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4. Commitments And Contingencies
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12 Months Ended | |||||||||||||||
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Dec. 31, 2011
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| Notes To Financial Statements | ||||||||||||||||
| Commitments and Contingencies Disclosure [Text Block] |
4. COMMITMENTS
AND CONTINGENCIES
Operating
Leases
The
Company has entered into non-cancelable operating lease
agreements for locations within the United States and for its
international subsidiaries, with expirations through July
2013. Rent expense in connection with operating leases
was $1.1 million and $744,000 during 2010 and 2011,
respectively.
Future
minimum lease obligations as of December 31, 2011, are as follows
(in thousands):
Purchase
Commitment
The
Company has entered into an agreement with one of its suppliers
to purchase its product through December 2014. To
maintain this agreement, the Company is required to purchase a
minimum of $220,000 of product in 2012. The minimum
purchase requirement in the following two years is dependent on
the volume in the preceding year plus an incremental amount not
to exceed $40,000.
Employment
Agreements
The
Company has employment agreements with certain members of its
management team that can be terminated by either the employee or
the Company upon four weeks’ notice. The employment
agreements entered into with the management team contain
provisions that guarantee the payments of specified amounts in
the event of a change in control, as defined, or if the employee
is terminated without cause, as defined, or terminates employment
for good reason, as defined. In addition, the Company
has an employment agreement with another employee that can be
terminated at will by either the employee or the Company,
provided that the Company must pay a specified amount if it
terminates the agreement without cause, as defined, or the
employee terminates the agreement with good reason, as
defined. As of December 31, 2011, no outstanding
obligations existed under any severance agreements.
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 December 31, 2010 and
2011, non-current other assets include KRW 260 million (USD
$229,000) and KRW 100 million (USD $86,000), respectively,
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 (see Note
5), the Company is obligated for a specified period of time to
maintain the effectiveness of the registration statement that was
filed with the Securities and Exchange Commission (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 is $5.00 per share. Such warrants expire
May 4, 2013.
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 December 31, 2011, no contingent obligations have been
recognized under registration payment arrangements.
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 litigation pending against the
Company. 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.
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