UNITED STATES
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 SEPTEMBER 30, 2003
[ ] 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.
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(Exact name of small business issuer as specified in its charter)
FLORIDA
-------
(State or other jurisdiction of incorporation or organization)
65-0452156
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(I.R.S. Employer Identification Number)
3750 INVESTMENT LANE, SUITE 5, WEST PALM BEACH, FLORIDA 33407
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(Address of principal executive offices)
(561) 863-8446
--------------
(Issuer's telephone number)
There were 3,832,813 shares of common stock, $0.001 par value, of the registrant
outstanding at September 30, 2003.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
HEALTH AND NUTRITION SYSTEMS INTERNATIONAL, INC.
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INDEX
Page
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Facing Sheet...................................................................... Cover
Page
Index............................................................................. ii
Part I - Financial Information
Item 1. Financial Statements 1
Condensed Balance Sheet as of September 30, 2003 (Unaudited)............. 1
Condensed Statements of Operations for the three and
six months ended September 30, 2003 and 2002 (Unaudited)................. 2
Condensed Statements of Cash Flows for the six months
ended September 30, 2003 and 2002 (Unaudited)............................ 3
Notes to Condensed Financial Statements.................................. 4-6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations............................... 7
Item 3 Controls and Procedures............................................ 12
Part II - Other Information
Item 1. Legal Proceedings.................................................. 13
Item 2. Changes in Securities.............................................. 13
Item 3. Defaults Upon Senior Securities.................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................ 13
Item 5. Other Information.................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................... 13
Signature......................................................................... 14
ii
PART I
ITEM 1. FINANCIAL STATEMENTS
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
================================================================================
ASSETS
------
SEPTEMBER 30, 2003
------------------
Current assets:
Cash $ 91,907
Accounts receivable, net 248,467
Inventory 1,372,254
-----------
Total current assets 1,712,628
-----------
Property and equipment, net 24,319
-----------
Other assets, net 7,986
Prepaids 21,003
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Total assets $ 1,765,936
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 1,054,495
Accrued expenses 68,487
Notes payable, current portion 500,000
-----------
Total current liabilities 1,622,982
-----------
Notes payable, less current portion 419,893
-----------
Total liabilities 2,042,875
Stockholders' deficit:
Common stock, $0.001 par value, authorized 30,000,000 shares;
3,832,813 shares issued and outstanding 3,830
Additional paid-in capital 858,612
Accumulated deficit (1,139,381)
-----------
Total stockholders' deficit (276,939)
-----------
Total liabilities and stockholders' deficit $ 1,765,936
See accompanying notes to condensed financial statements.
- 1 -
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue $ 1,867,887 $ 859,348 $ 4,369,984 $ 2,725,828
Cost of sales 767,375 399,898 1,772,077 1,038,972
----------- ----------- ----------- -----------
Gross profit 1,100,512 459,450 2,597,907 1,686,856
----------- ----------- ----------- -----------
Operating expense:
General and administrative expense 493,590 374,874 1,302,135 1,144,383
Advertising and promotion 553,949 154,288 1,050,261 404,341
Depreciation and amortization 4,495 7,617 16,821 22,850
----------- ----------- ----------- -----------
Total operating expense 1,052,034 536,779 2,369,217 1,571,574
----------- ----------- ----------- -----------
Income from operations 48,478 (77,329) 228,690 115,282
----------- ----------- ----------- -----------
Other income (expense):
Gain on sale of Trademark 279,308 -- 279,308 --
Interest expense (14,951) (17,505) (34,519) (30,884)
----------- ----------- ----------- -----------
Income before income taxes 312,835 (94,834) 473,479 84,398
=========== =========== =========== ===========
Benefit (provision) for income taxes -- -- -- --
Net income (loss) $ 312,835 $ (94,834) $ 473,479 $ 84,398
=========== =========== =========== ===========
Net income (loss) per share - basic $ 0.08 $ (0.03) $ 0.13 $ 0.02
=========== =========== =========== ===========
Net income (loss) per share - diluted $ 0.08 $ (0.03) $ 0.13 $ 0.02
=========== =========== =========== ===========
Weighted average number of shares - basic 3,772,813 3,632,813 3,679,480 3,632,813
=========== =========== =========== ===========
Weighted average number of shares - diluted 3,786,813 3,632,813 3,693,480 3,632,813
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
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HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
Net cash provided by operating activities $ 349,216 $ 161,843
----------- -----------
Cash flows from investing activities:
Proceeds from sale of trademark 300,000 --
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Net cash provided by investing activities 300,000 --
----------- -----------
Cash flows from financing activities:
Repayments on notes payable (571,373) (170,900)
Repayments on capital leases (714) (14,888)
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Net cash used in financing activities (572,087) (185,788)
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Net increase (decrease) in cash 77,129 (23,945)
Cash, beginning of period 14,778 81,932
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Cash, end of period $ 91,907 $ 57,987
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SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
Conversion of accounts payable to notes payable $ 1,000,000 $ 700,000
=========== ===========
Interest paid $ 7,500 $ --
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See accompanying notes to condensed financial statements.
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HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
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,
2002. Operating results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
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, 2002, found in the Company's Form 10-KSB.
NOTE 2 - LEGAL MATTERS
- ----------------------
The Company from time to time is a party of various legal proceedings. In the
opinion of management, none of the proceedings are expected to have a material
impact on its financial position or results of operations.
NOTE 3 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
- ----------------------------------------------------------
The Company's condensed financial statements have been prepared assuming that
the Company will continue as a going concern. During the nine months ended
September 30, 2003, the Company has successfully controlled costs and attained
profitability, including net income of $473,479 and cash flow from operations of
$349,216. However, at September 30, 2003, the Company has a working capital of
$89,646 and adverse liquidity ratios.
Management intends to continue controlling costs and monitoring financial
capabilities. Management believes these factors will contribute toward achieving
sustained profitability.
There remains 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.
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NOTE 4 - STOCK OPTIONS
- ----------------------
The non-qualified stock option plan adopted by the Company in May 1998
authorized the Company to grant 1,250,000 of its common shares.
The Company has elected to account for the stock options under the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized on the employee stock options. The Company accounts for stock options
granted to consultants under Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation."
During the nine months ended September 30, 2003, 50,000 new options were granted
to an officer of the Company, as per his employment agreement.
Had the compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation," at September 30, the Company's net income and
earnings per share would have been reduced to the proforma amounts indicated
below:
SEPT 30, 2003
-------------
Net income
As reported $ 473,479
===========
Pro forma $ 468,506
-----------
Earnings per share
As reported 0.13
-----------
Pro forma 0.13
===========
The fair value of each option is estimated on the date of grant using the fair
market value option-pricing model with the following assumptions:
Risk-free interest rate 4.5% - 6.5%
Expected life (years) Various
Expected volatility 1.23
Expected dividends None
NOTE 5 - RECLASSIFICATION AND CORRECTION OF AN ERROR
- ----------------------------------------------------
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 financial statement presentation. These reclassifications
have the effect of reducing revenue and reducing expense. Slotting fees expense
and new store discounts, charged back by customers were previously recorded as
marketing expense. In order to correct the accounting principle, the Company has
reclassified these costs as a reduction of gross sales. These reclassifications
have no effect on reported net income.
- 5 -
NOTE 6 - STOCK ISSUED
- ---------------------
On July 30, 2003, 200,000 shares of Health & Nutrition Systems were issued to
two board members of the Company, for services performed. The fair value of the
common stock at the time of issue was $0.12 per share, and the Company recorded
compensation expense of $24,000.
NOTE 7 - NOTES PAYABLE
- ----------------------
In July 2003, the Company issued an amended promissory note to Garden State
Nutrition in the principal amount of $1,300,000. The note provides for $300,000
to be paid before December 31, 2003, with the balance due in quarterly
installments of $131,410 commencing November 1, 2003 at 4.5% per annum. The
$300,000 was paid in August, 2003.
- 6 -
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 filed with the Securities and Exchange Commission. We do not
undertake any obligation to update any such factors or to publicly announce the
result of any revision to any of the forward looking statements contained herein
to reflect future events or developments.
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 filed
with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the U.S. Securities
and Exchange Commission, encourages all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. Our financial statements include a summary of the significant
accounting policies and methods used in the preparation of our financial
statements.
Management believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the financial
statements.
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of the respective merchandise,
except for two customers that have pay on scan terms with respect to which
revenue is recognized at time of sale by the customer. The Company records
revenues once the customer reports the sales through periodic sales reports.
Included in the net sales in the accompanying financial statements for the nine
months and the three months ended September 30, 2003 and 2002 are returns and
allowances, sales discounts, new store opening discounts and coop advertising
and promotions in the amounts of $1,510,491and $967,732 and $525,499 and
$300,385 respectively. The increase in sales reductions in year 2003 was
primarily due to the sales returns and allowances associated with the return of
discontinued ephedra products. Freight expenses are included in cost of sales.
USE OF ESTIMATES
Management's discussion and analysis of financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial
- 7 -
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates these estimates, including those related to valuation allowance for
the deferred tax asset, estimated useful life of fixed assets and the carrying
value of long-lived assets, intangible assets and allowances for sales returns,
doubtful accounts, and obsolete and slow moving inventory and reserve for
customer liabilities. Management bases these estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
CUSTOMER LIABILITY ESTIMATES
The company estimates and accrues expenses and liabilities for co-op advertising
and promotions and expenses for discontinued products as a reduction of sales.
The liability is maintained until the customer takes the deduction against
payments due. This liability is netted against the accounts receivable account
on the balance sheet. The amount at September 30, 2003 was $1,154,927 and
September 30, 2002 was $414,395.
OVERVIEW
We continued to implement the Company's strategic plan to diversify our product
line by developing and promoting new products. 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.
NET SALES
Gross revenues for the nine months ended September 30, 2003 and three months
ended September 30, 2003 were $5,880,465 an increase of $2,186,905 or 59% and
$2,393,387 an increase of $1,233,653 or 106% respectively, as compared to gross
revenue for the nine months ended September 30, 2002 of $3,693,560 and for the
three months ended September 30, 2002 of $1,159,733.
Net sales for the three months ended September 30, 2003 were $1,867,888, an
increase of $1,008,540 or 117%, as compared to net sales of $859,348 for the
three months ended September 30, 2002. For the three months ended September 30,
2003, the revenues with respect to our largest customers were as follows: (i)
Eckerd accounted for $201,048 or 8% of sales: (ii) GNC accounted for $630,630 or
26% of sales; (iii) Rite Aid accounted for $125,128 or 5% of sales; (iv)
Walgreen accounted for $139,836 or 6% of sales; (v) CVS accounted for $215,568
or 9% of sales and Wal-Mart accounted for $641,340 or 27% of sales. No other
account represented more than 5% of sales during the quarter.
Net sales for the nine months ended September 30, 2003 were $4,369,984, an
increase of $1,644,155 or 60%, as compared to net sales of $2,725,828 for the
nine months ended September 30, 2002.
- 8 -
For the nine months ended September 30, 2003, the revenues with respect to our
largest customers were as follows: (i) Eckerd accounted for $334,793 or 6% of
sales: (ii) GNC accounted for $1,353,420 or 23% of sales; (iii) Rite Aid
accounted for $307,665 or 5% of sales; (iv) Walgreen accounted for $376,788 or
6% of sales; (v) CVS accounted for $580,273 or 10% of sales and Wal-Mart
accounted for $1,605,342 or 27% of sales. No other account represented more than
5% of sales during the six months.
The increase in gross revenues and net sales for the nine months and three
months period attributable to an increase in advertising expenditures during
the nine month period ended September 30, 2003, and the introduction of new
products, Eat Less, Phase 2.
During the three months ended September 30, 2003, the Company sold the Acutrim
brand for $300,000 which resulted in a gain of $279,308. The impact on the
company's sales by this brand had been decreasing. The Acutrim brand was
acquired in January 2001 and comprised 22% of the Company's sales for the year
2001 at $1,028,000. For the year 2002, Acutrim sales were 18% of the Company's
sales at $646,763. For the nine months ended September 30, 2003, the sales were
4.8% of the Company's sales at $210,782.
COST OF SALES
Cost of sales for the three months ended September 30, 2003 was $767,375 or 41%
of net sales as compared to $399,898 or 47% of net sales for the three months
ended September 30, 2002. Cost of sales for the nine months ended September 30,
2003 was $1,772,377 or 41% of net sales as compared to $1,038,972 or 38% of net
sales for the nine months ended September 30, 2002. The cost of sales as a
percentage of gross revenues was 32% and 30% for the three months ended
September 30, 2003 and nine months ended September 30, 2003, respectively. The
dollar amount is higher due to the increased sales during the period. The
increased percentage as it relates to net sales is due to new products having a
higher cost of goods.
GROSS PROFIT
Gross profit for the three months ended September 30, 2003 was $1,100,512 an
increase of $641,062 or 140% compared to gross profit of $459,450 for the three
months ended September 30, 2002. As a percent of net sales, gross profit was 59%
for the three months ended September 30, 2003, compared to 54% for the three
months ended September 30, 2002. The increase in gross profit of $1,134,285 was
primarily due to sales increases in the Carb Cutter product and the introduction
of our new Eat Less and Phase2 products. Gross profit for the Nine months ended
September 30, 2003 was $2,597,907 an increase of $911,050 or 54% compared to
gross profit of $1,686,857 for the nine months ended September 30, 2002. As a
percent of net sales, gross profit was 59% for the nine months ended September
30, 2003, compared to 62% for the nine months ended September 30, 2002. The
increase in gross profit was primarily due to the sales increases in the Carb
Cutter, Eat Less and Phase2 in the aggregate amount of $2,911,930. The decrease
in gross profit percentage is due to the increase of sales reductions of coop
advertising and sales returns and allowances.
OPERATING EXPENSES
Operating expenses were $1,052,034 for the three months ended September 30,
2003, representing an increase of $515,255, compared to $536,778 for the three
months ended
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September 30, 2002. As a percent of net sales, operating expenses
were 56% for the three months ended September 30, 2003, compared to 63% for the
three months ended September 30, 2002. Advertising and promotion expenses for
the three months ended September 30, 2003, were $553,949 representing an
increase of $399,661, compared to $154,288 for the three months ended September
30, 2002. The general and administrative expenses were $493,590 for the three
months ended September 30, 2003 compared to $374,874 for the three months ended
September 30, 2002 or an increase of $118,716. Operating expenses were
$2,369,217 for the nine months ended September 30, 2003, representing an
increase of $797,643, compared to $1,571,573 for the nine months ended September
30, 2002. As a percent of net sales, operating expenses were 54% for the nine
months ended September 30, 2003, compared to 58% for the nine months ended
September 30, 2002. Advertising and promotion expenses for the nine months ended
September 30, 2003, were $1,050,261 representing an increase of $645,920,
compared to $404,341 for the nine months ended September 30, 2002. The general
and administrative expenses were $1,302,135 for the nine months ended September
30, 2003 compared to $1,144,383 for the nine months ended September 30, 2002 or
an increase of $157,752.
INCOME FROM OPERATIONS
Income from operations was $48,479 for the three months ended September 30,
2003, compared to a loss from operations of $(77,329) for the three months ended
September 30, 2002. Income from operations was $228,690 for the nine months
ended September 30, 2003, compared to income from operations of $115,283 for the
nine months ended September 30, 2003. Net income was $312,835 or $0.08 per share
for the three months ended September 30, 2003, as compared to a net loss of
$(94,833) or $(0.03) per share for the three months ended September 30, 2002.
Net income was $473,479 or $0.13 per share for the nine months ended September
30, 2003, as compared to a net income of $84,399 or $0.02 per share for the nine
months ended September 30, 2002. The increase in net income was primarily due to
the gain on sale of Acutrim of $279,308.
LIQUIDITY & CAPITAL RESOURCES
At September 30, 2003, the Company had a positive working capital of $89,646
compared to a $592,944 working capital deficit at September 30, 2002.
Net cash provided by operating activities for the nine months ended September
30, 2003 was $349,216 compared to $161,843 provided by operating activities for
the nine months ended September 30, 2002. The resulting increase in cash is
primarily due to a net profit realized during the nine months ended September
30, 2003, due to higher sales.
Cash from investing activities was $300,000 from the sale of Acutrim for the
nine months ended September 30, 2003 and there was no activity for the nine
months ended September 30, 2002.
The Acutrim brand was acquired in January 2001, and comprised 22% of the
Company's sales for the year 2001 at $1,028,000. For the year 2002, Acutrim
sales were 18% of the Company's
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sales at $646,763. For the nine months ended September 30, 2003, the sales were
4.8% of the Company's sales at $210,782.
Net cash used in financing activities for the nine months ended September 30,
2003 was $572,087 compared to net cash used by financing activities of $185,788
for the nine months ended September 30, 2002. This is primarily attributable to
the repayment of a portion of the note to Garden State Nutritionals.
On April 11, 2002, the Company entered into an agreement with Garden State
Nutritionals (GSN), sole manufacturer, to repay $700,000 owed to GSN 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 to GSN a blanket second
priority in lien on the Company's assets under a Security Agreement, which may
only be foreclosed upon the event the Company fails to make (3) consecutive
quarterly principle payments in accordance with the terms of the promissory
note. The occurrence of any of the following events constitute a default under
this promissory note: (i) the failure of Company to pay when due any payment of
principal and such failure continues for fifteen (15) days after Lender notifies
the Company in writing; (ii) the Company files for or is granted certain relief
pursuant to or within the meaning of the United States Bankruptcy Code or any
other federal or state law relating to insolvency or relief of debtors (a
"Bankruptcy Law") and (iii) Christopher Tisi ceases to be the President and
Chief Executive Officer of the Company (unless a replacement reasonably
acceptable to Lender is obtained within thirty days).
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,
on current invoices, with 60-day terms. GSN informally allowed the Company to
purchase up to $1,000,000 on the line of credit. At September 30, 2003, the
balance owed to GSN under this line of credit is $803,260.
In July 2003, the Company amended its manufacturing agreement with Garden State
Nutritionals to provide for a line of credit of $450,000 on both finished goods
and work in process. The terms of the amended agreement expire July 17, 2005.
In July 2003, the Company issued an amended promissory note to Garden State
Nutritionals in the principal amount of $1,300,000. The note provides for
$300,000 to be paid before December 31, 2003, with the balance due in quarterly
installments of $131,410 commencing November 1, 2003 at 4.5% per annum. The
$300,000 was paid in August, 2003.
COMMITMENTS AND CONTINGENCIES
REGULATORY MATTERS
Our discontinued products Fat Cutter Plus(TM), ThinTab(R) and our formally owned
Carbolizer(TM) product, contain ephedra, also known as Ma Huang, an herb that
contains naturally occurring ephedrine. These products represented approximately
19% of our gross revenue, for Fat Cutter Plus(TM) -$605,000, Carbolizer(TM) -
$244,000, and ThinTab(R) - $116,000, for the twelve months ended December 31,
2002. Ephedra containing products have been the subjects of adverse
- 11 -
publicity in the United States and other countries relating to alleged harmful
effects. The company has discontinued all sales of products containing ephedra.
PRODUCT LIABILITY
The Company, like other marketers of products that are intended to be ingested,
faces the inherent risk of exposure to product liability claims in the event
that the use of our products results in injury. The Company maintains product
liability insurance coverage of $6,000,000. It may become increasingly difficult
to obtain and maintain product liability insurance coverage for products
containing ephedra at premiums that the Company can afford.
Although no material product liability claims have been asserted against us, if
they are in the future, our product liability insurance coverage could prove to
be inadequate and these claims could result in material losses.
GOING CONCERN QUALIFICATION
The Company's condensed financial statements have been prepared assuming that
the Company will continue as a going concern. During the nine months ended
September 30, 2003, the Company has successfully controlled costs and attained
profitability, including net income of $473,479 and cash flow from operations of
$349,216. However, at September 30, 2003, the Company has a working capital of
only $89,646 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 form the outcome of
this uncertainty.
ITEM 3. CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of disclosure controls and procedures
- ------------------------------------------------
As of the end of the period, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under
the supervision and with the participation of the Company's President and its
Controller. Based upon that evaluation, they concluded that the Company's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy the Company's disclosure obligations
under the Exchange Act.
Change in internal controls
- ---------------------------
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
- 12 -
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
The Company, from time to time, is a party to various legal proceedings. In the
opinion of management, none of the proceedings are expected to have a material
impact on its financial position of results of operations.
ITEM 2. CHANGES IN SECURITIES.
During the three months ended September 30, 2003, we issued an aggregate of
200,000 restricted common shares of the Company to two directors for their
services on our Board of Directors. This transaction was approved by the Board
of Directors on July 30, 2003 and consummated on August 13, 2003. The shares
were issued without registration in reliance of the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of
Regulation D promulgated thereunder. The market value of the common stock at the
time the Board of Directors approved its issuance was $24,000 which we have
recorded as compensation expense.
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) Exhibits
Exhibit 31.1 Certification Pursuant to Item 601(b)(31) of Regulation
S-B, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2 Certification Pursuant to Item 601(b)(31) of Regulation
S-B, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished pursuant to Item 601(b)(32) of Regulation S-B).
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished pursuant to Item 601(b)(32) of Regulation S-B).
(b) Reports on Form 8-K during the fiscal quarter ended September 30, 2003.
None
- 13 -
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: November 14, 2003 Health & Nutrition Systems International, Inc.
(The "Registrant")
By: /s/Chris Tisi
----------------------------------------
Chris Tisi
Chief Executive Officer and President
(Principal executive officer and duly
authorized officer)
- 14 -
Exhibit Index
EXHIBIT DESCRIPTION
NUMBER
31.1 Certification Pursuant to Item 601(b)(31) of Regulation S-B, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Item 601(b)(31) of Regulation S-B, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to
Item 601(b)(32) of Regulation S-B).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to
Item 601(b)(32) of Regulation S-B).
- 15 -
Exhibit 31.1
CERTIFICATIONS
I, Chris Tisi, Chief Executive Officer of Health & Nutrition Systems
International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Health &
Nutrition Systems International, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's, other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) for the small
business issuer and have:
a) Designed such disclosure controls and procedures or costs,
or costs such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in ths report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluations; and
c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred during
the small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the small
business issuer's internal control or financial reporting.
Date: November 14, 2003
/s/Chris Tisi
-----------------------
Chris Tisi
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Al Dugan, Controller and Principal Accounting Officer of Health &
Nutrition Systems International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Health &
Nutrition Systems International, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's, other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) for the small
business issuer and have:
a) Designed such disclosure controls and procedures or costs,
or costs such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in ths report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluations; and
c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred during
the small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control or financial reporting.
Date: November 14, 2003
/s/Al Dugan
-----------------------------------------
Al Dugan
Controller (Principal Accounting Officer)
Exhibit 32.1
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Health & Nutrition Systems
International, Inc. (the "Company") on Form 10-QSB for the quarterly period
ended September 30, 2003 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Chris Tisi, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Health & Nutrition Systems International, Inc.
/s/ Chris Tisi
----------------------------------------------
Chris Tisi
Chief Executive Officer
November 14, 2003
EXHIBIT 32.2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Health & Nutrition Systems
International, Inc. (the "Company") on Form 10-QSB for the quarterly period
ending September 30, 2003 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Al Dugan, Controller (Principal Accounting
Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Health & Nutrition Systems International, Inc.
/s/ Al Dugan
----------------------------------------------
Al Dugan
Controller (Principal Accounting Officer)
November 14, 2003