, 2010 | | December 31, 2009 |
| Mortgage note payable bearing interest at 7.75%, payable in monthly installments of $25,797 through April 2019, collateralized by land and building, and personally guaranteed by the Company’s Chairman of the Board and Chief Executive Officer | $ | 1,936,213 | | | $ | 2,052,071 | |
| Less – current maturities | (165,299 | ) | | (155,994 | ) |
| | $ | 1,770,914 | | | $ | 1,896,077 | |
The fair value of long-term debt is estimated based on interest rates for the same or similar instruments offered having the same or similar maturities and collateral requirements. At September 30, 2010, the fair value of fixed-rate long-term debt was approximately $2,162,000, which was $226,000 above the carrying value of approximately $1,936,000. At December 31, 2009, the fair value of fixed-rate long-term debt was approximately $2,139,000, which was $87,000 above the carrying value of approximately $2,052,000.
Note J – Segments and Geographic Area:
The Company's segments are based on the organizational structure that is used by management for making operating and investment decisions and for assessing performance. Based on this management approach, the Company has two operating segments: Nutritional Products and Medical Products.
The Nutritional Products segment manufactures a nd 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 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 products under the MPM Medical brand name through a U.S. subsidia ry operating primarily in the U.S. These wound care products are distributed to hospitals, nursing homes, home health care agencies, clinics and pharmacies through a network of medical/surgical supply dealers and pharmaceutical distributors. Medical Products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care and oncology markets.
The Company evaluates the performance of its segments primarily based on operating profit. All intercompany transactions have been eliminated, and intersegment revenues are not significant. In calculating operating profit for these two segments, administrative expenses incurred that are common to the two segments are allocated on a usage basis.
Segment information is as follows (in thousands):
| | | | | | | | | | | |
| | Nutritional Products | | Medical Products | | Consolidated |
| Quarter Ended September 30, 2010 | | | | | |
| Net sales | $ | 4,533 | | | $ | 1,593 | | | $ | 6,126 | |
| Depreciation and amortization | 114 | | | 21 | | | 135 | |
| Operating profit | 85 | | | 86 | | | 171 | |
| Capital expenditures | 23 | | | — | | | 23 | |
| Total assets | 15,657 | | | 3,180 | | | 18,837 | |
| Quarter Ended September 30, 2009 | | | | | | | | |
| Net sales | $ | 4,982 | | | $ | 1,505 | | | $ | 6,487 | |
| Depreciation and amortization | 101 | | | 11 | | | 112 | |
| Operating profit (loss) | (214 | ) | | 60 | | | (154 | ) |
| Capital expenditures | 183 | | | 12 | | | 195 | |
| Total assets | 15,065 | | | 2,813 | | | 17,878 | |
| Nine Months Ended September 30, 2010 | | | | | | | | |
| Net sales | $ | 16,134 | | | $ | 4,812 | | | $ | 20,946 | |
| Depreciation and amortization | 346 | | | 63 | | | 409 | |
| Operating profit | 668 | | | 260 | | | 928 | |
| Capital expenditures | 156 | | | — | | | 156 | |
| Total assets | 15,657 | | | 3,180 | | | 18,837 | |
| Nine Months Ended September 30, 2009 | | | | | | | | |
| Net sales | $ | 14,803 | | | $ | 4,459 | | | $ | 19,262 | |
| Depreciation and amortization | 267 | | | 50 | | | 317 | |
| Operating profit | 12 | | | 180 | | | 192 | |
| Capital expenditures | 930 | | | 19 | | | 949 | |
| Total assets | 15,065 | | | 2,813 | | | 17,878 | |
Financial information summa rized geographically is as follows (in thousands):
| | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2010 | | Quarter Ended September 30, 2009 |
| | Net sales | | Long-Lived assets | | Net sales | | Long-Lived assets |
| Domestic | $ | 2,518 | | | $ | 6,575 | | | $ | 2,804 | | | $ | 6,806 | |
| Russia/Eastern Europe | 2,965 | | | — | | | 3,398 | | | — | |
| Canada | 249 | | | 536 | | | 262 | | | 540 | |
| All others | 394 | | | — | | | 23 | | | — | |
| Tot als | $ | 6,126 | | | $ | 7,111 | | | $ | 6,487 | | | $ | 7,346 | |
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2010 | | Nine Months Ended September 30, 2009 |
| | Net sales | | Long-Lived assets | | Net sales | | Long-Lived assets |
| Domestic | $ | 7,928 | | | $ | 6,575 | | | $ | 8,181 | | | $ | 6,806 | |
| Russia/Eastern Europe | 11,552 | | | — | | &n bsp; | 10,004 | | | — | |
| Canada | 808 | | | 536 | | | 804 | | | 540 | |
| All others | 658 | | | — | | | 273 | | | — | |
| Totals | $ | 20,946 | | | $ | 7,111 | &n bsp; | | $ | 19,262 | | | $ | 7,346 | |
Significant Customers
The Company recorded sales of Nutritional Products to Coral Club International, Inc., a licensee of the Company, in the amounts of $2,965,000 and $3,398,000 during the quarters ended September 30, 2010 and 2009, respectively, and $11,552,000 and $10,004,000 during the nine months ended Sep tember 30, 2010 and 2009, respectively. The Company also recorded sales of Medical Products to a medical/surgical dealer in the amounts of $848,000 and $855,000 during the quarters ended September 30, 2010 and 2009, respectively, and $2,880,000 and $2,742,000 during the nine months ended September 30, 2010 and 2009, respectively. 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, 2010 and 2009.
Note K – Earnings Per Share:
Summarized basic and diluted earnings (loss) per common share were calculated as follows:
| | | | | | | | | | |
| | Net Earnings | | Weighted Average Shares | | Per Share |
| Quarter Ended September 30, 2010 | | | | | |
| Basic earnings per common share | $ | 133,323 | | | 21,921,934 | | | $ | 0.01 | |
| Effect of dilutive stock options | — | | | 546,783 | | | | |
| Diluted earnings per common share | $ | 133,323 | | | 22,468,717 | | | $ | 0.01 | |
| Quarter Ended September 30, 2009 | | | | | | | | |
| Basic loss per common share | $ | (152,138 | ) | | 21,921,934 | | | $ | (0.01 | ) |
| Effect of dilutive stock options | — | | | — | | | | |
| Diluted loss per common share | $ | (152,138 | ) | | 21,921,934 | | | $ | (0.01 | ) |
| Nine Months Ended September 30, 2010 | | | | | | | | |
| Basic earnings per common share | $ | 516,620 | | | 21,921,934 | | | $ | 0.02 | |
| Effect of dilutive stock options | — | | | 464,353 | | | | |
| Diluted earnings per common share | $ | 516,620 | | | 22,386,287 | | | $ | 0.02 | |
| Nine Months Ended September 30, 2009 | | | | | | | | |
| Basic loss per common share | $ | (45,919 | ) | | 21,920,394 | | | $ | (0.00 | ) |
| Effect of dilutive stock options | — | | | — | ; | | | |
| Diluted loss per common share | $ | (45,919 | ) | | 21,920,394 | | | $ | (0.00 | ) |
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 675,000 and 2,087,000 for the quarters ended September 30, 2010 and 2009, respectively, and 929,000 and 2,087,000 for the nine months ended September 30, 2010 and 2009, respectively.
Note L – Comprehensive Income (Loss):
Comprehensive income (loss) is net earnings (loss) 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 (loss):
| | | | | | | | | | | | | | | |
| | Quarters Ended September 30, | | Nine Months Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| Net earnings (loss) | $ | 133,323 | | | $ | (152,138 | ) | | $ | 516,620 | | | $ | (45,919 | ) |
| Other comprehensive income: | | | | | | | | | | | |
| Foreign currency translation adjustment | (2,405 | ) | | 15,150 | | | (600 | ) | | 26,540 | |
| Comprehensive income (loss) | $ | 130,918 | | | $ | (136,988 | ) | | $ | 516,020 | | | $ | (19,379 | ) |
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.
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| ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the 2009 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,&rdquo ; 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 2009 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.
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| • | 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 other markets, we distribute Nutritional Products th rough exclusive license arrangements with third parties who, for the most part, distribute our products through an independent Associate network in the licensed territory. |
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| • | Through the Medical Products segment, we distribute wound care products. These products are distributed mainly in the U.S. to hospitals, nursing homes, clinics and pharmacies through traditional medical/su rgical supply dealers and pharmaceutical distributors. Medical Products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care and oncology markets. |
Consolidated net sales in dollars and as a percentage of consolidated net sales are as follows:
| | | | | | | | | | | | | |
| | Quarters Ended September 30, |
| | 2010 | | 2009 |
| | (U.S. dollars in 000’s) |
| Nutritional Products: | | | | | | | |
| Licensees | $ | 3,005 | | | 49 | % | | $ | 3,421 | | | 53 | % |
| Associate network | 1,528 | | | 25 | % | | 1,561 | | | 24 | % |
| | 4,533 | | | 74 | % | | 4,982 | | | 77 | % |
| Medical Products | 1,593 | | | 26 | % | | 1,505 | | | 23 | % |
| | $ | 6,126 | | | 100 | % | | $ | 6,487 | | | 100 | % |
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2010 | | 2009 |
| | (U.S. dollars in 000’s) |
| Nutritional Products: | | | | | | | |
| Licensees | $ | 11,801 | | | 56 | % | | $ | 10,277 | | | 54 | % |
| Associate network | 4,333 | | | 21 | % | | 4,526 | | | 23 | % |
| | 16,134 | | | 77 | % | | 14,803 | | | 77 | % |
| Medical Products | 4,812 | | | 23 | % | | 4,459 | | | 23 | % |
| | $ | 20,946 | | | 100 | % | | $ | 19,262 | | | 100 | % |
Licensees. Our highest revenue distribution channel is the licensee channel. In this channel we sell Nutritional Products to third parties who purchase products from us in accordance with a license arrangement that gives the licensee exclusive rights to distribute our products in the licensed territory. For the most part, licensees are required to distribute our products in the licensed territory through network marketing. Net sales in this distribution channel are mainly dependent upon the licensee's success in building a distribution network in the licensed territory.
Our principal licensee is Coral Club International (“CCI”). CCI, which accounted for 98% and 97% of licensee net sales in the nine months ended September 30, 2010 and 2009, respectivel y, distributes products in a territory comprised mainly of Russia and Eastern Europe. The President of CCI is a former member of our Board of Directors and beneficially owns approximately 18% of our outstanding common stock.
Net sales in this channel increased $1,524,000, or 15%, during the nine months ended September 30, 2010 compared with net sales for the same period in 2009. This increase was attributable to an increase in net sales to CCI. Net sales to CCI increased $1,548,000, or 15%, for the nine months ended September 30, 2010 compared with net sales for the same period in 2009. CCI’s sales in 2009 were negatively affected by the global economic recession; accordingly, it significantly reduced its purchases from us in 2009 to reduce inventory levels. We believe that CCI completed this inventory reduction process during the fourth quarter of 2009 and, as a result, increased its shipping requests to maintain rather than reduce its inventory. Net sales in this channel represented 56% of consolidated net sales in the first nine months of 2010, which compares to 51%, 60% and 58% for the years ended December 31, 2009, 2008 and 2007, respectively.
Under the Company's arrangement with CCI, CCI orders products from the Company and pays for the products when the product is segregated in the Company's warehouse for CCI’s account. Once segregated, products are not subject to return except in the case of a manufacturing defect. The Company stores the products until CCI provides shipping instructions. Because the Company does not recognize revenue until products are shipped to CCI, the Company's sales to CCI fluctuate from quarter to quarter depending on a number of logistical considerations, only one of which is the sales demand of CCI’s Associate network. Backlog related to CCI’s account was $6,275,000 at September 30, 2010 compared to $4,979,000 at September 30, 2009.
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 September 30, | | Nine Months Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| United States | 63 | % | | 83 | % | | 72 | % | | 82 | % |
| Canada | 16 | | | 17 | | | 19 | | | 18 | |
| Taiwan | 21 | | | — | | | 9 | | | — | |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Sales in this channel are dependent upon the number and productivity of our Associates. Accordingly, growth in sales is dependent upon the sponsorship of new Associates and retention of existing Associates. Net sales through the Associate network channel decreased approximately 4% during the first nine months of 2010 compared to the same period in 2009. This decrease was primarily attributable to a decrease in the rate of sponsorship of new Associates by the current Associate network in the North American market and increased Associate attrition. Sponsorship in the first nine months of 2009 was positively affected by the activities of a group of new Associates that enrolled with the Company in late 2008. The sponsoring activities of this group began to decline in the fourth quarter of 2009; accordingly, the rate of sponsorship in the first nine months of 2010 declined significantly.
In late March 2010, we began selling selected nutritional supplement products in Taiwan under a not-for-resale (“NFR”) program. The NFR program allows consumers in Taiwan to sign up as customers, purchase products, refer others to our network marketing program and receive commissions. The NFR program also allows independent Associates in North America to expand their distributorships into Taiwan. Product orders from Taiwan customers are currently fulfilled from our U.S. warehouse located in Irving, Te xas. We plan to establish a product distribution facility in the Taiwan region if sales increase sufficiently to justify a regional facility.
In addition to expansion into the Taiwan market, during the first nine months of 2010, we undertook a number of other marketing and sales initiatives in an effort to increase the rate of sponsorship of new Associates and/or reduce Associate attrition in the Associate network channel. However, no assurance can be given that these initiatives will be effective in accomplishing these objectives.
Medical Products. We sell Medical Products primarily in the U.S. to wholesalers such as medical/surgical dealers and pharmaceutical distributors. These wholesalers supply various health care providers such as hospitals, nursing homes, clinics and pharmacies. In some cases, wholesalers maintain their own sales forces to market products that they supply, which include our products.
This segment's largest customer, a medical/surgical dealer, accounted for 60% and 62% of Medical Products net sales during the nine months ended September 30, 2010 and 2009, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements and related disclosures in conformity with US GAAP requires us to make estimates and judgments that affect the amounts reported in our financial statements and accompanying footnotes. On an on-going basis, we evaluate these estimates and assumptions based on historical experience and various other factors and circumstances. Our management believes that the estimates and assumptions are reasonable in the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.
Management believes that there have been no significant changes during the nine months ended September 30, 2010 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 2009 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, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | 46.3 | | | 50.4 | | | 50.7 | | | 48.7 | |
| Gross profit | 53.7 | | | 49.6 | | | 49.3 | | | 51.3 | |
| Operating expenses: | | | | | | | | | | | |
| General and administrative | 36.6 | | | 40.8 | | | 33.4 | | | 39.3 | |
| Distributor commissions | 12.4 | | | 9.9 | | | 9.8 | | | 9.6 | |
| Depreciation and amortization | 1.9 | | | 1.3 | | | 1.7 | | | 1.4 | |
| Total operating expenses | 50.9 | | | 52.0 | | | 44.9 | | | 50.3 | |
| Operating profit (loss) | 2.8 | | | (2.4 | ) | | 4.4 | | | 1.0 | |
| Interest expense | 0.6 | | | 0.6 | | | 0.5 | | | 0.6 | |
| Earnings (loss) before income taxes | 2.2 | | | (3.0 | ) | | 3.9 | | | 0.4 | |
| Provision (benefit) for income taxes | — | | | (0.7 | ) | | 1.4 | | | 0.6 | |
| Net earnings (loss) | 2.2 | % | | (2.3 | )% | | 2.5 | % | | (0.2 | )% |
Quarter ended September 30, 2010 compared with quarter ended September 30, 2009 (000’s except per share amounts)
Net sales. Net sales for the quarter ended September 30, 2010 were $6,126 compared with net sales for t he same period in Quarter Ended September 30, 2009 of $6,487, a decrease of $361 or 6%. The decrease in net sales resulted from a $449 decrease in net sales of Nutritional Products that was partially offset by an $88 increase in net sales of Medical Products. Net sales of Nutritional Products to our licensees decreased $416 while net sales of Nutritional Products to our Associate network decreased $33.
Licensees. Net sales to our licensees decreased primarily as a result of decreased shipments to CCI. Sales to CCI can vary from quarter to quarter due to various logistical factors, sometimes significantly, irrespective of the sales demand of CCI’s Associate network. Consequently, sales to CCI decreased $433 during the third quarter of Quarter Ended September 30, 2010 compared to the third quarter of 2009, even though sales for the first nine months of 2010 increased $1,548 compared to the first nine months of 2009. Sales increased during the first nine months of 2010 due to CCI's increased purchases to maintain its inventories following significant reductions in purchases in 2009 to reduce its inventories.
Associate Network. Net sales to our Associate network decreased approximately $33, or 2%, during the quarter ended September 30, 2010. This decrease was primarily attributable to reduced levels of sponsorship of new Associates and increased Associate attrition, as further described above in the section entitled, Overview-Associate Network.
Medical products. The growth in net sales of our Medical Products was principally related to the addition of several new customers in this segment. Sales to our largest customer in this segment, which accounted for approximately 53% of Medical Products segment sales, were essentially flat, decreasing $7 to $848 during the third quarter of Quarter Ended September 30, 2010 compared to the third quarter of Quarter Ended September 30, 2009.
Cost of sales. Cost of sales for the quarter ended September 30, 2010 was $2,836 compared with cost of sales of $3,272 in the quarter ended September 30, 2009, a decrease of $436 or 13%. As a percentage of net sales, cost of sales was 46% in the third quarter of 2010 and 50% in the third quarter of 2009. As a percentage of net sales, gross profit increased 4% primarily as a result of a change in sales mix associated with sales to our licensees. During the third quarter of 2010, the sales mix associated with sales to our licensees contributed a higher gross margin than the corresponding sales mix in the third quarter of 2009.
General and administrative. General and administrative expenses for the quarter ended September 30, 2010 were $2,241 compared with general and administrative expenses of $2,646 in the quarter ended September 30, 2009, a decrease of $405 or 15%. As a percentage of net sales, general and administrative expenses decreased to 37% in the third quarter of 2010 compared with 41% in the third quarter of 2009. The decrease in general and administrative expenses in the third quarter of 2010 resulted from (i) reduced Associate network sales and marketing expenses, primarily salaries and meeting and travel expenses, (ii) reduced expenses related to the Company's Canadian operation following the relocation of fulfillment operations to our U.S. distribution facility in the second quarter of 2010 and (iii) reduced facilities maintenance expenses.
Distributor commissions. Distributor commissions were $759 for the quarter ended September 30, 2010 compared with distributor commissions of $637 in the quarter ended September 30, 2009, an increase of $122 or 19%. With respect to the Associate network, distributor commissions as a percentage of commissionable sales, exclusive of rebates, which are recorded as a reduction of sales, increased to approximately 50% in the third quarter of 2010 compared to 37% in the same period in 2009. This increase in distributor commissions as a percentage of commissionable sales partially resulted from the adoption of 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. Also contributing to the increase in distributor commissions were additional commissions paid to certain Associates to facilitate the transition from the previous Associate compensation plan to the new plan. On a consolidated basis, distributor commissions as a percentage of net sales were 12% and 10% in the third quarter of 2010 and 2009, respectively.
Income taxes. We did not record a provision for benefit for income taxes for the quarter ended September 30, 2010 based on our estimate of the effective annual income tax rate for 2010. During the third quarter of 2010, we identified certain tax credits and other adjustments that offset the provision for income taxes related to third quarter earnings. We recorded a benefit for income taxes of $43 during the quarter ended September 30, 2009 based on our estimate of the effective annual income tax rate for that period.
Net earnings (loss). As a result of the factors described above, net earnings for the quarter ended September 30, 2010 were $133, or $0.01 per share, compared with a net loss of $152, or 0.01 per share, in the quarter ended September 30, 2009.
Nine months ended September 30, 2010 compared with nine months ended September 30, 2009 (000’s except per share amounts)
Net sales. Net sales for the nine months ended September 30, 2010 were $20,946 compared with net sales for the same period in 2009 of $19,262, an increase of $1,684 or 9%. This increase resulted from a $1,331 in crease in net sales of Nutritional Products and a $353 increase in net sales of Medical Products. Net sales of Nutritional Products to our licensees increased $1,524 while net sales of Nutritional Products to our Associate network decreased $193.
Licensees. Net sales to our licensees increased as a result of increased shipments to CCI. While sales to CCI can vary from quarter to quarter due to various logistical factors, sometimes significantly, irrespective of the sales demand of CCI’s Associate network, sales of our products to CCI increased $1,548 during the first nine months of 2010 due to CCI's increased purchases to maintain its inventories following significant reductions in purchases in 2009 to reduce its inventories.
Associate Network. Net sales to our Associate network decreased approximately $193, or 4%, during the first nine months of 2010. We attribute thi s decrease primarily to reduced levels of sponsorship of new Associates and increased Associate attrition, as further described above in the section entitled, Overview-Associate Network.
Medical products. The growth in net sales of Medical Products resulted from increased sales both to new customers and to existing customers in this segment. Sales to the largest customer in this segment, which distributes wound care products and provides services to the nursing home market, increased $138 during the first nine months of 2010 compared to the first nine months of 2009. Sales to this distributor in the first nine months of 2010 were approximately $2,880.
Cost of sales. Cost of sales for the nine months ended September 30, 2010 was $10,612 compared with cost of sales in the f irst nine months of 2009 of $9,387, an increase of $1,225 or 13%. As a percentage of net sales, cost of sales was 51% in the firs t nine months of 2010 and 49% in the first nine months of 2009. As a percentage of net sales, gross profit decreased 2% primarily because of a change in sales mix. During the first nine months of 2010, the sales mix associated with sales to our licensees contributed a lower gross margin than the corresponding sales mix in the first nine months of 2009.
General and administrative. General and administrative expenses for the nine months ended September 30, 2010 were $6,998 compared with expenses in the first nine months of 2009 of $7,567, a decrease of $569 or 8%. This decrease was primarily attributable to (i) decreased Associate network sales and marketing expenses, (ii) decreased Medical Products sales and marketing expenses and (iii) decreased facilities maintenance expenses. As a percentage of net sales, general and administrative expenses were 33% and 39% in the nine months ended September 30, 2010 and 2009, respectively.
Distributor commissions. Distributor commissio ns were $2,046 for the nine months ended September 30, 2010 compared with distributor commissions of $1,840 in the first nine months of 2009, an increase of $206 or 11%. With respect to our Associate network, distributor commissions as a percentage of commissionable sales exclusive of rebates, which are recorded as a reduction of sales, increased to approximately 46% in the first nine months of 2010 compared to 36% in the same period in 2009. This percentage increase was mainly due to the adoption of 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. Also contributing to the increase in distributor commissions were additional commissions paid to certain Associates to facilitate the transition from the previous Associate compensation plan to the new plan. On a consolidated basis, distributor commissions as a percentage of net sales were 10% in the first nine months of 2010 and 2009.
Income taxes. We recorded a provision for income taxes of $296 and $114 during the nine months ended September 30, 2010 and 2009, respectively, based on our estimate of the effective annual income tax rate for the applicable period.
Net earnings (loss). As a result of the factors described above, net earnings for the nine months ended September 30, 2010 were $517, or $0.02 per share, compared with a net loss in the first nine months of 2009 of $46, or $0.00 per share.
LIQUIDITY AND CAPITAL RESOURCES (000’s)
Cash and working capital. At September 30, 2010, all of our cash and cash equivalents were maintained in accounts that were either insured or secured by federal government agencies. During the first nine months of 2010, we had a net increase in cash of $842 compared with a net decrease in cash of $1,455 in the first nine months of 2009. At September 30, 2010, we had working capital of $5,376, a $700 increase from working capital at December 31, 2009 of $4,676. The reasons for these changes in cash and working capital are described below.
Operating activities. In the first nine months of 2010, our operating activities provided cash flows of $1,119. In the first nine months of 2009, our operating activities used cash flows of $535. The primary source of cash provided by operating activities during the first nine months of 2010 was net earnings adjusted for depreciation and amortizatio n, which together provided cash flows of $926. Our cash flows provided by operating activities were also affected by a $147 decrease in prepaid expenses, which primarily resulted from a reduction in prepaid federal income taxes, and a $193 decrease in accounts payable and accrued liabilities, which was primarily related to the timing of payments to suppliers. In the first nine months of 2010, net earnings adjusted for non-cash activities, which include depreciation and amortization, stock-based compensation, deferred income taxes and loss on disposition of equipment, provided cash flows of $1,016 compared with providing cash flows of $475 in the first nine months of 2009.
Investing activities. During the first nine months of 2010, we used cash of $156 to purchase property and equipment, most of which was for use in our warehouse or quality control laboratory.
Financing activities. The principle financing activity during the first nine month s of 2010 was the repayment of long-term debt in the amount of $116.
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 ou r liquidity. In the event of a significant decrease in cash provided by our operating activities, we may seek outside sources of capital including bank borrowings or other types of debt or equity financings. We can give no assurance, however, that we would be able to obtain any additional outside financing or obtain financing on terms we would find acceptable. We have no plans or requirements for any significant capital expenditures during the next 12 months.
Other than those factors already described, we are not aware of any trends or uncertainties that would significantly affect our liquidity or capital resources in the future.
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| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The following discussion about our market risk includes “forward-lookin g statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. We do not use derivative financial instruments for speculative or trading purposes. We are exposed to market risk from changes in foreign currency exchange rates that could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.
Foreign exchange
We have foreign-based operations in Canada that accounted for 4% of net sales during both the first nine months of 2010 and 2009. 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 $940,000 to our Canadian operations at September 30, 2010, a 10% adverse change in the currency rate would reduce earnings before income taxes by approximately $94,000.
A ll transactions with our licensees are denominated in U.S. dollars so the licensee bears the currency exchange risk. Accordingly, exchange rate fluctuations in international markets served by our licensees do not directly affect our results of operations. However, exchange rate fluctuations in these markets may affect the ability of our licensees to conduct their business operations profitably.
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| ITEM 4. | 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 September 30, 2010, 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, 2010, 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 decisio ns regarding required disclosures.
There has been no change in internal control over financial reporting that occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| |
| ITEM 1. | Legal Proceedings. |
None
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 2009 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 2009 Form 10-K.
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| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
&nbs p;
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| ITEM 3. | Defaults Upon Senior Securities. |
None
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| ITEM 5. | Other Information. |
None
The Exhibit Index filed herewith is incorporated herein by reference.
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, 2010 | | By: | /s/ Clinton H. Howard |
| Date | | Its: | President and Chief Executive Officer |
| | | | |
| November 12, 2010 | | By: | /s/ Steven E. Brown |
| Date | | Its: | Vice President-Finance and |
| | | | Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |
RBC LIFE SCIENCES, INC.
Exhibit Index
| |
| Exhibit Number | Description |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
