UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
NATURAL HEALTH TRENDS CORP.
(Exact name of registrant as specified in its charter)
| |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
Units 1205-07, 12F
Mira Place Tower A
Kowloon,
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: +
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 |
| | The |
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.
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).
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 | ☐ | |
| ☑ | 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
At October 25, 2024, the number of shares outstanding of the registrant’s common stock was
Quarterly Report on Form 10-Q
September 30, 2024
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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:
• |
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; |
• | We experienced negative operating cash flows during the years ended December 31, 2023 and 2022, and only modest positive operating cash flows during the years ended December 31, 2021 and 2020. Unless our operating cash flows improve, this negative financial performance could have a material adverse effect on our business and our stock price; | |
• | Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results; | |
• | Our business and financial performance may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment; | |
• |
We are subject to risks relating to product concentration and lack of revenue diversification; | |
• | Epidemics, such as the COVID-19 pandemic, or natural disasters, terrorist attacks or acts of war or hostility may seriously harm our business; |
• |
The high level of competition in our industry could adversely affect our business; |
• |
Failure of new products to gain member and market acceptance could harm our business; |
• |
We rely on a limited number of independent third parties to manufacture and supply our products on a timely basis; |
• |
Growth may be impeded by the political and economic risks of entering and operating in foreign markets; |
• | 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 common stock; | |
• | We could be adversely affected by management changes or an inability to attract and retain key management, directors and consultants; | |
• | 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; | |
• | Although virtually all of our members are independent contractors, improper member actions that violate laws or regulations could harm our business; | |
• | An increase in the amount of compensation paid to members would reduce profitability; | |
• |
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; |
• | Our business in China is 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; | |
• | Changes in government trade and economic policies, including the imposition or threatened imposition of tariffs and other restrictive trade policies, and ongoing political and economic 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; | |
• |
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; |
• | Our business is subject to a variety of laws, regulations and other obligations regarding privacy, data protection and information security. Any actual or perceived failure by us or our third-party vendors to comply with such laws, regulations or other obligations could materially adversely affect our business; | |
• |
Challenges by third parties to the legality of our business operations could harm our business; |
• |
We have in the past been involved in, and may in the future face, lawsuits, claims, and governmental proceedings and inquiries that could harm our business; |
• |
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; |
• |
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; |
• |
We are subject to anti-bribery laws, including the U.S. Foreign Corrupt Practices Act; |
• |
We do not have a comprehensive product liability insurance program and product liability claims could hurt our business; |
• |
We may be unable to protect or use our intellectual property rights; |
• |
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, or the failure to comply with related laws and regulations, 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; |
• |
Our common stock is particularly subject to volatility because of the industry and markets in which we operate; and |
• |
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. |
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
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
September 30, 2024 | December 31, 2023 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Marketable securities | ||||||||
Inventories | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Restricted cash | ||||||||
Deferred tax asset | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Income taxes payable | ||||||||
Accrued commissions | ||||||||
Other accrued expenses | ||||||||
Deferred revenue | ||||||||
Amounts held in eWallets | ||||||||
Operating lease liabilities | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Income taxes payable | ||||||||
Deferred tax liability | ||||||||
Operating lease liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 7) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
Common stock, $ par value; shares authorized; shares issued at September 30, 2024 and December 31, 2023 | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Treasury stock, at cost; and shares at September 30, 2024 and December 31, 2023, respectively | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ |
See accompanying notes to consolidated financial statements.
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, |
|||||||||||||||
2024 |
2023 |
2024 |
2023 |
|||||||||||||
Net sales |
$ | $ | $ | $ | ||||||||||||
Cost of sales |
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Gross profit |
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Operating expenses: |
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Commissions expense |
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Selling, general and administrative expenses |
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Total operating expenses |
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Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income, net |
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Income before income taxes |
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Income tax provision |
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Net income |
$ | $ | $ | $ | ||||||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | $ | $ | $ | ||||||||||||
Diluted |
$ | $ | $ | $ | ||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
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Diluted |
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In Thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2024 |
2023 |
2024 |
2023 |
|||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||
Unrealized gains on available-for-sale securities |
||||||||||||||||
Comprehensive income (loss) |
$ | $ | $ | $ | ( |
) |
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In Thousands, Except Share Data)
Nine months ended September 30, 2024
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Treasury Stock | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Shares | Amount | Total | |||||||||||||||||||||||||||||||
BALANCE, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Dividends declared, $ /share | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized losses on available-for-sale securities | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
BALANCE, March 31, 2024 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Dividends declared, $ /share | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized gains on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||
BALANCE, June 30, 2024 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||||||||||
Restricted stock forfeiture | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Dividends declared, $ /share | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
Unrealized gains on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||
BALANCE, September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ |
Nine months ended September 30, 2023
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Treasury Stock | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Shares | Amount | Total | |||||||||||||||||||||||||||||||
BALANCE, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||||||||||
Reissuance of treasury shares | ( | ) | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Dividends declared, $ /share | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized losses on available-for-sale securities | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
BALANCE, March 31, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Net loss | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Dividends declared, $ /share | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized gains on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||
BALANCE, June 30, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||||||||||
Restricted stock forfeiture | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
Dividends declared, $ /share | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized gains on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||
BALANCE, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ |
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended September 30, |
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2024 |
2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization |
||||||||
Net accretion of marketable securities |
( |
) | ||||||
Share-based compensation |
||||||||
Noncash lease expense |
||||||||
Deferred income taxes |
( |
) | ||||||
Changes in assets and liabilities: |
||||||||
Inventories |
( |
) | ||||||
Other current assets |
( |
) | ( |
) | ||||
Other assets |
( |
) | ( |
) | ||||
Accounts payable |
( |
) | ( |
) | ||||
Income taxes payable |
( |
) | ( |
) | ||||
Accrued commissions |
( |
) | ( |
) | ||||
Other accrued expenses |
( |
) | ||||||
Deferred revenue |
||||||||
Amounts held in eWallets |
( |
) | ( |
) | ||||
Operating lease liabilities |
( |
) | ( |
) | ||||
Other current liabilities |
( |
) | ( |
) | ||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
( |
) | ( |
) | ||||
Purchases of marketable securities |
( |
) | ||||||
Proceeds from maturities of marketable securities |
||||||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Dividends paid |
( |
) | ( |
) | ||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
Effect of exchange rates on cash, cash equivalents and restricted cash |
( |
) | ||||||
Net decrease in cash, cash equivalents and restricted cash |
( |
) | ( |
) | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period |
||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period |
$ | $ | ||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
Right-of-use assets obtained in exchange for operating lease liabilities |
$ | $ |
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Malaysia, Singapore and Thailand; 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 2023 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 28, 2024.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company maintains substantially all of its cash balances at several institutions located in the United States, Hong Kong and China which at times may exceed insured limits. As of September 30, 2024, there was $
Net Income Per Common Share
Diluted net income 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 table illustrates the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):
Three Months Ended September 30, | ||||||||||||||||||||||||
2024 | 2023 | |||||||||||||||||||||||
Income (Numerator) | Shares (Denominator) | Per Share Amount | Income (Numerator) | Shares (Denominator) | Per Share Amount | |||||||||||||||||||
Basic net income per common share: | ||||||||||||||||||||||||
Net income available to common stockholders | $ | $ | $ | $ | ||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Non-vested restricted stock | ||||||||||||||||||||||||
Diluted net income per common share: | ||||||||||||||||||||||||
Net income available to common stockholders plus assumed dilution | $ | $ | $ | $ |
Nine Months Ended September 30, | ||||||||||||||||||||||||
2024 | 2023 | |||||||||||||||||||||||
Income (Numerator) | Shares (Denominator) | Per Share Amount | Income (Numerator) | Shares (Denominator) | Per Share Amount | |||||||||||||||||||
Basic net income per common share: | ||||||||||||||||||||||||
Net income available to common stockholders | $ | $ | $ | $ | ||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Non-vested restricted stock | ||||||||||||||||||||||||
Diluted net income per common share: | ||||||||||||||||||||||||
Net income available to common stockholders plus assumed dilution | $ | $ | $ | $ |
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in ASU 2023-07 will be applied retrospectively and are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of implementing this guidance.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 will be applied on a prospective basis and are effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of implementing this guidance on its consolidated financial statements.
Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
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
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. As of September 30, 2024 and December 31, 2023, the Company had $
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 11 for revenue by market information.
The Company’s net sales by product and service are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Product sales | $ | $ | $ | $ | ||||||||||||
Administrative fees, freight and other | ||||||||||||||||
Less: sales returns | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total net sales | $ | $ | $ | $ |
Concentration
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 single customer accounted for 10% or more of net sales for the three and nine months ended September 30, 2024 and 2023. 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.
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet amounts are as follows (in thousands):
September 30, 2024 | December 31, 2023 | |||||||
Cash, cash equivalents and restricted cash: | ||||||||
Cash | $ | $ | ||||||
Cash equivalents | ||||||||
Restricted cash | ||||||||
$ | $ | |||||||
Inventories: | ||||||||
Finished goods | $ | $ | ||||||
Raw materials | ||||||||
Reserve for obsolescence | ( | ) | ( | ) | ||||
$ | $ | |||||||
Other accrued expenses: | ||||||||
Sales returns | $ | $ | ||||||
Employee-related expense | ||||||||
Warehousing, inventory-related and other | ||||||||
$ | $ | |||||||
Deferred revenue: | ||||||||
Unshipped product and unredeemed product vouchers | $ | $ | ||||||
Auto ship advances | ||||||||
$ | $ |
4. FAIR VALUE MEASUREMENTS
As of September 30, 2024, cash and cash equivalents and marketable securities include the Company’s investments in money market funds, municipal debt securities, and corporate debt securities. 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 are required to be accounted for in accordance with the FASB ASC 320, Investments - Debt and Equity Securities. As such, the Company determined its investments in debt securities held at September 30, 2024 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 (expense). Realized gains and losses, as well as interest income, are also included in other income (expense). 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.
Investments by significant category included in cash equivalents and marketable securities at the end of each period were as follows (in thousands):
September 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||
Fair Value Level1 | Adjusted Cost | Gross Unrealized Gains (Losses) | Fair Value | Adjusted Cost | Gross Unrealized Gains (Losses) | Fair Value | |||||||||||||||||||
Money market funds | Level 1 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Municipal debt securities | Level 2 | ||||||||||||||||||||||||
Corporate debt securities | Level 2 | ( | ) | ( | ) | ||||||||||||||||||||
Total investments | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ |
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
The Company leases
branch offices throughout China, and additional office space in Peru, Japan, Taiwan, South Korea, Malaysia, Thailand, India, and the Cayman Islands. 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 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Operating leases | $ | $ | $ | $ | ||||||||||||
Short-term leases | ||||||||||||||||
Total lease cost | $ | $ | $ | $ |
Cash paid for amounts included in the measurement of operating leases liabilities was $
The weighted-average remaining lease term and discount rate related to operating leases as of September 30, 2024 were as follows:
Weighted-average remaining lease term (in years) | ||||
Weighted-average discount rate | % |
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 the Company's operating lease liabilities as of September 30, 2024 were as follows (in thousands):
Remainder of 2024 | $ | |||
2025 | ||||
2026 | ||||
2027 | ||||
2028 | ||||
Thereafter | ||||
Total lease payments | ||||
Less: imputed interest | ( | ) | ||
Present value of lease liabilities | $ |
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, 2024 includes estimates for foreign income inclusions such as global intangible low-taxed income (“GILTI”) and Subpart F income. As of September 30, 2024, the Company does
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, 2024, 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, 2024, the Company has zero U.S. federal net operating loss carryforwards. The Company has post-apportioned U.S. state net operating loss carryforwards of $
As of September 30, 2024, income taxes payable for the repatriation tax on the deemed repatriation of deferred foreign income required by the U.S. Tax Cuts and Jobs Act (the “Tax Act”), enacted in 2017 by the U.S. government, totaled $
As a result of capital return activities, the Company determined that a portion of its current undistributed foreign earnings not 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, 2024, 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, 2024 have already been repatriated. Due to the Tax Act, 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, 2024.
The Company and its subsidiaries file tax returns in the United States, California, New Jersey, Texas and various foreign jurisdictions. The Company is no longer subject to state income tax examinations for years prior to 2018. The Company is not aware of any jurisdiction that is currently examining any of its income tax returns.
7. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain members of its management team that can be terminated by either the employee or the Company upon four weeks’ notice. The employment agreements entered into with the management team contain provisions that guarantee the payment of specified amounts in the event of a change in control (together with a termination without cause), as defined, or if the employee is otherwise terminated without cause, as defined, or terminates employment for good reason, as defined.
8. STOCK-BASED INCENTIVE PLANS
Restricted Stock
In 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
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, 2023 | $ | |||||||
Vested | ( | ) | $ | |||||
Forfeited | ( | ) | $ | |||||
Nonvested at September 30, 2024 | $ |
Share-based compensation expense of $
Phantom Equity
In 2021, the Company’s Board of Directors approved and adopted a Phantom Equity Plan (the “Phantom Plan”). Under the terms of the Phantom Plan, the Board of Directors' Compensation Committee may grant to the Company’s employees, officers, directors, contractors, consultants, or advisors awards of phantom shares entitling grantees the right to receive a cash payment equal to the fair market value of an equal number of shares of the Company’s common stock upon the close of a vesting period, subject to any maximum payment value that the Compensation Committee may set. The vesting of phantom shares is subject to such vesting conditions as the Compensation Committee may specify in a grantee’s award agreement. Grantees of phantom shares shall not by virtue of their receipt of phantom shares have any ownership rights in shares of the Company’s common stock. The Phantom Plan shall continue for a period of
years, after which no further phantom shares may be awarded (although any phantom shares awarded prior to the expiration of such 10-year period shall be unaffected by the termination of the Phantom Plan).
On February 7, 2023, the Company granted
As a result of the vesting of phantom shares, the Company recognized compensation expense related to the cash settlement of such shares of $
9. STOCKHOLDERS’ EQUITY
Dividends
The Company declared and paid cash dividends of $
Stock Repurchases
In 2016, the Board of Directors authorized an increase to the Company’s stock repurchase program first approved in 2015 from $
Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component for the first nine months of 2024 were as follows (in thousands):
Foreign Currency Translation Adjustments |