Note 5 - Contingencies |
3 Months Ended |
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Sep. 30, 2011 | |
| Commitments and Contingencies Disclosure [Text Block] |
5. CONTINGENCIES
Legal
Matters
On
or about January 4, 2010, Steve Francisco sued the
Company’s subsidiary, NHT Global, Inc., in the Superior
Court for Orange County, California, in Case No.
30-2010-00333395, styled Steve Francisco,
Starsearch International, LLC, and Healthlik Resources, LLC
v. NHT Global, Inc., eKaire.com, Inc. and Does 1 through
20. Mr. Francisco sought damages for the
alleged breach of a prior settlement agreement under which
NHT Global had agreed to pay Mr. Francisco payments of not
less than $10,000 and not more than $30,000 per month unless
and until Mr. Francisco violated NHT Global’s policies
and procedures. On March 12, 2009, NHT Global had
terminated payments to Mr. Francisco for violating the
policies and procedures. Mr. Francisco sought
recovery of $100,000 in damages accrued through the date of
filing of the lawsuit and an order requiring NHT Global to
continue making the monthly payments required by the
settlement agreement, as well as an accounting,
attorneys’ fees and costs. Mr.
Francisco’s lawsuit also sought payment of certain
promissory notes in the aggregate amount of $102,000 made by
eKaire.com, Inc., a former subsidiary no longer affiliated
with the Company, who separately answered the
lawsuit. Trial of this lawsuit was set for
February 14, 2011. On February 14, 2011, the
parties announced to the court that they had reached an oral
settlement agreement that was pending
documentation. On or about March 8, 2011, NHT
Global, Inc. and the plaintiffs in this lawsuit signed a
Confidential Settlement Agreement and Mutual Release,
containing a mutually agreeable, confidential settlement of
the case.
On
or about June 9, 2010, the Company vacated the premises it
leased at 2050 Diplomat Drive, Dallas, Texas, so that it
could be leased to a new tenant. The landlord, CLP
Properties Texas, LP (the “Landlord”), terminated
the lease as of June 17, 2010 and entered into a lease with a
new tenant. On or about August 17, 2010, the
Company received the Landlord’s written demand for
payment of $413,000 for unpaid rent and other charges due
under the lease through June 17, 2010. On
September 30, 2010, CLP Properties Texas, LP, sued the
Company in the 116th Judicial District Court, Dallas County,
Texas, in Cause No. 10-13043, styled CLP Properties
Texas, LP v. Natural Health Trends Corp. The lawsuit
alleged breach of the lease and sought actual damages,
interest, costs and attorneys’ fees. The
Company answered with a general denial, and gave notice to
the Landlord that it intended to assert an affirmative
defense of failure to mitigate damages. On or
about June 2, 2011, the parties signed a Settlement Agreement
under which the Company agreed to pay the Landlord $50,000 by
June 3, 2011 and an additional $75,000 by September 15,
2011. These amounts were timely paid, and the
lawsuit was dismissed with prejudice.
Currently,
there is no other 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
Company’s 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 Company’s 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.
Consumer
Indemnity
As
required by the Door-to-Door Sales Act in South Korea, the
Company maintains insurance for consumer indemnity claims
with a mutual aid cooperative by possessing a mutual aid
contract with Mutual Aid Cooperative & Consumer (the
“Cooperative”). The contract secures
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 Company’s
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. Depending on the
sales volume, the Company may be required to increase or
decrease the amount of the contract. The maximum
potential amount of future payments the Company could be
required to make to address actual distributor claims under
the contract is equivalent to three months of rolling
sales. At September 30, 2011, non-current other
assets include KRW 100 million (USD $85,000) underlying the
contract, which can be utilized by the Cooperative to fund
any outstanding distributor claims. The Company
believes that the likelihood of utilizing these funds to
provide for distributors claims is remote.
Registration
Payment Arrangements
Pursuant
to the agreement with the original investors and the
placement agent in the 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
exercise of warrants issued in the financing. On March
18, 2010, the Company filed a post-effective amendment
withdrawing unsold shares from registration. If
the Company fails to file a new registration statement, and
maintain its effectiveness , then it may be liable for
payment in cash of 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, or up
to approximately $60,000, but only if the quoted closing
price of the Company’s common stock exceeds the warrant
exercise price of the warrants. The exercise price
of the warrants was $3.80 per share until May 3, 2010, $4.35
per share until November 3, 2011, and currently is $5.00 per
share until May 4, 2013, when the warrants expire.
Pursuant
to the agreement with the investors in the Company’s
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
Company’s common stock, and one-year warrants to
purchase 1,495,952 shares of the Company’s common
stock, the Company was obligated to (i) file a
registration statement covering the resale of the maximum
number of Registrable Securities (as defined) that is
permitted by SEC Guidance (as defined) 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 until all Registrable Securities have
been sold, or may be sold without volume restrictions
pursuant to Rule 144(k) under the Securities Act. The
Company timely filed that registration statement covering the
shares of common stock underlying the debentures, which have
been redeemed, and the one-year warrants, which have
expired. At the time, the 1,495,952 shares of
common stock underlying the seven-year warrants, and 149,595
shares of common stock underlying certain five-year warrants
issued to the placement agent in the transaction, were not
deemed Registrable Securities and were not included in the
registration statement. If they are subsequently
deemed Registrable Securities and we fail to file a new
registration statement covering them, then the warrants may
be exercised by means of a cashless exercise. The maximum
number of shares that could be required to be issued upon
exercise of the warrants (whether on a cashless basis or
otherwise) is limited to the number of shares indicated on
the face of the warrants.
As
of September 30, 2011, no contingent obligations have
been recognized under registration payment
arrangements.
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