10QSB/A 1 v059263_10qsba1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A (Amendment No. 1) (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2006 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______ to __________ Commission File Number : 0-27569 NATURAL NUTRITION, INC. ----------------------- (Exact name of small business issuer as specified in its charter) Nevada 65-0847995 --------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 109 North Post Oak Lane, Suite 422 Houston, TX 77024 -------------------------------------------------------------------------------- (Address of principal executive offices) (713) 621-2737 -------------------------------------------------------------------------------- (Issuer's telephone number) (Formerly CSI Business Finance, Inc.) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 |_| Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| The number of shares outstanding of our common stock at November 3, 2006 was 11,587,693. Transitional Small Business Disclosure Format (check one): Yes: |_| No: |X| - 1 - -------------------------------------------------------------------------------- EXPLANATORY NOTE Natural Nutrition, Inc, formerly CSI Business Finance, Inc. (the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-QSB for the three and nine months ended September 30, 2006 to restate the financial results. The restatement includes correcting proofing errors to include an adjustment to (a) reclassify the receipt of proceeds in the amount of $349,500 as a reduction in our Investments account in the Noncurrent asset section of our condensed consolidated balance sheet, (b) correct retained earnings in our condensed consolidated balance sheet in the amount of $349,500, and (c) correct the condensed consolidated statements of cash flows to correct our net loss and the cash flows from investing activities in the amount of $349,500. The information contained in this Amendment, including the financial statements and the notes hereto, amends only Items 1 and 2 of Part I of the Company's originally filed Quarterly Report for the three and nine months ended September 30, 2006 on Form 10-QSB and no other items in its originally filed Form 10-QSB are amended hereby. In accordance with Rule 12b-15 of the Securities Exchange Act of 1934, the complete text of those items in which amended language appears is set forth herein, including those portions of the text that have not been amended from that set forth in the original Form 10-QSB. Except for the restatement, this Form 10-QSB/A does not materially modify or update other disclosures in the original Form 10-QSB, including the nature and character of such disclosure to reflect events occurring after November 14, 2006, the filing date of the original Form 10-QSB. Accordingly this Form 10-QSB/A should be read in conjunction with the Company's other filings made with the Securities and Exchange Commission. Currently dated certifications from the Company's Chief Executive Officer and Chief Financial Officer have been included as exhibits to this amendment. - 2 - NATURAL NUTRITION, INC. FORM 10-QSB INDEX Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of September 30, 2006 (Unaudited) 4 Condensed Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005 (Unaudited) 5 Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005 (Unaudited) 6 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 - 10 Item 2. Management's Discussion and Analysis or Plan of Operation 11 - 14 Item 3. Controls and Procedures 14 - 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits 16 SIGNATURES 17 - 3 - -------------------------------------------------------------------------------- PART I -FINANCIAL INFORMATION Item 1. Financial Statements NATURAL NUTRITION, INC. AND SUBSIDIARIES (Formerly CSI Business Finance, Inc.) CONDENSED CONSOLIDATED BALANCE SHEET September 30, 2006 (Unaudited) ASSETS CURRENT ASSETS Cash $ 1,640,242 Deferred financing costs 191,665 Notes receivable 1,433,386 Note receivable - related party 275,000 Investment in marketable securities 25,000 Due from affiliate 96,581 Prepaids, accrued interest and accounts receivable other 87,795 ------------ Total current assets 3,749,669 ------------ NONCURRENT ASSETS Investments 9,538,459 Fixed assets, net 5,806 Deferred financing costs 180,642 ------------ Total noncurrent assets 9,724,907 ------------ TOTAL ASSETS $ 13,474,576 ============ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable, accrued liabilities and other $ 209,096 ------------ Total current liabilities 209,096 ------------ NONCURRENT LIABILITIES Debenture payable--net of discount of $268,816 15,364,383 Derivative liability 293,740 Accrued interest payable-noncurrent 507,236 ------------ Total liabilities 16,374,455 ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT Preferred stock, $.01 par value; 10,000,000 shares authorized Preferred stock Series A Convertible $0.01 par value; 100,000 shares authorized, 95,589 shares issued and outstanding and no liquidation or redemption value 956 Common stock, par value $0.001; 200,000,000 shares authorized; 11,587,693 issued and outstanding 11,588 Additional paid-in capital 198,836 Retained earnings (3,111,259) ------------ Total shareholders' deficit (2,899,879) ------------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 13,474,576 ============ See accompanying Notes to Condensed Consolidated Financial Statements - 4 - -------------------------------------------------------------------------------- NATURAL NUTRITION, INC. AND SUBSIDIARIES (Formerly CSI Business Finance, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30 2006 2005 ----------- ----------- REVENUE Lease income $ -- $ 19,338 Fee income 19,854 34,379 Trading gains (loss) (19,903) 33,898 Dividends from marketable securities 107,619 -- Interest income from notes and debenture receivable 44,818 -- ----------- ----------- Total revenue 152,388 87,615 OPERATING EXPENSES Selling, general and administrative expenses (2006 and 2005 include $63,654 and $0, respectively, of expenses allocated from an affiliated entity 489,050 275,910 Interest expense 260,191 76,081 ----------- ----------- OPERATING LOSS (596,853) (264,376) ----------- ----------- OTHER (INCOME) EXPENSE Net change in fair value of derivative (11,152) (6,839) Interest and other (income) expense (12,254) 675 Merger expense -- 876,150 ----------- ----------- Total other (income) expense (23,406) 869,986 ----------- ----------- Loss before provision for income taxes (573,447) (1,134,362) ----------- ----------- INCOME TAX PROVISION -- -- ----------- ----------- LOSS APPLICABLE TO COMMON SHARES $ (573,447) $(1,134,362) =========== =========== Net loss per share for basic and diluted $ (0.08) $ (0.54) =========== =========== Weighted shares outstanding for basic and diluted 7,034,110 2,096,553 =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements - 5 - -------------------------------------------------------------------------------- NATURAL NUTRITION, INC. AND SUBSIDIARIES (Formerly CSI Business Finance, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended September 30 2006 2005 ----------- ----------- REVENUE Lease income $ 39,684 $ 60,649 Fee income 86,009 81,492 Trading gains (losses) (66,795) 33,898 Dividends from marketable securities 354,054 -- Interest income from notes and debenture receivable 217,484 -- ----------- ----------- Total revenue 630,436 176,039 OPERATING EXPENSES Selling, general and administrative expenses (2006 and 2005 include $198,558 and $0, respectively, of expenses allocated from an affiliated entity) 1,188,385 342,427 Interest expense 796,379 76,081 ----------- ----------- OPERATING LOSS (1,354,328) (242,469) ----------- ----------- OTHER (INCOME) EXPENSE Net change in fair value of derivative (74,964) (6,839) Loss on extinguishment of debenture receivable 639 -- Other (income) expense (40,489) 4,685 Merger expense -- 876,150 ----------- ----------- Total other (income) expense (114,814) 873,996 ----------- ----------- Loss before provision for income taxes (1,239,514) (1,116,465) ----------- ----------- INCOME TAX PROVISION -- -- ----------- ----------- NET LOSS (1,239,514) (1,116,465) Preferred dividends paid -- 12,000 ----------- ----------- LOSS APPLICABLE TO COMMON SHARES $(1,239,514) $(1,128,465) =========== =========== Net (loss) per share for basic and diluted $ (0.19) 4 (1.61 =========== =========== Weighted shares outstanding for basic and diluted 6,539,222 699,518 =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements - 6 - -------------------------------------------------------------------------------- NATURAL NUTRITION, INC. AND SUBSIDIARIES (Formerly CSI Business Finance, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30 2006 2005 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,239,514) $ (1,116,465) Adjustment to reconcile net income to net cash provided by (used in) operating activities 2,670,295 557,577 ------------ ------------ Net cash provided by (used) in operating activities 1,430,781 (558,888) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of fixed assets -- (1,000) Sale of asset 349,500 -- ------------ ------------ Purchases of minimum lease payments receivable -- (25,037) ------------ ------------ Net cash provided by (used in) investing activities 349,500 (26,037) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from sale of convertible debentures -- 5,371,839 Payments on notes payable to affiliate (344,282) -- Preferred dividends paid -- (12,000) ------------ ------------ Net cash provided by (used in) financing activities (344,282) 5,359,839 ------------ ------------ NET CHANGE IN CASH 1,435,999 4,774,914 CASH, BEGINNING OF PERIOD 204,243 -- ------------ ------------ CASH, END OF PERIOD $ 1,640,242 $ 4,774,914 ============ ============ SUPPLEMENTAL INFORMATION Interest paid $ 432,099 $ 2,755 ============ ============ Taxes paid $ -- $ -- ============ ============ Exchange of certain receivable for common stock: Common stock acquired $ 9,887,959 $ -- ============ ============ Debentures and notes receivable exchanged $ 9,609,283 $ -- ============ ============ Accrued interest receivable exchanged $ 278,676 $ -- ============ ============ Assets and liabilities assumed in merger: Prepaids and other -- 9,992 ============ ============ Accounts payable and accrued liabilities $ -- $ 262,231 ============ ============ Convertible debentures and notes payable $ -- $ 547,533 ============ ============ Accrued interest payable $ -- $ 73,244 ============ ============ Issuance of Series A Convertible Preferred Stock $ -- $ 1,000 ============ ============ Payment of debentures, notes payable and accrued interest $ -- $ 635,119 ============ ============ Derivative liability $ -- $ 413,603 ============ ============ Derivative asset $ -- $ 33,315 ============ ============ Discount on debenture payable $ -- $ 413,603 ============ ============ Premium on debenture receivable $ -- $ 33,315 ============ ============ Conversion of advances from parent to note payable $ -- $ 4,134 ============ ============ Assets and liabilities paid from proceeds of convertible debentures: Debentures, notes payable and accrued interest payable $ -- $ 9,000,000 ============ ============ Deferred expenses $ -- $ 575,000 ============ ============ Debenture, notes payable and accrued interest paid $ -- $ 635,199 ============ ============ Accounts payable and accrued liabilities $ -- $ 53,161 ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements - 7 - -------------------------------------------------------------------------------- Natural Nutrition, Inc. and Subsidiaries (Formerly CSI Business Finance, Inc.) Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION Our Condensed Consolidated Balance Sheet as of September 30, 2006, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and September 30, 2005, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation of Natural Nutrition, Inc. (the "Company") and Subsidiaries. The results for the three and nine months are not necessarily indicative of the results expected for the year. As used herein, the "Company", "management", "we", "our" refers to Natural Nutrition, Inc., or Natural Nutrition, Inc. together with its subsidiaries. The Company's fiscal year ends on December 31st. 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 omitted in accordance with the published rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") for interim financial statements. The unaudited Condensed Consolidated Financial Statements and the notes thereto in this report should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 (the "10-KSB"). On May 23, 2006, our Board of Directors approved a 1 to 25 reverse common stock split. We currently do not have sufficient authorized shares to meet the number of shares on the conversion of the debentures. The Company is in the process of amending our articles of incorporation and bylaws to increase the number of our authorized shares. All references to our common stock in this document are stated in shares after the reverse split. The Company, formerly known as Health Express USA, Inc., was incorporated in Florida on July 2, 1998. On August 25, 2005, the Company completed the closing of that certain Share Exchange Agreement, by and among the Company, CSI Business Finance, Inc., a Texas corporation and wholly-owned subsidiary of the Company herein referred to as ("CSI") and the shareholder of CSI (the "CSI Shareholder"). On September 18, 2006, the Company formally changed its name to Natural Nutrition, Inc. and simultaneously migrated from Florida to become a Nevada corporation. On August 25, 2005, the Company effectively exchanged with the CSI Shareholder the issued and outstanding common stock of CSI in exchange for 100,000 shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock"), and CSI became a wholly-owned subsidiary of the Company. Each share of the Company's Series A Preferred Stock is convertible into 780 shares of common stock of the Company, beginning one (1) year after the effective date of the merger. The shares of Preferred Stock were subsequently distributed to the shareholders of Corporate Strategies, Inc., the former shareholder of CSI. In addition, at the exchange date, 4,326,861 shares of common stock of the Company were issued to pay off notes and debentures. If the stockholders of Preferred Stock were to convert to common stock as of the date of the merger, they would hold 78,000,000 shares, or ninety-two and one half percent (92.5%) of the issued and outstanding shares of common stock of the Company. This conversion would result in the holders of the Preferred Stock effectively controlling the Company. The holders of the Preferred Stock and the holders of the common stock of the Company vote together and not as separate classes, and the Preferred Stock shall be counted on an "as converted" basis, thereby giving the holders of Preferred Stock control of the Company. The transaction was accounted for as a reverse acquisition since control of the Company passed to the shareholders of the acquired company (CSI). CSI, the operating entity of the Company, was incorporated primarily for the purpose of engaging in equipment leasing. Subsequent to the merger, the Company's consolidated operations have expanded to include the purchase of debentures and notes receivable, secured lending and factoring to micro-cap public and private companies. The Company also actively trades marketable securities and options with available cash, and on margin, through a third party investment advisor. Because some of our trading involves leveraging, these transactions contain a considerable amount of risk. Since CSI was the surviving entity of the reverse merger, the 2005 financial reports include the operating results of the Company and its Subsidiary from September 1, 2005 and CSI only from January 1, 2005 through August 31, 2005. Our CEO is also on the Board of Directors of one of our clients. As of September 30, 2006, we have an outstanding note receivable in the amount of $275,000 from this client. The note receivable is separately stated on our balance sheet as of September 30, 2006. Subsequent to September 30, 2006, our CEO was elected Chairman of our client's Board of Directors. - 8 - The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. NOTE 2. INCOME (LOSS) PER COMMON SHARE AND STOCK BASED COMPENSATION Net Income (Loss) Per Common Share In accordance with SFAS No. 128, "Earnings per Share", basic earnings per share are computed based on the weighted average shares of common stock outstanding during the periods. Diluted earnings per share are computed based on the weighted average shares of common stock plus the assumed issuance of common stock for all potentially dilutive securities. Our basic and diluted shares used to compute loss per common share amounts are the same for both the three months and nine months ended September 30, 2005 and September 30, 2006. Since we had a net loss for the three and nine months ended September 30, 2006 and September 30, 2005, the assumed exercise of stock options and the conversion of the Series A Preferred Stock and secured convertible debentures outstanding as of September 30, 2006 would be anti-dilutive. We currently do not have sufficient authorized shares to meet the number of shares on the conversion of the debentures. The Company is in the process of amending our articles of incorporation and bylaws to increase the number of our authorized shares. Stock Based Compensation Statement of Financial Accounting Standards No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS 123(R)"), provides for the use of a fair value-based method of accounting for employee stock compensation. There are outstanding stock options to purchase 5,695 of the Company's common stock at an exercise price of $1.31 per share. These options expire in August 2007. We believe these options do not have a fair market value and we expect them to be forfeited. NOTE 3 - RESTATEMENT OF PRIOR PERIODS We have restated our financial results for fiscal 2005 and for the related interim periods therein previously reported. The restatement required us to reissue the report on Form 10-QSB at September 30, 2005 and for the three and nine months then ended. The restatements include adjustments to (a) correct the accounting for convertible debentures to recognize the effects of derivatives, and (b) remove the beneficial conversion feature previously recorded for the convertible debentures. NOTE 4 - AGREEMENT IN LIEU OF FORECLOSURE The Company completed an agreement in lieu of foreclosure (the "Agreement") with Bio One Corporation ("Bio-One") on March 22, 2006 and received the stock of Interactive Nutrition International, Inc ("INII"), along with other assets and claims, in return for the forgiveness of $9,887,959 in debt and accrued interest of Bio-One and will now be treated as an investment in INII. INII is currently being operated by Price Waterhouse Coopers as Receiver and Manager pursuant to Section 246(2) of the Bankruptcy and Insolvency Act of Canada, after being requested to do so by Nesracorp Inc., Eli Nesrallah, Joseph Nesrallah and Pamela Nesrallah (collectively, the "Sellers"), purporting default in payment of obligations incurred in the purchase of INII assets by Bio-One. A Court-supervised sale of the assets has been requested by the Receiver, and the Company intends to vigorously oppose this and pursue all claims against the Sellers. Additionally, the Company has been assigned all rights and claims previously asserted against Nesracorp Inc., Eli Nesrallah, Joseph Nesrallah, Pamela Nesrallah, Roxanne Anderson and Price Waterhouse Coopers, Inc. filed by INII and Bio-One in the Ontario Superior Court of Justice on January 13, 2005. The Company intends to pursue some or all of the previous claims in the filing of January 13, 2005 in Ontario Superior Court of Justice, as the stock of INII and these claims, as well as others, have been assigned to the Company as part of the Agreement the Company executed with Bio-One on March 22, 2006. On May 5, 2006, the Board of Directors terminated the Nesrallahs as employees of the Company. On March 30, 2006, the Company filed a lawsuit in State Court in Orlando, Florida against Eli Nesrallah, Joseph Nesrallah and Pamela Nesrallah, alleging, among other claims, breach of fiduciary duty to INII. As of the date of this filing, the Florida action has been abated pending the outcome of the results of our action filed in Canada. No reserve has been established for a loss on this transaction, as the Company believes its claims are meritorious and have a reasonable probability of prevailing in a Court of law. However, should the Company fail to prevail or settle its claims against the Sellers, the Company may be required to write down its entire investment of $9,538,459 in INII. As a result of the above foreclosure, the Company has recorded a $9,887,959 investment in the INII stock consisting of an $8,500,000 debenture receivable, $1,109,283 notes receivable and $278,676 of accrued interest receivable. This amount has been reduced by $349,500 reflecting the sale of an asset. NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS The derivatives for the debenture payable have been accounted for in accordance with Statement of Financial Accounting Standards Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133") and the Emerging Issues Task Force Abstract No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", ("EITF No. 00-19"). - 9 - We have determined that the following instrument has derivatives requiring evaluation and accounting under the relevant guidance applicable to financial derivative: o Cornell Convertible Debenture (the "Convertible Debenture"), issued on September 9, 2005 in the face amount of $15,635,199. Management has determined that the above debenture has embedded derivatives. These embedded derivatives have been bifurcated from their respective host debt contracts and accounted for as a derivative liability in accordance with EITF 00-19. When multiple derivatives exist within the Convertible Debenture, they have been bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15, "Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument". The embedded derivatives within the Convertible Debenture have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to our income statement as "Net change in fair value of derivative". We utilized a third party valuation firm to fair value the embedded derivatives using a layered discounted probability-weighted cash flow approach. The fair value model utilized to value the various embedded derivatives in the Convertible Debenture, comprises multiple probability-weighted scenarios under various assumptions reflecting the economics of the Convertible Debenture, such as the risk-free interest rate, expected issuer stock price and volatility, likelihood of conversion and or redemption and likelihood default status and timely registration. The Company used this model for the derivative valuations at September 30, 2006. The fair value of the derivative liability is subject to the changes in the trading value of our common stock, as well as other factors. As a result, our financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of our common stock at the balance sheet date and the amount of shares converted by the note holders. Consequently, our financial position and results of operations may vary from quarter-to-quarter based on conditions other than our operating revenues and expenses. The conversion feature, reset provision and the Company's optional early redemption right have been bundled together as a single compound embedded derivative liability, and using a layered discounted probability-weighted cash flow approach, was initially fair valued at $413,603 at September 9, 2005. Using the same methodology, the single compound embedded derivative liability was valued at $293,740 at September 30, 2006. The change in fair value of the derivative liability was a decrease of $11,152 from our prior reporting period, and has been classified as "net change in fair value of derivative" in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006. The Company had a debenture receivable which was extinguished on March 22, 2006. The derivative instrument related to the debenture receivable was initially fair valued at $33,315 upon acquisition at September 9, 2005. The single compound embedded derivative receivable was valued at $26,273 at March 22, 2006. For the period January 1 through March 22, 2006, the change in fair value of the derivative asset was an increase of $104, which has been classified as "net change in fair value of derivative". As result of the foreclosure discussed on Note 4, the derivative asset and a premium on the debenture receivable was written off and a $639 loss on extinguishment of debenture receivable was recorded during the nine months ended September 30, 2006. NOTE 6 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS Natural Nutrition, Inc, formerly CSI Business Finance, Inc. (the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-QSB for the three and nine months ended September 30, 2006 to restate the financial results. The restatement includes correcting proofing errors to include an adjustment to (a) reclassify the receipt of proceeds in the amount of $349,500 as a reduction in our Investments account in the Noncurrent asset section of our condensed consolidated balance sheet, (b) correct retained earnings in our condensed consolidated balance sheet in the amount of $349,500, and (c) correct the condensed consolidated statements of cash flows to correct our net loss and the cash flows from investing activities in the amount of $349,500. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Quarterly Report on Form 10-QSB, and the accompanying MD&A, contains forward-looking statements. Statements contained in this report about Natural Nutrition, Inc.'s future outlook, prospects, strategies and plans, and about industry conditions and demand for our financial services are forward-looking. All statements that express belief, expectation, estimates or intentions, as well as those that are not statements of historical fact, are forward looking. The words "proposed," "anticipates," "anticipated," "will," "would," "should," "estimates" and similar expressions are intended to identify forward-looking statements. Forward-looking statements represent our reasonable belief and are based on our current expectations and assumptions with respect to future events. While we believe our expectations and assumptions are reasonable, they involve risks and uncertainties beyond our control that could cause the actual results or outcome to differ materially from the expected results or outcome reflected in our forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this quarterly report may not occur. Such risks and uncertainties include, without limitation, our successful efforts in the outcome of our litigation concerning our investment in INII, our success in trading marketable securities, our ability to maintain contracts that are critical to our operations, actual customer demand for our financing and related services, collection of accounts and notes receivable, our ability to obtain and maintain normal terms with our vendors and service providers and conditions in the capital markets and equity markets during the periods covered by the forward-looking statements. - 10 - The forward-looking statements contained in this report speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. All forward-looking statements attributable to Natural Nutrition, Inc. or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in our annual report filed on Form 10-KSB and in our future periodic reports filed with the SEC. The following M,D&A should be read in conjunction with these unaudited Condensed Consolidated Financial Statements of the Company, and the related notes thereto included elsewhere herein, and in conjunction with our audited financial statements, together with footnotes and the M,D&A, in our 2005 annual report filed on Form 10-KSB with the Securities Exchange Commission (the "SEC"). Overview On August 25, 2005, Health Express USA, Inc., a Florida corporation, entered into a share exchange agreement with CSI Business Finance, Inc., a Texas corporation ("CSI") and the shareholder of CSI (Corporate Strategies, Inc.). The transaction is being reflected as a reverse acquisition since control of the Company has passed to the shareholders of Corporate Strategies, Inc. ("Corporate Strategies"). The Company was subsequently renamed in 2005 to CSI Business Finance, Inc. (the Florida corporation). In September of 2006 CSI Business Finance, Inc. changed its name to Natural Nutrition, Inc. and simultaneously migrated from Florida to Nevada. On May 23, 2006, our Board of Directors approved a 1 to 25 reverse common stock split. We currently do not have sufficient authorized shares to meet the number of shares on the conversion of the debentures. The Company is in the process of amending our articles of incorporation and bylaws to increase the number of our authorized shares. All references to our common stock in this document are stated in shares after the reverse split. At present our Company, through our operating subsidiary, primarily generates cash and revenue from financing and investing activities. To date these activities have included equipment leasing, factoring, brokerage activities earned in originating and selling business leases, providing short term secured lending, and investing in marketable securities. We commonly purchase notes receivable instruments and blocks of common stock from publicly traded micro cap issuers and individual holders of notes and publicly traded common stock. We offer individual issuers and holders in need of liquidity the opportunity to sell these notes or securities quickly and easily. We believe that gains are possible in holding these notes and securities and then selling the securities or collecting the notes purchased in the normal course of business over a reasonable period of time. Competition for the services we provide comes mainly from financial institutions that provide factoring services, equipment leases and small business loans, many of which have substantially more capital resources than our Company. We also actively trade marketable securities and options with available cash, and on margin, through a third party investment advisor. Because our trading involves leveraging, these transactions contain a considerable amount of risk. Management of the Company mitigates its risk in lending by securing loans with pledged assets (collateral) that, when liquidated, have a reasonable probability of realizing proceeds that would retire the liability. In some instances, we obtain personal guarantees from individuals of net worth which are adequate to repay the liability in the event of default. Additionally, in the example of public company finance, we utilize conversion features at a substantial discount to the market in the event of default that would enable us realize adequate proceeds from the sale of the borrower's stock to repay the liability to the Company. Over the long term, management would like to concentrate its efforts on growing the business of INII, our largest asset. The Company completed an agreement in lieu of foreclosure (the "Agreement") with Bio One Corporation ("Bio-One") on March 22, 2006 and received the stock of Interactive Nutrition International, Inc ("INII"), along with other assets and claims, in return for the forgiveness of $9,887,959 in debt and accrued interest of Bio-One and will now be treated as an investment in INII. INII is currently being operated by Price Waterhouse Coopers as Receiver and Manager pursuant to Section 246(2) of the Bankruptcy and Insolvency Act of Canada, after being requested to do so by Nesracorp Inc., Eli Nesrallah, Joseph Nesrallah and Pamela Nesrallah (collectively, the "Sellers"), purporting default in payment of obligations incurred in the purchase of INII assets by Bio-One. A Court-supervised sale of the assets has been requested by the Receiver, and the Company intends to vigorously oppose this and pursue all claims against the Sellers. Additionally, the Company has been assigned all rights and claims previously asserted against Nesracorp Inc., Eli Nesrallah, Joseph Nesrallah, Pamela Nesrallah, Roxanne Anderson and Price Waterhouse Coopers, Inc. filed by INII and Bio-One in the Ontario Superior Court of Justice on January 13, 2005. The Company intends to pursue some or all of the previous claims in the filing of January 13, 2005 in Ontario Superior Court of Justice, as the stock of INII and these claims, as well as others, have been assigned to the Company as part of the Agreement the Company executed with Bio-One on March 22, 2006. On May 5, 2006, the Board of Directors terminated the Nesrallahs as employees of the Company. On March 30, 2006, the Company filed a lawsuit in State Court in Orlando, Florida against Eli Nesrallah, Joseph Nesrallah and Pamela Nesrallah, alleging, among other claims, breach of fiduciary duty to INII. As of the date of this filing, the Florida action has been abated pending the outcome of the results of our action filed in Canada. No reserve has been established for a loss on this transaction, as the Company believes its claims are meritorious and have a reasonable probability of prevailing in a Court of law. We have reduced our investment by $349,500 for proceeds from the sale of an asset. However, should the Company fail to prevail or settle its claims against the Sellers, the Company may be required to write down its entire investment of $9,538,459 in INII. As a result of the above foreclosure, the Company has recorded a $9,887,959 investment in the INII stock consisting of an $8,500,000 debenture receivable, $1,109,283 notes receivable and $278,676 of accrued interest receivable. We have reduced our investment by $349,500 for proceeds from the sale of an asset. Recent Accounting Pronouncements In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements. - 11 - RESULTS OF OPERATIONS Three Months Ended September 30, 2006 and September 30, 2005 We had no leasing income for the three months ended September 30, 2006. Leasing income for the three months ended September 30, 2005 was $19,338. We will continue to seek leasing opportunities in the future, however this is not the primary focus of management, or the Company's resources. We are continuously seeking turn-around opportunities as these opportunities arise. Fee income from brokerage fees earned in originating and selling business leases and loans was $19,854 for the three months ended September 30, 2006 versus $34,379 for the three months ended September 30, 2005. During the quarter ended September 30, 2006, the Company funded short-term loans to four new clients totaling approximately $758,000. Interest income was $44,818 for the three months ended September 30, 2006 compared to zero dollars ($0) for the three months ended September 30, 2005. Interest income was derived mainly from notes receivable relating to receivables factoring and investments. We expect interest income to increase in the future since the Company has increased working capital availability for business lending and factoring. Dividend income was $107,619 for the three months ended September 30, 2006 compared to zero dollars ($0) for the three months ended September 30, 2005. Dividend income is primarily derived from various investments in marketable securities. We actively trade marketable securities and consider trading to be a significant source of future revenue. For the three months ended September 30, 2006, we recorded net trading losses from various investments in marketable securities in the amount of $19,903 ($108,507 in realized trading losses and $88,604 in unrealized trading gains). For the three months ended September 30, 2005, we recorded $33,898 net trading gains from various investments in marketable securities ($32,719 in realized trading gains and $1,179 in unrealized trading gains). We have not yet reached the size to benefit from separate office space and a dedicated staff. Our Company shares office space and certain administrative functions and staff with an affiliated company. Costs are allocated for these shared functions based on an estimate of time usage. Selling, general and administrative expenses were $489,050 for the three months ended September 30, 2006 versus $275,910 for the three months ended September 30, 2005. Professional fees of $249,337 associated with the Company's investment in INII as more fully described in Note 4 and our legal proceedings section to the Condensed Consolidated Financial Statements and salaries expense and allocated overhead of $175,612 comprised the majority of these expenses. The remainder of our selling, general and administrative expenses for the three months ended September 30, 2006 consist primarily of business development and other ordinary expenses necessary for the operation of the Company. Salaries and benefits were $198,697 for the three months ended September 30, 2005, while the remainder of the expenses incurred were for allocated expenses, professional fees and other ordinary office related expenses. The increase in salaries and benefits is due to officer's salaries incurred since the August 2005 merger. We incurred interest expense of $260,191 for the three months ended September 30, 2006 compared to $76,081 for the three months ended September 30, 2005. Interest primarily relates to the expense associated with the $15,635,199 five percent (5%) convertible debenture entered into in September 2005 to fund INII, anticipated growth of the Company and interest on our margin loan. We mark to market our derivative liability on a quarterly basis. For the three months ended September 30, 2006, the net change in fair value of derivative amounted to $11,152 of other income. For the three months ended September 30, 2005, we recorded a merger expense in the amount of $876,160 in association with the Share Exchange Agreement more fully described in Note 1. Nine Months Ended September 30, 2006 and September 30, 2005 Lease income for the nine months ended September 30, 2006 was $39,684 compared with $60,649 for the nine months ended September 30, 2005. We will continue to seek leasing opportunities in the future, however this is not the primary focus of management, or the Company's resources. We are continuously seeking turn-around opportunities as these opportunities arise. Fee income from brokerage fees earned in originating and selling business leases and loans remained relatively constant for the comparable nine months ended September 30, 2006 and 2005. Fee income was $86,009 for the nine months ended September 30, 2006 versus $81,492 for the nine months ended September 30, 2005. For the nine months ended September 30, 2006, the Company funded short-term loans to six new clients totaling approximately $1,595,000. Interest income was $217,484 for the nine months ended September 30, 2006 compared to $0 for the nine months ended September 30, 2005. Interest income was derived mainly from notes receivable relating to receivables factoring and investments as well as interest from a debenture and notes that were subsequently traded on March 22, 2006 for stock in a Canadian subsidiary of the maker of the debentures. We expect interest income to increase in the future since the Company has increased working capital availability for business lending and factoring. Dividend income was $354,054 for the nine months ended September 30, 2006 compared to zero dollars ($0) for the nine months ended September 30, 2005. Dividend income is primarily derived from various investments in marketable securities. For the nine months ended September 30, 2006, the Company recorded net trading losses from various investments in marketable securities in the amount of $66,795. These losses were attributable to sharp, short term losses in value of certain portfolio segments that were not properly hedged against sudden decreases in value. We actively trade marketable securities and consider trading to be a source of future revenue. The Company has taken steps to protect its portfolio with the use of put and call options to limit the risk of losses in the future, while maximizing upside potential. - 12 - We have not yet reached the size to benefit from separate office space and a dedicated staff. Our Company shares office space and certain administrative functions and staff with an affiliated company. Costs are allocated for these shared functions based on an estimate of time usage. Selling, general and administrative expenses were $1,188,385 for the nine months ended September 30, 2006 versus $342,427 for the nine months ended September 30, 2005. Professional fees of $645,734 associated with the Company's investment in INII, as more fully described in Note 4 and our legal proceedings section to the Condensed Consolidated Financial Statements, and salaries expense and allocated overhead of totaling $402,905 comprised the majority of these expenses. The remainder of our selling, general and administrative expenses for the nine months ended September 30, 2006 consist primarily of business development and other ordinary expenses necessary for the operation of the Company. Salaries and benefits were $230,803 for the nine months ended September 30, 2005, while the remainder of the expenses incurred were for allocated overhead expenses, professional fees and other ordinary office related expenses. The increase in salaries and benefits is due to officer's salaries incurred since the August 2005 merger. Interest expense was $796,379 for the nine months ended September 30, 2006 compared to $76,081 for the nine months ended September 30, 2005. Interest primarily relates to the expense associated with the $15,635,199 five percent (5%) convertible debenture entered into in September 2005 to fund INII, anticipated growth of the Company and interest on our margin loan. We mark to market our derivative liability on a quarterly basis. For the nine months ended September 30, 2006, the net change in fair value of derivative amounted to $74,964 of other income. For the nine months ended September 30, 2005, we recorded a merger expense in the amount of $876,160 in association with the Share Exchange Agreement more fully described in Note 1 to these financial statements. Liquidity and Capital Resources Operating Activities We incurred a net loss for the nine months ended September 30, 2006 in the amount of $1,239,514. During the nine months ended September 30, 2006, our operations provided cash flow in the amount of $1,430,781. Our operating cash flow was provided primarily by an increase in the value of our investments in marketable securities ($6,021,719) offset by a reduction of our associated margin loan ($2,936,194), changes in minimum lease payments receivable ($241,532) and debentures receivable ($519,238). Our decreases in net operating cash were primarily a result of changes in the amount of notes receivable ($1,414,195) used to fund short term loans for six new clients. Investing Activities We realized $349,500 in proceeds from the sale of assets. The asset was included as a part of our investment in INII. A receivable for this asset was not recorded when our original investment in INII was made. The proceeds from the collection of this loan were charged to our investment in INII. These proceeds were immediately used to pay a portion of the accrued interest due on our debenture payable. Financing Activities For the nine months ended September 30, 2006, we made $344,282 of payments on a note to an affiliate. The loan was fully repaid in the second quarter of 2006. Our CEO is also on the Board of Directors of one of our clients. As of September 30, 2006, we have an outstanding note receivable in the amount of $275,000 from this client. The note receivable is separately stated on our balance sheet as of September 30, 2006. Subsequent to September 30, 2006, our CEO was elected Chairman of our client's Board of Directors. The Company had working capital in the amount of $3,540,573 at September 30, 2006. Included in our working capital is $1,708,386 of short term notes receivable. For the nine months ended September 30, 2006, we funded short-term loans to six new clients totaling approximately $1,595,000. - 13 - Our cash flows for the periods are summarized below:
Nine Months Ended Nine Months Ended September 30, 2006 September 30, 2005 ------------------ ------------------ Net cash provided by (used in) $ 1,430,781 $ (558,888) operating activities Net cash provided by investing activities $ 349,500 $ 26,037 Net cash provided by (used in) financing activities $ (344,282) $ 5,359,839
Our cash increased $1,435,999 since December 31, 2005 Management believes the Company has adequate working capital and cash to be provided from operating activities to fund current levels of operations. We anticipate that our company will grow. As our business grows we believe that we will have to raise additional capital in the private debt and public equity markets to fund our investments. Off-Balance Sheet Arrangements The Company had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2006. Inflation The Company believes that inflation has not had a significant impact on operations since inception. ITEM 3. CONTROLS AND PROCEDURES (A) Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, accumulated and communicated to the Company's management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company's management carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the material weaknesses described herein the Company's CEO and CFO have concluded that the Company's disclosure controls and procedures were not effective, as of the date of that evaluation, for the purposes of recording, processing, summarizing and timely reporting of material information required to be disclosed in reports filed by the Company under the Exchange Act. More specifically, our failure to maintain effective controls over the selection, application and monitoring of our accounting policies to assure that certain transactions were accounted for in conformity with generally accepted accounting principles resulted in a failure during 2005 to record an appropriate derivative liability, deemed interest expense associated with the derivative liability and related charges associated with changes in the value of embedded derivatives, arising from the issuance during 2005 and a failure during the last quarter of 2005 to properly disclose hedging activities. (B) Changes in Internal Controls over Financial Reporting In connection with the evaluation of the Company's internal controls during the Company's last fiscal quarter covered by this report, the Company's CEO and CFO have determined that there were no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting. Material Weaknesses Identified In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2005, our independent registered public accounting firm informed us that we have significant deficiencies constituting material weaknesses. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 2, a material weakness is a significant control deficiency or a combination of significant control deficiencies that result in there being more than a remote likelihood that a material misstatement in the annual or interim financial statements will not be prevented or detected. The specific problems identified by the auditor were (1) lack of segregation of duties necessary to maintain proper checks and balances between functions, (2) failure of internal personnel to adequately communicate the scope and nature of non-routine transactions, and (3) applications of improper accounting principles to derivative financial instruments. The absence of qualified full time accounting personnel was a contributing factor to the problems identified by the auditor. The specific circumstances giving rise to the weaknesses include utilizing the services of contract accountants on a part time basis in the absence of internal accounting personnel. As a result of the absence of full time in-house accounting personnel and the failure of in-house personnel to adequately communicate information to the outside contract accountants, certain journal entries required during 2004 and 2005 were not made until the time of the audit when the need for such entries was identified by the auditor. - 14 - As a result of our review of the items identified by our auditors, we have concluded that our previous derivative accounting policies were incorrect and a communication failure resulted in not properly disclosing hedging activities. In light of the above, we have restated our consolidated financial statements for the third quarter of 2005 to correct our accounting for derivatives. The effects of the aforementioned weaknesses related to the closing and preparation of the financial statements were corrected by management prior to the issuance of this Quarterly Report on Form 10-QSB. Remediation Plan regarding the Material Weaknesses Because of our size, we share our accounting staff with an affiliated company. The accounting department is comprised of our Chief Financial Officer, a part-time Controller, an accounting manager and a data entry clerk, all of whom are considered contract employees since they are on the payroll of its affiliate and we reimburse our affiliate for the our share of the costs. Management is actively engaged in remediation efforts to address the material weaknesses identified in the Company's internal control over financial reporting as of June 30, 2006. These on-going remediation efforts, outlined below, are specifically designed to address the material weaknesses identified by Management and to improve and strengthen the Company's overall control environment. The Company has taken the following steps to address the specific problems identified by the auditors: o Our previous contract CFO was part time. Due to family health issues he was unable to devote full time to this position and has resigned as contract CFO and has become a part time contract controller. Our affiliate has hired a Chief Financial Officer and a contract full-charge bookkeeper to allow us to properly implement the segregation of duties necessary to maintain checks and balances between accounting and executive functions. o All non-routine transactions will be reviewed by our CFO and accounting manager before they are completed. o Our CFO will monitor our accounting policies to insure proper accounting for financial derivatives and other unusual transactions on an ongoing basis. During the quarter ended December 31, 2005, a full time accounting manager was hired by our affiliate. We believe that in conjunction with the hiring of a contract full charge bookkeeper, we will be able to materially improve our internal controls over financial reporting. The Company continues its efforts to remediate control weaknesses and further improve and strengthen its internal control over financial reporting under the direction of the CEO and the CFO. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company completed an agreement in lieu of foreclosure (the "Agreement") with Bio One Corporation ("Bio-One") on March 22, 2006 and received the stock of Interactive Nutrition International, Inc ("INII"), along with other assets and claims, in return for the forgiveness of $9,887,959 in debt and accrued interest of Bio-One and will now be treated as an investment in INII. INII is currently being operated by Price Waterhouse Coopers as Receiver and Manager pursuant to Section 246(2) of the Bankruptcy and Insolvency Act of Canada, after being requested to do so by Nesracorp Inc., Eli Nesrallah, Joseph Nesrallah and Pamela Nesrallah (collectively, the "Sellers"), purporting default in payment of obligations incurred in the purchase of INII assets by Bio-One. A Court-supervised sale of the assets has been requested by the Receiver, and the Company intends to vigorously oppose this and pursue all claims against the Sellers. Additionally, the Company has been assigned all rights and claims previously asserted against Nesracorp Inc., Eli Nesrallah, Joseph Nesrallah, Pamela Nesrallah, Roxanne Anderson and Price Waterhouse Coopers, Inc. filed by INII and Bio-One in the Ontario Superior Court of Justice on January 13, 2005. The Company intends to pursue some or all of the previous claims in the filing of January 13, 2005 in Ontario Superior Court of Justice, as the stock of INII and these claims, as well as others, have been assigned to the Company as part of the Agreement the Company executed with Bio-One on March 22, 2006. On May 5, 2006, the Board of Directors terminated the Nesrallahs as employees of the Company. On March 30, 2006, the Company filed a lawsuit in State Court in Orlando, Florida against Eli Nesrallah, Joseph Nesrallah and Pamela Nesrallah, alleging, among other claims, breach of fiduciary duty to INII. As of the date of this filing, the Florida action has been abated pending the outcome of the results of our action filed in Canada. No reserve has been established for a loss on this transaction, as the Company believes its claims are meritorious and have a reasonable probability of prevailing in a Court of law. However, should the Company fail to prevail or settle its claims against the Sellers, the Company may be required to write down its entire investment of $9,538,459 in INII. - 15 - 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 AND REPORTS ON FORM 8-K (A) Documents filed as a part of this report: EXHIBIT 31.1 Officer's Certification Pursuant to Section 302 EXHIBIT 32.1 Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (B) Current Reports filed on Form 8-K: None - 16 - SIGNATURES In accordance with the requirements of the Exchange Act, the Company has caused this Quarterly Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 29, 2006 Natural Nutrition, Inc. (Formerly CSI Business Finance, Inc.) ------------------------------------- (Registrant) /s/ Timothy J Connolly ------------------------------------- Timothy J. Connolly Chief Executive Officer Date: November 29, 2006 Natural Nutrition, Inc. (Formerly CSI Business Finance, Inc.) ------------------------------------- (Registrant) /s/ Wm Chris Mathers ------------------------------------- Wm Chris Mathers Chief Financial Officer - 17 -