FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25238
NATURAL HEALTH TRENDS CORP.
(Exact name of Small Business Issuer as specified in its charter)
Florida 59-2705336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 West Sample Road, Suite 318
Pompano Beach, FL 33064
(Address of Principal Executive Offices)
(954) 969-9771
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 X No
The number of shares outstanding of the issuer's Common Stock, $.001
par value, as of March 31, 1998 was 38,380,427 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998 1
(unaudited)
Consolidated Statements of Operations (unaudited) for the
Three months ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows (unaudited) for the
Three months ended March 31, 1998 and 1997 3
Notes to the financial statements 4
Item 2. Management's discussion and analysis of financial
condition and results of operations 5-7
PART II - OTHER INFORMATION 8-10
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
ITEM 5.III OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature 11
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
March 31, 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 318,089
Restricted cash 250,000
Accounts receivable 1,856,328
Inventories 772,224
Due from officers -
Due from affiliate -
Prepaid expenses and other current assets 113,479
--------------------
TOTAL CURRENT ASSETS 3,310,120
--------------------
PROPERTY, PLANT AND EQUIPMENT 3,473,827
PATENTS AND CUSTOMER LISTS 4,969,991
GOODWILL 1,203,533
DEPOSITS AND OTHER ASSETS 233,788
--------------------
$ 13,191,259
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,939,943
Accrued expenses 485,080
Revolving credit line 128,035
Accrued Expenses for Discontinued Operations 337,160
Current portion of long term debt 1,974,444
Deferred revenue 1,263,584
Current portion of accrued consulting contract 360,131
Other current liabilities 428,893
--------------------
TOTAL CURRENT LIABILITIES 6,917,269
--------------------
LONG-TERM DEBT 2,238,522
DEBENTURES PAYABLE -
ACCRUED CONSULTING CONTRACT -
ACCRUED EXPENSES DISCONTINUED OPERATIONS -
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,500,000 shares authorized; no shares
issued and outstanding 2,162,202
Common stock, $.001 par value; 40,000,000 shares authorized;
38,380,427 shares issued and outstanding at March 31, 1998 38,380
Additional paid-in capital 12,092,384
Retained earnings (accumulated deficit) (10,257,499)
Common stock subject to put (380,000)
Prepaid stock compensation -
--------------------
TOTAL STOCKHOLDERS' EQUITY 3,655,468
--------------------
$ 13,191,259
====================
See notes to consolidated financial statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter End March 31,
-----------------------------------
1998 1997
-----------------------------------
REVENUES $ 2,062,885 $ 1,443,234
COST OF SALES 861,703 652,843
---------------- ----------------
GROSS PROFIT 1,201,182 790,391
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,655,740 737,205
NON-CASH IMPUTED COMPENSATION EXPENSE - -
LITIGATION SETTLEMENT - 111,517
---------------- ----------------
OPERATING INCOME (LOSS) (454,558) (58,331)
OTHER INCOME (EXPENSE):
Interest (net) (110,507) (61,949)
Other - -
---------------- ----------------
INCOME(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (565,065) (120,280)
PROVISION FOR INCOME TAX - -
---------------- ----------------
INCOME (LOSS) FROM CONTINUED
OPERATIONS (565,065) (120,280)
---------------- ----------------
DICONTINUED OPERATIONS:
Income (Loss) From Discontinued
Operations - (589,578)
(Loss) On Disposal - 32,519
---------------- ----------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS - (557,060)
---------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (565,065) (677,340)
EXTRAORDINARY GAIN FROM FORGIVENESS OF DEBT 1,361,143 -
---------------- ----------------
NET INCOME (LOSS) $ 796,078 $ (677,340)
================ ================
INCOME (LOSS) PER COMMON SHARE:
Continued Operations (0.63) (0.39)
Discontinued Operations - (1.79)
Extraordinary Gain 1.52 -
Net Income (loss) 0.89 (2.18)
WEIGHTED AVERAGE COMMON SHARES USED 892,386 311,558
See notes to consolidated financial statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-----------------------------------
1998 1997
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 796,078 $ (677,340)
---------------- ---------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 188,424 82,912
Non-cash imputed compensation expense - 25,000
Loss on disposal of fixed assets,net - -
Interest settled by issuance of stock 8,858 -
Write-off of clinic goodwill - -
Amortization of Note Payable Discount - -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 123,620 (239,706)
(Increase) decrease in inventories 254,774 (26,117)
(Increase) decrease in prepaid expenses 71,097 (35,364)
(Increase) decrease in Property and Equipment 29,745 -
(Increase)decrease in due from affiliate - -
(Increase) decrease in deposits and other assets 220,342 3,392
Increase (decrease) in accounts payable (1,086,493) (20,430)
Increase (decrease) in accrued expenses (772,272) 71,375
Increase (decrease) in deferred revenue 173,937 109,115
Increase(decrease) in deposits - -
Increase(decrease) in Accrued Interest 57,466 -
Increase (decrease) in other current liabilities 103,778 (68,196)
Increase (decrease) in accrued expenses for disc. operations (18,903) -
Increase (decrease) in accrued consulting contract - 497,246
---------------- ---------------
TOTAL ADJUSTMENTS (645,628) 399,227
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 150,450 (278,113)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27,151) (78,028)
Disposition of Discontinued Operations (19,633) -
Loan to Global Health Alternatives, Inc. - -
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (46,784) (78,028)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer - (2,481)
Increase in due to related parties - -
Decrease in restricted cash - 8,932
Proceeds from preferred stock 261,000 -
Proceeds from sale of debentures - 326,826
Payment of debentures - -
Loan origination costs preferred stock - -
Proceeds from notes payable and long-term debt 34,666 255,000
Payments of notes payable and long-term debt (186,027) (530,024)
NET CASH PROVIDED BY FINANCING ACTIVITIES 109,639 58,253
---------------- ---------------
NET INCREASE (DECREASE) IN CASH 213,305 (297,888)
CASH, BEGINNING OF PERIOD 104,784 517,323
---------------- ---------------
CASH, END OF PERIOD $ 318,089 $ 219,435
================ ===============
See notes to consolidated financial statements.
3
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but reflect all
adjustments which, in the opinion of management, are necessary for a
fair presentation of financial position and the results of operations
for the interim periods presented. All such adjustments are of a normal
and recurring nature. The results of operations for any interim period
are not necessarily indicative of the results attainable for a full
fiscal year.
2. EARNINGS (LOSS) PER SHARE
Per share information is computed based on the weighted average number
of shares outstanding during the period.
3. GAIN ON FORGIVENESS OF DEBT
During the quarter ended March 31, 1998, the Company realized a $1.3
million gain on the work-out of various debt and payables of Global
Health Alternatives, Inc.
4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes contained in Item 1 hereof.
Forward-Looking Statements
When used in Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, the words "will likely result", and "the
Company expects", "will continue", is anticipated", "estimated", "project", or
"outlook" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Act of 1995.
The Company wishes to caution readers not to place undue reliance on such
forward-looking statements, each of which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company has no obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.
Result of Operations
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues:
Total revenues were $2,062,885 for the three months ended March 31,1998 compared
to $1,443,234 for the three months ended March 31,1997. This represents an
increase of $618,651 or 42.9%.
Product sales by Global Health Alternatives, Inc. ("GHA") of $429,884 accounted
for the primary portion of the increase. The increase is also attributable to
increased tuition revenue of $76,190 due to increased enrollment primarily at
the Orlando school. Bookstore revenue also increased by $86,775 compared to the
same period last year, again due primarily to the increased enrollment as well
as expansion of the Miami and Orlando bookstores.
Cost of sales:
Cost of sales for the three months ended March 31,1998 was $861,703 compared to
$788,843 for the comparable period last year. Gross profit as a percentage of
revenues was 58.2% compared with 54.8% for the three months ended March 31,1997.
Product sales' gross profit was 73.9% for the quarter as the Company incurred no
royalty expense during the quarter due to a restructuring agreement with the
previous holder of the patented base of its Natural relief 1222 product. The
schools' gross profit was 54.1% compared to 54.8% in the prior quarter.
5
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $1,655,740 for the three
months ended March 31,1998. This represents an increase of $918,535 over the
three months ended March 31,1997. The operations of GHA accounted for $781,177
of this increase. The remaining increase was primarily attributable to the move
into a new location for the Orlando school, which resulted in higher rent
expense.
Litigation settlement:
The litigation settlement resulted from the settlement of the litigation brought
by the landlord in connection with the property leased by the Company in
Lauderhill, Florida (the former Pompano Campus) whose lease expired in July
1997.
Interest Expense
These costs for the three months ended March 31, 1998 were $110,507 as compared
to $61,949 for the comparable period of 1997. The increase was due to the
interest expense of GHA of $62,573 associated with borrowing necessary to fund
the marketing effort of GHA's products.
Income(Loss) from Continuing Operations
For the three months ended March 31, 1998, the loss from continuing operations
was $565,065 compared to a loss from continuing operations of $120,280 for the
three months ended March 31, 1997. The increase in the loss is attributable to
the impact of the individual elements discussed above.
Discontinued Operations
In October 1997, the Company closed its medical clinic located in Boca Raton,
Florida. In February 1998, the Company sold its remaining medical clinic in
Pompano Beach, Florida. All anticipated losses on the discontinued operations
were reflected in the fiscal year ended December 31, 1997.
Gain on Forgiveness of Debt
During the quarter ended March 31, 1998, the Company realized a $1.3 million
gain on the work-out of various debt and payables of GHA.
Net Income (Loss)
For the three months ended March 31, 1998, the net profit was $796,078 compared
to a net loss of $677,340 for the three months ended March 31, 1997. The
increase in the profit is attributable
6
to the impact of the individual elements discussed above.
Liquidity and Capital Resources
The Company has funded its working capital and capital expenditure requirements
from cash provided through borrowing from institutions and from the sale of the
Company's securities in private placements and the initial public offering of
its securities. The Company's primary source of cash receipts is from the
payments for tuition, fees, and books. These payments were funded primarily from
students and parent educational loans and financial aid under various federal
and state assistance programs and, to a lesser extent, from student and parent
resources. The Company's secondary source of cash receipts has been from the
sale of GHA's products.
In February 1998, the company issued $300,000 face amount of convertible
preferred stock, net of expenses of $113,658.
In April 1998 the Company issued $4,000,000 face amount of Series C convertible
preferred stock, net of expenses of $581,035. The preferred stock pays a
dividend of 12% per annum and is convertible into common at 75% of the common's
market value, commencing 41 days after issuance. From the proceeds raised, the
Company retired $2,500,000 of Series A preferred stock outstanding.
At March 31, 1998 the ratio of current assets to current liabilities was .48 to
1.0. There was a working capital deficit of approximately $3,607,000.
Cash provided by operations for the period ended March 31, 1998 was
approximately $150,450, attributable primarily to the net profit of $796,078
adjusted for non-cash expenses and changes in operating assets and liabilities
aggregating $645,628. Capital expenditures used approximately $27,151 of cash.
The Company also anticipates utilizing the proceeds from the anticipated sale of
the Schools to provide financing, although there can be no assurance thereof.
The Company anticipates that further additional financing will be required to
finance the Company's continued operations during the next twelve months,
principally to fund the continued development and growth of GHA's product sales.
Management is currently seeking at least $4.0 million in additional capital to
continue to pursue GHA's business plan of national advertising in support of
national retail distribution. There can be no assurance that the Company will be
able to secure such additional debt or equity financing. Failure to obtain
additional financing of at least $2.5 million within the next 12 months will
require reductions in operating expenses, and may have a material impact on the
ability of the Company to increase GHA's sales and to continue operations. If
the Company obtains additional financing of at least $2.5 million for the next
twelve months, of which there can be no assurance, the Company believes that its
net cash flow, together with available lines of credit may be sufficient to
finance the Company's operations for the period of at least 12 months
thereafter.
7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has not become subject to any material legal proceedings in
the quarter ended March 31, 1998.
Item 2. Changes in Securities and Use of Proceeds
The Company issued $300,000 of convertible preferred stock in February
1998 and $4,000,000 in April 1998 which is ranked senior to the Common Stock
with respect to dividends and liquidation.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
At a special meeting of the stockholders on March 23, 1998, the
stockholders of the Company increased the number of authorized shares of Common
Stock from 40,000,000 to 200,000,000 shares. Of the 16,669,709 shares of Common
Stock voted, 15,893,389 voted in favor, 714,201 voted against and 62,119
abstained. On April 6, 1998, the Company effected a one for 40 reverse stock
split.
Item 5. Other Information
On April 29, 1998, the Company entered into an agreement with Neal R.
Heller, Elizabeth S. Heller and Florida College of Natural Health, Inc. to sell
the Company's three schools for a cash purchase price of $1,800,000 plus certain
additional consideration.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Please see Exhibit Index on page 9.
(b) Reports on Form 8-K
The Company filed current reports on Form 8-K on January 8, 1998,
February 19, 1998, March 4, 1998 and April 21, 1998.
8
NATURAL HEALTH TRENDS CORP. EXHIBIT INDEX
Number Description of Exhibit
2.1 Assets Purchase Agreement dated April 29, 1998 by and among Natural Health Trends corp., Neal R. Heller &
Elizabeth S. Heller and Florida College of Natural Health, Inc.#
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Amended and Restated By-Laws of the Company.*
4.1 Specimen Certificate of the Company's Common Stock.*
4.2 Form of Class A Warrant.*
4.3 Form of Class B Warrant.*
4.4 Form of Warrant Agreement between the Company and Continental Stock Transfer &
Trust Company.*
4.5 Form of Underwriter's Warrants.*
4.6 1994 Stock Option Plan.*
4.7 Form of Debenture.**
4.8 Registration Rights Agreement dated July 23, 1997 by and among the Company,Global and the Global stockholders.+
4.9 Agreement as to Transfers dated July 23, 1997 by and between Capital Development, S.A. and the Company.+
4.10 Articles of Amendment of Articles of Incorporation of the Company. ***
4.11 Form of Debenture.**
4.12 Florida Statutes Sections 607.1301, 607.1302, 607.1320 Regarding Appraisal Rights.#
10.1 Form of Employment Agreement between the Company and Neal R. Heller.*
10.2 Form of Employment Agreement between the Company and Elizabeth S. Heller.*
10.3 Lease, dated April 29, 1993, between Florida Institute of Massage Therapy, Inc., as
tenant, and MICC Venture, as landlord, as amended.*
10.4 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp., Smantha Haimes and Leonard Haimes.++
10.13 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp., Smantha Haimes and Leonard Haimes.
10.14 Employment Agreement between Health Wellness Nationwide Corp. and Kaye Lenzi.
10.15 Mortgage note in the amount of $2,250,000 dated October 30,1997 between NHTC Real Estate, Inc. as maker and BANC
One Mortgage Capital Marker, LLC as payee.
27.1 Financial Data Schedule.
* Previously filed with the Company's Registration Statement No. 33-991184
** Previously filed with the Company's Form 10-10QSB for the quarter ended
March 31,1997
*** Previously filed with the Company's Form 10-QSB dated June 30, 1997
+ Previously filed with the Company's Form 8-K dated August 7,1997
++ Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1996
+++ Previously filed with this Registration Statement No. 333-35935
# Previously filed with the Company's Proxy Statement on Schedule 14A, dated
May 14,1998
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL HEALTH TRENDS CORP.
By: /s/ Neal Heller
Neal Heller
President
Date: May 19, 1998
11