þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Delaware | 59-2705336 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
Page
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PART I – FINANCIAL INFORMATION | ||
Item 1. |
Financial Statements
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1
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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12
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk
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18
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Item 4. |
Controls and Procedures
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19
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PART II – OTHER INFORMATION | ||
Item 1. |
Legal Proceedings
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19
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Item 1A. |
Risk Factors
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19
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
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19
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Item 3. |
Defaults Upon Senior Securities
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19
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Item 4. |
(Removed and Reserved)
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19
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Item 5. |
Other Information
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19
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Item 6. |
Exhibits
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20
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Signatures |
21
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Difficult economic conditions could harm our business;
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We may experience substantial negative cash flows, which may have a significant adverse effect on our business and could threaten our solvency;
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If we experience negative cash flows, we may need to seek additional debt or equity financing, which may not be available on acceptable terms or at all. If available, it could have a highly dilutive effect on the holdings of existing stockholders;
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We could be adversely affected by additional management changes or an inability to attract and retain key management, directors and consultants;
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Because our Hong Kong operations account for a majority of our overall business, and most of our Hong Kong business is derived from the sale of products to members in China, any material adverse change in our business relating to either Hong Kong or China would likely have a material adverse impact on our overall business;
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As a network marketing company, we rely on an independent sales force and we do not have direct control over the marketing of our products;
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Our failure to maintain and expand our distributor relationships could adversely affect our business;
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The high level of competition in our industry could adversely affect our business;
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An increase in the amount of compensation paid to distributors would reduce profitability;
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Failure of new products to gain distributor and market acceptance could harm our business;
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Direct-selling laws and regulations may prohibit or severely restrict our direct sales efforts and cause our revenue and profitability to decline, and regulators could adopt new regulations that harm our business;
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Challenges by third parties to the form of our business model could harm our business;
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Our products and related activities are subject to extensive government regulation, which could delay, limit or prevent the sale of some of our products in some markets;
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New regulations governing the marketing and sale of nutritional supplements could harm our business;
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Regulations governing the production and marketing of our personal care products could harm our business;
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If we are found not to be in compliance with good manufacturing practices our operations could be harmed;
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Failure to comply with domestic and foreign laws and regulations governing product claims and advertising could harm our business;
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Although our distributors are independent contractors, improper distributor actions that violate laws or regulations could harm our business;
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Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results;
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We have a limited product line;
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We do not manufacture our own products so we must rely on independent third parties for the manufacturing and supply of our products;
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Growth may be impeded by the political and economic risks of entering and operating foreign markets;
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Currency exchange rate fluctuations could lower our revenue and net income;
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Transfer pricing, duties and other tax regulations affect our business;
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Failure to properly pay business taxes or customs duties, including those in China, could have a material adverse effect;
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We may be held responsible for certain taxes or assessments relating to the activities of our distributors, which could harm our financial condition and operating results;
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We may face litigation that could harm our business;
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We may be unable to protect or use our intellectual property rights;
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We do not have product liability insurance and product liability claims could hurt our business;
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Our internal controls and accounting methods may require modification;
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If we fail to achieve and maintain an effective system of internal controls in the future, we may not be able to accurately report our financial results or prevent fraud. As a result, investors may lose confidence in our financial reporting;
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We rely on and are subject to risks associated with our reliance upon information technology systems;
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System failures and attacks could harm our business;
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Terrorist attacks, cyber attacks, acts of war, epidemics or other communicable diseases or any other natural disasters may seriously harm our business;
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Disappointing quarterly revenue or operating results could cause the price of our common stock to fall;
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Our common stock is particularly subject to volatility because of the industry in which we operate;
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There is no assurance that an active public trading market will continue;
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The exercise of our warrants may result in substantial dilution and may depress the market price of our common stock;
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Future sales by us or our existing stockholders could depress the market price of our common stock; and
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Penny stock regulations are applicable to investment in our shares of common stock.
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December 31, 2010
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June 30, 2011
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|||||||
(Unaudited)
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||||||||
ASSETS
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||||||||
Current assets:
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||||||||
Cash and cash equivalents
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$ | 648 | $ | 1,437 | ||||
Restricted cash
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422 | 500 | ||||||
Accounts receivable
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105 | 133 | ||||||
Inventories, net
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751 | 1,193 | ||||||
Other current assets
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639 | 1,235 | ||||||
Total current assets
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2,565 | 4,498 | ||||||
Property and equipment, net
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203 | 158 | ||||||
Goodwill
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1,764 | 1,764 | ||||||
Intangible assets, net
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200 | – | ||||||
Restricted cash
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225 | 237 | ||||||
Other assets
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406 | 336 | ||||||
Total assets
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$ | 5,363 | $ | 6,993 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities:
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||||||||
Accounts payable
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$ | 3,115 | $ | 2,614 | ||||
Income taxes payable
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330 | 376 | ||||||
Accrued distributor commissions
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723 | 727 | ||||||
Other accrued expenses
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1,792 | 1,702 | ||||||
Deferred revenue
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1,029 | 2,696 | ||||||
Deferred tax liability
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178 | 177 | ||||||
Advance from related party
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4 | 237 | ||||||
Other current liabilities
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1,013 | 1,019 | ||||||
Total current liabilities
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8,184 | 9,548 | ||||||
Commitments and contingencies
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||||||||
Stockholders’ deficit:
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||||||||
Natural Health Trends stockholders’ deficit:
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||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,761,900 shares designated Series A convertible preferred stock, 138,400 shares issued and outstanding at December 31, 2010 and June 30, 2011, aggregate liquidation value of $304
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124 | 124 | ||||||
Common stock, $0.001 par value; 50,000,000 shares authorized; 10,725,899 and 11,306,323 shares issued and outstanding at December 31, 2010 and June 30, 2011, respectively
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11 | 11 | ||||||
Additional paid-in capital
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80,414 | 80,449 | ||||||
Accumulated deficit
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(83,643 | ) | (83,446 | ) | ||||
Accumulated other comprehensive income:
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||||||||
Foreign currency translation adjustments
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366 | 427 | ||||||
Total Natural Health Trends stockholders’ deficit
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(2,728 | ) | (2,435 | ) | ||||
Noncontrolling interest
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(93 | ) | (120 | ) | ||||
Total stockholders’ deficit
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(2,821 | ) | (2,555 | ) | ||||
Total liabilities and stockholders’ deficit
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$ | 5,363 | $ | 6,993 |
Three Months Ended June 30,
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Six Months Ended June 30,
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2010
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2011
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2010
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2011
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Net sales
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$ | 5,935 | $ | 7,208 | $ | 12,168 | $ | 12,383 | ||||||||
Cost of sales
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1,679 | 1,977 | 3,510 | 3,506 | ||||||||||||
Gross profit
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4,256 | 5,231 | 8,658 | 8,877 | ||||||||||||
Operating expenses:
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Distributor commissions
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1,980 | 2,714 | 4,232 | 4,476 | ||||||||||||
Selling, general and administrative expenses (including stock-based compensation expense of $38 and $21during the three months ended June 30, 2010 and 2011, respectively, and $102 and $35 during the six months ended June 30, 2010 and 2011, respectively)
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2,716 | 1,836 | 5,392 | 3,866 | ||||||||||||
Depreciation and amortization
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406 | 26 | 718 | 258 | ||||||||||||
Total operating expenses
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5,102 | 4,576 | 10,342 | 8,600 | ||||||||||||
Income (loss) from operations
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(846 | ) | 655 | (1,684 | ) | 277 | ||||||||||
Other income (expense), net:
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Gain (loss) on foreign exchange
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260 | 25 | 280 | (73 | ) | |||||||||||
Interest income
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7 | 1 | 7 | 2 | ||||||||||||
Interest expense
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(1 | ) | – | (10 | ) | (1 | ) | |||||||||
Other
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47 | – | 45 | 3 | ||||||||||||
Total other income (expense), net
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313 | 26 | 322 | (69 | ) | |||||||||||
Income (loss) before income taxes
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(533 | ) | 681 | (1,362 | ) | 208 | ||||||||||
Income tax provision (benefit)
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(28 | ) | 13 | (17 | ) | 20 | ||||||||||
Net income (loss)
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(505 | ) | 668 | (1,345 | ) | 188 | ||||||||||
Plus: Net loss attributable to the noncontrolling interest
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– | 1 | 7 | 9 | ||||||||||||
Net income (loss) attributable to Natural Health Trends
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(505 | ) | 669 | (1,338 | ) | 197 | ||||||||||
Preferred stock dividends
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(4 | ) | (4 | ) | (8 | ) | (8 | ) | ||||||||
Net income (loss) attributable to common stockholders of Natural Health Trends
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$ | (509 | ) | $ | 665 | $ | (1,346 | ) | $ | 189 | ||||||
Income (loss) per share of Natural Health Trends – basic and diluted
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$ | (0.05 | ) | $ | 0.06 | $ | (0.13 | ) | $ | 0.02 | ||||||
Weighted-average number of shares outstanding – basic
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10,485 | 10,675 | 10,452 | 10,655 | ||||||||||||
Weighted-average number of shares outstanding – diluted
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10,485 | 10,706 | 10,452 | 10,659 |
Six Months Ended June 30,
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||||||||
2010
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2011
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$ | (1,345 | ) | $ | 188 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
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Depreciation and amortization of property and equipment
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318 | 58 | ||||||
Amortization of intangibles
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400 | 200 | ||||||
Stock-based compensation
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102 | 35 | ||||||
Loss on disposal of property and equipment
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35 | – | ||||||
Deferred income taxes
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– | (1 | ) | |||||
Changes in assets and liabilities:
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Accounts receivable
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10 | (19 | ) | |||||
Inventories, net
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41 | (431 | ) | |||||
Other current assets
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350 | (577 | ) | |||||
Other assets
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325 | 84 | ||||||
Accounts payable
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966 | (502 | ) | |||||
Income taxes payable
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– | 18 | ||||||
Accrued distributor commissions
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169 | (16 | ) | |||||
Other accrued expenses
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(39 | ) | (107 | ) | ||||
Deferred revenue
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(1,564 | ) | 1,654 | |||||
Other current liabilities
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(43 | ) | (1 | ) | ||||
Net cash provided by (used in) operating activities
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(275 | ) | 583 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment, net
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4 | (9 | ) | |||||
Decrease (increase) in restricted cash
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155 | (72 | ) | |||||
Net cash provided by (used in) investing activities
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159 | (81 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES
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Advance from related party
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– | 233 | ||||||
Net cash provided by financing activities
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– | 233 | ||||||
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Effect of exchange rates on cash and cash equivalents
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(350 | ) | 54 | |||||
Net increase (decrease) in cash and cash equivalents
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(466 | ) | 789 | |||||
CASH AND CASH EQUIVALENTS, beginning of period
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1,552 | 648 | ||||||
CASH AND CASH EQUIVALENTS, end of period
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$ | 1,086 | $ | 1,437 |
1.
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NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Three Months Ended June 30,
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2010
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2011
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Loss
(Numerator)
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Shares
(Denominator)
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Per Share Amount
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Income
(Numerator)
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Shares
(Denominator)
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Per Share Amount
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Basic EPS:
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Net income (loss) attributable to common stockholders of Natural Health Trends
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$ | (509 | ) | 10,485 | $ | (0.05 | ) | $ | 665 | 10,675 | $ | 0.06 | ||||||||||||
Effect of dilutive securities:
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Non-vested restricted stock
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– | 31 | ||||||||||||||||||||||
Diluted EPS:
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Net income (loss) attributable to common stockholders of Natural Health Trends plus assumed conversions
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$ | (509 | ) | 10,485 | $ | (0.05 | ) | $ | 665 | 10,706 | $ | 0.06 |
Six Months Ended June 30,
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2010
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2011
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Loss
(Numerator)
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Shares
(Denominator)
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Per Share Amount
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Income
(Numerator)
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Shares
(Denominator)
|
Per Share Amount
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Basic EPS:
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Net income (loss) attributable to common stockholders of Natural Health Trends
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$ | (1,346 | ) | 10,452 | $ | (0.13 | ) | $ | 189 | 10,655 | $ | 0.02 | ||||||||||||
Effect of dilutive securities:
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Non-vested restricted stock
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– | 4 | ||||||||||||||||||||||
Diluted EPS:
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Net income (loss) attributable to common stockholders of Natural Health Trends plus assumed conversions
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$ | (1,346 | ) | 10,452 | $ | (0.13 | ) | $ | 189 | 10,659 | $ | 0.02 |
Three Months Ended June 30,
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Six Months Ended June 30,
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2010
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2011
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2010
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2011
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Options to purchase common stock
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27,500 | 22,500 | 27,500 | 22,500 | ||||||||||||
Warrants to purchase common stock
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3,704,854 | 3,704,854 | 3,704,854 | 3,704,854 | ||||||||||||
Non-vested restricted stock
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339,296 | 9,998 | 412,112 | 624,523 | ||||||||||||
Convertible preferred stock
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138,400 | 138,400 | 138,400 | 138,400 |
3.
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STOCK-BASED COMPENSATION
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Shares
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Wtd. Avg.
Exercise
Price
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Wtd. Avg.
Remaining
Contractual
Life
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Aggregate
Intrinsic
Value1
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|||||||||||||
Outstanding at December 31, 2010
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22,500 | $ | 1.80 | |||||||||||||
Cancelled, forfeited or expired
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– | – | ||||||||||||||
Outstanding at June 30, 2011
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22,500 | 1.80 | 0.4 | $ | – | |||||||||||
Vested and expected to vest at June 30, 2011
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22,500 | 1.80 | 0.4 | – | ||||||||||||
Exercisable at June 30, 2011
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22,500 | 1.80 | 0.4 | – |
Shares
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Wtd. Avg.
Price at
Date of
Issuance
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|||||||
Outstanding at December 31, 2010
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114,613 | $ | 0.45 | |||||
Granted
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600,000 | 0.36 | ||||||
Vested
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(108,688 | ) | 0.39 | |||||
Forfeited
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(18,748 | ) | 0.69 | |||||
Outstanding at June 30, 2011
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587,177 | 0.36 |
Three Months Ended June 30,
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Six Months Ended June 30,
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2010
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2011
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2010
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2011
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Net income (loss)
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$ | (505 | ) | $ | 668 | $ | (1,345 | ) | $ | 188 | ||||||
Other comprehensive income (loss), net of tax:
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Foreign currency translation adjustment
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(325 | ) | (42 | ) | (334 | ) | 61 | |||||||||
Comprehensive income (loss)
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(830 | ) | 626 | (1,679 | ) | 249 | ||||||||||
Plus: Comprehensive loss attributable to the noncontrolling interest
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– | 1 | 7 | 9 | ||||||||||||
Comprehensive income (loss) attributable to Natural Health Trends
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$ | (830 | ) | $ | 627 | $ | (1,672 | ) | $ | 258 |
6.
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RELATED PARTY TRANSACTIONS
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7.
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SUBSEQUENT EVENT
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Item 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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●
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Through retail markups on sales of products purchased by distributors at wholesale prices (in some markets, sales are for personal consumption only and income may not be earned through retail mark-ups on sales in that market); and
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●
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Through commissions paid on product purchases made by their down-line distributors.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2010
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2011
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2010
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2011
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Net sales
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100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales
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28.3 | 27.4 | 28.8 | 28.3 | ||||||||||||
Gross profit
|
71.7 | 72.6 | 71.2 | 71.7 | ||||||||||||
Operating expenses:
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||||||||||||||||
Distributor commissions
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33.4 | 37.6 | 34.8 | 36.2 | ||||||||||||
Selling, general and administrative expenses
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45.8 | 25.5 | 44.3 | 31.2 | ||||||||||||
Depreciation and amortization
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6.8 | 0.4 | 5.9 | 2.1 | ||||||||||||
Total operating expenses
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86.0 | 63.5 | 85.0 | 69.5 | ||||||||||||
Income (loss) from operations
|
(14.3 | ) | 9.1 | (13.8 | ) | 2.2 | ||||||||||
Other income (expense), net
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5.3 | 0.4 | 2.6 | (0.5 | ) | |||||||||||
Income (loss) before income taxes
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(9.0 | ) | 9.5 | (11.2 | ) | 1.7 | ||||||||||
Income tax provision (benefit)
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(0.5 | ) | 0.2 | (0.1 | ) | 0.2 | ||||||||||
Net income (loss)
|
(8.5 | )% | 9.3 | % | (11.1 | )% | 1.5 | % |
Three Months Ended June 30,
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Six Months Ended June 30,
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2010
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2011
|
2010
|
2011
|
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North America
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$ | 263 | 4.4 | % | $ | 329 | 4.6 | % | $ | 899 | 7.4 | % | $ | 626 | 5.1 | % | ||||||||||||||||
Hong Kong
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3,559 | 60.0 | 4,688 | 65.0 | 7,114 | 58.5 | 7,064 | 57.0 | ||||||||||||||||||||||||
China
|
414 | 7.0 | 232 | 3.2 | 655 | 5.4 | 518 | 4.2 | ||||||||||||||||||||||||
Taiwan
|
432 | 7.3 | 447 | 6.2 | 853 | 7.0 | 1,106 | 8.9 | ||||||||||||||||||||||||
South Korea
|
217 | 3.6 | 122 | 1.7 | 454 | 3.7 | 232 | 1.9 | ||||||||||||||||||||||||
Japan
|
111 | 1.9 | 60 | 0.8 | 248 | 2.0 | 135 | 1.1 | ||||||||||||||||||||||||
Russia
|
792 | 13.3 | 1,236 | 17.2 | 1,607 | 13.2 | 2,504 | 20.2 | ||||||||||||||||||||||||
Europe
|
147 | 2.5 | 94 | 1.3 | 338 | 2.8 | 198 | 1.6 | ||||||||||||||||||||||||
Total
|
$ | 5,935 | 100.0 | % | $ | 7,208 | 100.0 | % | $ | 12,168 | 100.0 | % | $ | 12,383 | 100.0 | % |
|
●
|
lower salaries, employee-related costs, and consulting fees at the corporate office totaling $220,000 and $500,000 during the three and six month periods, respectively;
|
|
●
|
lower rent, utilities, and other business expenses in North America totaling $86,000 and $62,000 during the three and six month periods, respectively;
|
|
●
|
lower salaries and employee-related costs in China amounting to $47,000 and $100,000 during the three and six month periods, respectively;
|
|
●
|
lower rent and utilities in China totaling $58,000 and $89,000 during the three and six month periods, respectively;
|
|
●
|
lower salaries and professional fees in South Korea amounting to $229,000 during the second quarter of 2011;
|
|
●
|
impact of agreements with vendors to settle outstanding amounts at $209,000 and $262,000 less than carrying value during the three and six month periods, respectively; and
|
|
●
|
lower stock-based compensation expense in the amount of $17,000 and $67,000 during the three and six month periods, respectively.
|
Exhibit
Number
|
Exhibit Description
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
NATURAL HEALTH TRENDS CORP. | |||
Date: November 14, 2011
|
|
/s/ Timothy S. Davidson | |
Timothy S. Davidson | |||
Senior Vice President and Chief Financial Officer | |||
(Principal Financial Officer) |
Exhibit
Number
|
EXHIBIT INDEX
Exhibit Description
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Date: November 14, 2011
|
By:
|
/s/ Chris T. Sharng | |
Chris T. Sharng | |||
President | |||
(Principal Executive Officer) |
Date: November 14, 2011
|
By:
|
/s/ Timothy S. Davidson | |
Timothy S. Davidson | |||
Senior Vice President and Chief Financial Officer | |||
(Principal Financial Officer) |
Date: November 14, 2011
|
By:
|
/s/ Chris T. Sharng | |
Chris T. Sharng | |||
President | |||
(Principal Executive Officer) |
Date: November 14, 2011
|
By:
|
/s/ Timothy S. Davidson | |
Timothy S. Davidson | |||
Senior Vice President and Chief Financial Officer | |||
(Principal Financial Officer) |
Consolidated Balance Sheets (Parentheticals) (USD $) In Thousands, except Share data | Jun. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Preferred stock, par value (in Dollars per share) | $ 0.001 | $ 0.001 |
Preferred stock, aggregate liquidation value (in Dollars) | $ 304 | |
Common stock, par value (in Dollars per share) | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 50,000,000 | 50,000,000 |
Common stock, shares issued | 11,306,323 | 10,725,899 |
Common stock, shares outstanding | 11,306,323 | 10,725,899 |
Total [Member] | ||
Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
Preferred stock, shares designated Series A convertible preferred stock | 5,000,000 | 5,000,000 |
Series A Convertible Preferred Stock [Member] | ||
Preferred stock, shares authorized | 1,761,900 | 1,761,900 |
Preferred stock, shares designated Series A convertible preferred stock | 1,761,900 | 1,761,900 |
Preferred stock, shares issued | 138,400 | 138,400 |
Preferred stock, shares outstanding | 138,400 | 138,400 |
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Document And Entity Information | 6 Months Ended | |
---|---|---|
Jun. 30, 2011 | Nov. 07, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | NATURAL HEALTH TRENDS CORP | |
Document Type | 10-Q | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 11,326,323 | |
Amendment Flag | false | |
Entity Central Index Key | 0000912061 | |
Entity Current Reporting Status | No | |
Entity Voluntary Filers | No | |
Entity Filer Category | Smaller Reporting Company | |
Entity Well-known Seasoned Issuer | No | |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q2 |
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Note 6 - Related Party Transactions | 3 Months Ended | ||
---|---|---|---|
Jun. 30, 2011 | |||
Related Party Transactions Disclosure [Text Block] |
George
Broady, a director of the Company and owner of more than 5%
of its outstanding common stock, advanced $2,500 on January
13, 2011, and $30,000 on March 14, 2011 to settle certain
claims against the Company. The aggregate amount of
these advances, plus a $4,000 advance on December 17, 2010,
totaling $36,500 was repaid on August 8, 2011.
Additionally,
Mr. Broady advanced $100,000 to the Company on February 28,
2011 and an additional $100,000 on March 14, 2011. The
Company has agreed to pay Mr. Broady interest of 9% per annum
on the aggregate amount of the advances. The Company
repaid Mr. Broady principal of approximately $128,000 during
the third and fourth quarters of 2011, and expects to repay
the balance of the principal and interest before the end of
2011.
|
Note 2 - Summary of Significant Accounting Policies | 3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant Accounting Policies [Text Block] |
Principles
of Consolidation
The
consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated in consolidation.
Use of
Estimates
The
preparation of financial statements in accordance with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reported period.
The
most significant accounting estimates inherent in the
preparation of the Company’s financial statements
include estimates associated with obsolete inventory and the
fair value of acquired intangible assets, including goodwill,
as well as those used in the determination of liabilities
related to sales returns and income taxes. Various
assumptions and other factors prompt the determination of
these significant estimates. The process of
determining significant estimates is fact specific and takes
into account historical experience and current and expected
economic conditions. The actual results may differ
materially and adversely from the Company’s
estimates. To the extent that there are material
differences between the estimates and actual results, future
results of operations will be affected.
Reclassification
Certain
balances have been reclassified in the prior year
consolidated financial statements to conform to current year
presentation.
Income
Taxes
The
Company recognizes income taxes under the liability method of
accounting for income taxes. Deferred income taxes
are recognized for differences between the financial
reporting and tax bases of assets and liabilities at enacted
statutory tax rates in effect for the years in which the
differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be ultimately
realized.
The
Company and its subsidiaries file income tax returns in the
United States, various states, and foreign
jurisdictions. The Company is no longer subject to
U.S. federal income tax examinations for years prior to 2007,
and is no longer subject to state income tax examinations for
years prior to 2006. No jurisdictions are
currently examining any income tax returns of the Company or
its subsidiaries.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s financial
instruments, including cash and cash equivalents, restricted
cash, accounts receivable, accounts payable, and accrued
expenses, approximate fair value because of their short
maturities. The carrying amount of the noncurrent
restricted cash approximates fair value since, absent the
restrictions, the underlying assets would be included in cash
and cash equivalents.
Accounting
standards specify a hierarchy of valuation techniques based
on whether the inputs to those valuation techniques are
observable or unobservable. Observable inputs reflect
data obtained from independent sources, while unobservable
inputs reflect the Company’s market assumptions.
These two types of inputs have created the following
fair-value hierarchy:
●
Level 1 – quoted prices in active markets for identical
assets or liabilities;
●
Level 2 – inputs, other than the quoted prices in
active markets, that are observable either directly or
indirectly;
●
Level 3 – unobservable inputs based on the
Company’s own assumptions.
Accounting
standards permit companies, at their option, to choose to
measure many financial instruments and certain other items at
fair value. The Company has elected to not fair value
existing eligible items.
Revenue
Recognition
Product
sales are recorded when the products are shipped and title
passes to independent distributors. Product sales
to distributors are made pursuant to a distributor agreement
that provides for transfer of both title and risk of loss
upon our delivery to the carrier that completes delivery to
the distributors, which is commonly referred to as
“F.O.B. Shipping Point.” The Company
primarily receives payment by credit card at the time
distributors place orders. Amounts received for
unshipped product are recorded as deferred
revenue. The Company’s sales arrangements do
not contain right of inspection or customer acceptance
provisions other than general rights of return.
Actual
product returns are recorded as a reduction to net
sales. The Company estimates and accrues a reserve
for product returns based on its return policies and
historical experience.
Enrollment
package revenue, including any nonrefundable set-up fees, is
deferred and recognized over the term of the arrangement,
generally twelve months. Enrollment packages
provide distributors access to both a personalized marketing
website and a business management system. No
upfront costs are deferred as the amount is
nominal.
Shipping charges
billed to distributors are included in net
sales. Costs associated with shipments are
included in cost of sales.
Various
taxes on the sale of products and enrollment packages to
distributors are collected by the Company as an agent and
remitted to the respective taxing authority. These
taxes are presented on a net basis and recorded as a
liability until remitted to the respective taxing
authority.
Selling,
General and Adminstrative Expenses
During
the second quarter of 2011, the Company successfully
negotiated and entered into agreements with certain legacy
and on-going vendors to settle prior outstanding payable
balances. The impact of such agreements to settle
outstanding payable balances was $209,000 less than carrying
value, which was immediately recognized as a credit to
selling, general and administrative expenses upon
settlement.
Income
Per Share
Basic
income per share is computed by dividing net income
applicable to common stockholders by the weighted-average
number of common shares outstanding during the
period. Diluted income per share is determined
using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive
effect of common stock equivalents, consisting of non-vested
restricted stock and shares that might be issued upon the
exercise of outstanding stock options and warrants and the
conversion of preferred stock.
The
dilutive effect of non-vested restricted stock, stock options
and warrants is reflected by application of the treasury
stock method. Under the treasury stock method, the
amount the employee must pay for exercising stock options,
the amount of compensation cost for future service that the
Company has not yet recognized, and the amount of tax benefit
that would be recorded in additional paid-in capital when the
award becomes deductible are assumed to be used to repurchase
shares. The potential tax benefit derived from
exercise of non-qualified stock options has been excluded
from the treasury stock calculation as the Company is
uncertain that the benefit will be realized.
The
following tables illustrate the computation of basic and
diluted income per share for the periods indicated (in
thousands, except per share data):
In
periods where losses are reported, the weighted-average
number of common shares outstanding excludes common stock
equivalents because their inclusion would be
anti-dilutive. In periods where income is
reported, certain non-vested restricted stock is
anti-dilutive upon applying the treasury stock method since
the amount of compensation cost for future service results in
the hypothetical repurchase of shares exceeding the actual
number of shares to be vested. Other common stock
equivalents are also anti-dilutive since the average market
price of the related common stock for the period exceeds the
exercise price.
The
following securities were not included for the time periods
indicated as their effect would have been
anti-dilutive:
Options
and warrants to purchase 22,500 and 3,704,854 shares of
common stock, respectively, were outstanding at June 30,
2011. Such options expire on November 17,
2011. The warrants have expirations through April
21, 2015.
Recently
Issued and Adopted Accounting Pronouncements
In
September 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2011-08, Intangibles—Goodwill
and Other (Topic 350) — Testing Goodwill for
Impairment, to allow entities to use a qualitative
approach to test goodwill for impairment. ASU
2011-08 permits an entity to first perform a qualitative
assessment to determine whether it is more likely than not
that the fair value of a reporting unit is less than its
carrying value. If it is concluded that
this
In
June 2011, the FASB issued ASU No. 2011-05,
Comprehensive
Income (Topic 220)—Presentation of Comprehensive
Income, to require an entity to present the total of
comprehensive income, the components of net income, and the
components of other comprehensive income either in a single
continuous statement of comprehensive income or in two
separate but consecutive statements. ASU 2011-05
eliminates the option to present the components of other
comprehensive income as part of the statement of
equity. ASU 2011-05 is effective for interim and
annual financial periods beginning after December 15,
2011. Early adoption is permitted. The
Company does not expect adoption of this standard to have a
material impact on its consolidated financial
statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRS. ASU 2011-04 provides a consistent definition of
fair value and ensures that the fair value measurement and
disclosure requirements are similar between U.S. GAAP and
International Financial Reporting Standards. ASU 2011-04
changes certain fair value measurement principles and
enhances the disclosure requirements particularly for level 3
fair value measurements. This guidance will be effective for
interim and annual reporting periods beginning after
December 15, 2011, and will be applied prospectively.
The Company is currently evaluating the impact of adopting
ASU 2011-04, but believes there will be no significant impact
on its consolidated financial statements.
Other recently issued accounting pronouncements did not or
are not believed by management to have a material impact on
the Company’s present or future financial statements.
|
Note 7 - Subsequent Event | 3 Months Ended | ||
---|---|---|---|
Jun. 30, 2011 | |||
Subsequent Events [Text Block] |
During
the third quarter of 2011, the Company successfully
negotiated and entered into agreements with certain legacy
and on-going vendors to settle prior outstanding payable
balances. The impact of such agreements to settle
outstanding payable balances was $220,000 less than carrying
value, which was immediately recognized as a credit to
selling, general and administrative expenses upon
settlement.
|
Note 3 - Stock-Based Compensation | 3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disclosure of Compensation Related Costs, Share-based Payments [Text Block] |
Stock-based compensation expense totaled approximately
$38,000 and $21,000 for the three months ended June 30, 2010
and 2011, respectively, and approximately $102,000 and
$35,000 for the six months ended June 30, 2010 and 2011,
respectively. No tax benefits were attributed to
the share-based compensation because a valuation allowance
was maintained for substantially all net deferred tax assets.
The
following table summarizes the Company’s stock option
activity:
1 Aggregate intrinsic value is defined as the positive difference between the current market value and the exercise price and is estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates indicated (in thousands).
No
stock options vested during the six months ended June 30,
2010 and 2011. As of June 30, 2011, no
unrecognized stock-based compensation expense related to
stock options is remaining. All stock options
outstanding at June 30, 2011 have an exercise price of $1.80
per share.
The
following table summarizes the Company’s restricted
stock activity:
On
May 12, 2011, the Company granted 600,000 shares of
restricted stock under the 2007 Equity Incentive Plan to its
executive officers, directors, and certain key
employees. The restricted stock vests quarterly on
a pro rata basis over a three-year period.
As
of June 30, 2011, total unrecognized stock-based compensation
expense related to non-vested restricted stock was
approximately $218,000, which is expected to be recognized
over a weighted-average period of 2.6 years.
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Note 4 - Comprehensive Income (Loss) (In Thousands) | 3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Comprehensive Income (Loss) Note [Text Block] |
4.
COMPREHENSIVE
INCOME (LOSS) (In Thousands)
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Note 5 - Contingencies | 3 Months Ended |
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Jun. 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 June 30, 2011, non-current other assets
include KRW 128 million (USD $119,000) 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 is currently $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 June 30, 2011, no contingent obligations have been
recognized under registration payment arrangements.
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Consolidated Statements of Operations (Unaudited) (Parentheticals) (USD $) In Thousands | 3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2011 | Jun. 30, 2010 | Jun. 30, 2011 | Jun. 30, 2010 | |
Stock-based compensation expense included in selling, general, and administrative expense | $ 21 | $ 38 | $ 35 | $ 102 |
Note 1 - Nature of Operations and Basis of Presentation | 3 Months Ended | ||
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Jun. 30, 2011 | |||
Business Description and Basis of Presentation [Text Block] |
Nature of
Operations
Natural
Health Trends Corp. (the “Company”), a Delaware
corporation, is an international direct-selling and
e-commerce company headquartered in Dallas,
Texas. Subsidiaries controlled by the Company sell
personal care, wellness, and “quality of life”
products under the “NHT Global”
brand. In most markets, we sell our products to an
independent distributor network that either uses the products
themselves or resells them to consumers.
Our
majority-owned subsidiaries have an active physical presence
in the following markets: North America; Greater
China, which consists of Hong Kong, Taiwan and China; Russia;
South Korea; Japan; and Europe, which consists of Italy and
Slovenia. In July 2009, the Company activated
an engagement with a service provider in Russia to provide
storage, distribution and order processing services.
Basis of
Presentation
The
unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. As a result,
certain information and footnote disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States
of America have been condensed or omitted. In the
opinion of management, the accompanying unaudited interim
consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, considered
necessary for a fair statement of the Company’s
financial information for the interim periods
presented. The results of operations of any
interim period are not necessarily indicative of the results
of operations to be expected for the fiscal
year. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes included in our 2010 Annual
Report on Form 10-K filed with the United States Securities
and Exchange Commission (SEC) on November 14, 2011.
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