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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to _______

 

Commission File Number: 001-36849

 

NATURAL HEALTH TRENDS CORP.

(Exact name of registrant as specified in its charter)

Delaware

59-2705336

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

Units 1205-07, 12F

Mira Place Tower A

132 Nathan Road

, Tsimshatsui

Kowloon, Hong Kong

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: +852-3107-0800

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

NHTC

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☑

 

At October 30, 2020, the number of shares outstanding of the registrant’s common stock was 11,422,539 shares.

 

 

 

 

NATURAL HEALTH TRENDS CORP.

Quarterly Report on Form 10-Q

September 30, 2020

 

INDEX 

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

24

 

 

 

Signatures

25

 

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, in particular “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this report, the words or phrases “will likely result,” “expect,” “intend,” “will continue,” “anticipate,” “estimate,” “project,” “believe” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Exchange Act. These statements represent our expectations or beliefs concerning, among other things, future revenue, earnings, growth strategies, new products and initiatives, future operations and operating results, and future business and market opportunities.

 

Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution and advise readers that these statements are based on certain assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein.

 

For a summary of certain risks related to our business, see “Part I, Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K, which includes the following:

 

 

We could be adversely affected by management changes or an inability to attract and retain key management, directors and consultants;

 

Because our Hong Kong operations account for a substantial portion of our overall business, and substantially all 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;

 

Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong, and the negative impact on our operations and financial performance could continue or intensify;

 

Our operations in China are subject to compliance with a myriad of applicable laws and regulations, and any actual or alleged violations of those laws or government actions otherwise directed at us could have a material adverse impact on our business and the value of our company;

 

Our recent loss of a significant number of members is adversely affecting our business, and if we cannot stabilize or increase the number of members our business could be further negatively impacted;

 

Epidemics, such as the 2020 coronavirus outbreak, or natural disasters, terrorist attacks or acts of war may seriously harm our business;

 

We experienced negative operating cash flows during the year ended December 31, 2019, and if this trend continues it could have a material adverse effect on our business and our stock price;

 

We are currently involved in, and may in the future face, lawsuits, claims, and governmental proceedings and inquiries that could harm our business;

 

Although virtually all of our members are independent contractors, improper member actions that violate laws or regulations could harm our business;

 

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;

 

The high level of competition in our industry could adversely affect our business;

 

Challenges by third parties to the legality of our business operations could harm our business;

 

An increase in the amount of compensation paid to members would reduce profitability;

 

Currency exchange rate fluctuations could lower our revenue and net income;

 

Changes in tax or duty laws, and unanticipated tax or duty liabilities, could adversely affect our net income;

 

Transfer pricing regulations affect our business and results of operations;

 

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;

 

Failure of new products to gain member and market acceptance could harm our business;

 

New regulations governing the marketing and sale of nutritional supplements could harm our business;

 

Regulations governing the production and marketing of our personal care products could harm our business;

 

If we are found not to be in compliance with good manufacturing practices our operations could be harmed;

 

Failure to comply with domestic and foreign laws and regulations governing product claims and advertising could harm our business;

 

Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results;

 

 

 

 

We are subject to risks relating to product concentration and lack of revenue diversification;

 

We rely on a limited number of independent third parties to manufacture and supply our products;

 

Growth may be impeded by the political and economic risks of entering and operating in foreign markets;

 

We are subject to anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;

 

Recently enacted tariffs, other potential changes to tariff and import/export regulations, and ongoing trade disputes between the United States and other jurisdictions, particularly China, may have a negative effect on global economic conditions and our business, financial results and financial condition;

 

We may be held responsible for certain taxes or assessments relating to the activities of our members and service providers, which could harm our financial condition and operating results;

 

We may be unable to protect or use our intellectual property rights;

 

We do not have a comprehensive product liability insurance program and product liability claims could hurt our business;

 

Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact our business and the market price of our stock;

 

We rely on and are subject to risks associated with our reliance upon information technology systems;

 

System disruptions or failures, cybersecurity risks, and compromises of data could harm our business;

 

Our systems, software and data reside on third-party servers, exposing us to risks that disruption or intrusion of those servers could temporarily or permanently interrupt our access and damage our business;

 

Disappointing quarterly revenue or operating results could cause the price of our common stock to fall;

 

Our common stock is particularly subject to volatility because of the industry and markets in which we operate;

 

Our common stock continues to experience wide fluctuations in trading volumes and prices. This may make it more difficult for holders of our common stock to sell shares when they want and at prices they find attractive; and

 

Future sales by us or our existing stockholders could depress the market price of our common stock.

 

Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this report, including under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our financial statements and the related notes.

 

 

 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

  

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data) 

 

  

September 30, 2020

  

December 31, 2019

 
  

(Unaudited)

     

ASSETS

        

Current assets:

        
Cash and cash equivalents $90,789  $96,035 
Inventories  4,259   6,404 
Other current assets  4,972   5,936 
Total current assets  100,020   108,375 
Property and equipment, net  581   735 
Operating lease right-of-use assets  4,200   3,135 
Restricted cash  517   3,390 
Deferred tax asset  1,069   2,039 
Other assets  701   823 
Total assets $107,088  $118,497 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        
Accounts payable $887  $680 
Accrued commissions  3,046   2,931 
Other accrued expenses  1,786   2,387 
Deferred revenue  3,477   4,506 
Amounts held in eWallets  9,831   12,938 
Operating lease liabilities  1,217   1,655 
Other current liabilities  1,067   1,205 
Total current liabilities  21,311   26,302 
Income taxes payable  13,748   15,365 
Deferred tax liability  203   202 
Operating lease liabilities  3,150   1,564 
Total liabilities  38,412   43,433 

Commitments and contingencies (Note 7)

          

Stockholders’ equity:

        

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding

      
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,979,414 shares issued at September 30, 2020 and December 31, 2019  13   13 
Additional paid-in capital  86,102   86,102 
Retained earnings  9,358   16,117 
Accumulated other comprehensive loss  (893)  (1,264)
Treasury stock, at cost; 1,556,875 shares at September 30, 2020 and December 31, 2019  (25,904)  (25,904)
Total stockholders’ equity  68,676   75,064 
Total liabilities and stockholders’ equity $107,088  $118,497 

 

 

See accompanying notes to consolidated financial statements.

 

1

 

 

NATURAL HEALTH TRENDS CORP. 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net sales

  $ 14,124     $ 17,023     $ 45,476     $ 59,779  

Cost of sales

    3,635       4,371       12,966       15,002  

Gross profit

    10,489       12,652       32,510       44,777  

Operating expenses:

                               

Commissions expense

    5,620       7,362       19,336       28,258  

Selling, general and administrative expenses

    4,201       6,354       13,771       20,296  

Total operating expenses

    9,821       13,716       33,107       48,554  

Income (loss) from operations

    668       (1,064 )     (597 )     (3,777 )
Other income, net     385       323       603       1,128  

Income (loss) before income taxes

    1,053       (741 )     6       (2,649 )

Income tax provision (benefit)

    418       502       (90 )     120  

Net income (loss)

  $ 635     $ (1,243 )   $ 96     $ (2,769 )
Net income (loss) per common share:                                

Basic

  $ 0.06     $ (0.12 )   $ 0.01     $ (0.25 )

Diluted

  $ 0.06     $ (0.12 )   $ 0.01     $ (0.25 )
Weighted-average common shares outstanding:                                
Basic     10,678       10,623       10,581       11,010  

Diluted

    11,424       10,623       11,424       11,010  

 

 

See accompanying notes to consolidated financial statements.

 

2

 

 

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income (loss)

  $ 635     $ (1,243 )   $ 96     $ (2,769 )

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustment

    493       (584 )     355       (537 )

Unrealized gains (losses) on available-for-sale securities

    (2 )     12       16       23  

Comprehensive income (loss)

  $ 1,126     $ (1,815 )   $ 467     $ (3,283 )

 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Share Data)

 

Nine months ended September 30, 2020

 

                          

Accumulated

             
                  

Additional

      

Other

             
  

Preferred Stock

  

Common Stock

  

Paid-In

  

Retained

  

Comprehensive

  

Treasury Stock

     
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Shares

  

Amount

  

Total

 
                                         

BALANCE, December 31, 2019

    $   12,979,414  $13  $86,102  $16,117  $(1,264)  (1,556,875) $(25,904) $75,064 

Net loss

                 (573)           (573)

Dividends declared, $0.20/share

                 (2,285)           (2,285)

Foreign currency translation adjustments

                    (222)        (222)

Unrealized losses on available-for-sale securities

                    (87)        (87)

BALANCE, March 31, 2020

        12,979,414   13   86,102   13,259   (1,573)  (1,556,875)  (25,904)  71,897 
Net income                 34            34 
Dividends declared, $0.20/share                 (2,285)           (2,285)
Foreign currency translation adjustments                    84         84 
Unrealized gains on available-for-sale securities                    105         105 
BALANCE, June 30, 2020        12,979,414   13   86,102   11,008   (1,384)  (1,556,875)  (25,904)  69,835 
Net income                 635            635 
Dividends declared, $0.20/share                 (2,285)           (2,285)
Foreign currency translation adjustments                    493         493 
Unrealized losses on available-for-sale securities                    (2)        (2)
BALANCE, September 30, 2020    $   12,979,414  $13  $86,102  $9,358  $(893)  (1,556,875) $(25,904) $68,676 

 

 

Nine months ended September 30, 2019

 

                          

Accumulated

             
                  

Additional

      

Other

             
  

Preferred Stock

  

Common Stock

  

Paid-In

  

Retained

  

Comprehensive

  

Treasury Stock

     
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Shares

  

Amount

  

Total

 

BALANCE, December 31, 2018

    $   12,979,414  $13  $86,415  $44,431  $(1,250)  (1,603,322) $(39,748) $89,861 

Net loss

                 (1,923)           (1,923)

Common stock issued

              (166)        22,603   543   377 

Dividends declared, $0.24/share

                 (2,736)           (2,736)

Foreign currency translation adjustments

                    259         259 

Unrealized gains on available-for-sale securities

                    17         17 

BALANCE, March 31, 2019

        12,979,414   13   86,249   39,772   (974)  (1,580,719)  (39,205)  85,855 

Net income

                 397            397 

Repurchase of common stock

                       (612,729)  (6,682)  (6,682)

Foreign currency translation adjustments

                    (212)        (212)

Unrealized losses on available-for-sale securities

                    (6)        (6)
BALANCE, June 30, 2019        12,979,414   13   86,249   40,169   (1,192)  (2,193,448)  (45,887)  79,352 
Net loss                 (1,243)           (1,243)
Repurchase of common stock                       (383,127)  (2,882)  (2,882)
Common stock issued              (147)  (15,359)     1,117,485   23,418   7,912 
Foreign currency translation adjustments                    (584)        (584)
Unrealized gains on available-for-sale securities                    12         12 

BALANCE, September 30, 2019

    $   12,979,414  $13  $86,102  $23,567  $(1,764)  (1,459,090) $(25,351) $82,567 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               
Net income (loss)   $ 96     $ (2,769 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

               
Depreciation and amortization     301       290  
Noncash lease expense     1,199       1,336  
Deferred income taxes     979       (3 )

Changes in assets and liabilities:

               
Inventories     2,193       4,104  
Other current assets     923       (1,674 )
Other assets     120       2  
Accounts payable     206       (1,002 )
Accrued commissions     136       (8,683 )
Other accrued expenses     (598 )     (1,779 )
Deferred revenue     (1,045 )     (3,485 )
Amounts held in eWallets     (3,163 )     (1,508 )
Operating lease liabilities     (1,120 )     (1,392 )
Income taxes payable     (1,617 )     (1,617 )
Other current liabilities     (140 )     (235 )

Long-term incentive

          (333 )
Net cash used in operating activities     (1,530 )     (18,748 )

CASH FLOWS FROM INVESTING ACTIVITIES:

               
Purchases of property and equipment     (147 )     (181 )
Net cash used in investing activities     (147 )     (181 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               
Repurchase of common stock           (9,564 )
Dividends paid     (6,855 )     (2,736 )
Net cash used in financing activities     (6,855 )     (12,300 )
Effect of exchange rates on cash, cash equivalents and restricted cash     413       (428 )
Net decrease in cash, cash equivalents and restricted cash     (8,119 )     (31,657 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period     99,425       135,651  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period   $ 91,306     $ 103,994  

SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:

               

Issuance of treasury stock for employee awards, net

  $     $ 8,289  
Right-of-use assets obtained in exchange for operating lease liabilities   $ 2,724     $ 5,058  

 

 

See accompanying notes to consolidated financial statements.

 

5

 

NATURAL HEALTH TRENDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND CONSOLIDATION

 

Nature of Operations 

 

Natural Health Trends Corp., a Delaware corporation (whether or not including its subsidiaries, the “Company”), is an international direct-selling and e-commerce company. Subsidiaries controlled by the Company sell personal care, wellness, and “quality of life” products under the “NHT Global” brand.

 

The Company’s wholly-owned subsidiaries have an active physical presence in the following markets: the Americas, which consists of the United States, Canada, Cayman Islands, Mexico and Peru; Greater China, which consists of Hong Kong, Taiwan and China; Southeast Asia, which consists of Singapore, Malaysia, Thailand and Vietnam; South Korea; Japan; India; and Europe. The Company also operates in Russia and Kazakhstan through an engagement with a local service provider.

 

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 the Company’s 2019 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 9, 2020.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Restricted Cash

 

In June 2015, the Company funded a bank deposit account in the amount of CNY 20 million ($2.9 million at December 31, 2019) in anticipation of submitting a direct selling license application in China. Such deposit is required by Chinese laws to establish a consumer protection fund. The Company received a refund of this deposit in March 2020 in connection with the withdrawal of its application.

 

Net Income (Loss) Per Common Share

 

Diluted net income (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. The dilutive effect of non-vested restricted stock is reflected by application of the treasury stock method. Under the treasury stock method, the amount of compensation cost for future service that the Company has not yet recognized, if any, is assumed to be used to repurchase shares.

 

The following tables illustrate the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):

 

  

Three Months Ended September 30,

 
  

2020

  

2019

 
  

Income (Numerator)

  

Shares (Denominator)

  

Per Share Amount

  

Loss (Numerator)

  

Shares (Denominator)

  

Per Share Amount

 

Basic net income (loss) per common share:

                        

Net income (loss) available to common stockholders

 $635   10,678  $0.06  $(1,243)  10,623  $(0.12)

Effect of dilutive securities:

                        

Non-vested restricted stock

     746               

Diluted net income (loss) per common share:

                        

Net income (loss) available to common stockholders plus assumed conversions

 $635   11,424  $0.06  $(1,243)  10,623  $(0.12)

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
  

Income (Numerator)

  

Shares (Denominator)

  

Per Share Amount

  

Loss (Numerator)

  

Shares (Denominator)

  

Per Share Amount

 

Basic net income (loss) per common share:

                        

Net income (loss) available to common stockholders

 $96   10,581  $0.01  $(2,769)  11,010  $(0.25)

Effect of dilutive securities:

                        

Non-vested restricted stock

     843               

Diluted net income (loss) per common share:

                        

Net income (loss) available to common stockholders plus assumed conversions

 $96   11,424  $0.01  $(2,769)  11,010  $(0.25)

 

In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. As such, non-vested restricted stock totaling 672,231 and 263,289 shares were not included for the three and nine months ended September 30, 2019, respectively.

 

6

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis and added Topic 326 to the FASB ASC. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments to ASU 2019-11 clarify, correct and make improvements to Topic 326. ASU 2016-13 as well as the updates in ASU 2019-11 are effective for interim and annual periods beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This guidance modifies, removes, and adds certain disclosure requirements on fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. The Company elected to early adopt the new standard during the first quarter of 2020. Such adoption did not have a material impact on the Company’s consolidated financial statement.

 

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.

 

 

2. REVENUE

 

Revenue Recognition

 

All revenue is recognized when the performance obligations under a contract, including any product vouchers sold on a stand-alone basis in Hong Kong, are satisfied. Product sales are recognized when the products are shipped and title passes to independent members. Product sales to members are made pursuant to a member agreement that provides for transfer of both title and risk of loss upon the Company’s delivery to the carrier that completes delivery to the members, which is commonly referred to as “F.O.B. Shipping Point.” The Company’s sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return. These contracts are generally short-term in nature.

 

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. The reserve is based upon the return policy of each country, which varies from 14 days to one year, and their historical return rates, which range from 1% to 10% of sales.  Sales returns were 1% and 2% of sales for the nine months ended September 30, 2020 and 2019, respectively.  No material changes in estimates have been recognized during the periods presented. See Note 3 for additional information.

 

The Company has elected to account for shipping and handling activities performed after title has passed to members as a fulfillment cost, and accrues for the costs of shipping and handling if revenue is recognized before the contractually obligated shipping and handling activities occurs. Shipping charges billed to members are included in net sales. Costs associated with shipments are included in cost of sales. Event and training revenue is deferred and recognized as the event or training occurs. Costs of events and member training are included within selling, general and administrative expenses.

 

Various taxes on the sale of products to members 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.

 

Deferred Revenue

 

The Company primarily receives payment by credit card at the time members place orders. Amounts received for unshipped product orders and unredeemed product vouchers are considered a contract liability and are recorded as deferred revenue. The increase in deferred revenue from June 30, 2020 to September 30, 2020 is primarily due to an increase of $812,000 in the value of unshipped product orders and unredeemed vouchers. See Note 3 for additional information.

 

Disaggregation of Revenue

 

The Company sells products to a member network that operates in a seamless manner from market to market, except for the Chinese market where it sells to consumers through an e-commerce retail platform and the Russia and Kazakhstan market where the Company operates through an engagement of a third-party service provider. See Note 10 for revenue by market information.

 

7

 

The Company’s net sales by product and service are as follows (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Product sales

 $12,023  $15,732  $41,234  $56,355 

Administrative fees, freight and other

  2,316   1,468   4,854   4,713 

Less: sales returns

  (215)  (177)  (612)  (1,289)

Total net sales

 $14,124  $17,023  $45,476  $59,779 

 

During June 2020, the Company modified its fee structure associated with certain electronic (eWallet) accounts held by members in Hong Kong, resulting in increased administrative fees recognized as revenue during the three months ended September 30, 2020.

 

Concentration

 

No single market other than Hong Kong had net sales greater than 10% of total net sales. Sales are made to the Company’s members and no single customer accounted for 10% or more of net sales for the three and nine months ended September 30, 2020 and 2019. However, the Company’s business model can result in a concentration of sales to several different members and their network of members. Although no single member accounted for 10% or more of net sales, the loss of a key member or that member’s network could have an adverse effect on the Company’s net sales and financial results.

 

Arrangements with Multiple Performance Obligations

 

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged for individual products to similar customers.

 

Practical Expedients

 

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded in commissions expense.

 

The Company does not provide certain disclosures about unsatisfied performance obligations for contracts with an original expected length of one year or less.

 

8

 

 

 

3. BALANCE SHEET COMPONENTS

 

The components of certain balance sheet amounts are as follows (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 

Cash, cash equivalents and restricted cash:

               

Cash

  $ 22,408     $ 13,720  

Cash equivalents

    68,381       82,315  
      90,789       96,035  

Restricted cash

    517       3,390  
    $ 91,306     $ 99,425  

Inventories:

               

Finished goods

  $ 3,844     $ 6,142  

Raw materials

    836       1,249  

Reserve for obsolescence

    (421 )     (987 )
    $ 4,259     $ 6,404  

Other accrued expenses:

               

Sales returns

  $ 207     $ 373  

Employee-related expense

    941       1,258  

Warehousing, inventory-related and other

    638       756  
    $ 1,786     $ 2,387  

Deferred revenue:

               

Unshipped product and unredeemed product vouchers

  $ 1,397     $ 2,390  

Auto ship advances

    1,971       1,985  

Other

    109       131  
    $ 3,477     $ 4,506  

 

 

4. FAIR VALUE MEASUREMENTS

 

As of September 30, 2020, cash and cash equivalents include the Company’s investments in municipal and corporate debt securities, money market funds, and time deposits. The Company considers all highly liquid investments with original maturities of three months or less when purchased and have insignificant interest rate risk to be cash equivalents.  Debt securities classified as cash equivalents are required to be accounted for in accordance with the FASB Accounting Standards Codification (“ASC”) 320, Investments - Debt and Equity Securities. As such, the Company determined its investments in debt securities held at September 30, 2020 should be classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in stockholders’ equity. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in other income. Realized gains and losses, as well as interest income, are also included in other income. The fair values of securities are based on quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs.

 

The carrying amounts of the Company’s financial instruments, including cash and accounts payable, 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 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.

 

9

 

Investments by significant category included in cash equivalents at the end of each period were as follows (in thousands):

 

       

September 30, 2020

   

December 31, 2019

 
    Fair Value Level1  

Adjusted Cost

    Gross Unrealized Losses    

Fair Value

   

Adjusted Cost

    Gross Unrealized Losses    

Fair Value

 

Money market funds

 

Level 1

  $ 56,547     $     $ 56,547     $ 11,659     $     $ 11,659  

Time deposits

 

Level 2

    5,000             5,000       13,544             13,544  

Municipal debt securities

 

Level 2

    2,104             2,104       347             347  

Corporate debt securities

 

Level 2

    4,732       (2 )     4,730       56,784       (19 )     56,765  

Total investments

      $ 68,383     $ (2 )   $ 68,381     $ 82,334     $ (19 )   $ 82,315  

 


 

1 FASB Topic 820, Fair Value Measurements, establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

 

5. LEASES

 

The Company leases 9,600 square feet of office space in Hong Kong and 4,900 square feet of office space in Rolling Hills Estates, California for its corporate staff.  In June 2020, the Company extended the Rolling Hills Estates office lease for an additional five years with a term now expiring in September 2030.  Effective July 1, 2020, the Company modified the terms of its largest Hong Kong office lease resulting in 10% monthly lease cost savings and a lease extension through June 2023.  To help further develop the market for its products in North America, the Company leases 1,600 square feet of retail space in each of Rowland Heights, California and Richmond, British Columbia and 2,000 square feet of retail space in Metuchen, New Jersey. The Rowland Heights, Richmond and Metuchen locations have terms expiring in November 2025, February 2021, and November 2022, respectively.

 

The Company leases eight branch offices throughout China, and additional office space in Peru, Japan, Taiwan, South Korea, Singapore, Malaysia, Vietnam, Indonesia, Thailand, India, and the Cayman Islands. The Company also leases a factory in Zhongshan, China. The Company contracts with third parties for fulfillment and distribution operations in all of its international markets. None of the Company’s third party logistics contracts contain a lease as the Company does not have the right to access the warehouses or move its inventories at will.

 

The components of lease cost for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Operating leases

  $ 377     $ 512     $ 1,292     $ 1,544  

Short-term leases

    72       73       237       201  

Total lease cost

  $ 449     $ 585     $ 1,529     $ 1,745  

 

Cash paid for amounts included in the measurement of operating leases liabilities was $342,000 and $459,000 for the three months ended  September 30, 2020 and 2019, respectively, and $1.2 million and $1.5 million for the nine months ended  September 30, 2020 and 2019, respectively.

 

The weighted-average remaining lease term and discount rate related to operating leases as of September 30, 2020 were as follows:

 

Weighted-average remaining lease term (in years)

    5.5  

Weighted-average discount rate

    3.5 %

 

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As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, or the rate of each of its subsidiaries if available, based on the information available at the lease commencement date to determine the present value of lease payments.

 

The annual scheduled lease payments of our operating lease liabilities as of September 30, 2020 were as follows (in thousands):

 

Remainder of 2020

  $ 373  

2021

    1,245  

2022

    1,095  

2023

    582  

2024

    261  

Thereafter

    1,251  

Total lease payments

  $ 4,807  

Less: imputed interest

    (440 )

Present value of lease liabilities

  $ 4,367  

 

For all asset classes, the Company elected not to recognize assets or liabilities at the acquisition date for leases that, at the acquisition date, have a remaining lease term of 12 months or less. Additionally, for all asset classes, the Company choose not to separate nonlease components from lease components and instead account for the combined lease and nonlease components associated with that lease component as a single lease component.

 

 

6. INCOME TAXES

 

The effective income tax rate for the three and nine months ended September 30, 2020 includes an estimate for the Global Intangible Low-Taxed Income (“GILTI”) inclusion along with recording the effect of the U.S. Coronavirus Aid, Relief, and Economic Security (“CARES”) Act enacted on March 27, 2020. The CARES Act makes broad changes to the Internal Revenue Code of 1986, as amended, including, but not limited to, the ability to carry net operating losses generated in tax years 2018, 2019 or 2020 back to the each of the five tax years preceding the tax year of such loss.

 

As of September 30, 2020, the Company does not have a valuation allowance against its U.S. deferred tax assets. The Company analyzed all sources of available income and determined that they are more likely than not to realize the tax benefits of their deferred assets. As of September 30, 2020, the Company has a valuation allowance against deferred tax assets in certain foreign jurisdictions with an overall net operating loss. The valuation allowance will be reduced at such time as management believes it is more likely than not that the deferred tax assets will be realized. Any reductions in the valuation allowance will reduce future income tax provision.

 

As of September 30, 2020, the Company no longer has U.S. federal net operating losses due to its filing in August 2020 to carry back $3.6 million of losses generated in the tax year ended December 31, 2019 to offset taxable income from the tax year ended December 31, 2016. The Company has U.S. state net operating loss carryforwards of $2.4 million that begin expiring in 2040. At September 30, 2020, the Company has foreign net operating loss carryforwards of approximately $2.9 million in various jurisdictions with various expirations.

 

As a result of capital return activities, the Company determined that a portion of its current undistributed foreign earnings is no longer deemed reinvested indefinitely by its non-U.S. subsidiaries. For state income tax purposes, the Company will continue to periodically reassess the needs of its foreign subsidiaries and update its indefinite reinvestment assertion as necessary. To the extent that additional foreign earnings are not deemed permanently reinvested, the Company expects to recognize additional income tax provision at the applicable state corporate income tax rate(s). As of September 30, 2020, the Company has not recorded a state deferred tax liability for earnings that the Company plans to repatriate out of accumulated earnings in future periods because all earnings as of September 30, 2020 have already been repatriated. Due to the U.S. Tax Cuts and Jobs Act in 2017, repatriation from foreign subsidiaries will be offset with a dividends received deduction, resulting in little to no impact on federal tax expense. All undistributed earnings in excess of 50% of current earnings on an annual basis are intended to be reinvested indefinitely as of September 30, 2020.

 

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The Company and its subsidiaries file tax returns in the United States, California, New Jersey and Texas and various foreign jurisdictions. During the fourth quarter of 2018, the Company was notified that it was selected for audit of the 2016 tax year by the U.S. Internal Revenue Service. The audit was expanded to also include the 2017 and 2018 tax years. For purposes of this audit, fiscal years since 2007 are open for examination by tax authorities as a result of net operating loss carryovers from older years being used to offset income in recent tax years. No adjustments have been proposed at this time. The Company is no longer subject to state income tax examinations for years prior to 2015.

 

 

7. COMMITMENTS AND CONTINGENCIES

 

On January 8, 2019, the Company and its two executive officers were named in a putative securities class action filed in the United States District Court for the Central District of California, captioned Kauffman v. Natural Health Trends Corp., Case No. 2:19-cv-00163. On May 3, 2019, the court issued an order appointing Xia Yang as lead plaintiff and appointing The Rosen Law Firm, P.A. as lead counsel. On June 3, 2019, lead plaintiff filed an amended complaint. On January 17, 2020, after briefing and oral argument on the Company’s motion to dismiss, the court issued an order dismissing the entire action with prejudice and ordering that judgment be entered for defendants. On February 14, 2020, plaintiff filed a notice of appeal to the Ninth Circuit Court of Appeals. On April 9, 2020, plaintiff filed a stipulated motion for voluntary dismissal of her appeal, concluding this matter.

 

The SEC is conducting a non-public investigation to determine whether there have been violations of the federal securities laws relating to the trading of the Company’s securities and/or its public disclosures. The Company has fully cooperated with the SEC and continues to do so. The amount of time needed to resolve this matter is uncertain, and the Company cannot predict the outcome or whether it will face additional governmental inquiries or other actions.

 

 

8. STOCKHOLDERS’ EQUITY

 

Dividends

 

The following table summarizes the Company’s cash dividend activity for the nine months ended September 30, 2020 (in thousands, except per share data):

 

Declaration Date

 

Per Share

   

Amount

 

Record Date

 

Payment Date

February 10, 2020

  $ 0.20     $ 2,285  

February 25, 2020

 

March 6, 2020

May 4, 2020

    0.20       2,285  

May 19, 2020

 

May 29, 2020

August 3, 2020     0.20       2,285   August 18, 2020   August 28, 2020
    $ 0.60     $ 6,855        

 

The declaration and payment of any future dividends on shares of common stock will be at the sole discretion of the Company’s Board of Directors.

 

Stock Repurchases

 

On January 12, 2016, the Board of Directors authorized an increase to the Company’s stock repurchase program first approved on July 28, 2015 from $15.0 million to $70.0 million. Repurchases are expected to be executed to the extent that the Company’s earnings and cash-on-hand allow, and will be made in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. For all or a portion of the authorized repurchase amount, the Company may enter into one or more plans that are compliant with Rule 10b5-1 of the Exchange Act that are designed to facilitate these purchases. The stock repurchase program does not require the Company to acquire a specific number of shares, and may be suspended from time to time or discontinued.

 

On May 16, 2019, the Company’s Board of Directors authorized the Company to proceed with the purchase of up to $8.0 million in shares of common stock under the foregoing stock repurchase program. In connection therewith, the Company was advised that George K. Broady, a director of the Company and beneficial owner of more than 5% of its outstanding shares of common stock, would participate in the stock repurchase program through The George K. Broady 2012 Irrevocable Trust (the "Broady Trust") on a basis roughly proportional to his family’s ownership interest (see Note 9). During May 2019, the Company authorized its broker to proceed with the purchase of shares of the Company’s common stock in the open market for a total purchase price of $4.7 million in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. The open market repurchases were completed on May 31, 2019. The stock repurchases, which included both open market purchases and the purchase of shares from the Broady Trust, resulted in the Company purchasing a total of 612,729 shares of its common stock for an aggregate purchase price of $6.7 million, plus transaction costs.

 

On August 6, 2019, the Company’s Board of Directors authorized the Company to proceed with additional purchases under the foregoing stock repurchase program in the open market. During August and September 2019, the Company purchased a total of 383,127 shares of common stock in the open market for an aggregate purchase price of $2.9 million, plus transaction costs.

 

As of September 30, 2020, $21.9 million of the $70.0 million stock repurchase program approved on July 28, 2015 and increased on January 12, 2016 remained available for future purchases, inclusive of related estimated income tax.

 

Restricted Stock

 

At the Company’s annual meeting of stockholders held on April 7, 2016, the Company’s stockholders approved the Natural Health Trends Corp. 2016 Equity Incentive Plan (the “2016 Plan”) to replace its 2007 Equity Incentive Plan. The 2016 Plan allows for the grant of various equity awards including incentive stock options, non-statutory options, stock, stock units, stock appreciation rights and other similar equity-based awards to the Company’s employees, officers, non-employee directors, contractors, consultants and advisors of the Company. Up to 2,500,000 shares of the Company’s common stock (subject to adjustment under certain circumstances) may be issued pursuant to awards granted. At September 30, 2020, 1,219,583 shares remained available for issuance under the 2016 Plan.

 

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The following table summarizes the Company’s restricted stock activity under the 2016 Plan:

 

   

Shares

    Wtd. Avg. Price at Date of Issuance  

Nonvested at December 31, 2019

    957,682     $ 7.34  

Vested

    (293,583 )   $ 7.53  

Nonvested at September 30, 2020

    664,099     $ 7.25  

 

Accumulated Other Comprehensive Loss

 

The changes in accumulated other comprehensive loss by component for the nine months of 2020 were as follows (in thousands):

 

    Foreign Currency Translation Adjustment     Unrealized Gains (Losses) on Available-For-Sale Investments    

Total

 

Balance, December 31, 2019

  $ (1,245 )   $ (19 )   $ (1,264 )
Other comprehensive income     355       16       371  
Balance, September 30, 2020   $ (890 )   $ (3 )   $ (893 )

 

 

9. RELATED PARTY TRANSACTIONS

 

The Company is a party to a Royalty Agreement and License with Broady Health Sciences, L.L.C., a Texas limited liability company, (“BHS”) regarding the manufacture and sale of a product called ReStor™. George K. Broady, a director of the Company and beneficial owner of more than 5% of its outstanding common stock, is owner of BHS. Under this agreement (as amended), the Company agreed to pay BHS a royalty based on a price per unit in return for the right to manufacture (or have manufactured), market, import, export and sell this product worldwide by or through multi-level marketing or network marketing. Such royalties were $14,000 and $19,000 for the three months ended September 30, 2020 and 2019, respectively, and $64,000 and $75,000 for the nine months ended September 30, 2020 and 2019, respectively. The Company is not required to purchase any product under the agreement, and the agreement may be terminated under certain circumstances with no notice. An amendment to the agreement effective March 20, 2020 extends the term of the agreement for an additional five years to March 31, 2025, after which it shall be automatically renewed for successive one-year terms unless notice is given by either party at least 90 days in advance of the expiration of the then-current term.

 

The Company procured in China and arranged for shipment to The Aberdeen Group, LLC (“Aberdeen”) one order of apparel products in the amount of $7,100 during the three months ended March 31, 2019. Aberdeen is owned 40% by Sharng Holdings, which is wholly-owned by the Company’s president, Chris T. Sharng, and his wife, 40% by Mr. Broady, and 20% by an unrelated third party.  Aberdeen promptly paid the Company for the product and shipping cost incurred. Given the Company’s provision of such product sourcing service to Aberdeen, Aberdeen also paid the Company a market-based fee consistent with the provision of such service of $420. The Company analyzed the nature of the transaction with Aberdeen to determine whether it could be construed a violation under the guidelines of Section 402 of the Sarbanes-Oxley Act of 2002. The Company, through advice from its legal counsel, concluded that there is not a reasonable possibility that the transaction with Aberdeen would be deemed a violation of Section 402. This relationship between the Company and Aberdeen ceased following the completion of this transaction.

 

On May 17, 2019, the Company entered into a Stock Repurchase Agreement with The George K. Broady 2012 Irrevocable Trust (“Broady Trust”). Mr. Broady is the trustee and a beneficiary of the Broady Trust. The Stock Repurchase Agreement, which the Company and the Broady Trust entered into in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, provided for the Company’s purchase of common stock from the Broady Trust in off-the-market, private transactions at a rate of 0.4105 times the number of shares purchased by the Company’s broker in conjunction with the stock repurchase program authorized by the Company’s Board of Directors on May 16, 2019. The Company’s purchases from the Broady Trust concluded on May 31, 2019, were completed at a per share purchase price equal to the weighted average price per share paid by the Company’s broker in its open-market purchases, and resulted in the purchase of 178,324 shares of common stock for an aggregate purchase price of $1.9 million. See Note 8.

 

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10.    SEGMENT INFORMATION

 

The Company sells products to a member network that operates in a seamless manner from market to market, except for the China market where it sells to some consumers through an e-commerce platform, and the Russia and Kazakhstan market where the Company’s engagement of a third-party service provider results in a different economic structure than its other markets. Otherwise, the Company believes that all of its other operating segments have similar economic characteristics and are similar in the nature of the products sold, the product acquisition process, the types of customers products are sold to, the methods used to distribute the products, and the nature of the regulatory environment. Therefore, the Company aggregates its other operating segments (including its Hong Kong operating segment) into a single reporting segment (the “Primary Reporting Segment”).

 

The Company reviews its net sales and operating income (loss) by operating segment, and reviews its assets and capital expenditures on a consolidated basis and not by operating segment. As such, net sales and operating income (loss) are presented by reportable segment and assets and capital expenditures by operating segment are not presented. Segment operating income (loss) is adjusted for certain direct costs and commission allocation.

 

The Company’s operating information by geographic area are as follows (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net sales:

                

Primary Reporting Segment

 $13,294  $16,254  $42,718  $56,979 
China  640   525   2,156   2,138 

Russia and Kazakhstan

  190   244   602   662 

Total net sales

 $14,124  $17,023  $45,476  $59,779 
                 

Income (loss) from operations:

                

Primary Reporting Segment

 $2,715  $2,974  $6,038  $7,506 

China

  134   (795)  64   (1,530)

Russia and Kazakhstan

  (59)  (82)  (37)  (138)

Total income from operations for reportable segments

  2,790   2,097   6,065   5,838