UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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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: 0-26272
NATURAL HEALTH TRENDS CORP.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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59-2705336
(I.R.S. Employer
Identification No.) |
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2050 Diplomat Drive |
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Dallas, Texas
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75234 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (972) 241-4080
Indicate by check mark whether the registrant: (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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
At May 8, 2009, the number of shares outstanding of the registrants common stock was 10,728,714
shares.
NATURAL HEALTH TRENDS CORP.
Quarterly Report on Form 10-Q
March 31, 2009
INDEX
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements included in this report, other than statements of
historical facts, regarding our strategy, future operations, financial position, estimated
revenues, projected costs, prospects, plans and objectives are forward-looking statements. When
used in this report, the words believe, anticipate, intend, estimate, expect, project,
could, would, may, plan, predict, pursue, continue, feel and similar expressions
are intended to identify forward-looking statements, although not all forward-looking statements
contain these identifying words.
We cannot guarantee future results, levels of activity, performance or achievements, and you
should not place reliance on our forward-looking statements. Our forward-looking statements do not
reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or
strategic investments. In addition, any forward-looking statements represent our expectation only
as of the date of this report and should not be relied on as representing our expectations as of
any subsequent date. While we may elect to update forward-looking statements at some point in the
future, we specifically disclaim any obligation to do so, even if our expectations change.
Although we believe that the expectations reflected in any of our forward-looking statements
are reasonable, actual results could differ materially from those projected or assumed in any of
our forward-looking statements. Our future financial condition and results of operations, as well
as any forward-looking statements, are subject to change and to inherent risks and uncertainties,
such as those disclosed in this report. Important factors that could cause our actual results,
performance and achievements, or industry results to differ materially from forward-looking
statements include the risks described under the caption Risk Factors in our most recent Annual
Report on Form 10-K and in this report, which include the following:
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we may continue to experience substantial negative cash flows; |
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adverse cash flow consequences from leverage and debt service obligations; |
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substantial cash payments could be required upon an event of default under our variable
rate convertible debentures; |
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covenants and restrictions in certain investor agreements could restrict our ability to
operate our business; |
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we may need to seek additional debt or equity financing on unfavorable terms, if
available at all; |
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our dependence on the Hong Kong and China markets and our vulnerability to sometimes
unpredictable changes in those markets; |
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our ability to attract and retain distributors; |
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our ability to recruit and retain key management, directors and consultants; |
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our inability to directly control the marketing of our products; |
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our inability to control our distributors to the same extent as if they were our own
employees; |
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our ability to protect or use our intellectual property rights; |
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adverse publicity associated with our products, ingredients or network marketing
programs, or those of similar companies; |
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our ability to maintain or expand the number of our distributors or their productivity
levels; |
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changes to our distributor compensation plan may not be accepted; |
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our failure to properly pay business taxes or customs duties, including those of China; |
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risks associated with operating internationally; |
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risks associated with the amount of compensation paid to distributors, which can affect
our profitability; |
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we face risks related to litigation; |
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we rely on our suppliers product liability insurance and product liability claims could
hurt our business; |
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our internal controls and accounting methods may require further modification; |
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we could be adversely affected if we fail to maintain an effective system of internal
controls; |
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risks associated with our reliance on information technology systems; |
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risks associated with the extensive regulation of our business and the implications of
changes in such regulations; |
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currency exchange rate fluctuations could lower our revenue and net income; |
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failure of new products to gain distributor or market acceptance; |
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failure of our information technology system could harm our business; |
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we have a limited product line; |
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our reliance on outside manufacturers; |
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the intensely competitive nature of our business; |
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terrorist attacks, cyber attacks, acts of war or other disasters, particularly given the
scope of our international operations; |
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disappointing quarterly revenue or operating results, which could adversely affect our
stock price; |
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our common stock is particularly subject to volatility because of the industry in which
we operate; |
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consequences arising if an active public trading market for our common stock does not
continue; |
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consequences if we fail to regain compliance with applicable Nasdaq requirements; |
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failure to maintain the registration statements covering the resale of shares of common
stock for certain investors will result in liquidated damages; |
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the implications of the actual or anticipated conversion or exercise of our convertible
securities; and |
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future sales by us or our stockholders of shares of common stock could depress the
market price of our common stock. |
Additional factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this report, including under the heading Managements
Discussion and Analysis of Financial Condition and Results of Operations and in our financial
statements and the related notes.
Forward-looking statements in this report speak only as of the date hereof, and forward
looking statements in documents incorporated by reference speak only as of the date of those
documents. The Company does not undertake any obligation to update or release any revisions to any
forward-looking statement or to report any events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events, except as required by law. Unless otherwise noted,
the terms we, our, us, Company, refer to Natural Health Trends Corp. and its subsidiaries.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
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December 31, |
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March 31, |
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2008 |
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2009 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,491 |
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$ |
2,636 |
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Restricted cash |
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340 |
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390 |
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Accounts receivable |
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71 |
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102 |
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Inventories, net |
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2,141 |
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2,057 |
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Other current assets |
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735 |
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792 |
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Total current assets |
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6,778 |
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5,977 |
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Property and equipment, net |
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1,173 |
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1,096 |
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Goodwill |
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1,764 |
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1,764 |
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Intangible assets, net |
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1,800 |
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1,600 |
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Restricted cash |
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3,646 |
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3,268 |
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Other assets |
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1,464 |
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1,169 |
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Total assets |
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$ |
16,625 |
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$ |
14,874 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,746 |
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$ |
2,722 |
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Income taxes payable |
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187 |
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281 |
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Accrued distributor commissions |
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554 |
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903 |
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Other accrued expenses |
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2,456 |
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2,837 |
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Deferred revenue |
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2,841 |
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1,098 |
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Current portion of convertible debentures, net of
discount of $2,320 and $1,677 at December 31, 2008
and March 31, 2009, respectively |
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1,534 |
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1,687 |
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Deferred tax liability |
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351 |
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351 |
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Other current liabilities |
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1,170 |
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1,062 |
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Total liabilities |
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10,839 |
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10,941 |
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Commitments and contingencies
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Stockholders equity: |
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Natural Health Trends stockholders equity: |
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Preferred stock, $0.001 par value; 5,000,000
shares authorized; 1,761,900 shares designated
Series A convertible preferred stock, 138,400
shares issued and outstanding at December 31,
2008 and March 31, 2009, aggregate liquidation
value of $267 |
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124 |
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124 |
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Common stock, $0.001 par value; 50,000,000
shares authorized; 10,691,582 and 10,728,714
shares issued and outstanding at December 31,
2008 and March 31, 2009, respectively |
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11 |
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11 |
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Additional paid-in capital |
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79,711 |
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79,822 |
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Accumulated deficit |
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(74,853 |
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(76,597 |
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Accumulated other comprehensive income: |
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Foreign currency translation adjustments |
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759 |
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562 |
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Total Natural Health Trends stockholders equity |
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5,752 |
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3,922 |
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Noncontrolling interest |
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34 |
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11 |
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Total stockholders equity |
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5,786 |
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3,933 |
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Total liabilities and stockholders equity |
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$ |
16,625 |
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$ |
14,874 |
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See accompanying notes to consolidated financial statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Data)
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Three Months Ended |
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March 31, |
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2008 |
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2009 |
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Net sales |
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$ |
11,395 |
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$ |
9,869 |
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Cost of sales |
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3,090 |
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2,797 |
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Gross profit |
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8,305 |
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7,072 |
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Operating expenses: |
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Distributor commissions |
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3,997 |
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3,779 |
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Selling, general and administrative expenses (including stock-based compensation
expense of $164 and $111 during 2008 and 2009, respectively) |
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4,596 |
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3,771 |
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Depreciation and amortization |
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386 |
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330 |
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Impairment of long-lived assets |
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24 |
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Total operating expenses |
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9,003 |
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7,880 |
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Loss from operations |
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(698 |
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(808 |
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Other income (expense), net: |
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Gain (loss) on foreign exchange |
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371 |
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(2 |
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Interest income |
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35 |
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14 |
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Interest expense (including amortization of debt issuance costs and accretion of debt
discount of $362 and $775 during 2008 and 2009, respectively |
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(387 |
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(866 |
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Other |
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8 |
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11 |
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Total other income (expense), net |
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27 |
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(843 |
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Loss before income taxes |
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(671 |
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(1,651 |
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Income tax provision |
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(37 |
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(114 |
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Net loss |
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(708 |
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(1,765 |
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Plus: Net loss attributable to the noncontrolling interest |
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21 |
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Net loss attributable to Natural Health Trends |
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(708 |
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(1,744 |
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Preferred stock dividends |
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(4 |
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(4 |
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Net loss attributable to common stockholders of Natural Health Trends |
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$ |
(712 |
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$ |
(1,748 |
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Loss per share of Natural Health Trends basic and diluted |
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$ |
(0.07 |
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$ |
(0.18 |
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Weighted-average number of shares outstanding |
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9,567 |
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9,903 |
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See accompanying notes to consolidated financial statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
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Three Months Ended |
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March 31, |
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2008 |
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2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(708 |
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$ |
(1,765 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization of property and equipment |
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186 |
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130 |
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Amortization of intangibles |
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200 |
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200 |
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Amortization of debt issuance costs |
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62 |
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132 |
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Accretion of debt discount |
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300 |
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643 |
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Stock-based compensation |
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164 |
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111 |
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Impairment of long-lived assets |
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24 |
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Changes in assets and liabilities: |
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Accounts receivable |
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50 |
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(34 |
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Inventories, net |
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781 |
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31 |
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Other current assets |
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(399 |
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(61 |
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Other assets |
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59 |
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96 |
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Accounts payable |
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(293 |
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977 |
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Income taxes payable |
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18 |
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114 |
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Accrued distributor commissions |
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(374 |
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362 |
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Other accrued expenses |
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(389 |
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396 |
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Deferred revenue |
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(938 |
) |
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(1,723 |
) |
Other current liabilities |
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(127 |
) |
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(95 |
) |
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Net cash used in operating activities |
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(1,384 |
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(486 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(6 |
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(58 |
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Decrease in restricted cash |
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93 |
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266 |
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Net cash provided by investing activities |
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87 |
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208 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Payments on debt |
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(490 |
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Net cash used in financing activities |
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(490 |
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Effect of exchange rates on cash and cash equivalents |
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(328 |
) |
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(87 |
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Net decrease in cash and cash equivalents |
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(1,625 |
) |
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(855 |
) |
CASH AND CASH EQUIVALENTS, beginning of period |
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6,282 |
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3,491 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
4,657 |
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$ |
2,636 |
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See accompanying notes to consolidated financial statements.
3
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Natural Health Trends Corp. (the Company), a Delaware corporation, is an international
direct-selling and e-commerce company headquartered in Dallas, Texas. Subsidiaries controlled by
the Company sell personal care, wellness, and quality of life products under the NHT Global
brand to an independent distributor network that either uses the products themselves or resells
them to consumers.
Our majority-owned subsidiaries have an active physical presence in the following markets:
North America; Greater China, which consists of Hong Kong, Taiwan and China; South Korea; Japan;
and Europe, which consists of Italy and Slovenia.
Basis of Presentation
The unaudited interim consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. As a result,
certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted. In the opinion of management, the accompanying unaudited interim
consolidated financial statements contain all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair statement of the Companys financial information for
the interim periods presented. The results of operations of any interim period are not necessarily
indicative of the results of operations to be expected for the fiscal year. These consolidated
financial statements should be read in conjunction with the consolidated financial statements and
related notes included in our 2008 Annual Report on Form 10-K filed with the United States
Securities and Exchange Commission (SEC) on March 23, 2009.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its
majority-owned subsidiaries. All significant inter-company balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reported period.
The most significant accounting estimates inherent in the preparation of the Companys
financial statements include estimates associated with obsolete inventory and the fair value of
acquired intangible assets, including goodwill, and other long-lived assets, as well as those used
in the determination of liabilities related to sales returns, distributor commissions, and income
taxes. Various assumptions and other factors prompt the determination of these significant
estimates. The process of determining significant estimates is fact specific and takes into
account historical experience and current and expected economic conditions. The actual results may
differ materially and adversely from the Companys estimates. To the extent that there are
material differences between the estimates and actual results, future results of operations will be
affected.
Reclassification
Certain balances have been reclassified in the prior year consolidated financial statements to
conform to current year presentation.
4
Income Taxes
The Company recognizes income taxes under the liability method of accounting for income taxes.
Deferred income taxes are
recognized for differences between the financial reporting and tax bases of assets and
liabilities at enacted statutory tax rates in effect for the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be ultimately realized.
The Company and its subsidiaries file income tax returns in the United States, various
states, and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax
examinations for years prior to 2005, and is no longer subject to state income tax examinations for
years prior to 2004. No jurisdictions are currently examining any income tax returns of the
Company or its subsidiaries.
Revenue Recognition
Product sales are recorded when the products are shipped and title passes to independent
distributors. Product sales to distributors are made pursuant to a distributor agreement that
provides for transfer of both title and risk of loss upon our delivery to the carrier that
completes delivery to the distributors, which is commonly referred to as F.O.B. Shipping Point.
The Company primarily receives payment by credit card at the time distributors place orders.
Amounts received for unshipped product are recorded as deferred revenue. The Companys sales
arrangements do not contain right of inspection or customer acceptance provisions other than
general rights of return.
Actual product returns are recorded as a reduction to net sales. The Company estimates and
accrues a reserve for product returns based on its return policies and historical experience.
Enrollment package revenue, including any nonrefundable set-up fees, is deferred and
recognized over the term of the arrangement, generally twelve months. Enrollment packages provide
distributors access to both a personalized marketing website and a business management system. No
upfront costs are deferred as the amount is nominal.
Shipping charges billed to distributors are included in net sales. Costs associated with
shipments are included in cost of sales.
Various taxes on the sale of products and enrollment packages to distributors are collected by
the Company as an agent and remitted to the respective taxing authority. These taxes are presented
on a net basis and recorded as a liability until remitted to the respective taxing authority.
Income Per Share
Basic income per share is computed by dividing net income applicable to common stockholders by
the weighted-average number of common shares outstanding during the period. Diluted income per
share is determined using the weighted-average number of common shares outstanding during the
period, adjusted for the dilutive effect of common stock equivalents, consisting of non-vested
restricted stock and shares that might be issued upon the exercise of outstanding stock options and
warrants and the conversion of preferred stock and debentures.
The dilutive effect of non-vested restricted stock, stock options and warrants is reflected by
application of the treasury stock method. Under the treasury stock method, the amount the employee
must pay for exercising stock options, the amount of compensation cost for future service that the
Company has not yet recognized, and the amount of tax benefit that would be recorded in additional
paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. The
potential tax benefit derived from exercise of non-qualified stock options has been excluded from
the treasury stock calculation as the Company is uncertain that the benefit will be realized.
5
In periods where losses are reported, the weighted-average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive. The following
securities were not included for the time periods indicated as their effect would have been
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
70,500 |
|
|
|
42,500 |
|
Warrants to purchase common stock |
|
|
6,281,310 |
|
|
|
6,281,310 |
|
Non-vested restricted stock |
|
|
892,478 |
|
|
|
906,921 |
|
Convertible preferred stock |
|
|
138,400 |
|
|
|
138,400 |
|
Convertible debentures |
|
|
1,700,000 |
|
|
|
1,700,000 |
|
Options and warrants to purchase 37,500 and 4,785,358 shares of common stock, respectively,
were outstanding at March 31, 2009. Such options expire on November 17, 2011. The warrants have
expirations through April 21, 2015. The convertible debentures mature on October 19, 2009.
Recently Issued and Adopted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements, which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 for
financial assets and liabilities, as well as for any other assets and liabilities that are carried
at fair value on a recurring basis in financial statements. In February 2008, the FASB issued FASB
Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, which provided a one
year deferral for the implementation of SFAS No. 157 for other non-financial assets and
liabilities. The Company adopted SFAS No. 157 as of January 1, 2008, except as it applies to those
non-financial assets and liabilities affected by the one year deferral. The partial adoption of
SFAS No. 157 did not have a material impact on the Companys financial position or results of
operations. In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of
SFAS No. 157 as it relates to the valuation of financial assets in a market that is not active for
those financial assets. FSP No. 157-3 became effective for the Company upon issuance, and had no
material impact on the Companys financial position or results of operations. The adoption of SFAS
No. 157 on the Companys non-financial assets and liabilities did not have a material impact on its
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51, which establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. On January 1, 2009, the Company adopted the
provisions of SFAS No. 160 and reclassified the noncontrolling interest (formerly minority
interest) from mezzanine presentation to stockholders equity on a retrospective basis. The Company
also presented the noncontrolling interest in its statement of operations as net loss attributable
to noncontrolling interest.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets, which amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142.
This pronouncement requires enhanced disclosures concerning a companys treatment of costs incurred
to renew or extend the term of a recognized intangible asset. FSP No. 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008. FSP No. 142-3 was
adopted on January 1, 2009 on a prospective basis and did not have a material impact on the
Companys consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles in the
United States. The adoption of SFAS No. 162 will have no material impact on the Companys
consolidated financial position or results of operations.
In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The
FSP addresses whether instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method. This FSP is effective for financial
statements issued for fiscal years
beginning after December 15, 2008. The Companys adoption of this FSP did not have a material
impact on earnings per share as its outstanding non-vested restricted stock awards currently do not
contain nonforfeitable rights to dividends.
6
In June 2008, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue
07-5, Determining whether an Instrument (or Embedded Feature) is indexed to an Entitys Own
Stock. This issue addresses whether an instrument (or an embedded feature) is indexed to an
entitys own stock, which is the first part of the scope exception in paragraph 11(a) of SFAS
No. 133, for purposes of determining whether the instrument should be classified as an equity
instrument or accounted for as a derivative instrument. The provisions of EITF Issue No. 07-5 are
effective for financial statements issued for fiscal years beginning after December 15, 2008. The
adoption of EITF Issue No. 07-5 did not have an impact on the Companys financial condition or
results of operations.
In April 2009, the FASB issued FSP No. SFAS 107-1 and APB No. 28-1, Interim Disclosures about
Fair Value of Financial Instruments. This staff position amends SFAS No. 107, Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial statements and also amends
APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. This staff position is effective for periods
ending after June 15, 2009. The Company is currently evaluating the effects, if any, that adoption
will have on its consolidated financial statements.
3. SHARE-BASED COMPENSATION
Share-based compensation expense totaled approximately $164,000 and $111,000 for the three
months ended March 31, 2008 and 2009, respectively. No tax benefits were attributed to the
share-based compensation because a valuation allowance was maintained for substantially all net
deferred tax assets.
The following table summarizes the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
|
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
42,500 |
|
|
$ |
1.80 |
|
|
|
|
|
|
|
|
|
Cancelled, forfeited or expired |
|
|
(5,000 |
) |
|
|
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
37,500 |
|
|
|
1.80 |
|
|
|
2.0 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2009 |
|
|
32,624 |
|
|
|
1.80 |
|
|
|
1.9 |
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
28,334 |
|
|
|
1.80 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
1 |
|
Aggregate intrinsic value is defined as the positive
difference between the current market value and the exercise price and is
estimated using the closing price of the Companys common stock on the last
trading day of the periods ended as of the dates indicated (in thousands). |
7
As of March 31, 2009, total unrecognized share-based compensation expense related to
non-vested stock options was approximately $7,000, which is expected to be recognized over a
weighted-average period of 0.7 years. All stock options outstanding at March 31, 2009 have an
exercise price of $1.80 per share.
The following table summarizes the Companys restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
|
|
|
|
|
|
Price at |
|
|
|
|
|
|
|
Date of |
|
|
|
Shares |
|
|
Issuance |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
807,471 |
|
|
$ |
1.18 |
|
Granted |
|
|
99,450 |
|
|
|
0.31 |
|
Vested |
|
|
(98,440 |
) |
|
|
1.46 |
|
Forfeited |
|
|
(62,318 |
) |
|
|
0.83 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
746,163 |
|
|
|
1.06 |
|
|
|
|
|
|
|
|
|
As of March 31, 2009, total unrecognized share-based compensation expense related to
non-vested restricted stock was approximately $620,000, which is expected to be recognized over a
weighted-average period of 1.7 years.
4. COMPREHENSIVE LOSS (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(708 |
) |
|
$ |
(1,765 |
) |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(428 |
) |
|
|
(197 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(1,136 |
) |
|
|
(1,962 |
) |
Plus: Comprehensive loss attributable to the noncontrolling interest |
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Natural Health Trends |
|
$ |
(1,136 |
) |
|
$ |
(1,941 |
) |
|
|
|
|
|
|
|
5. CONTINGENCIES
Legal Matters
On or around March 31, 2004, the Companys U.S. subsidiary, NHT Global, Inc. (NHT Global
U.S.) received a letter from John Loghry, a former NHT Global distributor, alleging that NHT
Global U.S. had breached its distributorship agreement with Mr. Loghry and that the Company had
breached an agreement to issue shares of the Companys common stock to Mr. Loghry. On May 13,
2004, NHT Global U.S. and the Company filed an action against Mr. Loghry in the United States
District Court for the Northern District of Texas (the Loghry Case) for disparagement and to
declare that they were not liable to Mr. Loghry on his alleged claims. Mr. Loghry filed
counterclaims against the Company and NHT Global U.S. for fraud and breach of contract, as well as
related claims of fraud, tortuous interference and conspiracy against Mark Woodburn and Terry
LaCore (who were officers and directors at that time) and Lisa Grossmann, an NHT Global
distributor. On June 2, 2005, the Company and the other counterclaim defendants moved to dismiss
the counterclaims on the grounds that the claims were barred by Mr. Loghrys failure to disclose
their existence when he filed for personal bankruptcy in September 2002. On June 30, 2005, the
U.S. Bankruptcy Court for the District of Nebraska granted Mr. Loghrys request to reopen his
bankruptcy case. On September 6, 2005, the United States Trustee filed an action in the U.S.
District Court for the District of Nebraska (the Trustees Case) asserting Loghrys claims
against the same defendants. On February 21, 2006, the Trustees Case was transferred to the
United States District Court for the Northern District of Texas. On March 30, 2007, the District
Court granted summary judgment against Mr. Loghry for lack of standing and against the Company on
some of our claims. The Company dismissed its remaining claims against Mr. Loghry and moved for
entry of a final judgment against Mr. Loghry. The Court has declined to enter final judgment
against Mr. Loghry until the Trustees Case is resolved. On February 13, 2008, the District Court
granted the Companys motion to dismiss certain of the Trustees fraud and contract claims because
the dismissed claims had been filed too late to be heard. In May 2008, the Court consolidated the
Trustees Case with a related, pending lawsuit. Messrs. Woodburn and LaCore and Ms. Grossmann,
have now reached settlements with the Trustee and Mr. Loghry. On February 17, 2009, the Court
dismissed some additional claims and limited any judgment for damages to an amount needed to make
Mr. Loghrys creditors whole and pay costs of litigation, including attorneys fees. The Court
calculated that creditor
claims total approximately $40,000, but held that the summary judgment evidence was otherwise
inconclusive on the amount necessary to make creditors whole and pay costs of litigation. The
Company has reached a tentative settlement agreement with the Trustee to release and dismiss all
remaining claims of the Trustee against all parties. This tentative agreement has been announced
to the Court, and the Court has taken this matter off of if its trial docket and administratively
closed the case. If the parties are unable to agree to and sign a definitive settlement agreement,
then it is possible that the case will be reopened set for trial.
8
On September 11, 2006, a putative class action lawsuit was filed in the United States District
Court for the Northern District of Texas by The Rosen Law Firm P.A. purportedly on behalf of
certain purchasers of the Companys common stock to recover damages caused by alleged violations of
federal securities laws. The lawsuit names the Company and certain current and former officers and
directors as defendants. The Company and the other defendants have signed a definitive settlement
agreement with the plaintiffs, pursuant to which the shareholder class will receive a total payment
of $2.75 million. Of that amount, the Companys directors and officers insurance carriers have
agreed in principal to pay $2.5 million, and the Company has agreed in principal to pay $250,000.
The settlement is subject to final court approval following completion of a fairness hearing, which
has been set for July 19, 2009. At this time, there can be no assurance that these conditions will
be met and that the settlement of the securities class action litigation will receive final court
approval. If the settlement is not completed, the parties to this suit may attempt to reach
agreement on alternative settlement terms or resume litigation. The Company recorded an accrual
for $250,000 related to this matter during the third quarter of 2008 and simultaneously
de-recognized $225,000 of legal fees that existed as of June 30, 2008, but which have now been paid
under its directors and officers insurance policy.
On June 26, 2008, the Company filed a lawsuit in the 116 th District Court, Dallas
County, Texas, against Terry LaCore and bHIP Global, Inc. seeking an unspecified amount in actual
and punitive damages, as well as a temporary and permanent injunction and other equitable relief.
The Company claims that Mr. LaCore deceived the Company, breached fiduciary duties, and breached
various agreements regarding the use, disclosure and return of confidential information and other
assets and non-interference with the Company and its business and relationships. The Company also
claims that Mr. LaCore and bHIP Global, Inc. are unlawfully taking, disparaging and/or interfering
with the Companys reputation, identity, confidential information, contracts and relationships,
products, businesses and other assets. On March 5, 2009 the Company obtained a temporary
injunction that restrains Mr. LaCore and bHIP Global, Inc. (and their officers, agents, employees
and attorneys, and all persons in active concert or participation with them) from (1) contracting
with, or employing, any former or existing employee, distributor or supplier of the Company if such
contract or employment would result in that person breaching his or her agreement with the Company;
and (2) obtaining confidential information belonging to the Company if the defendants know that the
information was obtained in breach of a confidentiality agreement between the Company and any
former or existing employee, distributor or supplier of the Company. The temporary injunction also
orders the Mr. LaCore and bHIP Global, Inc. to locate and return the Companys trade secrets and
proprietary and confidential information. The temporary injunction will remain in place until the
trial of the case, which is currently scheduled for November 9, 2009. The Company believes that
its claims have merit and intend to vigorously pursue them.
On July 16, 2008, Lisa Grossmann, a former distributor and consultant for the Company, filed a
lawsuit in the Superior Court of California in Sacramento, California, against the Company, and
certain current officers and directors, purporting to sue individually and on behalf of California
distributors, shareholders, and customers of the Company. On behalf of California residents, Ms.
Grossmann alleges that the defendants engaged in, or conspired to engage in, unfair competition and
false advertising and seeks an unspecified amount of restitution and disgorgement, as well as an
injunction. Individually, Ms. Grossmann alleges that the Company breached a contract to pay
distributor commissions to her, the Company breached an implied covenant of good faith and fair
dealing, all defendants were unjustly enriched at her expense, the individual defendants breached
fiduciary duties to her, all defendants were negligent in conducting the affairs of the Company,
and all defendants committed fraud. Ms. Grossman seeks in excess of $500,000 in damages on her
individual claims. On February 9, 2009, the Superior Court granted the defendants motion to quash
service of the lawsuit on them for lack of personal jurisdiction. Ms. Grossman has filed a motion
for new trial and, alternatively, a motion to set aside the order quashing service. That motion
will be heard on May 15, 2009. All Defendants deny Ms. Grossmans allegations and intend to
vigorously defend them if either of Ms. Grossmanns pending motions are granted.
Currently, there is no other material litigation pending against the Company other than as
disclosed in the paragraphs above. From time to time, the Company may become a party to litigation
and subject to claims incident to the ordinary course of the Companys business. Although the
results of such litigation and claims in the ordinary course of business cannot be predicted with
certainty, the Company believes that the final outcome of such matters will not have a material
adverse effect on the Companys business, results of operations or financial condition. Regardless
of outcome, litigation can have an adverse impact on the Company because of defense costs,
diversion of management resources and other factors.
9
Consumer Indemnity
As required by the Door-to-Door Sales Act in South Korea, the Company obtained insurance for
consumer indemnity claims with a mutual aid cooperative by entering into two mutual aid contracts
with Mutual Aid Cooperative & Consumer (the Cooperative).
The initial contract entered into on January 1, 2005 required the Company to invest KRW
600 million in the Cooperative, and the subsequent contract entered into on January 9, 2007,
required the Company to deposit KRW 600 million with a financial organization as security on behalf
of the Cooperative. The contracts secure payment to distributors in the event that the Company is
unable to provide refunds to distributors. Typically, requests for refunds are paid directly by
the Company according to the Companys normal Korean refund policy, which requires that refund
requests be submitted within three months. Accordingly, the Company estimates and accrues a
reserve for product returns based on this policy and its historical experience. The accrual
totaled KRW 16.5 million (USD $12,000) as of March 31, 2009. Depending on the sales volume, the
Company may be required to increase or decrease the amount of the security deposit. During the
second quarter of 2008, the Company withdrew the entire KRW 600 million deposit. The term of the
remaining contract is considered indefinite since it must remain in place as long as the Company
operates within South Korea. The maximum potential amount of future payments the Company could be
required to make to address actual distributor claims under these contracts is equivalent to three
months of rolling sales. The Company believes that the likelihood of utilizing the investment
funds to provide for distributor claims is remote.
Registration Payment Arrangements
Pursuant to the agreement with the investors in the Companys May 2007 financing for the sale
of 1,759,307 shares of Series A preferred stock and warrants representing the right to purchase
1,759,307 shares of common stock, the Company is obligated for a specified period of time to
maintain the effectiveness of the registration statement that was filed with the SEC covering the
resale of the shares of common stock issuable upon the conversion of Series A preferred stock or
the exercise of warrants issued in the financing. If the Company fails to maintain the
effectiveness of such registration statement due to an intentional and willful act without
immediately causing a subsequent registration statement to be filed with the SEC, then it will be
obligated to pay in cash an amount equal to 2% of the product of $1.70 times the number of shares
of Series A preferred stock sold in the financing to the relevant purchasers.
Pursuant to the agreement with the investors in the Companys October 2007 financing of
variable rate convertible debentures having an aggregate face amount of $4,250,000, seven-year
warrants to purchase 1,495,952 shares of the Companys common stock, and one-year warrants to
purchase 1,495,952 shares of the Companys common stock, the Company is obligated to (i) file a
registration statement covering the resale of certain of the shares of common stock underlying the
securities issued in the financing with the Commission on or prior to November 18, 2007, (ii) cause
the registration statement to be declared effective within certain specified periods of time and
(iii) maintain the effectiveness of the registration statement and the ability of the investors to
use the prospectus forming a part thereof for a specified period. If we fail to comply with these
or certain other provisions, then we will be required to pay liquidated damages of 2.0% per month
of the aggregate purchase price paid with respect to the unregistered shares of common stock by the
investors in the October 2007 financing until the first anniversary of the closing date of the
financing and 1.0% per month thereafter through the second anniversary of the closing date. The
registration statement was declared effective on March 17, 2008 with respect to 1,700,000 shares of
common stock issuable upon conversion of the variable rate convertible debentures and up to
1,495,952 shares issuable upon exercise of warrants held by the selling stockholders.
As of March 31, 2009, no contingent obligations have been recognized under registration
payment arrangements.
6. RELATED PARTY TRANSACTION
On and effective as of December 1, 2008, John Cavanaugh and the Company entered into a Going
Forward Agreement (the Going Forward Agreement) in which they mutually agreed to terminate the
Employment Agreement dated as of December 8, 2006, between the Company and Mr. Cavanaugh, who was
until then the President of the Companys subsidiary MarketVision Communications Corp. (MV
Corp.). As a result of the Going Forward Agreement, the Company is no longer obligated under the
Employment Agreement to make any severance payments to Mr. Cavanaugh, but shares of restricted
stock previously granted to Mr. Cavanaugh continue to vest during the six-month period referenced
below (and may vest earlier under some circumstances).
Pursuant to the Going Forward Agreement, the Company and MarketVision Consulting Group, LLC
(MV Consulting), a company controlled by Mr. Cavanaugh, have also entered into a new agreement
under which MV Consulting will provide the Company with up to 30 hours per month of consulting
services by each of Mr. Cavanaugh and another former MV Corp. employee, Jason Landry, for six
months (the Transition Services Agreement). As part of the Transition Services Agreement, MV
Consulting has hired the other employees of MV Corp. and will provide limited access to them as
consultants to the Company and its software development and support team for six months. In return,
the Company agreed to pay MV Consulting $65,000 per month for the first three months and $50,000
per month for the last three months, plus $150 per hour for services in excess of the allotted
hours per month. In addition, the Company agreed to pay MV Consulting a one-time $15,000 incentive
bonus, which was paid in January 2009.
10
In 2004, as part of a merger between the Company and MV Corp., the Company granted to MV
Consulting an irrevocable, exclusive, perpetual, royalty-free, fully-paid, worldwide, transferable,
sublicensable right and license to use, copy, modify, distribute,
rent, lease, enhance, transfer, market, and create derivative works of the software and
documentation owned by MV Corp. that was dormant unless and until an Event of Default occurred.
The Going Forward Agreement acknowledges that an Event of Default occurred on January 1, 2007,
under the Software License Agreement. The Company does not believe that the Event of Default, by
itself, has had or will have a material adverse effect on the Company. The Company continues to
own its version of the software and documentation and has the right to use its version of the
software and documentation for its internal use only and not as an application service provider or
service bureau, but may not rent, lease, license, transfer or distribute the software and
documentation without MV Consultings prior written consent.
Under the Going Forward Agreement and Transition Services Agreement, the Company also agreed
to (a) pay to MV Consulting the amounts paid by bHIP Global, Inc. to MV Corp. for services in the
months of September, October, and November 2008 under a previously disclosed Service Bureau Hosting
Agreement, which payments totaled $57,000, (b) transfer certain domain names and property rights in
the name MarketVision to MV Consulting, (c) pay $15,000 in certain legal fees incurred by Mr.
Cavanaugh and MV Consulting Corp., (d) sublease certain facilities in Eden Prairie, Minnesota to MV
Consulting at no cost until expiration of the lease on March 31, 2009 (lease payments are $3,300
per month), (e) transfer certain equipment used in the Eden Prairie office to MV Consulting, and
(f) reimburse certain expenses if incurred under the Transition Services Agreement. The Going
Forward Agreement also contains certain mutual releases by and among the Company and MV Corp., Mr.
Cavanaugh and Mr. Landry. The Transition Services Agreement also contains the agreement of Mr.
Cavanaugh and Mr. Landry not to solicit the Companys customers and distributors during the
six-month term of the Transition Services Agreement and for one year thereafter.
7. LIQUIDITY
At March 31, 2009, the Company had cash and cash equivalents of $2.6 million and a working
capital deficit of $5.0 million, or $3.9 million excluding deferred revenue. During the years
ended 2007 and 2008, the Company incurred significant, recurring losses from operations and
negative operating cash flows. Sales decreased significantly during these years and the Company
was unable to cut operating expenses sufficiently to avoid the negative operating results, though
we did successfully manage to decelerate the losses in 2008 compared to 2007. The Companys losses
attributable to common stockholders were $27.0 million and $3.9 million during 2007 and 2008,
respectively, and were $712,000 and $1,748,000 during the quarters ended March 31, 2008 and 2009,
respectively.
The Company has taken numerous actions to ensure that it will continue as a going concern. It
has planned and executed many cost reduction and margin improvement initiatives since the end of
the third quarter of 2007, such as (1) reducing headcount, which includes the termination of
multiple management-level positions in Greater China, South Korea and North America; (2)
down-sizing offices in Greater China and South Korea; (3) closing offices in Latin America and
Southeast Asia; (4) renegotiating vendor contracts in Greater China; (5) increasing product pricing
in Greater China, Europe and the U.S.; (6) changing commission plans worldwide; (7) streamlining
logistics processes in Greater China; (8) introducing better margin pre-assortments; and (9)
reducing Company-wide discretionary expenses. Also, the Company believes that it has taken a
number of effective steps toward stabilizing its revenues on a sequential basis, especially in the
Hong Kong market. As a result, the Company believes that its current cash breakeven level has been
significantly reduced and is more attainable.
The Company believes that its existing internal liquidity, supported by cash on hand, certain
restricted cash that the Company believes will be made available later in 2009 upon the approval
for a capital reduction application in China, anticipated improvement in cash flows from operations
with more stabilized revenue and much lower fixed costs since October 2007 should be adequate to
fund normal business operations and address its financial commitments for at least the next 12
months, assuming no significant unforeseen expense or further revenue decline. If the Companys
foregoing beliefs or assumptions prove to be incorrect, however, the Companys business, results of
operations and financial condition could be materially adversely affected.
The October 2007 private placement of convertible debentures requires twelve monthly
redemption payments that began November 1, 2008 for one-half of the original principal amount, and
the balance payable on October 19, 2009. The Company has made seven of the monthly redemption
payments as of May 1, 2009. The Companys current plan is to pay off the remaining monthly
redemption payments and the balance payable on October 19, 2009 with a combination of existing
cash, including removing restrictions on previously restricted cash, and cash generated from
operations. However, there is no assurance that the Company is able to successfully execute this
plan without delay or that the Companys ability to generate cash can be sustained to make the
necessary payments.
8. SUBSEQUENT EVENT
In April 2009, the Company reclassified non-current restricted cash in the amount of $2.9
million to cash and cash equivalents as the restrictions on the cash have been removed and the cash
is made available for operations in China. The amount was previously held as part of a statutory
requirement when a direct selling license application was pending. The Company has since
tentatively
withdrawn its last application, which has turned stale over the past year, with the intention
to re-submit an updated application in the future.
11
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Business Overview
We are an international direct-selling and e-commerce company. Subsidiaries controlled by us
sell personal care, wellness, and quality of life products under the NHT Global brand to an
independent distributor network that either uses the products themselves or resells them to
consumers.
As of March 31, 2009, we are conducting business through approximately 29,000 active
distributors. We consider a distributor active if they have placed at least one product order
with us during the preceding year. Although we have in prior years expended significant efforts to
expand into new markets, we do not intend to devote material resources to opening any additional
foreign markets in the near future. Our priority is to focus our resources in our most promising
markets, namely Greater China, South Korea and Europe, in particular Russia.
During the year 2008 and the first three months of 2009, we generated approximately 93% and
96% of our revenue from subsidiaries located outside North America, with sales in Hong Kong
representing approximately 66% and 74% of revenue, respectively. Because of the size of our
foreign operations, operating results can be impacted negatively or positively by factors such as
foreign currency fluctuations, and economic, political and business conditions around the world.
In addition, our business is subject to various laws and regulations, in particular regulations
related to direct selling activities that create certain risks for our business, including improper
claims or activities by our distributors and potential inability to obtain necessary product
registrations.
China is currently our most important business development project. In June 2004, NHT Global
obtained a general business license in China. The license stipulates a capital requirement of $12
million over a three-year period, including a $1.8 million initial payment we made in January 2005.
Direct selling is prohibited in China without a direct selling license that we do not have. In
December 2005, we submitted a preliminary application for a direct selling license and fully
capitalized our Chinese entity with the remaining capital necessary to fulfill the $12.0 million
required cash infusion. In June 2006, we submitted a revised application package in accordance
with new requirements issued by the Chinese government. In June 2007, we launched a new e-commerce
retail platform in China that does not require a direct selling license and is separate from our
current worldwide platform. We believe this model, which offers discounts based on volume
purchases, will encourage repeat purchases of our products for personal consumption in the Chinese
market. The platform is designed to be in compliance with our understanding of current laws and
regulations in China. In November 2007, we filed a new, revised direct selling application
incorporating a name change, our new e-commerce model and other developments. These direct selling
applications were not approved or rejected by the pertinent authorities, but did not appear to
materially progress. By now, the information contained in the most recent application is stale.
The Companys application to temporarily withdraw the license application in February 2009 has been
granted, and the Company intends to amend its application with the goal to re-apply in the future.
We are unable to predict whether we will be successful in obtaining a direct selling license to
operate in China, and if we are successful, when we will be permitted to enhance our e-commerce
retail platform with direct selling operations.
Most of the Companys Hong Kong revenue is derived from the sale of products that are
delivered to members in China. After consulting with outside professionals, the Company believes
that its Hong Kong e-commerce business does not violate any applicable laws in China even though it
is used for the internet purchase of our products by buyers in China. But the government in China
could, in the future, officially interpret its laws and regulations or adopt new laws and
regulations to prohibit some or all of our e-commerce activities with China and, if our members
engage in illegal activities in China, those actions could be attributable to us. In addition,
other Chinese laws regarding how and when members may assemble and the activities that they may
conduct, or the conditions under which the activities may be conducted, in China are subject to
interpretations and enforcement attitudes that sometimes vary from province to province, among
different levels of government, and from time to time. Members sometimes violate one or more of
the laws regulating these activities, notwithstanding training that the Company attempts to
provide. Enforcement measures regarding these violations, which can include arrests, raise the
uncertainty and perceived risk associated with conducting this business, especially among those who
are aware of the enforcement actions but not the specific activities leading to the enforcement.
The Company believes that this has led some existing members in China who are signed up as
distributors in Hong Kong to leave the business or curtail their selling activities and has led
potential members to choose not to participate. Among other things, the Company is combating this
with more training and public relations efforts that are designed, among other things, to
distinguish the Company from businesses that make no attempt to comply with the law. This
environment creates uncertainty about the future of doing this type of business in China generally
and under our business model, specifically.
12
Income Statement Presentation
The Company derives its revenue from sales of its products, sales of its enrollment packages,
and from shipping charges. Substantially all of its product sales are to independent distributors
at published wholesale prices. We translate revenue from each markets local currency into U.S.
dollars using average rates of exchange during the period. The following table sets forth revenue
by market and product line for the time periods indicated (dollars in thousands).
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
1,215 |
|
|
|
10.7 |
% |
|
$ |
372 |
|
|
|
3.8 |
% |
Hong Kong |
|
|
6,927 |
|
|
|
60.8 |
|
|
|
7,256 |
|
|
|
73.5 |
|
China |
|
|
283 |
|
|
|
2.5 |
|
|
|
449 |
|
|
|
4.5 |
|
Taiwan |
|
|
1,104 |
|
|
|
9.7 |
|
|
|
592 |
|
|
|
6.0 |
|
South Korea |
|
|
1,409 |
|
|
|
12.3 |
|
|
|
252 |
|
|
|
2.6 |
|
Japan |
|
|
342 |
|
|
|
3.0 |
|
|
|
188 |
|
|
|
1.9 |
|
Europe |
|
|
|
|
|
|
|
|
|
|
760 |
|
|
|
7.7 |
|
Other1 |
|
|
115 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,395 |
|
|
|
100.0 |
% |
|
$ |
9,869 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes sales from the Latin America, Australia, New
Zealand, and Southeast Asia markets. |
13
Cost of sales consist primarily of products purchased from third-party manufacturers, freight
cost for shipping products to distributors, import duties, costs of promotional materials sold to
the Companys distributors at or near cost, and provisions for slow moving or obsolete inventories.
Cost of sales also includes purchasing costs, receiving costs, inspection costs and warehousing
costs.
Distributor commissions are typically our most significant expense and are classified as an
operating expense. Under our compensation plan, distributors are paid weekly commissions,
generally in their home country currency, for product sold by their down-line distributor network
across all geographic markets, except China, where in the second quarter of 2007 we launched an
e-commerce portal based on a buyers-club concept and do not pay any commissions. Distributors are
not paid commissions on purchases or sales of our products made directly by them. This seamless
compensation plan enables a distributor located in one country to sponsor other distributors
located in other countries where we are authorized to do business. Currently, there are basically
two ways in which our distributors can earn income:
|
|
|
Through retail markups on sales of products purchased by distributors at wholesale
prices (in some markets, sales are for personal consumption only and income may not be
earned through retail mark-ups on sales in that market); and |
|
|
|
Through commissions paid on product purchases made by their down-line distributors. |
Each of our products is designated a specified number of sales volume points, also called
bonus volume or BV. Commissions are based on total personal and group sales volume points per
sales period. Sales volume points are essentially a percentage of a products wholesale cost. As
the distributors business expands from successfully sponsoring other distributors who in turn
expand their own businesses by sponsoring other distributors, the distributor receives higher
commissions from purchases made by an expanding down-line network. To be eligible to receive
commissions, a distributor may be required to make nominal monthly or other periodic purchases of
our products. Certain of our subsidiaries do not require these nominal purchases for a distributor
to be eligible to receive commissions. In determining commissions, the number of levels of
down-line distributors included within the distributors commissionable group increases as the
number of distributorships directly below the distributor increases. Under our current
compensation plan, certain of our commission payouts may be limited by a fixed ceiling measured in
terms of total payments to or for distributors as a specific percentage of total product revenue.
In some markets, commissions may be further limited. Distributor commissions are dependent on the
sales mix and, for fiscal 2008 and the first three months of 2009, represented 39% and 38% of net
sales, respectively. From time to time we make modifications and enhancements to our compensation
plan to help motivate distributors, which can have an impact on distributor commissions. From time
to time we also enter into agreements for business or market development, which may result in
additional compensation to specific distributors.
Selling, general and administrative expenses consist of administrative compensation and
benefits (including stock-based compensation), travel, credit card fees and assessments,
professional fees, certain occupancy costs, and other corporate administrative expenses. In
addition, this category includes selling, marketing, and promotion expenses including costs of
distributor conventions which are designed to increase both product awareness and distributor
recruitment. Because our various distributor conventions are not always held at the same time each
year, interim period comparisons will be impacted accordingly.
Provision for income taxes depends on the statutory tax rates in each of the jurisdictions in
which we operate. We implemented a foreign holding and operating company structure for our
non-United States businesses effective December 1, 2005. This structure re-organized our
non-United States subsidiaries into the Cayman Islands. In October 2007, we discontinued our
operational use of this structure to reduce costs and because we determined that our United States
operating losses will lower our overall effective tax rate. We believe that we operate in
compliance with all applicable transfer pricing laws and we intend to continue to operate in
compliance with such laws. However, there can be no assurance that we will continue to be found to
be operating in compliance with transfer pricing laws, or that those laws would not be modified,
which, as a result, may require changes in our operating procedures. If the United States Internal
Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge
these agreements, plans, or arrangements, or require changes in our transfer pricing practices, we
could be required to pay higher taxes, interest and penalties, and our earnings would be adversely
affected.
14
Results of Operations
The following table sets forth our operating results as a percentage of net sales for the
periods indicated.
|
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|
|
|
|
|
|
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|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
27.1 |
|
|
|
28.3 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
72.9 |
|
|
|
71.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Distributor commissions |
|
|
35.1 |
|
|
|
38.3 |
|
Selling, general and administrative expenses |
|
|
40.3 |
|
|
|
38.2 |
|
Depreciation and amortization |
|
|
3.4 |
|
|
|
3.4 |
|
Impairment of long-lived assets |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
79.0 |
|
|
|
79.9 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(6.1 |
) |
|
|
(8.2 |
) |
Other income (expense), net |
|
|
0.2 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
Loss before income taxes and minority interest |
|
|
(5.9 |
) |
|
|
(16.7 |
) |
Income tax provision |
|
|
(0.3 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(6.2 |
)% |
|
|
(17.9 |
)% |
|
|
|
|
|
|
|
Net Sales. Net sales were $9.9 million for the three months ended March 31, 2009 compared to
$11.4 million for the three months ended March 31, 2008, a decrease of $1.5 million, or 13%. Hong
Kong net sales increased $329,000, or 5%, over the comparable period a year ago. Conversely, net
sales for North America, South Korea, and Taiwan were down $843,000, $1,157,000, and $512,000,
respectively. North American sales were impacted by the launch of retail product selling in Italy
during June 2008. Prior to the launch, sales into the European market were fulfilled by our North
American subsidiaries. European sales during the first quarter of 2009 totaled $760,000.
Additionally, net sales in China from our e-commerce retail platform increased $166,000 over the
comparable period a year ago.
The decrease in net sales was primarily due to the Companys effort to reduce loss-making
recruitment programs. The Company is lowering the cost of new member acquisition and focusing more
on improving the productivity of the existing members. As of March 31, 2009, the operating
subsidiaries of the Company had approximately 29,000 active distributors, compared to 49,000 active
distributors at March 31, 2008. Hong Kong experienced a decrease of 10,000 active distributors, or
35%, from March 31, 2008 to March 31, 2009.
As of March 31, 2009, the Company had deferred revenue of approximately $1.1 million, of which
approximately $260,000 pertained to product sales and approximately $837,000 pertained to
unamortized enrollment package revenue.
Cost of Sales. Cost of sales was $2.8 million, or 28.3% of net sales, for the three months
ended March 31, 2009 compared with $3.1 million, or 27.1% of net sales, for the three months ended
March 31, 2008. Cost of sales decreased $293,000, or 9%, for the three months ended March 31, 2009
over the comparable period in the prior year, due primarily to the decrease in net sales. Cost of
sales as a percentage of net sales increased for the three months ended March 31, 2009 due to the
decline in enrollment package revenue, specifically in Hong Kong, as this component of net sales
does not contain any corresponding charge to cost of sales. The impact of the enrollment package
revenue has been partially offset by a price increase and a restructuring of shipping methods in
Hong Kong, both effective at the end of the fourth quarter of 2008.
Gross Profit. Gross profit was $7.1 million, or 71.7% of net sales, for the three months ended
March 31, 2009 compared with $8.3 million, or 72.9% of net sales, for the three months ended March
31, 2008. The gross profit decrease of $1.2 million for the three months ended March 31, 2009,
over the comparable period in the prior year, was mainly due to, as stated above, the decline in
enrollment package revenue.
Distributor Commissions. Distributor commissions were $3.8 million, or 38.3% of net sales, for
the three months ended March 31, 2009 compared with $4.0 million, or 35.1% of net sales, for the
three months ended March 31, 2008. Distributor commissions decreased by $218,000, or 5%, mainly
due to the decrease in product sales. We implemented certain changes to our commission plan in
March 2008, primarily in the markets of Hong Kong, the United States, and Taiwan.
15
Selling, General and Administrative Expenses. Selling, general and administrative expenses
were $3.8 million, or 38.2% of net sales, for the three months ended March 31, 2009 compared with
$4.6 million, or 40.3% of net sales, for the three months ended March 31, 2008. Selling, general
and administrative expenses decreased by $825,000, or 18%, over the comparable period in the prior
year, mainly due to the following:
|
|
|
lower legal and accounting fees ($119,000) and insurance costs ($27,000) in North
America; |
|
|
|
lower rent expense ($134,000), public relations expense ($91,000), and professional fees
($124,000) in Hong Kong and China; |
|
|
|
lower event costs ($68,000) and professional fees ($61,000) in Europe; |
|
|
|
lower operating costs due to office closures in Mexico ($206,000), and Southeast Asia
($69,000); |
|
|
|
lower employee-related costs ($213,000), credit card charges and assessments ($40,000),
and rent expense ($57,000) in South Korea; |
|
|
|
lower stock-based compensation expense ($53,000); partly offset by |
|
|
|
higher employee-related expense ($199,000) and other professional
fees ($55,000) in North
America, as well as the reversal of a litigation settlement accrual during the prior year
($207,000). |
Depreciation and Amortization. Depreciation and amortization was $330,000, or 3.4% of net
sales, for the three months ended March 31, 2009 compared with $386,000, or 3.4% of net sales, for
the three months ended March 31, 2008. Depreciation and amortization decreased by $56,000 for the
three months ended March 31, 2009 compared to the comparable period in the prior year, as a result
of the Companys slowdown in capital expenditures.
Other Income (Expense), Net. Other expense was $843,000 for the three months ended March 31,
2009 compared with income of $27,000 for the three months ended March 31, 2008. The increase in
other expense was primarily due to interest expense of $866,000 the Company recorded on its
convertible debentures issued in October 2007, including amortization of debt issuance cost and
accretion of debt discount aggregating $775,000. During the three months ended March 31, 2008, the
Company recorded $371,000 in unrealized foreign currency gains on intercompany foreign currency
transactions. During the three months ended March 31, 2009, the amount of unrealized foreign
currency gains or losses was minimized as the Company determined that settlement of certain of its
intercompany balances are not planned or anticipated in the foreseeable future, and thus, the gains
and losses are reflected as a cumulative translation adjustment.
Income Taxes. The Company recorded a provision of $114,000 and $37,000 during the three months
ended March 31, 2009 and 2008, respectively, related to its operations outside the United States.
The Company did not recognize a tax benefit for U.S. tax purposes due to uncertainty that the
benefit will be realized.
Net Loss. Net loss was $1.8 million, or 17.9% of net sales, for the three months ended March
31, 2009 compared to net loss of $708,000, or 6.2% of net sales, for the three months ended March
31, 2008. The increase in losses was primarily due to lower net sales, higher percentage
distributor commission payout, and additional interest expense on the convertible debentures,
partially offset by the reduction in selling, general and administrative expenses, as compared to
the comparable period in the prior year.
Liquidity and Capital Resources
The Company has in recent quarters supported its working capital and capital expenditure needs
with cash generated from operations as well as capital raised from several private placements.
On May 4, 2007, the Company consummated a private equity placement generating gross proceeds
of approximately $3.0 million. The May 2007 financing consisted of the sale of 1,759,307 shares of
the Companys Series A convertible preferred stock and the sale of warrants evidencing the right to
purchase 1,759,307 shares of the Companys common stock. As partial consideration for placement
agency services, the Company issued warrants evidencing the right to purchase an additional 300,000
shares of the Companys common stock to the placement agent that assisted in the financing. The
warrants are exercisable at any time through the sixth anniversary following their issuance. The
exercise price of the warrants varies from $3.80 to $5.00 per share, depending on the time of
exercise.
16
More recently, on October 19, 2007, the Company raised gross proceeds of $3.7 million in a
private placement of variable rate convertible debentures (the Debentures) having an aggregate
face amount of $4,250,000, seven-year warrants to purchase 1,495,952 shares of the Companys common
stock, and one-year warrants to purchase 1,495,952 shares of the Companys common stock. The
Debentures are convertible by their holders into shares of our common stock at a conversion price
of $2.50, subject to adjustment in certain circumstances. The Debentures bear interest at the
greater of LIBOR plus 4%, or 10% per annum. Interest is payable quarterly beginning on January 1,
2008. One-half of the original principal amount of the Debentures is payable in 12 equal monthly
installments beginning on November 1, 2008, and the balance is payable on October 19, 2009,
unless extended by the holders to October 19, 2012. Under certain conditions, the Company may be
able to pay principal and interest in shares of its common stock. Under certain conditions, the
Company also has certain rights to force conversion or redemption of the debentures. The warrants
have an exercise price of $3.52 per share. The placement agent and its assigns also received
five-year warrants to purchase 149,595 shares of the Companys common stock at an exercise price of
$3.52 per share. The Company has used and plans to continue using the net proceeds from the
October 2007 private placement to provide additional working capital. The one-year warrants
expired on April 21, 2009.
At March 31, 2009, the Companys cash and cash equivalents totaled approximately $2.6 million,
including $213,000 in China that may not be freely transferable to other countries because the
Companys Chinese subsidiary is subject to a business license capitalization requirement. Total
cash and cash equivalents decreased by approximately $855,000 from December 31, 2008 to March 31,
2009. In April 2009, the Company reclassified non-current restricted cash in the amount of $2.9
million to cash and cash equivalents as the restrictions on the cash have been removed and the cash
is made available for operations in China.
At March 31, 2009, the ratio of current assets to current liabilities was 0.55 to 1.00 and the
Company had a working capital deficit of approximately $5.0 million. Current liabilities included
deferred revenue of $1.1 million that consisted of unamortized enrollment package revenues and
unshipped orders. The ratio of current assets to current liabilities, excluding deferred revenue,
is 0.61 to 1.00. Working capital as of March 31, 2009 decreased $903,000 compared to the Companys
working capital as of December 31, 2008, mainly due to cash used in operations and an increase of
$643,000 in convertible debentures due to accretion of the related discount.
Cash used in operations for the three months ended March 31, 2009 was approximately $486,000.
Cash was mainly utilized due to the incurrence of net losses and decreases in deferred revenue,
partly offset by an increase in accounts payable and accrued expenses.
Cash provided by investing activities during the period was approximately $208,000, primarily
due to a decrease in restricted cash maintained as a reserve with a certain credit card processing
company in South Korea to provide for potential uncollectible amounts and chargebacks, partially
offset by $58,000 in capital expenditures.
Cash used in financing activities during the three months ended March 31, 2009 was
approximately $490,000 due to the monthly installments payments on the Debentures that began on
November 1, 2008.
The Company has taken numerous actions to ensure that it will continue as a going concern. It
has planned and executed many cost reduction and margin improvement initiatives since the end of
the third quarter of 2007, such as (1) reducing headcount, which includes the termination of
multiple management-level positions in Greater China, South Korea and North America; (2)
down-sizing offices in Greater China and South Korea; (3) closing offices in Latin America and
Southeast Asia; (4) renegotiating vendor contracts in Greater China; (5) increasing product pricing
in Greater China, Europe and the U.S.; (6) changing commission plans worldwide; (7) streamlining
logistics processes in Greater China; (8) introducing better margin pre-assortments; and (9)
reducing Company-wide discretionary expenses. Also, we believe that we have taken a number of
effective steps toward stabilizing the Companys revenues on a sequential basis, especially in the
Hong Kong market. As a result, the Company believes that its current cash breakeven level has been
significantly reduced and is more attainable.
The Company believes that its existing internal liquidity, supported by cash on hand, certain
restricted cash that the Company believes will be made available later in 2009 upon the approval
for a capital reduction application in China, anticipated improvement in cash flows from operations
with more stabilized revenue and much lower fixed costs since October 2007 should be adequate to
fund normal business operations and address its financial commitments for at least the next 12
months, assuming no significant unforeseen expense or further revenue decline. If the Companys
foregoing beliefs or assumptions prove to be incorrect, however, the Companys business, results of
operations and financial condition could be materially adversely affected.
The Company does not have any significant unused sources of liquid assets. Potentially the
Company might receive additional external funding if currently outstanding warrants are exercised.
Furthermore, if necessary, the Company may attempt to generate more funding from the capital
markets, but currently does not believe that will be necessary.
We do not intend to devote material resources to opening any additional foreign markets in the
near future. Our priority is to focus our resources in our most promising markets, namely Greater
China and Russia.
17
Critical Accounting Policies and Estimates
In response to SEC Release No. 33-8040, Cautionary Advice Regarding Disclosure about Critical
Accounting Policies and SEC Release Number 33-8056, Commission Statement about Managements
Discussion and Analysis of Financial Condition and Results
of Operations, the Company has identified certain policies and estimates that are important
to the portrayal of its financial condition and results of operations. Critical accounting
policies and estimates are defined as both those that are material to the portrayal of our
financial condition and results of operations and as those that require managements most
subjective judgments. These policies and estimates require the application of significant judgment
by the Companys management.
The most significant accounting estimates inherent in the preparation of the Companys
financial statements include estimates associated with obsolete inventory and the fair value of
acquired intangible assets, including goodwill, and other long-lived assets, as well as those used
in the determination of liabilities related to sales returns, distributor commissions, and income
taxes. Various assumptions and other factors prompt the determination of these significant
estimates. The process of determining significant estimates is fact specific and takes into
account historical experience and current and expected economic conditions. The actual results may
differ materially and adversely from the Companys estimates. To the extent that there are
material differences between the estimates and actual results, future results of operations will be
affected. The Companys critical accounting policies at March 31, 2009 include the following:
Inventory Valuation. The Company reviews its inventory carrying value and compares it to the
net realizable value of its inventory and any inventory value in excess of net realizable value is
written down. In addition, the Company reviews its inventory for obsolescence and any inventory
identified as obsolete is reserved or written off. The Companys determination of obsolescence is
based on assumptions about the demand for its products, product expiration dates, estimated future
sales, and managements future plans. Also, if actual sales or management plans are less favorable
than those originally projected by management, additional inventory reserves or write-downs may be
required. At December 31, 2008 and March 31, 2009, the Companys inventory value was approximately
$2.1 million, net of reserves of $239,000 and $106,000, respectively. No significant provision was
recorded during the three month periods ended March 31, 2008 and 2009.
Valuation of Intangible Assets and Other Long-Lived Assets. The Company has adopted Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually or sooner whenever events or
changes in circumstances indicate that they may be impaired. At March 31, 2009, goodwill of
approximately $1.8 million was reflected on the Companys balance sheet. No impairment of goodwill
was recognized during the three month periods ended March 31, 2008 and 2009.
The Company reviews the book value of its property and equipment and intangible assets with
definite lives whenever an event or change in circumstances indicates that the carrying amount of
an asset or group of assets may not be recoverable. Recoverability of these assets is measured by
comparison of its carrying amounts to future undiscounted cash flows the assets are expected to
generate. If property and equipment and intangible assets with definite lives are considered to be
impaired, the impairment to be recognized equals the amount by which the carrying value of the
asset exceeds its fair value. At March 31, 2009, the net book value of the Companys property and
equipment and intangible assets were approximately $1.1 million and $1.6 million, respectively. No
significant impairment was recorded during the three month periods ended March 31, 2008 and 2009.
Allowance for Sales Returns. An allowance for sales returns is provided during the period the
product is shipped. The allowance is based upon the return policy of each country, which varies
from 14 days to one year, and their historical return rates, which range from approximately 1% to
approximately 5% of sales. Sales returns are approximately 5% and 4% of sales for the three months
ended March 31, 2008 and 2009. The allowance for sales returns was approximately $517,000 and
$369,000 at December 31, 2008 and March 31, 2009, respectively. No material changes in estimates
have been recognized for the three months ended March 31, 2009.
Revenue Recognition. Product sales are recorded when the products are shipped and title passes
to independent distributors. Product sales to distributors are made pursuant to a distributor
agreement that provides for transfer of both title and risk of loss upon our delivery to the
carrier that completes delivery to the distributors, which is commonly referred to as F.O.B.
Shipping Point. The Company primarily receives payment by credit card at the time distributors
place orders. The Companys sales arrangements do not contain right of inspection or customer
acceptance provisions other than general rights of return. Amounts received for unshipped product
are recorded as deferred revenue. Such amounts totaled approximately $1.9 million and $260,000 at
December 31, 2008 and March 31, 2009, respectively. Shipping charges billed to distributors are
included in net sales. Costs associated with shipments are included in cost of sales.
Enrollment package revenue, including any nonrefundable set-up fees, is deferred and
recognized over the term of the arrangement, generally twelve months. Enrollment packages provide
distributors access to both a personalized marketing website and a business management system. No
upfront costs are deferred as the amount is nominal. At December 31, 2008 and March 31, 2009,
enrollment package revenue totaling $1.0 million and $837,000 was deferred, respectively. Although
the Company has no immediate plans to significantly change the terms or conditions of enrollment
packages, any changes in the future could result in additional revenue deferrals or could cause us
to recognize the deferred revenue over a longer period of time.
18
Tax Valuation Allowance. The Company evaluates the probability of realizing the future
benefits of any of its deferred tax assets and records a valuation allowance when it believes a
portion or all of its deferred tax assets may not be realized. At December 31, 2005, the Company
increased the valuation allowance to equal its net deferred tax assets due to the uncertainty of
future operating results. During 2006, the Company recorded deferred tax assets in foreign
jurisdictions that were expected to be realized and therefore no valuation allowance was necessary.
The valuation allowance will be reduced at such time as management believes it is more likely than
not that the deferred tax assets will be realized. During the three month periods ended March 31,
2008 and 2009, no such reduction in the valuation allowance occurred. Any reductions in the
valuation allowance to uncover deferred tax assets will reduce future income tax provisions.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable under smaller reporting company disclosure rules.
Item 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management, with the participation of the Companys principal executive officer and principal
financial officer, evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of March 31, 2009. The Companys disclosure controls and
procedures are designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to management, including the
Companys principal executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Based on this evaluation, the principal executive
officer and principal financial officer concluded that, as of March 31, 2009, the Companys
disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the
fiscal quarter ended March 31, 2009 that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.
19
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings which could have an adverse effect on its
business, results of operations, or financial condition. For information relating to such legal
proceedings, see Note 5 in the Notes to Consolidated Financial Statements contained in Part I, Item
1 of this Quarterly Report on Form 10-Q.
Item 1A. RISK FACTORS
Not applicable under smaller reporting company disclosure rules.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
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Exhibit |
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|
Number |
|
Exhibit Description |
|
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|
|
|
|
31.1 |
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|
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). |
|
|
|
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31.2 |
|
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Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
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32.2 |
|
|
Certification of the Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
20
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.
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NATURAL HEALTH TRENDS CORP.
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Date: May 14, 2009 |
/s/ Chris T. Sharng
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Chris T. Sharng |
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President
(Principal Executive Officer) |
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21
EXHIBIT INDEX
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|
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|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |