UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2001
OR
[ ] 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: 0-25238
NATURAL HEALTH TRENDS CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Florida 59-2705336
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
12901 Hutton Drive
Dallas, Texas 75234
(Address of Principal Executive Office) (Zip Code)
(972) 241-4080
(Issuer's telephone number including area code)
Indicate by check mark whether the issuer (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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares of issuer's Common Stock, $.001 par value, outstanding as
of October 29, 2001 was 2,128,477 shares.
NATURAL HEALTH TRENDS CORP.
FORM 10-QSB/A
For Quarter Ended September 30, 2001
Explanatory Note:
-----------------
The purpose of this amendment is to amend Part I Item 2 - Management's
Discussion and Analysis and Part I, Item 1 -Financial Statements for the
restatements identified in note 2 to the consolidated financial statements and
to give effect to the 1 for 100 reverse stock split in March 2003. All other
items remain unchanged from the original filing.
During the quarters ended September 30 and December 31, 2003, the Company
re-evaluated its financial statements for the years ended December 31, 2002 and
2001, the quarterly periods included in such years and the quarterly periods
ended March 31, June 30 and September 30, 2003. As a result of such review, the
Company determined that it inadvertently applied the incorrect accounting
treatment with respect to the following items:
(i) revenue recognition with respect to administrative enrollment
fees;
(ii) revenue cut-off between 2002 and 2003;
(iii) reserves established for product returns and refunds;
(iv) the gain recorded in connection with the sale of a subsidiary
in 2001; and
(v) income tax provisions.
Consequently, the Company is amending and restating its financial statements for
each quarter in 2001, 2002 and 2003 as well as the Form 10-KSB for the years
ended December 31, 2001 and 2002.
NATURAL HEALTH TRENDS CORP.
FORM 10-QSB/A
For Quarter Ended September 30, 2001
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of September 30, 2001 1
Consolidated Statements of Operations
for the three and nine months ended September 30, 2001 and 2000 2
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2001 and 2000 3
Consolidated Statements of Cash Flows
for the three and nine months ended September 30, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of
Operations 8
Item 3. Controls and Procedures 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Certifications 14
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30,
2001
As Restated
------------
ASSETS
Current Assets:
Cash $ 1,666,257
Account receivables 166,174
Restricted cash 80,752
Inventory 860,231
Prepaid expenses and other current assets 671,884
------------
Total Current Assets 3,445,298
Property and equipment, net 155,128
Goodwill 524,000
Deposits and other assets 84,068
------------
Total Assets $ 4,208,494
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 4,653,883
Accrued expenses 242,265
Accrued associate commissions 217,640
Notes payable 395,875
Current portion of long-term debt 138,776
Deferred revenue 1,458,471
Other current liabilities 83,870
------------
Total Current Liabilities 7,190,780
------------
Long-term debt 378,988
------------
Total Liabilities 7,569,768
------------
Stockholders' Deficit:
Preferred stock 2,276,258
Common stock 2,123
Additional paid in capital 29,256,250
Accumulated deficit (34,310,026)
Deferred compensation (565,417)
Accumulated other comprehensive income (20,462)
------------
Total Stockholders' Deficit (3,361,274)
------------
Total Liabilities and Stockholders' Deficit $ 4,208,494
============
The accompanying notes are an integral part of these consolidated financial
statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2001 2001
As Restated 2000 As Restated 2000
------------ ------------ ------------ ------------
Net sales $ 7,028,882 $ 1,544,067 $ 19,114,349 $ 6,498,739
Cost of sales 1,275,035 527,814 4,350,485 1,673,865
------------ ------------ ------------ ------------
Gross profit 5,753,847 1,016,253 14,763,864 4,824,874
Associate commissions 2,879,856 682,511 9,333,493 2,801,729
Selling, general and
administrative expenses 2,496,411 1,076,072 4,290,066 3,635,712
------------ ------------ ------------ ------------
Operating income (loss) 377,580 (742,330) 1,140,305 (1,612,567)
Minority interest in subsidiary -- 16,199 -- 80,736
Gain (loss) on foreign currency 231 -- (13) 7,427
Other income, net 20,137 23,872 55,146 --
Interest (expense) income, net 4,088 (41,287) (11,446) (59,487)
------------ ------------ ------------ ------------
Net income (loss) from
continuing operations 402,036 (743,546) 1,183,992 (1,583,891)
Discontinued Operations:
Loss from discontinued
operations -- (15,000) -- (19,822)
------------ ------------ ------------ ------------
Net income (loss) 402,036 (758,546) 1,183,992 (1,603,713)
Preferred stock dividends 50,875 296,364 281,804 296,568
------------ ------------ ------------ ------------
Net income (loss) to common
stockholders $ 351,161 $ (1,054,910) $ 902,188 $ (1,900,281)
============ ============ ============ ============
Basic income (loss) per
common share $ 0.19 $ (12.27) $ 0.84 $ (23.19)
============ ============ ============ ============
Basic weighted common shares used 1,867,081 85,966 1,073,852 81,937
============ ============ ============ ============
Diluted income (loss) per
common share $ 0.10 $ (12.27) $ 0.54 $ (23.19)
============ ============ ============ ============
Diluted weighted common shares
used 3,538,772 85,966 1,671,338 81,937
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2001 2001
As Restated 2002 As Restated 2000
----------- ----------- ----------- -----------
Net income (loss) $ 402,036 $ (758,546) $ 1,183,992 $(1,603,713)
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments (20,462) -- 16,741 --
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 381,574 $ (758,546) $ 1,200,733 $(1,603,713)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------
2001
As Restated 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,183,992 $(1,603,713)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,259 375,505
Impairment of fixed assets 35,448 --
Loss on disposal of fixed asset -- 114,868
Common stock issued for services and
interest/penalties 1,333,861 (485)
Changes in operating assets and liabilities:
Accounts receivable (114,406) 103,058
Inventories (663,162) 244,699
Prepaid expenses and other current assets (654,292) (27,136)
Deposits and other assets (521,029) (84,199)
Accounts payable 1,607,115 488,380
Accrued expenses(i) (1,201,555) 277,933
Deferred revenue 1,339,058 (500,242)
Other current liabilities (200,785) (2,189)
----------- -----------
Total Adjustments 967,512 990,192
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,151,504 (613,521)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (141,709) (538)
Business acquisitions, net of cash acquired -- (253,326)
(Increase)Decrease in Restricted Cash (7,918) 93,152
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (149,627) (160,712)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock 50,000 1,000,000
Proceeds from notes payable and long-term debt(i) 150,000 389,701
Payments of capital lease obligation (46,590) --
Payments of notes payable and long-term debt (48,773) (194,351)
Change in deferred compensation (565,417)
Redemption of preferred stock -- (359,153)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (460,780) 836,197
----------- -----------
Effect of exchange rate 16,741 --
NET INCREASE IN CASH 1,557,838 61,964
CASH, BEGINNING OF PERIOD 108,419 434,063
----------- -----------
CASH, END OF PERIOD $ 1,666,257 $ 496,027
=========== ===========
(i) Certain accrued expenses were reclassified to notes payable and debt as of
December 31, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
4
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements of Natural Health Trends
Corp. and its subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation (consisting of normal recurring
accruals) of financial position and results of operations for the interim
periods have been presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Operating results for the nine month period ended September 30,
2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2000.
NHTC's common stock, par value $.001 per share (the "Common Stock"), is
listed on the OTC Bulletin Board (the "OTCBB"). In March 2003, we effected a
1-for-100 reverse stock split with respect to our outstanding shares of
Common Stock. In addition, the trading symbol for the shares of our Common
Stock changed from "NHTC" to "NHLC". The effect of the reverse is reflected
throughout this document.
2. Restatement of Previously Issued Financial Statements
During the quarters ended September 30 and December 31, 2003, the Company
re-evaluated its financial statements for the years ended December 31, 2002
and 2001, the quarterly periods included in such years and the quarterly
periods ended March 31, June 30 and September 30, 2003. As a result of such
review, the Company determined that it inadvertently applied the incorrect
accounting treatment with respect to the following items:
(i) revenue recognition with respect to administrative enrollment fees;
(ii) revenue cut-off between 2002 and 2003;
(iii) reserves established for product returns and refunds;
(iv) the gain recorded in connection with the sale of a subsidiary in 2001;
and
(v) income tax provisions.
Consequently, the Company is amending and restating its financial statements
for each quarter in 2001, 2002 and 2003 as well as the Form 10-KSB for the
years ended December 31, 2001 and 2002.
In connection with the engagement of a new independent accounting firm and
the review of the Company's financial statements, the Company has revised
its accounting treatment for administrative enrollment fees received from
distributors in accordance with the principles contained in Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", ("SAB 101")
and related guidance. The Company determined that under SAB 101, such fees
actually received and recorded as current sales in prior quarters should
have been deferred and recognized as revenue on a straight-line basis over
5
the twelve-month term of the membership. The restatement resulted in net
sales for the three and nine-month periods ended September 30, 2001 being
decreased by approximately $520,000 and $1,445,000, respectively. The
restatement in net sales resulted in a corresponding adjustment to cost of
sales for direct costs paid to a third party associated with the
administrative enrollment fees received from distributors. Compared to
amounts previously reported, the restatement decreased cost of sales by
approximately $187,000 and $520,000 for the three and nine-month periods
ended September 30, 2001, respectively.
In connection with the 2003 annual audit, the Company reviewed its revenue
cut-off as of the beginning of 2003. There was no impact of this item to the
2001 financial statements.
The Company had not recorded reserves for distributor returns and refunds as
of September 30, 2003 and for prior periods. Based upon analysis of the
Company's historical returns and refund trends by country, it was determined
that the reserves for returns and refunds for prior quarters were required
and should be recorded. The restatement resulted in no adjustment in the
three and nine month periods ended September 30, 2001.
In 2001, the Company sold all of the outstanding common stock in Kaire
Nutraceuticals, Inc. ("Kaire"), a Delaware corporation and wholly-owned
subsidiary, to an unrelated third party. The gain on the sale of Kaire was
approximately $3.1 million, a portion of which was previously deferred. The
Company subsequently recognized into income approximately $1.9 million from
the transaction over the period from the fourth quarter of 2001 through the
second quarter of 2003. Based upon a review of the transaction, the Company
now believes the gain on sale of Kaire should have been recognized only in
2001 and 2002 and not in 2003. The restatement resulted in no adjustment in
the three and nine month periods ended September 30, 2001.
The Company disclosed in its 2002 Form 10-KSB that it had a net operating
loss carry forward at December 31, 2002 of approximately $6,000,000, subject
to certain limitations. Consequently, the Company made no provision for
income taxes for any period in 2002 or 2001. Upon further review, it has
been determined that the available net operating loss was not expected to be
sufficient to offset all of the domestic and foreign taxable income in 2002
or 2001. The restatement resulted in no adjustment in the three and nine
month periods ended September 30, 2001.
The following table presents amounts from operations as previously reported
and as restated (in thousands, except for per share data):
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
--------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
------------ ------------ ------------ ------------
Net sales $ 7,549 $ 7,029 $ 20,559 $ 19,114
Cost of sales 1,462 1,275 4,870 4,350
------------ ------------ ------------ ------------
Gross profit 6,087 5,754 15,689 14,764
Operating expenses 5,376 5,376 13,624 13,624
------------ ------------ ------------ ------------
Operating income 711 378 2,065 1,140
Interest expense, other income,
loss on foreign exchange and gain on
discontinued operations 24 24 44 44
------------ ------------ ------------ ------------
Net income 735 402 2,109 1,184
Preferred stock dividends 51 51 282 282
------------ ------------ ------------ ------------
Net income available to common
stockholders $ 684 $ 351 $ 1,827 $ 902
============ ============ ============ ============
Basic income per share $ 0.37 $ 0.19 $ 1.70 $ 0.84
============ ============ ============ ============
Basic weighted common share used 1,867 1,867 1,074 1,074
============ ============ ============ ============
Diluted income per share $ 0.19 $ 0.10 $ 1.09 $ 0.54
============ ============ ============ ============
Diluted weighed commons shares used 3,539 3,539 1,671 1,671
============ ============ ============ ============
6
Basic and Diluted Income per share:
The adjustments in net sales and cost of sales resulted in a net decrease in
net income available to stockholders of approximately $333,000 and $925,000
over the amounts previously reported for the three and nine months ended
September 30, 2001, respectively. Restated basic and diluted income per
share decreased $0.18 and $0.09, respectively, for the three months ended
September 30, 2001. Restated basic and diluted income per share decreased
$0.86 and $0.55, respectively, for the nine months ended September 30, 2001.
3. Principles of Consolidation and Accounting Policies
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Reclassifications
Certain reclassifications were made to the prior year financial statements
to conform to the current year presentation.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the USA requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company's revenues are primarily derived from sales of products, sales
of starter and renewal administrative enrollment packs and shipping fees.
Substantially all product sales are sales to associates at published
wholesale prices. The Company defers a portion of its revenue from the sale
of its starter and renewal packs related to its administrative enrollment
fee. The Company amortizes its deferred revenue and its associated direct
costs over twelve months, the term of the membership. Total deferred revenue
for the Company was approximately $1,458,000 as of September 30, 2001.
The Company also estimates and records a sales return reserve for possible
sales refunds based on historical experience.
Shipping and Handling Costs
The Company records freight and shipping revenues collected from associates
as revenue. The Company records shipping and handling costs associated with
shipping products to its associates as cost of goods sold.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the periods presented. Diluted earnings per
share data gives effect to all potentially dilutive common shares that were
outstanding during the periods presented.
7
4. Equity Transactions
During the first nine months of 2001, the Company received notice of
conversion on $3,526,152 of Series E, F, G, H and J Preferred Stock. The
Company issued 1,427,741 shares of common stock in settlement of the shares
of Preferred Stock and the accrued dividends thereon.
In April 2001, the Company issued an additional $50,000 of Series H
Preferred Stock. The Company recorded a beneficial conversion feature of
$16,667.
In February 2001 we borrowed $50,000 from an individual. The loan bears
interest at 12% interest per annum and was due in April. We have received an
extension on repayment until September 2001.
The Company issued 30,000 shares of common stock in connection with the
Founder's Agreement in April 2001, in the start-up phase of Lexxus
International, Inc. In connection with this agreement, the Company issued an
additional 70,000 shares of common stock to the founding partners of Lexxus
International, Inc. during July 2001. The Company has recorded an intangible
asset of approximately $500,000 in connection with the acquisition.
The Company increased the number of authorized shares to 500,000,000 common
stock, par $.001, in January 2001 by a majority vote of the Board of
Directors in order to meet its obligations with respect to convertible
securities.
The Company issued 5,000 shares of common stock to certain management
employees in April 2001 and recorded $30,500 of compensation expense.
The Company issued 2,000 shares of common stock to a consulting firm in
August 2001 and recorded $11,800 of consulting expense.
In August 2001, the Company issued 200,000 shares of common stock to two
consulting firms as part of a long-term consulting agreement. This issuance
was recorded as deferred compensation and will be amortized over the life of
the agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussions should be read in conjunction with the consolidated
financial statements and notes contained in Item 1 hereof.
Forward Looking Statements
When used in Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, the words "will likely result", "the
Company expects", "will continue", "is anticipated", "estimated",
"projected", "outlook" or similar expressions are intended to identify
"forward- looking statements" within the meaning of the Private Securities
Litigation Act of 1995. The Company wishes to caution readers not to place
undue reliance on such forward-looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The
8
Company has no obligation to publicly release the results of any revisions
which may be made to any forward-looking statements to reflect anticipated
or unanticipated events or circumstances occurring after the date of such
statements.
Overview
Prior to August 1997, the Company's operations consisted of the operations of
Natural Health Care Centers, and vocational schools. Upon the acquisition of
Global Health Alternatives, Inc. ("GHA") on July 23, 1997, the Company commenced
marketing and distributing a line of natural, over-the-counter homeopathic
pharmaceutical products. In February 1999, the Company acquired the assets of
Kaire International, Inc. and commenced marketing and distributing a line of
natural, herbal based dietary supplements and personal care products through an
established network marketing system.
The Company discontinued the operations of the natural health care centers
during the third quarter of 1997 and sold the vocational schools in August 1998.
During the fourth quarter of 1999, the Company ceased GHA activity and in March
2001 filed for Chapter 7 Bankruptcy in U.S. Federal Court, North Dallas. In
January 2001 we launched Lexxus International, Inc., a majority owned subsidiary
and commenced marketing and distributing a line of woman's topical creme that
assists in sexual stimulation.
Results of Operations - Nine Months Ended September 30, 2001 Compared To the
Nine Months Ended September 30, 2000.
As discussed in Note 2 to the consolidated financial statements, we have amended
and restated our results for the three and nine months ended September 30, 2001.
All of the following analyses apply the basis of the restated amounts.
Net Sales. Net sales were approximately $19,114,000 and $6,499,000 for the nine
months ended September 30, 2001 and September 30, 2000 respectively; an increase
of $12,615,000. The increase in sales is attributable to the introduction of the
subsidiary, Lexxus International, Inc. which had sales of approximately
$15,755,000 for the nine months. This increase was partially offset by a
reduction in sales by eKaire.com and reduced by the deferral of revenue related
to the administrative enrollment fee of distributors.
Cost of Sales. Cost of sales for the nine months ended September 30, 2001 was
approximately $4,350,000 or 23% of net sales. Cost of sales for the nine months
ended September 30, 2000 was approximately $1,674,000 or 26% of net sales. The
total Cost of sales increased due to increased sales volume year over year and
the costs associated with the packaging of the Lexxus product line and by the
deferral of the cost of sales related to the direct cost of the administrative
enrollment fee of the distributors.
Gross Profit. Gross profit increased from approximately $4,825,000 in the nine
months ended September 30, 2000 to approximately $14,764,000 in the nine months
ended September 30, 2001. The increase of approximately $9,939,000 was
attributable to higher sales volumes by Lexxus partially offset by the deferral
of both revenue and cost of sales related to the administrative enrollment fee
of distributors.
Associate Commissions. Associate commissions were approximately $9,333,000 or
49% of net sales in the nine months ended September 30, 2001 compared to
approximately $2,802,000 or 43% of net sales for the nine months ended September
30, 2000. This increase is attributable to the higher payout percentage
associated with the Lexxus compensation plan.
Selling, General and Administrative Expenses. Selling, general and
administrative costs as a percentage of net sales decreased from approximately
$3,636,000 or 56% of sales in the nine months ended September 30, 2000 to
approximately $4,290,000 or 22% of sales in the nine months ended September 30,
2001. These costs as a percentage of net sales decreased primarily due to
eKaire.com's reduction of expenses and Lexxus sharing overhead in its start-up
phase.
9
Operating Income (loss). Operating income (loss) increased from a loss of
approximately $1,613,000 in the nine months ended September 30, 2000 to
operating income of approximately $1,140,000 in the nine months ended September
30, 2001.
Other Income (expenses) and Interest. Other expense and interest of
approximately $59,000 in the nine months ended September 30, 2000 increased to
other income and interest of approximately $44,000 in the nine months ended
September 30, 2001, a change of approximately $103,000. This increase is due
primarily to a decrease in interest- bearing liabilities and an increase in
interest-bearing assets.
Income Taxes. Income tax benefits were not reflected in either period. The
anticipated benefits of utilizing net operating losses against future profits
were not recognized in the nine months ended September 30, 2001 or the nine
months ended September 30, 2000 under the provisions of Financial Standards
Board Statement of Financial Accounting Standards No. 109 (Accounting for Income
Taxes), utilizing the Company's loss carry forward as a component of income tax
expense. A valuation allowance equal to the net deferred tax asset has been
recorded, as management of the Company has not been able to determine that it is
more likely than not that the deferred tax assets will be realized.
Net Income (Loss). Net income was approximately $1,184,000 in the nine months
ended September 30, 2001 as compared to a loss of approximately $1,604,000 in
the nine months ended September 30, 2000.
Liquidity and Capital Resources:
The Company has funded working capital and capital expenditure requirements
primarily from cash provided through borrowings from institutions and
individuals, as well as from the sale of Company securities in private
placements. Other ongoing sources of cash receipts are directly from the sale of
eKaire.com and Lexxus products.
In February 1998, the Company issued $300,000 face amount of Series B Preferred
Stock, net of expenses of $38,500. The Series B Preferred Stock has been
converted into 5,413 shares of common stock.
In April 1998, the Company issued $4,000,000 face amount of Series C Preferred
Stock, net of expenses of $492,500 from the proceeds raised, the Company paid
$2,500,000 to retire $1,568,407 face value of Series A Preferred Stock
outstanding. The Series C Preferred Stock has been converted into 36,083 shares
of common stock.
In August 1998, the Company issued $1,650,000 face amount of Series E Preferred
Stock, net of expenses of $210,500. The Series E Preferred Stock pays dividends
of 10% per annum and is convertible into shares of common stock at the lower of
the closing bid price on the date of issue or 75% of the market value of the
common stock. In September 1999, $610,000, face amount of Series E Preferred
Stock was converted into 6,031 shares of common stock. During the first nine
months of 2001, $946,768, face amount of Series E Preferred Stock was converted
into 355,230 shares of common stock.
During the nine months ended September 30, 2001 the Company converted
$1,414,448, face amount of Series F Preferred stock into 515,592 shares of the
Company's common stock.
During the nine months ended September 30, 2001 the Company converted $344,200,
face amount of Series G Preferred stock into 157,322 shares of the Company's
common stock. These transactions fully retired the Series G Preferred Stock.
In March and April 1999, the Company issued $1,400,000 of Series H Preferred
Stock. The Series H Preferred Stock pays dividends of 10% per annum and is
convertible into shares of common stock at the lower of the closing bid price on
the date of issue or 75% of the market value of the common stock. In the first
nine months of 2001, $614,542, face amount of Series H Preferred Stock were
converted into 276,994 shares of the Company's common stock. In April 2001, the
Company issued an additional $50,000 of Series H Preferred Stock.
10
In March 2000, the Company sold 1,000 shares of Series J Preferred Stock with a
stated value of $1,000 per share realizing net proceeds of $1,000,000. The
preferred stock pays a dividend at the rate of 10% per annum. The preferred
stock and the accrued dividends thereon are convertible into shares of the
Company's common stock at a conversion price equal to the lower of the closing
bid price on the date of issuance or 70% of the average closing bid price of the
common stock for the lowest three trading days during the twenty day period
immediately preceding the date on which the Company receives notice of
conversion from a holder. In connection with the offering of the Series J
Preferred Stock, the Company issued warrants to purchase 1,419 shares of common
stock at an exercise price of $1.41 per share. In the first nine months of 2001,
$206,194, face amount of Series J Preferred Stock were converted into 122,604
shares of the Company's common stock.
In June 1999, the Company borrowed $100,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion. This note was fully satisfied through conversion to common stock
during the second quarter of 2001.
In July and August 1999 the Company borrowed $150,000 from Filin Corporation,
and issued a secured promissory note due on the earlier of 60 days from the date
of issuance or upon the sale of its securities resulting in gross proceeds of at
least $5,000,000 and bearing interest at the rate of 10% per annum, but in no
event less than $12,000. In October 1999 the promissory note was amended to
provide that the note is payable upon demand and is convertible into shares of
common stock at a discount equal to 60% of the average closing bid price of the
common stock on the three days preceding notice of conversion. This note was
fully satisfied through conversion to common stock during the second quarter of
2001.
In October 1999, the Company borrowed $100,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion. This note was fully satisfied through conversion to common stock
during the second quarter of 2001.
In February 2001, the Company borrowed $50,000 from an individual. The loan
bears interest at 12% per annum and was originally due in April 2001 but an
extension on repayment was allowed.
At September 30, 2001, the ratio of current assets to current liabilities was
0.48 to 1.0 and the Company had a working capital deficit of approximately
$3,745,000.
Cash provided by operations for the nine months ended September 30, 2001 was
approximately $2,152,000 primarily related to operating profits. Cash used in
investing activities during the period was approximately $150,000, which
primarily relates to capital expenditures associated with the formation of
Lexxus. Cash used in financing activities during the period was approximately
$461,000, primarily from the repayment of certain notes payable and a deferred
compensation arrangement partially offset by borrowings of approximately
$150,000. Total cash increased by approximately $1,558,000 during the period.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the USA.
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities,
revenue and expenses and disclosures at the date of the financial statements. We
evaluate our estimates on an on-going basis, including those related to revenue
recognition, legal contingencies and income taxes. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making estimates. Actual results could differ from those estimates.
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ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our President and
Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
During the quarter ended September 30, 2003, the Company identified certain
matters that resulted in the restatement of the Company's financial statements
for the three months ended September 30, 2001, as set forth in Note 2 to the
Consolidated Financial Statements.
Within ninety (90) days prior to the date of this report, the Company's
President and Chief Financial Officer evaluated the effectiveness of the
Company's disclosure controls and procedures. Based upon his evaluation and as a
result, in part, of the matters noted above, the Company's President and Chief
Financial Officer has concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1937, as amended) are effective, with the qualification that the
restatements mentioned above were just recently identified and implemented for
the three and nine months ended September 30, 2002. Management requires
additional time to fully (i) assess their correction plan and (ii) implement
appropriate enhancements to its controls and procedures, if and so warranted in
the circumstances.
Since the date of his evaluation, there have been no significant changes to the
Company's internal controls or other factors that could significantly affect
these controls.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to A Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable.
(b) Reports on Form 8-K
Not applicable.
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SIGNATURE
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.
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D. WOODBURN
-------------------------------------
Mark D. Woodburn
President and Chief Financial Officer
Date: April 12, 2004
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