FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 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.)
5605 N. MacArthur Boulevard, 11 Floor
Irving, Texas 75038
(Address of Principal Executive Office) (Zip Code)
(972) 819-2035
(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 March 31, 2000 was 49,440,319 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2001
(unaudited) 1
Consolidated Statements of Operations (unaudited)
for the Three months ended March 31, 2001 and 2000 2
Consolidated Statements of Cash Flows (unaudited)
for the Three months ended March 31, 2001 and 2000 3
Notes to the financial statements 4
Item 2. Management's discussion and analysis or plan of
operations 5-8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 8
Item 2 Changes in Securities and Use of Proceeds 8
Item 3 Defaults Upon Senior Securities 8
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 5 Other Information 9
PART III - OTHER
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
2001
-----------
ASSETS
Current Assets:
Cash $ 528,987
Restricted Cash 66,944
Account Receivables 46,528
Inventory 342,887
Prepaid expenses and other current assets 8,968
-----------
Total Current Assets 994,313
Property and Equipment, net 39,418
Long term Prepaids 21,839
Deposits and Other Assets 12,800
-----------
Total Assets $ 1,068,370
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Checks written in excess of deposits $ 393,169
Accounts Payable 3,446,950
Accrued Expenses 1,043,896
Accrued Bonus Payable 164,250
Accrued Payroll Payable 821,568
Notes Payable 455,940
Notes Payable related parties 195,987
Current portion of long term debt 44,111
Deferred Revenue 66,413
------------
Total Current Liabilities 6,632,283
------------
Capital Lease Obligations, net of current portion 2,479
------------
Total Liabilities 6,634,762
------------
Stockholders' Deficit:
Preferred Stock 5,343,509
Common Stock 49,440
Additional Paid in Capital 24,238,782
Accumulated Deficit (35,197,677)
Cumulative Currency translation adjustment (445)
------------
Total Stockholders' Deficit (5,566,392)
------------
Total Liabilities and Stockholders' Deficit $ 1,068,370
============
See Notes to Consolidated Financial Statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2001 2000
---------- -----------
Revenues $ 3,185,848 $ 3,186,218
Cost of Sales 639,277 682,197
---------- -----------
Gross Profit 2,546,571 2,504,021
Distributor commissions 1,666,894 1,295,905
Selling, general and administrative expenses 743,655 1,234,110
---------- -----------
Operating income (loss) 136,022 (25,994)
Gain (loss) on foreign exchange (44) 2,641
Other (expense) (2,980) 26,149
Interest (net) (12,416) (6,914)
---------- -----------
Net income (loss) 120,581 (4,118)
Preferred stock dividends 106,043 625,103
---------- -----------
Net income (loss) to common shareholders $ 14,538 $ (629,221)
========== ===========
Basic income (loss) per common share $ 0.00 $ (0.08)
========== ===========
Basic weighted common shares used 27,804,656 8,220,350
========== ===========
Diluted income (loss) per common share $ 0.00 $ (0.00)
========== ===========
Diluted weighted common shares used 585,278,183 8,220,350
=========== ===========
See Notes to Consolidated Financial Statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 120,581 $ (4,118)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 37,631 85,346
Issuance of common stock in settlement of interest 36,758 46
Changes in assets and liabilities
(Increase) decrease in accounts receivable 5,240 (428,607)
Increase in inventories (145,818) (269,915)
(Increase) decrease in prepaid expenses (13,215) 50,834
(Increase) decrease in deposits and other assets 74,239 (75,949)
Increase (decrease) in accounts payable 400,183 (47,439)
Increase in accrued expenses 431,630 331,833
Decrease in deferred revenue (53,001) (527,831)
Increase (decrease) in other current liabilities (284,875) 59,848
---------- ----------
Total Adjustments 488,773 (821,834)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 609,354 (825,952)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,490) -
Decrease in cash overdraft (206,999) -
Decrease in restricted cash 5,890 32,838
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (220,599) 32,838
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock - 937,500
Proceeds from notes payable and long-term debt 50,000 36,566
Payments of notes payable and long-term debt (18,187) (339,521)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,813 634,545
---------- ----------
NET INCREASE (DECREASE) IN CASH 420,568 (158,569)
CASH, BEGINNING OF PERIOD 108,419 434,063
---------- ----------
CASH, END OF PERIOD $ 528,987 $ 275,494
========== ==========
See Notes to Consolidated Financial Statements.
3
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Natural Health
Trends Corp. (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 three month period ended March 31,
2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. 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.
The Company had a working capital deficiency of approximately
$5,638,000 for the quarter ended March 31, 2000 and $5,865,000 for the
year ended December 31, 2000, and we recorded a net loss of
approximately $11,947,000 for the year ended December 31, 2000 that
raises substantial doubt about the Company's ability to continue as a
going concern. The Company's continued existence is dependent on its
ability to obtain additional debt or equity financing and to generate
profits from operations.
2. During the first quarter of 2001, the Company received notice of
conversion on of Series E, F, G, and H Preferred Stock. The Company
issued 33,478,350 shares of common stock in settlement of the shares of
Preferred Stock and the accrued dividends thereon. The following table
sets forth the conversions and the stock price thereof as of the date
of conversion.
Preferred Conversion Date Preferred Stock Common stock
stock Series Face Value conversion price
converted
E 4-Jan-01 5,236 .01005
E 18-Jan-01 3,898 .0075
E 22-Jan-01 3,974 .00765
E 23-Jan-01 5,452 .0105
E 24-Jan-01 7,476 .0144
E 8-Feb-01 6,990 .0129
E 17-Feb-01 12,856 .01194
E 25-Mar-01 23,008 .010965
E 12-Mar-01 5,800 .01125
F 17-Feb-01 172,118 .02359
F 25-Mar-01 30,000 .019
G 17-Jan-01 16,000 .0095
G 27-Feb-01 13,000 .01425
G 26-Feb-01 21,000 .0114
G 25-Mar-01 14,400 .0114
G 31-Mar-01 17,000 .01235
H 5-Feb-01 19,132 .0125
H 31-Mar-01 31,561 .01000
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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 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 cream that assists in sexual
stimulation.
Three Months Ended March 31, 2001 Compared To The Three Months Ended March 31,
2000.
Net Sales. Net sales were approximately $3,186,000 for the three months
ended March 31, 2001 and March 31, 2000. Sales for eKaire.com and Kaire
Nutraceuticals declined approximately $1,800,000 which was offset by sales of
Lexxus International of approximately $1,800,000.
Cost of Goods Sold. Cost of goods sold for the three months ended March
31, 2001 was approximately $639,000 or 20.1% of net sales. Cost of goods sold
for the three months ended March 31, 2000 was approximately $682,000 or 21.4% of
net sales. The total cost of goods sold decreased by approximately $43,000 or
6.3% due to lower costs associated with the Lexxus product line.
Gross Profit. Gross profit increased from approximately $2,504,000 in
the three months ended March 31, 2000 to approximately $2,547,000 in the three
months ended March 31, 2001. The increase was approximately $43,000 or 1.7%.
The increase was attributable to higher sales volume in our Lexxus subsidiary
and its lower cost of goods sold.
Commissions. Associate commissions were approximately $1,667,000 or
52.3% of net sales in the three months ended March 31, 2001 compared to
approximately $1,296,000 or 40.7% of net sales for the three months ended March
31, 2000. This increase is attributable to the Lexxus compensation plan.
Selling, General and Administrative Expenses. Selling, general and
administrative costs decreased from approximately $1,234,000 or 38.7% of sales
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in the three months ended March 31, 2000 to approximately $744,000 or 23.3% of
sales in the three months ended March 31, 2001, a decrease of approximately
$490,000 or 39.7%. The decrease is due primarily to eKaire's reduction of
expenses and Lexxus sharing overhead in its start-up phase.
Income (loss)from Operations. Operating income increased from a loss of
approximately $26,000 in the three months ended March 31, 2000 to operating
income of approximately $136,000 in the three months ended March 31, 2001.
Gain (Loss) on Foreign Exchange. The Company operates KNI's
subsidiaries in Australia, New Zealand, Trinidad and Tobago. During the three
months ended March 31, 2001, the net loss on foreign exchange adjustments was
approximately $44 compared to a net gain of approximately $3,000 in the three
months ended March 31, 2000.
Other Expenses. Other expenses of approximately $19,000 or 0.6% of
sales in the three months ended March 31, 2000 decreased to income of
approximately $15,000 or 0.5% of sales in the three months ended March 31, 2001,
a change of approximately $34,000.
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 three months ended March 31, 2001 or the
three months ended March 31, 2000 under the provisions of Financial Standards
Board Statement of Financial Accounting Standards No. 109 (Accounting for Income
Taxes), utilizing its loss carryforwards 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 from operations was approximately
$121,000 in the three months ended March 31, 2001 or 3.8% of net sales as
compared to a loss of approximately $4,000 or .1% of net sales in the three
months ended March 31, 2000.
Liquidity and Capital Resources:
We have funded our working capital and capital expenditure requirements
primarily from cash provided through borrowings from institutions and
individuals, and from the sale of our securities in private placements. Our
other ongoing source of cash receipts has been from the sale of eKaire.com and
Lexxus products.
In February 1998, we 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 541,330 shares of common stock.
In April 1998, we issued $4,000,000 face amount of Series C Preferred
Stock, net of expenses of $492,500 from the proceeds raised, we 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 3,608,296 shares of common
stock.
In July 1998, we issued $75,000 face amount of Series D Preferred Stock,
which was redeemed in August 1998 for $91,291.
In August 1998, we 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 of face amount of Series E Preferred
Stock was converted into 603,130 shares of common stock.
In August 1998, we sold our three vocational schools and certain related
businesses for $1,778,333 and other consideration. From the proceeds from the
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sale of the schools, we paid $1,030,309 to retire the remaining $631,593 face
value of Series A Preferred Stock then outstanding, and $91,291 to redeem all of
the Series D Preferred Stock outstanding. The remaining proceeds were used to
pay down payables.
In March and April 1999, we 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 quarter of
2001, 50,693 shares of Series H Preferred Stock were converted into 5,425,292
shares of the Company's common stock.
In June 1999, we 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.
In July and August 1999 we 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 we amended the promissory note 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.
In October 1999, we 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.
In November 1999, we borrowed $70,000 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 repaid with interest in March 2000.
During 2000, the Company has not made its payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. The Company has filed all required payroll tax returns and is
currently negotiating a payment plan with the IRS. As of March 31, 2001, the
Company owes approximately $816,000 of delinquent payroll tax liabilities
including interest and penalties. The Company's failure to pay its delinquent
payroll tax liabilities could result in tax liens being filed by various taxing
authorities.
During 1999 and 2000, the Company did not make its sales tax deposits with
the various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of March 31, 2001, the Company owed approximately
$287,000 in current and delinquent sales taxes which is included in other
current liabilities. The Company's failure to pay its delinquent sales taxes
could result in tax liens being filed by various taxing authorities.
In March 2000, we 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
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Preferred Stock, the Company issued warrants to purchase 141,907 shares of
common stock at an exercise price of $1.41 per share.
At March 31, 2001, our ratio of current assets to current liabilities was
.15 to 1.0 and we had a working capital deficit of approximately $5,638,000.
Cash provided by operations for the three months ended March 31, 2001 was
approximately $609,000. Cash used in investing activities during the period
was approximately $221,000, which primarily relates to the decrease of our cash
overdraft at eKaire. Cash provided by financing activities during the period was
approximately $32,000, primarily from a private borrowing of approximately
$50,000 and partially offset by the repayment of certain notes payable of
approximately $18,000. Total cash increased by approximately $421,000 during the
period.
Our independent auditors' report on our consolidated financial
statements stated as of December 31, 2000 due to net losses and a working
capital deficit, there is substantial doubt about the company's ability to
continue as a going concern. The Company requires additional financing to
continue operations of which there can be no assurance. Management has revised
its business plan of marketing development and support for Global Health's
products, licensing rights to sell its products. We believe that the Company
will require approximately $500,000, primarily to finance operations for the
next 12 months assuming that we do not have to satisfy certain existing
obligations. The Company intends to raise such additional financing through
additional debt and equity financings, of which there can be no assurance and
for which there are no commitments or definitive agreements. We have filed for
Chapter 7 Bankruptcy on behalf of Global
Health. There can be no assurance that we will be able to achieve satisfactory
settlements with our creditors or secure such additional financing. The failure
of Natural Health Trends to achieve satisfactory settlements with our creditors
and secure additional financing would have a material adverse effect on our
business, prospects, financial conditions and results of operations and we may
have to curtail or cease operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
The Company received 16 notices of conversion on its Series E Preferred
Stock during the three months ended March 31, 2001 and redeemed $74,690, face
value in exchange for 7,370,616 shares of the Company's common stock.
The Company received 5 notices of conversion on its Series F Preferred
Stock during the three months ended March 31, 2001 and redeemed $202,118, face
value in exchange for 11,124,011 shares of its common stock.
The Company received 10 notices of conversion on its Series G Preferred
Stock during the three months ended March 31, 2001 and redeemed $81,400, face
value in exchange for 7,932,056 shares of its common stock.
The Company received 2 notices of conversion on its Series H Preferred
Stock during the three months ended March 31, 2001 and redeemed $50,693, face
value in exchange for 5,425,292 shares of its common stock.
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 it's obligations with respect to convertible
securities.
Item 3. Defaults upon Senior Securities
None
8
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
9
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.
NATURAL HEALTH TRENDS CORP.
By:/s/Mark D. Woodburn
-----------------------
Mark D. Woodburn
President
By:/s/Robin T. Phelan-Tuggle
-----------------------
Robin T. Phelan-Tuggle
Secretary
Date: May 29, 2001
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