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 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.)
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 October 29, 2001 was 212,847,706 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2001 1
(unaudited)
Consolidated Statements of Operations (unaudited)
for the Three months ended September 30, 2001 and 2000
and the Nine months ended September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows (unaudited)
for the Nine months ended September 30, 2001 and 2000 3
Notes to the financial statements 4-5
Item 2. Management's discussion and analysis or plan of
operations 5-8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 9
Item 2 Changes in Securities and Use of Proceeds 9
Item 3 Defaults Upon Senior Securities 9
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)
September 30,
2001
---------------
ASSETS
Current Assets:
Cash $ 1,666,257
Restricted cash 80,752
Account receivables 166,174
Inventories 860,231
Prepaid expenses and other current assets 151,819
---------------
Total Current Assets 2,925,233
Property and Equipment, net 155,128
Deposits and Other Assets 608,068
---------------
Total Assets $ 3,688,429
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Checks written in excess of deposits $ 229,972
Accounts payable 1,543,860
Reserve for contingent liabilities 3,110,023
Accrued expenses 560,419
Accrued bonus payable 217,640
Accrued payroll payable 19,211
Notes payable 346,302
Deferred revenue 13,844
Other current liabilities 83,870
---------------
Total Current Liabilities 6,125,141
---------------
Stockholders' Deficit:
Preferred stock ($1,000 par value; authorized 1,500,000
shares; issued 2,277 shares) 2,276,258
Common stock ($.001 par value; authorized 500,000,000
shares; issued 212,323,000 shares) 212,323
Additional paid-in capital 29,046,051
Accumulated deficit (33,385,465)
Deferred compensation (565,417)
Cumulative currency translation adjustment (20,462)
---------------
Total Stockholders' Deficit (2,436,712)
---------------
Total Liabilities and Stockholders' Deficit $ 3,688,429
===============
See Notes to Consolidated Financial Statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------- ------------- --------------- --------------
Revenues $ 7,548,925 $ 1,544,067 $ 20,558,976 $ 6,498,739
Cost of Sales 1,462,251 527,814 4,870,551 1,673,865
--------------- ------------- --------------- --------------
Gross Profit 6,086,674 1,016,253 15,688,425 4,824,874
Distributor 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)
710,407 (742,330) 2,064,866 (1,612,567)
Minority interest in gain of subsidiary - 16,199 - 80,736
Gain (loss) on foreign exchange 231 - (13) 7,427
Other income 20,137 23,872 55,146 -
Interest income (expense), net 4,088 (41,287) (11,446) (59,487)
--------------- ------------- --------------- --------------
Net income (loss) from continuing operations 734,863 (743,546) 2,108,553 (1,583,891)
Discontinued Operations:
Loss from discontinued operations - - - (4,822)
Loss on disposal (15,000) (15,000)
--------------- ------------- --------------- --------------
Net income (loss) 734,863 (758,546) 2,108,553 (1,603,713)
Preferred stock dividends 50,875 296,364 281,804 296,568
--------------- ------------- --------------- --------------
Net income (loss) to common shareholders $ 683,988 $ (1,054,910) $ 1,826,749 $ (1,900,281)
=============== ============= =============== ==============
Basic income (loss) per common share $ 0.00 $ (0.12) $ 0.02 $ (0.23)
=============== ============= =============== ==============
Basic weighted common shares used 186,708,148 8,596,587 107,385,224 8,193,654
=============== ============= =============== ==============
Diluted income (loss) per common share $ 0.00 $ (0.12) $ 0.01 $ (0.23)
=============== ============= =============== ==============
Diluted weighted common shares used 353,877,190 8,596,367 167,133,823 8,193,654
=============== ============= =============== ==============
See Notes to Consolidated Financial Statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,108,553 $ (1,603,713)
------------- -------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 72,707 375,505
Loss on disposal of fixed asset - 114,868
Issuance of stock for services rendered 243,826 (485)
Changes in assets and liabilities:
Accounts receivable (114,406) 103,058
Inventories (663,162) 244,699
Prepaid expenses (134,227) (27,136)
Deposits and other assets (108,771) (84,199)
Accounts payable and accrued expenses 555,745 766,313
Deferred revenue (105,570) (500,242)
Other current liabilities (200,785) (2,189)
------------- -------------
Total Adjustments (454,643) 990,192
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,653,910 (613,521)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (171,708) (538)
Business acquisitions, net of cash acquired - (253,326)
Decrease in restricted cash (7,918) 93,152
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (179,626) (160,712)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock 50,000 1,000,000
Proceeds from notes payable 50,000 389,701
Payments of notes payable (33,187) (194,351)
Redemption of preferred stock - (359,153)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 66,813 836,197
------------- -------------
Effect of Exchange Rate Changes 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
============= =============
SUPPLEMENTAL INFORMATION:
CASH PAID FOR INTEREST $ 2,343 $ 7,294
============= =============
CASH PAID FOR TAXES $ 243,739 $ 282,986
============= =============
See notes to consolidated financial statements.
3
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.
The Company had a working capital deficiency of approximately $3,200,000 at
September 30, 2001 and $5,865,000 at December 31, 2000 and recorded a net
loss of approximately $11,947,000 for the year ended December 31, 2000.
This 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 generate profits from operations. While management is unable to
predict profitability and can make no assurances, management believes the
Company will generate sufficient profits to ease its dependency on debt and
equity financing in the foreseeable future.
2. FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will
be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful
lives. The Company will apply the new accounting rules for goodwill and
other intangible assets beginning in the first quarter of 2002. Application
of the non-amortization provisions of the Statement are not expected to
have a material effect on the Company's financial position or operations.
3. 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 142,774,130 shares of common stock in settlement of the
shares of Preferred Stock and the accrued dividends thereon.
4
4. The Company sold 100% of the stock in Kaire Nutraceuticals, Inc. to a South
African firm in June 2001. The agreement includes an earn out over five
years with a minimum of $50,000 per year. The Company has fully reserved
any gain that may have been recognized for contingent liabilities
associated with the sale.
5. 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.
6. In April 2001, the Company issued a promissory note for $50,000, due on
demand bearing interest at 10% per annum.
7. The Company issued 3,000,000 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 7,000,000 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.
8. In April 2001, the Company issued 200,000 shares of common stock to an
individual for lending the Company $50,000.
9. 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.
10. The Company issued 500,000 shares of common stock to certain management
employees in April 2001 and recorded $30,500 of compensation expense.
11. The Company issued 200,000 shares of common stock to a consulting firm in
August 2001 and recorded $11,800 of consulting expense.
12. In August 2001, the Company issued 20,000,000 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 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.
5
Overview
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. During 1999, the Company ceased operations of Global Health
Alternatives ("GHA") and in March 2001 filed for Chapter 7 Bankruptcy protection
in U.S. Federal Court, North Dallas. In January 2001, the Company launched
Lexxus International, Inc., a majority-owned subsidiary and commenced marketing
and distributing a line of women's quality of life products.
Nine Months Ended September 30, 2001 Compared To The Nine Months Ended September
30, 2000.
Net Sales. Net sales were approximately $20,559,000 and $6,499,000 for
the nine months ended September 30, 2001 and September 30, 2000 respectively; an
increase of $14,060,000. The increase in sales is attributable to the
introduction of the subsidiary, Lexxus International, Inc. which had sales of
approximately $17,200,000 for the nine months. This increase was partially
offset by a reduction in sales by eKaire.com.
Cost of Goods Sold. Cost of goods sold for the nine months ended
September 30, 2001 was approximately $4,871,000 or 24% of net sales. Cost of
goods sold for the nine months ended September 30, 2000 was approximately
$1,674,000 or 26% of net sales. The total cost of goods sold increased due to
increased sales volume year over year and the costs associated with the
packaging of the Lexxus product line.
Gross Profit. Gross profit increased from approximately $4,825,000 in
the nine months ended September 30, 2000 to approximately $15,688,000 in the
nine months ended September 30, 2001. The increase of approximately $10,863,000
was attributable to higher sales volumes by Lexxus.
Commissions. Associate commissions were approximately $9,333,000 in the
nine months ended September 30, 2001 compared to approximately $2,802,000 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 21% 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.
Income (loss)from Operations. 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 $2,065,000 in the nine months ended September
30, 2001.
Other Income (expenses). Other income of approximately $29,000 in the
nine months ended September 30, 2000 increased to other income of approximately
$44,000 in the nine months ended September 30, 2001, a change of approximately
$15,000. This increase is due primarily to a decrease in interest- bearing
liabilities and an increase in interest-bearing assets.
6
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 carryforward 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 $2,109,000 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 541,330 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
3,608,296 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 603,130 shares of common stock. During the
first nine months of 2001, $946,768, face amount of Series E Preferred Stock was
converted into 35,523,045 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 51,559,177 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 15,732,164 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 27,699,368 shares of the Company's common stock. In April
2001, the Company issued an additional $50,000 of Series H Preferred Stock.
7
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 141,907 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
12,260,376 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
$3,200,000.
Cash provided by operations for the nine months ended September 30, 2001
was approximately $1,654,000 primarily related to operating profits. Cash used
in investing activities during the period was approximately $180,000, which
primarily relates to capital expenditures associated with the formation of
Lexxus. Cash provided by financing activities during the period was
approximately $67,000, primarily from a private borrowing of approximately
$50,000 and proceeds from Series H Preferred stock issued and partially offset
by the repayment of certain notes payable of approximately $33,000. Total cash
increased by approximately $1,558,000 during the period.
Our independent auditors' report on the consolidated financial statements
stated as of December 31, 2000 that due to net losses and a working capital
deficit, there is substantial doubt about the company's ability to continue as a
going concern. A subsidiary, Global Health Alternatives filed for Chapter 7
Bankruptcy protection and received a discharge of all debt in the second quarter
of 2001. While there can be no assurances, management believes that the
profitability achieved during the nine months ended September 30, 2001 will
continue for the foreseeable future.
8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
PART III - OTHER
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
Date: November 16, 2001
10