SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _____________
Commission File No.000-29245
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
----------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 65-0452156
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3750 Investment Lane, Suite 5, West Palm Beach, Florida 33407
-------------------------------------------------------------
(Address of principal executive offices)
(561) 863-8446
--------------
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,632,813 shares of Common Stock as
of April 26, 2002.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
Condensed Financial Statements:
Condensed Balance Sheet as of March 31, 2002 (Unaudited)...................1
Condensed Statements of Operations for the three months ended
March 31, 2002 and 2001 (Unaudited).....................................2
Condensed Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (Unaudited).....................................3
Notes to Condensed Financial Statements .....................................4-5
ii
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
ASSETS
------
Current assets:
Cash $ 59,324
Accounts receivable, net 55,149
Inventory 181,172
Prepaids and other current assets 80,645
-----------
Total current assets 376,290
-----------
Property and equipment, net 60,037
-----------
Other assets:
Other assets, net 32,631
-----------
Total other assets 32,631
-----------
Total assets $ 468,958
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 386,423
Accrued expenses 115,118
Capital leases, current portion 13,927
Notes payable, current portion 365,067
-----------
Total current liabilities 880,535
-----------
Notes payable, less current portion 350,000
-----------
Total liabilities 1,230,535
-----------
Stockholders' deficit:
Common stock, $ 0.001 par value, authorized 30,000,000
shares; 3,629,813 shares issued and outstanding 3,630
Additional paid-in capital 834,812
Accumulated deficit (1,600,019)
-----------
Total stockholders' deficit (761,577)
-----------
Total liabilities and stockholders' deficit $ 468,958
===========
See accompanying notes to condensed financial statements.
-1-
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- -----------
Revenue $ 1,064,904 $ 1,505,084
Cost of sales 312,390 499,044
----------- -----------
Gross profit 752,514 1,006,040
----------- -----------
Operating expense:
General and administrative expense 335,235 574,225
Advertising and promotion 367,612 343,093
Depreciation and amortization 7,616 8,261
----------- -----------
Total operating expense 710,463 925,579
----------- -----------
Income from operations 42,051 80,461
----------- -----------
Other income (expense):
Interest income -- 2,040
Interest expense (1,604) (8,578)
----------- -----------
Total other income (expense) (1,604) (6,538)
----------- -----------
Income before income taxes 40,447 73,923
----------- -----------
Benefit (provision) for income taxes -- (32,235)
----------- -----------
Net income $ 40,447 $ 41,688
=========== ===========
Net income per share - basic $ 0.01 $ 0.01
=========== ===========
Net income per share - diluted $ 0.01 $ 0.01
=========== ===========
Weighted average number of shares - basic 3,629,813 3,608,935
=========== ===========
Weighted average number of shares - diluted 3,629,813 3,807,735
=========== ===========
See accompanying notes to condensed financial statements.
-2-
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
--------- ---------
Net cash provided by (used in) operating activities $ 3,595 $(102,773)
--------- ---------
Cash flows from investing activities:
Investment in trademarks -- (25,000)
Purchases of property and equipment -- (2,883)
--------- ---------
Net cash used in investing activities -- (27,883)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments on) notes payable (19,333) 89,166
Repayments on capital leases (6,870) (4,013)
Repayments to related parties -- (464)
--------- ---------
Net cash provided by (used in) financing activities (26,203) 84,689
--------- ---------
Net decrease in cash (22,608) (45,967)
Cash, beginning of period 81,932 125,585
--------- ---------
Cash, end of period $ 59,324 $ 79,618
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of accounts payable to notes payable $ 700,000 $ --
========= =========
See accompanying notes to condensed financial statements.
-3-
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed financial statements of Health & Nutrition
Systems International, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Regulation S-B. Accordingly, they do not include all of the information and
footnotes required for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for the
interim periods presented have been included.
These results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's Annual Financial Statements for the year ended December 31,
2001. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
It is recommended that the accompanying condensed financial statements be read
in conjunction with the financial statements and notes for the year ended
December 31, 2001, found in the Company's Form 10-KSB.
NOTE 2 - NOTES PAYABLE
- ----------------------
On January 12, 2001 the Company received a short-term loan from a bank in the
amount of $100,000. Interest accrued at a rate of 7.73% per annum and is
personally guaranteed by a former officer of the Company. This loan was paid off
on January 12, 2002.
On January 15, 2002 the Company received a short-term loan from a bank in the
amount of $23,400. Interest accrues at a rate of 4.75% per annum and is
collateralized by a certificate of deposit in the amount of $23,400 owned by a
former officer of the Company and current member of the Board of Directors. The
loan is due on July 15, 2002, and is payable in monthly installments of $4,167.
At March 31, 2002, the balance due is $15,067.
On April 11, 2002, the Company entered into an agreement with Garden State
Nutritionals (GSN), the sole manufacturer, to repay $700,000 owed to them as of
the date of the agreement. The repayment schedule requires equal quarterly
payments, without interest, over the next eight quarters, starting June 1, 2002.
In connection with this agreement, the Company granted a blanket second priority
lien on the Company's assets to GSN, which may only be foreclosed if the Company
fails to make three (3) consecutive quarterly principal payments in accordance
with the terms of the promissory note. This debt has been recorded as a note
payable with an imputed interest rate of 9% and with the interested calculated
over the term on the loan at $74,964.
-4-
Also on April 11, 2002, the Company entered into an exclusive manufacturing
agreement with GSN pursuant to which GSN provided the Company with a $450,000
line of credit, on current invoices, with 60-day terms.
NOTE 3 - FACTORING AGREEMENTS
- -----------------------------
On March 15, 2002, the Company terminated their factoring agreement with
Alliance Financial Capital, Inc. and entered into a factoring agreement with LSQ
Funding Group, L.C. (LSQ). The agreement provides that LSQ will purchase certain
receivables and advance 85% of the face amount of factored receivables. 15% of
the face of the factored receivables will be reserved. Fees include 2.125% of
each purchased receivable and a funds usage fee of 2% over the prime rate. The
term of this agreement is one year. The maximum amount of receivables the
Company may factor under the agreement is $750,000, and there is no minimum
amount required to be factored. In connection with the factoring agreement, the
Company granted LSQ a blanket lien on Company assets and a personal guarantee by
the President/Chief Executive Officer.
NOTE 4 - GOING CONCERN
- ----------------------
The Company's condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company sustained significant
losses during the year ended December 31, 2001. In addition, the Company had
negative cash flows from operations and adverse liquidity ratios.
The Company's continuation is dependent upon its ability to control costs and
attain a satisfactory level of profitability with sufficient financing
capabilities or equity investment.
There is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
This Quarterly Report on Form 10-QSB contains forward-looking statements. Any
statements that are not statements of historical fact should be regarded as
forward-looking statements. For example, the words "intends," "believes,"
"anticipates," "plans," and "expects" are intended to identify forward-looking
statements. There are a number of important factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements.
These factors include without limitation those factors contained in our Form
10-KSB for the year ended December 31, 2001, filed with the Securities and
Exchange Commission. In addition, the recent terrorist attacks on the United
States, possible responses by the U.S. government, the effects on consumer
demand, the financial markets and other conditions increase the uncertainty
-5-
inherent in forward-looking statements. Finally, recent government action and
the surrounding publicity regarding Ephedra-containing products may make it
difficult for us to obtain and maintain product liability insurance for our
products containing Ephedra at current premiums. This could cause our actual
results to differ materially from those indicated by such forward-looking
statements.
The following discussion of our results of operations and financial condition
should be read together with our Unaudited Financial Statements contained in
Part I, Item 1 and the related Notes in this Form 10-QSB, and our audited
Financial Statements and the related Notes contained in our Form 10-KSB for the
fiscal year ended December 31, 2001 filed with the Securities and Exchange
Commission.
OVERVIEW
During the first quarter of 2002, we continued to implement the Company's
strategic plan to diversify our product line by developing and promoting new
products, Acutrim(R) Natural A.M., Fat Cutter(TM) and Carbolizer(TM). This
strategy is aimed at minimizing the impact of a shift in consumer preferences
with regard to any one of our products, a change in retailer attitude with
respect to any of our products, or any other cause of reduced sales either for a
particular product or in a particular geographical area.
The Company is continuing with it's cost reduction program which is showing good
results in the first quarter of 2002. The total operating expenses in the first
quarter of 2002 were $710,463 compared to $1,345,394 for the fourth quarter of
2001, a decrease of $634,931. Like most consumer businesses, our business is
affected by general economic, political and public safety conditions that impact
consumer confidence and spending. The impact of these terrorist attacks and the
government's response to them have had short-term and may have long-term adverse
effects on our revenues, results of operations, financial condition and
prospects. The terrorist attacks have had an immediate impact on our business as
a result of the contraction in consumer confidence and a negative impact on the
retail environment generally. We, as well as most other companies operating in
the same market sector may see a decline in sales due to a consumer perception
that under these present circumstances the purchase of diet-related products is
marginally less important than other household expenditures. Additional
terrorist attacks or related events, such as bioterrorism, could adversely
impact all consumer businesses, including ours. It is not possible at this time
to predict the longer-term effects of the attacks, or the impacts of actions
taken in response to the attacks, on general economic, political and public
safety conditions and our results of operations.
Recent events have also included renewed interest by the FDA with regard to
regulating Ephedra. This interest has been accompanied by adverse publicity. As
of March 31, 2002, 26% of our gross revenue was generated by sales of products
containing Ephedra. We cannot predict the effects of these events our revenues,
results of operations, financial condition and prospects. See "Commitments and
Contingencies."
-6-
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended March 31, 2002 were $1,064,904, a decrease
of $440,180 or 29%, compared to net sales of $1,505,084 for the three months
ended March 31, 2001. The decrease in net sales was primarily due to the fact
that Net Sales for the first quarter ended March 31, 2001 included new opening
orders for Acutrim(R) Natural. Opening orders are unusually large due to the
fact that the order is typically three (3) months worth of supply so that the
customers can fill their distribution pipelines. The sales of Acutrim(R) in the
first three months ended March 31, 2002 were $195,513, a decrease of $463,731 or
70%, compared to sales of $659,244 for the three months ended March 31, 2001.
The level of sales of Acutrim(R) in the first quarter of 2002 reflects sales
levels in the ordinary course of business. Chain store sales accounted for
$994,721 or 93% of our sales during the quarter. HNS Direct (sales direct to the
independent retailer) were $70,183 or 7% of our sales during the quarter. GNC
accounted for $347,634 or 33 %, Rite Aid accounted for $110,425 or 10 % of sales
for the quarter, Walgreens accounted for $168,603 or 16% of sales for the
quarter, Target accounted for $76,669 or 7% of sales for the quarter, Eckerd
accounted for $81,934 or 8% of sales for the quarter.
COST OF SALES
Cost of sales for the three months ended March 31, 2002 were $312,390 or 29% of
net sales, compared to $499,044 or 33% of net sales for the three months ended
March 31, 2001. The decrease in cost of sales for the three months ended March
31, 2002, as a percent of net sales was primarily attributable to the change in
product sales mix and the large number of new sales, in the first quarter of
year 2001, from Acutrim(R), which has a higher cost compared to the company's
other products.
GROSS PROFIT
Gross profit for the three months ended March 31, 2002 was $ 752,514 a decrease
of $253,526 or 25%, compared to gross profit of $1,006,040 for the three months
ended March 31, 2001. The decrease in gross profit dollars is a result of change
in the product mix sold. Sales from Acutrim(R) decreased by $463,731 in the
three months ended March 31, 2002 compared to the three months ended March 31,
2001. As a percent of net sales, gross profit was 71% for the three months ended
March 31, 2002, compared to 67% for the three months ended March 31, 2001.
OPERATING EXPENSES
Operating expenses were $710,463 for the three months ended March 31, 2002,
representing a decrease of $215,116, compared to $925,579 for the three months
ended March 31, 2001. The decrease in operating expenses was primarily
attributable to decreases in the following expense categories: sales expenses
$36,213, personnel expenses $65,952 and other general and administration
expenses $158,531. As a percent of net sales, gross profit was 71% for the three
months ended March 31, 2002, compared to 67% for the three months ended March
31, 2001.
-7-
Commission expense for quarter ended March 31, 2002, was $27,822. We utilize
brokers to supplement our marketing efforts to our national chain customers.
These brokers cover different regions of the country under our agreements with
them which can be terminated on 30-day's notice. We pay the brokers 5% of Net
Sales, (Net Sales is defined as Gross Sales less deductions taken by the
vendors). We do not use a broker for our largest customer General Nutrition Co.
(GNC).
NET PROFIT FROM OPERATIONS
Net profit from operations was $40,447 or $.01 per share for the three months
ended March 31, 2002, as compared to a net profit from operations of $41,688 or
$.01 per share for the three months ended March 31,2001.
LIQUIDITY & CAPITAL RESOURCES
At March 31, 2002, we had a working capital deficit of $504,246 compared to a
$553,445 working capital surplus at March 31, 2001. Net cash provided by
operating activities for the three months ended March 31, 2002 was $3,595
compared to $(102,773) used in operating activities for the period ending March
31, 2001. Cash used in investing activities was $-0- for the three months ended
March 31, 2001 compared to $ ($27,883) used in investing activities for the
three months ending March 31, 2001. There was no cash used for investing
activities in the first three months ended March 31, 2002. Cash used for
investing activities in the first quarter 2001 was mainly applied to the
purchase of the Acutrim(R) Trademark. Net cash used by financing activities for
the three months ended March 31, 2002 was $(26,203) as compared to $84,689 cash
provided by financing activities for the period ending March 31, 2001. During
the three months ending March 31, 2002, the Company repaid note payments of
$19,333 and capital lease payments of $6,870. During the three months ending
March 31, 2001, the Company received a $100,000 loan, and $10,834 was repaid
with regards to all loans. Payments were also made on capital leases.
We are dependent on factoring our receivables in order to support our working
capital needs. During 2001, we factored certain of our accounts receivable with
Alliance Financial Capital, Inc. On March 15, 2002, we terminated our factoring
agreement with Alliance and entered into a factoring agreement with LSQ Funding
Group, L.C. (LSQ). The term of this agreement is one year. The maximum amount of
receivables we may factor under our agreement with LSQ is $750,000, and there is
no minimum amount required to be factored. In connection with the factoring
agreement, we granted to LSQ a blanket lien on our assets. Factoring our large
pharmacy chain accounts and large health food accounts continues to play a
crucial role in providing capital and liquidity for our operations.
Our factoring arrangement provides us with revenue at the time of shipment of
the product. Absent a factoring arrangement, we would be required to carry these
accounts receivable for approximately 30-90 days. Other than as described below,
factoring is the only available financing alternative available to us at this
time.
-8-
On April 11, 2002 the Company entered into an agreement with GSN, our sole
manufacturer, pursuant to which we agreed to repay to GSN amounts we owed to
them as of the date of the agreement which were approximately $700,000. In
connection with this agreement, we granted to GSN a blanket second priority lien
on our assets, which may only be foreclosed if we fail to make three (3)
consecutive quarterly principal payments. Also, on April 11, 2002, we entered
into an exclusive manufacturing agreement with GSN pursuant to which GSN has
provided us with a $450,000 line of credit with 60-day terms. The Chief
Executive Officer/President, Christopher Tisi, personally guarantees this
agreement.
In the fourth quarter of 2001, we were able to increase our credit limits, as
well as improve our payment terms, with certain vendors for 2002.
At March 31, 2002, we have generated sufficient cash flow from normal
operations through the end of the first quarter of 2002 to pay our ongoing
current expenses. We believe that we can meet our budgeted operating expenses
for the balance of the fiscal year 2002 and that this will produce sufficient
cash flow to continue our normal operations. Except as described above, we
currently have identified no other sources of capital or financing. To the
extent that our product sales are insufficient to support out internal cash flow
needs, our vendor credit lines and our factoring arrangement with LSQ may not be
sufficient to fund our operations.
Going Concern Qualification
The Company's auditors stated that the financial statements of the Company for
the year ended December 31, 2001 were prepared on the going-concern basis. For
the year ended December 31, 2001, we incurred a net annual loss of $1,399,533
and the Company has an accumulated deficit of $1,640,466. The loss raises
substantial doubt about the ability of the Company to continue as a
going-concern. In addition, the Company has negative cash flows from operations
of $33,650 during the year ended December 31, 2001 and has adverse liquidity
ratios. The Company's continuation is dependent upon its ability to control
costs and attain a satisfactory level of profitability with sufficient financing
capabilities or equity investment. There is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty. Management has
established plans intended to increase sales of the Company's products and
reduce operating costs to provide funds needed to increase liquidity and
implement the business plan.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
J.C. Herbert Bryant, III and KMS-Thin Tab 100, Inc.
In the federal case filed by the Company against KMS and Bryant for trademark
infringement, unfair competition, cyber piracy and breach of fiduciary duty, on
April 26, 2002, a summary judgment motion was filed by the Company. The court
has set a pretrial conference for July 26, 2002, after which trial may be held.
Commitments and Contingencies
Regulatory Matters - Our products Fat Cutter(TM), ThinTab(R) and Carbolizer(TM),
contain Ephedra, also known as "Ma Huang," an herb which contains
naturally-occurring Ephedrine. These products represented approximately 26% of
our gross revenue for the three months ended March 31, 2002. Ephedra containing
products have been the subject of adverse publicity in the United States and
other countries relating to alleged harmful effects.
In April 2000, the FDA withdrew most of the provisions of its proposed rule
regarding dietary supplements that contain ephedrine alkaloids. The proposed
rule, which was published in 1997, would have significantly limited our ability
to sell Fat Cutter(TM), ThinTab(R) and Carbolizer(TM), if it had been made
effective. The FDA's withdrawal of the provisions removed most, but not all, of
the limitations. This action was prompted largely by a report issued by the
-9-
United States General Accounting Office ("GAO") in which the GAO criticized as
faulty the scientific basis for the proposed rule and the FDA's evaluation of
approximately 900 reports of adverse events supposedly related to the
consumption of dietary supplements containing ephedrine alkaloids. The FDA made
available for public inspection most of the adverse event reports on April 3,
2000.
On October 25, 2000, several trade organizations for the dietary supplement
industry submitted a petition to the FDA, which concerned the remaining
provisions of the proposed rule regarding dietary supplements that contain
ephedrine alkaloids. The petition requested the FDA to: (1) withdraw the
remaining provisions of the proposed rule, and (2) adopt new standards for
dietary supplements that contain Ephedrine Alkaloids, which were set forth in
the petition. The FDA has not publicly responded to this petition.
The FDA will, most likely, attempt to issue a new proposed rule with respect to
dietary supplements that contain Ephedrine Alkaloids. However, it is uncertain
what restrictions the new proposed rule might contain or when a new proposed
rule will be issued. In the Company's opinion, it is unlikely that a final
regulation will be issued by the FDA during 2001. Consequently, management is
unable at the present time to predict the ultimate resolution of these issues,
or their ultimate impact on the Company's results of operations or financial
condition.
PRODUCTS LIABILITY INSURANCE
We are currently insured for products liability claims up to an aggregate of
$10,000,000. While our products liability policy currently cover our products
which contain Ephedra, there can be no assurance that this coverage will be
available in the future at premium rates that were consider acceptable, or at
all.
We are also an additional named insured on GSN's products liability policy which
have aggregate coverage of up to $5,000,000.
-10-
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Index and Exhibits:
b) Reports on Form 8-K during the fiscal quarter ended March 31,
2002:
The Registrant filed a report dated February 13, 2002 on Form
8-K, reporting an Item 5 event.
-11-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: May 16, 2002 Health & Nutrition Systems International, Inc.
By: /s/ Chris Tisi
--------------------
Chris Tisi
Chief Executive Officer, President, and
Interim Chairman of the Board
(Principal executive officer)
-12-