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 June 30, 2002
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, 11th 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 August 12, 2002 were 297,999,898 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2002 1
(unaudited)
Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 2002 and 2001 2
Consolidated Statements of Comprehensive Income (unaudited)
for the three and six months ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002 and 2001 4
Notes to the Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis or Plan of
Operation 6-9
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)
June 30,
2002
-------------
ASSETS
Current Assets:
Cash $ 3,468,228
Account receivables 359,663
Inventories 1,141,017
Prepaid expenses and other current assets 71,797
------------
Total Current Assets 5,040,705
Restricted cash 188,931
Property and Equipment, net 459,874
Deposits and Other Assets 172,190
Goodwill 207,765
Website 99,750
------------
Total Assets $ 6,169,215
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 1,767,412
Accrued expenses 572,321
Accrued bonus payable 1,938,514
Reserve for contingent liability 2,000,000
Notes payable 336,606
Current portion of long term debt 341,082
Deferred revenue 116,684
Other current liabilities 332,294
------------
Total Current Liabilities 7,404,913
------------
Minority interest 196,091
Long term debt 626,417
------------
Total Liabilities 8,227,421
------------
Stockholders' Deficit:
Preferred stock ($1,000 par value; authorized
1,500,000 shares; issued 903 shares) 902,588
Common Stock ($.001 par value; authorized 500,000,000
shares; issued and outstanding 297,999,898 shares) 298,000
Additional paid-in capital 30,612,123
Accumulated deficit (33,647,083)
Deferred compensation (281,250)
Accumulated other comprehensive income 57,416
------------
Total Stockholders' Deficit (2,058,206)
------------
Total Liabilities and Stockholders' Deficit $ 6,169,215
============
See Notes to Consolidated Financial Statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ------------ ---------
Net Sales $ 9,116,192 $ 9,824,203 $ 15,270,336 $ 13,010,051
Cost of Sales 1,573,626 2,769,023 2,664,121 3,408,300
---------- ---------- ------------ ----------
Gross Profit 7,542,566 7,055,180 12,606,215 9,601,751
Associate commissions 4,535,501 4,786,743 7,747,237 6,453,637
Selling, general and
administrative expenses 2,355,613 1,050,000 4,337,451 1,793,655
---------- ---------- ------------ ----------
Operating income 651,452 1,218,437 521,527 1,354,459
Minority interest in
subsidiary (48,541) - (60,378) -
Loss on foreign exchange (78,781) (200) (78,871) (244)
Other expense/income (45,831) 37,989 (76,469) 35,009
Interest, net (14,980) (3,118) (32,609) (15,534)
---------- ---------- ---------- ----------
Income before
extraordinary items 463,319 1,253,108 273,200 1,373,690
Extraordinary gain -
forgiveness of debt 200,000 - 400,000 -
--------- ---------- ----------- ----------
Net income 663,319 1,253,108 673,200 1,373,690
Preferred stock dividends 19,175 124,886 41,460 230,929
--------- ---------- ----------- ----------
Net income to
common shareholders $ 644,144 $ 1,128,222 $ 631,740 $ 1,142,761
========= ========== =========== ==========
Basic income per common
share $ 0.00 $ 0.04 $ 0.00 $ 0.04
========= ========== ============ ==========
Basic weighted common
shares used 297,271,348 59,245,565 281,983,013 29,622,783
=========== ============ ============= ===========
Diluted income per
common share $ 0.00 $ 0.01 $ 0.00 $ 0.01
=========== ============ ============= ==========
Diluted weighted common
shares used 368,205,119 190,126,367 352,916,784 160,408,421
============ ============ ============== ===========
See Notes to Consolidated Financial Statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- ---------- -------- --------
Net income $ 663,319 $ 1,253,108 $ 673,200 $ 1,373,690
Other comprehensive income,
net of tax
Foreign translation
adjustment 53,816 445 59,658 37,203
-------- ---------- --------- ----------
Comprehensive income $ 717,135 $ 1,253,553 $ 732,858 $ 1,410,893
======== ========== ========= ==========
See Notes to Consolidated Financial Statements.
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------------
2002 2001
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 673,200 $ 1,373,690
---------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 191,008 39,589
Issuance of stock for services 7,192 61,758
rendered/ settlement of interest
Gain on forgiveness of debt (400,000) -
Minority interest of subsidiary 196,091 -
Changes in assets and liabilities:
Accounts receivable (239,846) (822,048)
Inventories (216,256) (306,737)
Prepaid expenses 175,393 (33,782)
Deposits and other assets 152,495 52,912
Accounts payable and accrued expenses 2,476,668 1,320,513
Deferred revenue 116,684 (80,061)
Other current liabilities 225,071 (331,195)
----------- ------------
Total Adjustments 2,684,500 (99,051)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,357,700 1,274,639
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (367,958) (24,636)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (367,958) (24,636)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (88,122) 6,050
Proceeds from preferred stock - 100,000
Proceeds from notes payable and long-term debt 260,000 50,000
Payments of notes payable and long-term debt (77,365) (33,187)
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 94,513 122,863
----------- ------------
Effect of Exchange Rate Changes 59,658 -
----------- ------------
NET INCREASE IN CASH 3,143,913 1,372,866
CASH, BEGINNING OF PERIOD 324,315 108,419
----------- ------------
CASH, END OF PERIOD $ 3,468,228 $ 1,481,285
----------- ------------
See Notes to Consolidated Financial Statements.
4
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002
(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 six month period
ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. 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, 2001.
The Company had a working capital deficiency of approximately
$2,364,000 at June 30, 2002 and $3,522,000 at December 31, 2001. 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 July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141
("SFAS No. 141"), "Business Combinations." SFAS No. 141 requires
the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS No. 141 did not
have a significant impact on the financial statements.
In July 2001, FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", ("SFAS No. 142"),
which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions
upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for the impairment of
existing goodwill and other intangibles. Application of the
non-amortization provisions of the Statement did not have an effect on
the Company's financial position or operations.
5
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations",
("SFAS No. 143"), which is effective for all fiscal years beginning
after June 15, 2002; however, early adoption is encouraged.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and certain provisions of APB Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." SFAS No. 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at
the lower of carrying amount or fair value, less cost to sell, whether
reported in continuing operations or in discontinued operations. SFAS
No. 144 also broadens the reporting requirements of discontinued
operations to include all components of an entity that have operations
and cash flows that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the entity. The
provisions of SFAS No. 144 are effective for fiscal years beginning
after December 15, 2001. The Company implemented SFAS No. 144 and SFAS
No. 143 beginning January 1, 2002.
3. During the first six months of 2002, the Company received notice of
conversion on $1,421,710 of Series F, H and J Preferred Stock. The
Company issued 73,289,680 shares of Common Stock upon conversion of the
shares of Preferred Stock and the accrued dividends thereon.
4. The Company issued 1,930,000 shares of Common Stock to a law firm
in the first six months of 2002 for legal services of approximately
$57,100.
5. The Company issued 1,842,499 shares of Common Stock in the first six
months of 2002 for a note payable and its accrued interest of
approximately $27,000.
Item 2. Management's Discussion and Analysis or Plan of Operation
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 speaks 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
Natural Health Trends Corp. ("NHTC") is a Florida corporation.
NHTC was incorporated on December 1, 1988 as "Florida Institute of Massage
Therapy, Inc." and changed its name to "Natural Health Trends Corp." on
June 24, 1993. NHTC's Common Stock, par value $0.001 per share
(the "Common Stock") is listed on the
Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "NHTC".
NHTC is a holding company that operates two businesses, both of which
distribute products that promote health, wellness and sexual vitality through
the multi-level marketing ("MLM") channel.
6
NHTC's largest operation is Lexxus International, Inc.
("Lexxus"), a Delaware corporation and a majority-owned subsidiary of
NHTC. Lexxus sells products that heighten mental and sexual arousal,
particularly in women. NHTC's other business, eKaire.com, Inc. ("eKaire"),
distributes nutritional supplements aimed at general health and wellness
through the Internet and other channels. eKaire consists of companies
operating in the U.S., in Canada as Kaire International Canada
Ltd. ("Kaire Canada"), in Australia as Kaire Nutraceuticals Australia
Pty. Ltd. ("Kaire Australia"), in New Zealand as Kaire Nutraceuticals
New Zealand Limited ("Kaire New Zealand"), and in Trinidad as Kaire
Trinidad, Ltd. ("Kaire Trinidad").
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus International,
Inc., a Delaware corporation. The original founders of Lexxus International
received an aggregate of 10,000,000 shares of Common Stock.
In March 2001, Global Health Alternatives, Inc., a Delaware corporation
and wholly-owned subsidiary of NHTC ("GHA"), and Ellon, Inc., a Delaware
corporation and wholly-owned subsidiary of GHA ("Ellon"), filed for Chapter 7
bankruptcy liquidation in the United States Bankruptcy Court of the Northern
District of Texas. Neither GHA nor Ellon had operations during the years 2000 or
2001. Both GHA and Ellon were dissolved in June 2001.
In the second quarter of 2001, NHTC incorporated Lexxus International
(SW Pacific) Pty. Ltd., an Australian corporation and majority-owned subsidiary
of NHTC, which does business in Australia ("Lexxus Australia"). In addition,
NHTC incorporated Lexxus International (New Zealand) Limited, a New Zealand
corporation and majority-owned subsidiary of NHTC, which does business in New
Zealand ("Lexxus New Zealand").
In June 2001, NHTC incorporated Lighthouse Marketing Corporation
("LMC"), a Delaware Corporation and a wholly-owned subsidiary of NHTC. As of
June 30, 2002, LMC had not conducted any business, but intends to conduct
business in the future.
On November 16, 2001, NHTC incorporated Lexxus International Co. Ltd.,
a corporation organized under the laws of the Republic of China and a
majority-owned subsidiary of NHTC ("Lexxus Taiwan").
On January 28, 2002, NHTC incorporated MyLexxus Europe AG, a
corporation organized under the laws of Switzerland and a majority-owned
subsidiary of NHTC ("Lexxus Europe"). This company manages the sales of product
into sixteen eastern European countries, including Russia.
In March 2002, NHTC incorporated Lexxus International Co. Ltd.,
a corporation organized under the laws of Hong Kong and a majority-owned
subsidiary of NHTC ("Lexxus Hong Kong").
In April 2002, NHTC incorporated Personal Care International India Pvt.
Ltd., a corporation organized under the laws of India and a majority-owned
subsidiary of NHTC ("MyLexxus India").
In June 2002, NHTC incorporated Lexxus Marketing Pte. Ltd., a
corporation organized under the laws of Singapore and a majority-owned
subsidiary of NHTC ("Lexxus Singapore").
Six Months Ended June 30, 2002 Compared To the Six Months Ended June 30, 2001.
Net Sales. Net sales were approximately $15,270,000 and $13,010,000 for
the six months ended June 30, 2002 and June 30, 2001, respectively; an increase
of approximately $2,260,000. The increased sales were primarily from the sales
of Lexxus products at varying prices in different markets and the expansion of
Lexxus into international markets offset by a slight decrease in the sales of
eKaire products.
Cost of Goods Sold. Cost of goods sold for the six months ended June
30, 2002 was approximately $2,664,000 or 17% of net sales. Cost of goods sold
for the six months ended June 30, 2001 was approximately $3,408,000 or 26% of
net sales. Cost of goods sold decreased as a percentage of net sales due to
increased sales volume of lower priced inventory, the costs associated with the
packaging of the Lexxus product line, and increased efficiencies gained from
global distribution channels.
7
Gross Profit. Gross profit increased from approximately $9,602,000 for
the six months ended June 30, 2001 to approximately $12,606,000 for the six
months ended June 30, 2002. The increase of approximately $3,004,000 is
attributable to higher sales volumes by Lexxus and the international expansion
of Lexxus.
Commissions. Associate commissions were approximately $7,747,000 in the
six months ended June 30, 2002 compared to approximately $6,454,000 for the six
months ended June 30, 2001, an increase of approximately $1,293,000. This
increase is directly attributable to the higher sales volume generated in 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net sales increased from
approximately $1,794,000 or 14% of net sales in the six months ended June 30,
2001 to approximately $4,337,000 or 28% of net sales in the six months ended
June 30, 2002. These expenses as a percentage of net sales increased primarily
due to the expansion of Lexxus into international markets and the development of
a strong global infrastructure, including increased personnel and facility
costs.
Income from Operations. Operating income decreased from approximately
$1,354,000 for the six months ended June 30, 2001 to approximately $522,000 for
the six months ended June 30, 2002. The decrease is due to the initial costs
incurred in opening international offices and developing a marketing strategy in
international markets.
Income Taxes. Income tax benefits were not reflected in either
period due to the utilization of net operating loss carryforwards.
Income before Extraordinary Items. As of June 30, 2002 the Company had
income before extraordinary times of approximately $273,000 as compared to
approximately $1,374,000 as of June 30, 2001.
Gain on Forgiveness of Debt. During the six months ended June 30, 2002,
NHTC realized a gain of $400,000 on the various debt and payables related to the
sale of Kaire Nutraceuticals, Inc.
Net Income. Net income was approximately $673,000 in the six months
ended June 30, 2002 as compared to approximately $1,374,000 in the six months
ended June 30, 2001.
Liquidity and Capital Resources
The Company has funded working capital and capital expenditure
requirements primarily from cash receipts which are directly from the sale of
Lexxus and eKaire products.
In the six months ended June 30, 2002, NHTC issued 50,988,189 shares of
Common Stock to an accredited investor upon conversion of $1,096,710, face
amount of Series F Preferred Stock pursuant to Section 4(2) of the Securities
Act of 1933, as amended (the "Act").
In the six months ended June 30, 2002, NHTC issued 3,773,949 shares of
Common Stock to an accredited investor upon conversion of $50,000, face amount
of Series H Preferred Stock pursuant to Section 4(2) of the Act.
In the six months ended June 30, 2002, NHTC issued 18,527,542 shares of
Common Stock to an accredited investor upon conversion of $275,000, face amount
of Series J Preferred Stock pursuant to Section 4(2) of the Act.
At June 30, 2002, the ratio of current assets to current liabilities
was 0.68 to 1.0 and the Company had a working capital deficit of approximately
$2,364,000.
Cash provided by operations for the six months ended June 30, 2002 was
approximately $3,358,000. Cash used in investing activities during the period
was approximately $368,000. Cash provided by financing activities during the
period was approximately $95,000. Total cash increased by approximately
$3,144,000 during the period.
8
Our independent auditors' report on the consolidated financial
statements stated as of December 31, 2001, that due to a working capital
deficit, there is substantial doubt about the company's ability to continue as a
going concern. While there can be no assurances, management believes that the
profitability achieved during the six months ended June 30, 2002 will continue
for the foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 22, 2001, Pfizer, Inc. filed an action in the United States
District Court, Southern District of New York, against Lexxus alleging
that Lexxus' distribution and marketing of Viacreme TM infringes on
Pfizer's federally registered trademark, Viagra (R). Pfizer's complaint
alleges federal false designation of origin and unfair competition,
federal trademark dilution, federal false advertising and unfair
competition, common law trademark infringement, trademark dilution and
deceptive acts and practices. NHTC settled the Pfizer lawsuit amicably
in July 2002.
Item 2. Changes in Securities and Use of Proceeds
In the six months ended June 30, 2002, NHTC issued 50,988,189 shares of
Common Stock to an accredited investor upon conversion of $1,096,710,
face amount of Series F Preferred Stock pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
In the six months ended June 30, 2002, NHTC issued 3,773,949 shares of
Common Stock to an accredited investor upon conversion of $50,000, face
amount of Series H Preferred Stock pursuant to Section 4(2) of the Act.
In the six months ended June 30, 2002, NHTC issued 18,527,542 shares of
Common Stock to an accredited investor upon conversion of $275,000,
face amount of Series J Preferred Stock pursuant to Section 4(2) of the
Act.
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
99.1 Certification of Chief Executive and Financial Officer
(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: August 14, 2002
10