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 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.)
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 March 31, 2001 was 494,403 shares.
NATURAL HEALTH TRENDS CORP.
FORM 10-QSB/A
For Quarter Ended March 31, 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 March 31, 2001
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of March 31, 2001 1
Consolidated Statements of Operations
for the three months ended March 31, 2001 and 2000 2
Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of
Operations 8
Item 3. Controls and Procedures 11
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 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
Certifications 15
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
2001
As Restated
------------
ASSETS
Current Assets:
Cash $ 528,987
Account receivables 46,528
Restricted cash 66,944
Inventory 342,887
Prepaid expenses and other current assets 74,425
------------
Total Current Assets 1,059,771
Property and equipment, net 39,418
Deposits and other assets 34,639
------------
Total Assets $ 1,133,828
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 3,446,950
Accrued expenses 1,724,328
Accrued associate commissions 164,250
Notes payable 660,867
Current portion capital lease obligation 44,111
Deferred revenue 248,236
------------
Total Current Liabilities 6,288,742
------------
Capital lease obligations, net of current
portion 2,479
Long-term note payable 525,364
------------
Total Liabilities 6,816,585
------------
Stockholders' Deficit:
Preferred stock 5,343,509
Common stock 494
Additional paid in capital 24,287,728
Accumulated deficit (35,314,043)
Accumulated other comprehensive income (445)
------------
Total Stockholders' Deficit (5,682,757)
------------
Total Liabilities and Stockholders' Deficit $ 1,133,828
============
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 March 31,
----------------------------
2001
As Restated 2000
------------ ------------
Net sales $ 3,004,023 $ 3,186,218
Cost of sales 573,820 682,197
------------ ------------
Gross profit 2,430,203 2,504,021
Associate commissions 1,666,894 1,295,905
Selling, general and administrative expenses 743,655 1,234,110
------------ ------------
Operating income (loss) 19,654 (25,994)
(Loss) gain on foreign currency (44) 2,641
Other (expense) income, net (2,980) 26,149
Interest expense, (net) (12,416) (6,914)
------------ ------------
Net income (loss) 4,214 (4,118)
------------ ------------
Preferred stock dividends 106,043 625,103
------------ ------------
Net loss to common shareholders $ (101,829) $ (629,221)
============ ============
Basic loss to common shareholders $ (0.37) $ (7.65)
============ ============
Basic weighted common shares used 278,047 82,204
============ ============
Diluted loss to common shareholders $ (0.02) $ (7.65)
============ ============
Diluted weighted common shares used 5,852,782 82,204
============ ============
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
March 31,
---------------------------
2001
As Restated 2000
------------ ------------
Net income (loss) $ 4,214 $ (4,118)
Other comprehensive income, net of tax:
Foreign currency
translation adjustments 36,758 --
------------ ------------
Comprehensive income (loss) $ 40,972 $ (4,118)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2001
As Restated 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,214 $ (4,118)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,183 85,346
Impairment of fixed assets 35,448 --
Common stock issued for services and
interest/penalties 13,712 46
Changes in operating assets and liabilities:
Accounts receivable 5,240 (428,607)
Inventories (145,818) (269,915)
Prepaid expenses and other current assets (56,833) 50,834
Deposits and other assets 52,400 (75,949)
Accounts payable 400,182 (47,439)
Accrued expenses(i) 227,118 331,833
Deferred revenue 128,823 (527,831)
Other current liabilities (284,655) 59,848
------------ ------------
Total Adjustments 377,800 (821,834)
------------ ------------
NET PROVIDED BY (USED IN) OPERATING ACTIVITIES 382,014 (825,952)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,921) --
Decrease in restricted cash 5,890 32,838
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (15,031) 32,838
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock -- 937,500
Proceeds from notes payable and long-term debt(i) 50,000 36,566
Payments of notes payable and long-term debt (33,173) (339,521)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,827 634,545
------------ ------------
Effect of Exchange rates 36,758 --
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
============ ============
(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
THREE MONTHS ENDED MARCH 31, 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 three month period ended March 31, 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
the twelve-month term of the membership. The restatement resulted in net
5
sales for the three month period ended March 31, 2001 being decreased by
approximately $182,000. 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 $65,000 for the three month period
ended March 31, 2001.
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 a reserve 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 for the
quarter ended March 31, 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 for
the quarter ended March 31, 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 for the quarter ended
March 31, 2001.
The following table presents amounts from operations as previously reported
and as restated (in thousands, except for per share data):
Three Months Ended
March 31, 2001
----------------------------
As
Previously As
Reported Restated
------------ ------------
Net sales $ 3,186 $ 3,004
Cost of sales 639 574
------------ ------------
Gross profit 2,547 2,430
Operating expenses 2,411 2,411
------------ ------------
Operating income 136 19
Interest expense, other income,
loss on foreign exchange and gain
on discontinued operations (15) (15)
------------ ------------
Net income 121 4
Preferred stock dividends 106 106
------------ ------------
Net income available to common
stockholders $ 15 $ (102)
============ ============
Basic income per share $ 0.05 $ (0.37)
============ ============
Basic weighted common shares used 278 278
============ ============
Diluted income per share $ 0.00 $ (0.02)
============ ============
Diluted weighted common shares used 5,853 5,853
============ ============
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 $117,000 over the
amounts previously reported for the three months ended March 31, 2001.
Restated basic and diluted income per share decreased $0.42 and $0.02,
respectively, for the three months ended March 31, 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 $248,000 as of March 31, 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 quarter of 2001, the Company received notice of conversion
on of Series E, F, G, and H Preferred Stock. The Company issued 334,784
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
stock Preferred Common stock
Series Stock Face conversion
converted Conversion Date Value price
---------------- --------------- ------------- ----------------
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
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.
8
Overview
Prior to August 1997, the Company's operations consisted of the operations of
the 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 - Three Months Ended March 31, 2001 Compared To the Three
Months Ended March 31, 2000.
As discussed in Note 2 to the consolidated financial statements, we have amended
and restated our results for the three month period ended March 31, 2001. All of
the following analyses apply the basis of the restated amounts.
Net Sales. Net sales were approximately $3,004,000 and $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 partially offset by
sales of Lexxus International of approximately $1,618,000 which was slightly
reduced by the deferral of revenue related to the administrative enrollment fee
of distributors.
Cost of Sales. Cost of sales for the three months ended March 31, 2001 was
approximately $574,000 or 19.1% of net sales. Cost of sales for the three months
ended March 31, 2000 was approximately $682,000 or 21.4% of net sales. The total
cost of sales decreased by approximately $108,000 or 15.8% due to lower costs
associated with the Lexxus product line slightly offset 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 decreased from approximately $2,504,000 in the three
months ended March 31, 2000 to approximately $2,430,000 in the three months
ended March 31, 2001. The decrease was approximately $74,000 or 3.0%. The
decrease was attributable to the deferral of both revenue and cost of sales
related to the administrative enrollment fee of distributors partially offset by
higher sales volumes in our Lexxus subsidiary and its lower cost of sales per
unit.
Associate Commissions. Associate commissions were approximately $1,667,000 or
55.5% 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
in the three months ended March 31, 2000 to approximately $744,000 or 24.8% 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.
Operating Income (loss). Operating income (loss) increased from a loss of
approximately $26,000 in the three months ended March 31, 2000 to operating
income of approximately $20,000 in the three months ended March 31, 2001.
9
Other Income/Expense and Interest. Other income and interest of approximately
$19,000 or 0.6% of sales in the three months ended March 31, 2000 decreased to
expense 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
was 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 carry forwards as a component of income tax expense. A
valuation allowance equal to the net deferred tax asset has not 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 $4,000 in the three months ended
March 31, 2001 as compared to a loss of approximately $4,000 in the three months
ended March 31, 2000.
Liquidity and Capital Resources:
The Company has funded its 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
5,413 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 36,083 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 6,031 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
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 54,253
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.
10
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 did not make 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 owed
approximately $816,000 of delinquent payroll tax liabilities including interest
and penalties.
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.
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 Preferred Stock, the Company issued
warrants to purchase 1,419 shares of common stock at an exercise price of $1.41
per share.
In February 2001, we borrowed $50,000 from an individual. The loan bears
interest at 12% per annum and is due in April 2001.
At March 31, 2001, our ratio of current assets to current liabilities was 0.17
to 1.0 and we had a working capital deficit of approximately $5,229,000.
Cash provided by operations for the three months ended March 31, 2001 was
approximately $382,000. Cash used in investing activities during the period was
approximately $15,000, which primarily relates to capital expenditures. Cash
provided by financing activities during the period was approximately $17,000.
Total cash increased by approximately $421,000 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.
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
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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 March 31, 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
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 73,706 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 111,240 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 79,321 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 54,253 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
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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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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