RBC Life Sciences (RBCL) 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, 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 June 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 or organization)	(IRS Employer Identification No.)

2301 Crown Court, Irving, Texas	75038
(Address of principal executive offices)	(Zip code)

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

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 Act of 1934 during the past 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.

þ YES     o NO

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 filero      Accelerated filer o      Non-accelerated filerþ

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

o YES      þ NO

Number of shares of common stock, par value $0.001, outstanding at July 31, 2007:

20,424,094

TABLE OF CONTENTS

		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)		3
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		20
Item 4.	Controls and Procedures		21
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.	Defaults Upon Senior Securities		22
Item 4.	Submission of Matters to a Vote of Security Holders		22
Item 5.	Other Information		22
Item 6.	Exhibits		22
Signatures			23
Exhibit Index			24
Certification of Principal Executive Officer - Section 302
Certification of Principal Financial Officer - Section 302
Certification of Principal Executive Officer - Section 906
Certification of Principal Financial Officer - Section 906

PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,883,492		$	3,219,503
Accounts receivable, net		738,325			331,834
Inventories		3,742,850			2,651,082
Deferred income taxes		379,080			231,680
Prepaid expenses		585,268			499,267
Total current assets		9,329,015			6,933,366
Property and equipment, net		3,514,061			3,584,415
Goodwill, net		2,095,054			2,095,054
Intangible assets, net		172,969			194,173
Other assets		714,995			708,187
	$	15,826,094		$	13,515,195
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	1,834,464		$	850,143
Accrued liabilities		2,008,260			1,165,247
Current maturities of long-term obligations		291,808			379,635
Line of credit		—			100,000
Deferred revenue		2,384,622			2,503,638
Total current liabilities		6,519,154			4,998,663
Long-term obligations, less current maturities		2,408,695			2,543,964
Deferred income taxes		492,529			489,810
Shareholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 20,421,294 and 20,188,294 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		20,421			20,188
Additional paid-in capital		12,987,642			12,916,035
Accumulated deficit		(6,576,950	)		(7,412,250	)
Accumulated other comprehensive loss		(25,397	)		(41,215	)
		6,405,716			5,482,758
	$	15,826,094		$	13,515,195

See notes to condensed consolidated financial statements.

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RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	For the Quarters Ended June 30,
	2007		2006
Net sales	$	7,147,513	$	6,202,541
Cost of sales		3,354,181		2,628,860
Gross profit		3,793,332		3,573,681
Operating expenses
General and administrative		2,200,004		2,126,067
Distributor commissions		643,263		768,720
Depreciation and amortization		83,955		161,917
Total operating expenses		2,927,222		3,056,704
Operating profit		866,110		516,977
Interest expense		53,951		64,122
Earnings before income taxes		812,159		452,855
Provision for income taxes		302,000		160,000
Net earnings	$	510,159	$	292,855
Earnings per share:
Basic	$	0.03	$	0.01
Diluted		0.02		0.01
Weighted average common shares outstanding:
Basic		20,265,961		20,155,294
Diluted		22,498,525		22,404,118

See notes to condensed consolidated financial statements.

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RBC LIFE SCIENCES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	For the Six Months Ended June 30,
	2007		2006
Net sales	$	12,539,565	$	11,011,440
Cost of sales		5,441,918		4,181,591
Gross profit		7,097,647		6,829,849
Operating expenses
General and administrative		4,166,860		4,310,364
Distributor commissions		1,298,153		1,652,535
Depreciation and amortization		174,173		324,295
Total operating expenses		5,639,186		6,287,194
Operating profit		1,458,461		542,655
Interest expense		113,161		128,438
Earnings before income taxes		1,345,300		414,217
Provision for income taxes		510,000		160,000
Net earnings	$	835,300	$	254,217
Earnings per share:
Basic	$	0.04	$	0.01
Diluted		0.04		0.01
Weighted average common shares outstanding:
Basic		20,227,127		20,149,794
Diluted		22,109,002		22,491,663

See notes to condensed consolidated financial statements.

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

	For the Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net earnings	$	835,300		$	254,217
Adjustment for non-cash items:
Depreciation and amortization		187,771			331,627
Stock-based compensation		38,055			49,989
Deferred income taxes		(140,000	)		160,000
Change in operating assets and liabilities
Accounts receivable		(406,491	)		(5,011	)
Inventories		(1,081,380	)		559,568
Prepaid expenses		(85,956	)		(288,143	)
Other assets		(6,005	)		(221,433	)
Accounts payable and accrued liabilities		1,815,285			(277,185	)
Deferred revenue		(119,016	)		270,394
Net cash provided by operating activities		1,037,563			834,023
Cash flows from investing activities:
Purchase of property and equipment		(92,673	)		(370,367	)
Net cash used by investing activities		(92,673	)		(370,367	)
Cash flows from financing activities:
Net payments of lines of credit		(100,000	)		(1,374	)
Payments of long-term obligations		(223,096	)		(60,576	)
Proceeds from the exercise of stock options		33,785			14,355
Net cash used by financing activities		(289,311	)		(47,595	)
Effect of exchange rate changes on cash flows		8,410			14,772
Net increase in cash and cash equivalents		663,989			430,833
Cash and cash equivalents, beginning of period		3,219,503			1,697,966
Cash and cash equivalents, end of period	$	3,883,492		$	2,128,799

See notes to condensed consolidated financial statements.

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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.

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Note C – Inventories:

Inventories at June 30, 2007 and December 31, 2006 consist of the following:

	June 30, 2007		December 31, 2006
Raw materials and bulk products	$	592,879	$	411,880
Packaging materials		527,564		422,063
Finished goods		2,622,407		1,817,139
	$	3,742,850	$	2,651,082

Note D – Prepaid Expenses:

Prepaid expenses at June 30, 2007 and December 31, 2006 consist of the following:

	June 30, 2007		December 31, 2006
Advance payment to suppliers	$	416,698	$	368,536
Prepaid insurance and other		168,570		130,731
	$	585,268	$	499,267

Note E – Property and Equipment:

Property and equipment at June 30, 2007 and December 31, 2006 consists of the following:

	June 30, 2007			December 31, 2006
Building and improvements	$	2,775,109		$	2,775,109
Computer software and office equipment		2,223,761			3,050,784
Warehouse equipment		301,504			271,309
Automotive equipment		55,392			55,392
Leasehold improvements		20,555			18,758
		5,376,321			6,171,352
Less – accumulated depreciation		(3,003,433	)		(3,728,110	)
		2,372,888			2,443,242
Land		1,141,173			1,141,173
	$	3,514,061		$	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:

	June 30, 2007					December 31, 2006
	Gross					Gross
	carrying		Accumulated			carrying		Accumulated
	value		amortization			value		amortization
Goodwill	$	3,222,349	$	(1,127,295	)	$	3,222,349	$	(1,127,295	)

- 8 -

Other intangible assets consist of the following:

			June 30, 2007					December 31, 2006
	Average		Gross					Gross
	life		carrying		Accumulated			carrying		Accumulated
	(years)		value		amortization			value		amortization
Distribution contracts		8	$	277,369	$	(195,100	)	$	277,369	$	(178,625	)
Copyrights, trademarks and other registrations		19		99,100		(31,051	)		99,100		(28,409	)
Other		11		47,600		(24,949	)		47,600		(22,862	)
			$	424,069	$	(251,100	)	$	424,069	$	(229,896	)

Amortization expense related to other intangible assets totaled approximately $10,600 for the quarters ended June 30, 2007 and 2006 and $21,200 for the six months ended June 30, 2007 and 2006. The aggregate estimated amortization expense for intangible assets remaining as of June 30, 2007 is as follows:

Remainder of 2007	$	21,203
2008		42,407
2009		24,049
2010		21,626
2011		13,791
Thereafter		49,893
Total	$	172,969

Note G – Accrued Liabilities:

Accrued liabilities at June 30, 2007 and December 31, 2006 consist of the following:

	June 30, 2007		December 31, 2006
Salaries and wages	$	794,975	$	556,058
Income taxes		650,500		—
Distributor commissions		359,173		415,474
Sales and property taxes		76,208		73,060
Interest		17,562		20,312
Other		109,842		100,343
	$	2,008,260	$	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 June 30, 2007 and 2006 was approximately $18,300 and $27,400, respectively, and for the six months ended June 30, 2007 and 2006 was approximately $38,000 and $50,000, 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 -

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 June 30,				Six Months Ended June 30,
	2007(1)		2006(1)		2007(1)		2006
Expected life (years)		—		—		—		9.0
Risk-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 six months ended June 30, 2007 is as follows:

						Weighted-Average
				Weighted-		Remaining		Aggregate
				Average Exercise		Contractual Term		Intrinsic
	Options			Price per Share		(in years)		Value
Outstanding on January 1, 2007		3,757,150		$	0.22
Granted		—			—
Exercised		(233,000	)		0.15
Forfeited/canceled		(18,950	)		0.21
Outstanding on June 30, 2007		3,505,200		$	0.22		4.7	$	1,553,325
Exercisable on June 30, 2007		2,549,850		$	0.24		4.5	$	1,085,551

A summary of the status of the Company’s non-vested stock options as of June 30, 2007, and changes during the six months then ended, is presented below:

				Weighted-Average
				Grant Date Fair
	Shares			Value per Share
Non-vested stock options at January 1, 2007		1,109,370		$	0.15
Non-vested stock options granted		—			—
Vested stock options		(140,000	)		0.14
Forfeited stock options		(14,020	)		0.20
Non-vested stock options at June 30, 2007		955,350			0.15

As of June 30, 2007, there was approximately $88,000 of total unrecognized compensation cost related to stock option grants.

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Note I – Long-Term Obligations and Credit Lines:

At June 30, 2007 and December 31, 2006 long-term obligations consist of the following:

	June 30, 2007			December 31, 2006
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 Chief Executive Officer	$	2,393,187		$	2,453,855
Note payable to bank bearing interest at 7.96%, payable in monthly installments of $12,550 through June 2009, collateralized by accounts receivable, inventories and equipment, and personally guaranteed by the Company’s Chief Executive Officer		277,150			339,848
Convertible 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			121,500
Capital lease obligation		5,166			8,396
		2,700,503			2,923,599
Less – current maturities		(291,808	)		(379,635	)
	$	2,408,695		$	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 June 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 June 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 June 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.

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Segment information is as follows (in thousands):

	Nutritional Products		Medical Products		Consolidated
Quarter ended June 30, 2007
Net sales	$	6,059	$	1,089	$	7,148
Depreciation and amortization		69		23		92
Operating profit		815		51		866
Capital expenditures		67		—		67
Total assets		13,983		1,843		15,826
Quarter ended June 30, 2006
Net sales	$	5,297	$	906	$	6,203
Depreciation and amortization		152		14		166
Operating profit		368		149		517
Capital expenditures		16		—		16
Total assets		11,691		1,442		13,133
Six Months ended June 30, 2007
Net sales	$	10,419	$	2,121	$	12,540
Depreciation and amortization		141		47		188
Operating profit		1,281		177		1,458
Capital expenditures		93		—		93
Total assets		13,983		1,843		15,826
Six Months ended June 30, 2006
Net sales	$	9,361	$	1,650	$	11,011
Depreciation and amortization		305		27		332
Operating profit		341		202		543
Capital expenditures		370		—		370
Total assets		11,691		1,442		13,133

Financial information summarized geographically for the quarters and six months ended June 30, 2007 and 2006 is listed below (in thousands):

	Quarter ended June 30, 2007				Quarter ended June 30, 2006
	Net sales		Long-Lived assets		Net sales		Long-Lived assets
Domestic	$	2,531	$	6,116	$	2,497	$	5,886
Former Soviet Union		4,081		—		2,858		—
Canada		358		381		401		389
South Korea		—		—		200		557
All others		178		—		247		—
Totals	$	7,148	$	6,497	$	6,203	$	6,832

	Six Months ended June 30, 2007				Six Months ended June 30, 2006
	Net sales		Long-Lived assets		Net sales		Long-Lived assets
Domestic	$	5,081	$	6,116	$	5,040	$	5,886
Former Soviet Union		6,415		—		4,125		—
Canada		711		381		870		389
South Korea		—		—		429		557
All others		333		—		547		—
Totals	$	12,540	$	6,497	$	11,011	$	6,832

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Significant Customers

The Company recorded sales of Nutritional Products to Coral Club International, Inc., a licensee of the Company, in the amounts of $4,081,000 and $2,858,000 during the quarters ended June 30, 2007 and 2006, respectively, and $6,415,000 and $4,125,000 for the six months ended June 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 six months ended June 30, 2007 and 2006.

Note K – Earnings Per Share:

Summarized basic and diluted earnings per common share was calculated as follows:

			Weighted
			Average
	Net Earnings		Shares		Per Share
Quarter ended June 30, 2007
Basic earnings per common share	$	510,159		20,265,961	$	0.03
Effect of dilutive stock options		—		2,232,564
Diluted earnings per common share	$	510,159		22,498,525	$	0.02
Quarter ended June 30, 2006
Basic earnings per common share	$	292,855		20,155,294	$	0.01
Effect of dilutive stock options		—		2,248,824
Diluted earnings per common share	$	292,855		22,404,118	$	0.01
Six Months ended June 30, 2007
Basic earnings per common share	$	835,300		20,227,127	$	0.04
Effect of dilutive stock options		—		1,881,875
Diluted earnings per common share	$	835,300		22,109,002	$	0.04
Six Months ended June 30, 2006
Basic earnings per common share	$	254,217		20,149,794	$	0.01
Effect of dilutive stock options		—		2,341,869
Diluted earnings per common share	$	254,217		22,491,663	$	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 500,000 for the quarters ended June 30, 2007 and 2006, respectively, and 400,000 and 500,000 for the six months ended June 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 six months ended June 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, which, for the periods presented, consists of the change in the foreign currency translation adjustment. The following table provides information regarding comprehensive income:

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	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net earnings	$	510,159	$	292,855	$	835,300	$	254,217
Other comprehensive income:
Foreign currency translation adjustment		13,591		28,167		15,818		30,619
Comprehensive income	$	523,750	$	321,022	$	851,118	$	284,836

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 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 June 30,
	2007				2006
	(U.S. dollars in 000’s)
Nutritional Products:
Associate network	$	1,801	25	%	$	2,193	35	%
Licensees		4,258	60	%		3,104	50	%
		6,059	85	%		5,297	85	%
Medical Products		1,089	15	%		906	15	%
	$	7,148	100	%	$	6,203	100	%

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	Six Months Ended June 30,
	2007				2006
	(U.S. dollars in 000’s)
Nutritional Products:
Associate network	$	3,674	29	%	$	4,690	43	%
Licensees		6,745	54	%		4,671	42	%
		10,419	83	%		9,361	85	%
Medical Products		2,121	17	%		1,650	15	%
	$	12,540	100	%	$	11,011	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 June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
United States		81	%		72	%		81	%		72	%
Canada		19			19			19			19
South Korea		—			9			—			9
		100	%		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 95% and 88% of licensee net sales in the six months ended June 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 56% and 55% of Medical Products net sales in the six months ended June 30, 2007 and 2006, respectively.

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.

Management believes that there have been no significant changes during the six months ended June 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.

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RESULTS OF OPERATIONS

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

	Quarters Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		46.9			42.4			43.4			38.0
Gross profit		53.1			57.6			56.6			62.0
Operating expenses:
General and administrative		30.8			34.3			33.2			39.1
Distributor commissions		9.0			12.4			10.4			15.0
Depreciation and amortization		1.2			2.6			1.4			3.0
Total operating expenses		41.0			49.3			45.0			57.1
Operating profit		12.1			8.3			11.6			4.9
Interest expense		0.8			1.0			0.9			1.1
Earnings before income taxes		11.3			7.3			10.7			3.8
Provision for income taxes		4.2			2.6			4.0			1.5
Net earnings		7.1	%		4.7	%		6.7	%		2.3	%

Quarter ended June 30, 2007 compared with quarter ended June 30, 2006

Net sales.Net sales for the quarter ended June 30, 2007 were $7,148,000 compared with net sales for the prior year of $6,203,000, an increase of $945,000 or 15%. This increase was due to a $762,000 increase in net sales of Nutritional Products and a $183,000 increase in net sales of Medical Products. Net sales of Nutritional Products to our licensees increased $1,154,000 while net sales of Nutritional Products to our Associate network decreased $392,000.

Associate Network. We began distribution of our Nutritional Products in South Korea through an Associate network in February 2006 and recorded net sales of $200,000 during the quarter ended June 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 $392,000 during the second 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 six months of 2007, we implemented new marketing programs and introduced new products intended 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 $1,223,000 in the second 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 $6,369,000 and $3,469,000 at June 30, 2007 and 2006, respectively.

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Medical products.The growth in net sales of Medical Products is primarily related to increased sales to the largest customer in this segment. Sales to this customer increased $180,000 during the second quarter of 2007 compared to the second quarter of 2006.

Cost of sales.Cost of sales for the quarter ended June 30, 2007 was $3,354,000 compared with cost of sales in the second quarter of 2006 of $2,629,000, an increase of $725,000 or 28%. As a percentage of net sales, cost of sales was 47% in the second quarter of 2007 and 42% in the second quarter of 2006. As a percentage of net sales, gross profit decreased 5% mainly because of a change in sales mix. During the first quarter of 2007, a smaller percentage of our sales were 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 June 30, 2007, were $2,200,000 compared with expenses in the second quarter of 2006 of $2,126,000, an increase of $74,000 or 3%. General and administrative expenses in the second quarter of 2006 included $309,000 of expenses associated with operations in South Korea. The elimination of these expenses for the second 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. As a percentage of net sales, general and administrative expenses were 31% and 34% in the quarters ended June 30, 2007 and 2006, respectively.

Distributor commissions.Distributor commissions for the quarter ended June 30, 2007 were $643,000 compared with distributor commissions in the same quarter of 2006 of $769,000, a decrease of $126,000 or 16%. With regard to our Associate network, distributor commissions as a percentage of commissionable sales were substantially unchanged in the second quarter of 2007 compared to 2006. On a consolidated basis, distributor commissions as a percentage of net sales declined to 9% in the second quarter of 2007 compared with 12% 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 $302,000 during the quarter ended June 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 June 30, 2007 were $510,000, or $0.02 per diluted share, compared with net earnings in the second quarter of 2006 of $293,000, or $0.01 per diluted share.

Six months ended June 30, 2007 compared with six months ended June 30, 2006

Net sales.Net sales for the six months ended June 30, 2007 were $12,540,000 compared with net sales for the prior year of $11,011,000, an increase of $1,529,000 or 14%. This increase was due to a $1,058,000 increase in net sales of Nutritional Products and a $471,000 increase in net sales of Medical Products. Net sales of Nutritional Products to our licensees increased $2,074,000 while net sales of Nutritional Products to our Associate network decreased $1,016,000.

Associate Network. We began distribution of our Nutritional Products in South Korea through an Associate network in February 2006 and recorded net sales of $429,000 during the six months ended June 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 $1,016,000 during the first six 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 six months of 2007, we implemented new marketing programs and introduced new products intended 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.

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Licensees. The growth in net sales to our licensees is the result of the growth of CCI. Sales to CCI increased $2,290,000 in the first six months 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 $6,369,000 and $3,469,000 at June 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 increased $278,000 during the first six months of 2007 compared to the first six months of 2006.

Cost of sales.Cost of sales for the six months ended June 30, 2007 was $5,442,000 compared with cost of sales in the first six months of 2006 of $4,182,000, an increase of $1,260,000 or 30%. As a percentage of net sales, cost of sales was 43% in the first six months of 2007 and 38% in the first six months of 2006. As a percentage of net sales, gross profit decreased 5% mainly because of a change in sales mix. During the first six months of 2007, a smaller percentage of our sales were 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 six months ended June 30, 2007, were $4,167,000 compared with expenses in the first six months of 2006 of $4,310,000, a decrease of $143,000 or 3%. General and administrative expenses in the first six months of 2006 included $661,000 of expenses associated with operations in South Korea. The elimination of these expenses for the first six months of 2007 was partially offset by increased marketing expenses related to both Nutritional Products sales in North America and Medical Products sales. As a percentage of net sales, general and administrative expenses were 33% and 39% in the six months ended June 30, 2007 and 2006, respectively.

Distributor commissions.Distributor commissions for the six months ended June 30, 2007 were $1,298,000 compared with distributor commissions in the same six months of 2006 of $1,653,000, a decrease of $355,000 or 21%. With regard to our Associate network, distributor commissions as a percentage of commissionable sales were substantially unchanged in the first six months of 2007 compared to 2006. On a consolidated basis, distributor commissions as a percentage of net sales declined to 10% in the first six months of 2007 compared with 15% 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 $510,000 during the six months ended June 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 six months ended June 30, 2007 were $835,000, or $0.04 per share, compared with net earnings in the first six months of 2006 of $254,000, or $0.01 per share.

LIQUIDITY AND CAPITAL RESOURCES

Cash and working capital.During the six months ended June 30, 2007, we had a net increase in cash of $664,000 compared with a net increase in cash of $431,000 in the first six months of 2006. At June 30, 2007, we had working capital of $2,810,000, a $875,000 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 six months of 2007, our operating activities provided cash flows of $1,038,000 compared with $834,000 in the first six months of 2006. This improvement was primarily related to net earnings and the timing of payments made to suppliers. 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

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inventory in support of sales increases in this segment. In the first six months of 2007, net earnings adjusted for non-cash activities, which include depreciation and amortization, stock-based compensation and deferred income taxes, provided cash flows of $921,000 compared with $796,000 in the first six months of 2006.

Investing activities.During the first six months of 2007, we used cash of $93,000 related to the purchase of property and equipment.

Financing activities. During the first six months of 2007, we used cash of $323,000 to repay long-term debt and 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 June 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 third quarter of 2007, we plan to initiate a project to affect certain improvements and repairs of our headquarters building. This project is expected to take four to six months to complete and cost 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.

Foreign exchange

We have foreign-based operations in Canada that accounted for 6% of net sales during the first six 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 $43,000 to our Canadian operations at June 30, 2007, a 10% adverse change in the currency rate would reduce earnings before income taxes by approximately $4,300.

Interest rates

Our line of credit arrangement may expose us to fluctuations in interest rates. At June 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 June 30, 2007.

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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 June 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 June 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 controls over financial reporting that occurred during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings.

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.

We held our Annual Meeting of Shareholders on May 30, 2007. At this meeting the following persons were elected to serve as directors until the 2008 Annual Meeting of Shareholders:

	For		Withheld
Steven E. Brown		18,523,186		271,980
J. Ike Guest		18,523,186		271,980
Clinton H. Howard		18,523,186		271,980
Wayne R. Holbrook		18,523,186		271,980
Paul R. Miller		18,523,186		271,980
Joseph P. Philipp		18,523,186		271,980
Kenneth L. Sabot		18,517,686		277,480

ITEM 5. Other Information.

None

ITEM 6. Exhibits.

The Exhibit Index filed herewith is incorporated herein by reference.

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SIGNATURES

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

RBC Life Sciences, Inc. Registrant
By: Its:	/s/ Clinton H. HowardChief Executive Officer
By: Its:	/s/ Steven E. BrownVice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

DATE:      August 10, 2007
                  Irving, Texas

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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

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