NATURAL HEALTH TRENDS CORP MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
Business Overview
We are an international direct-selling and e-commerce company. Subsidiaries
controlled by us sell personal care, wellness, and “quality of life” products
under the “NHT Global” brand. Our wholly-owned subsidiaries have an active
physical presence in the following markets: the
United States
consists of
operate in
provider. See Note 13 of the Notes to Consolidated Financial Statements in “Item
8. Financial Statements and Supplementary Data” of this report for further
information about our net sales by geographic area.
As of
members, compared to 45,760 at the end of 2021. We consider a member “active” if
they have placed at least one product order with us during the preceding year.
Our priority is to focus our resources in our most promising markets, which we
consider to be
connections to recruit prospects and sell our products, such as
risks associated with our loss of members, see “Item 1A. Risk Factors – Our
recent loss of a significant number of members is adversely affecting our
business…”.
We generate approximately 93% of our net sales from subsidiaries located outside
the
sales in the latest fiscal year. Because of the size of our foreign operations,
operating results can be impacted negatively or positively by factors such as
foreign currency fluctuations, inflation rates, and economic, political and
business conditions around the world. In addition, our business is subject to
various laws and regulations, in particular, regulations related to direct
selling activities that create uncertain risks for our business, including
improper claims or activities by our members and our potential inability to
obtain necessary product registrations. We continually evaluate our business for
compliance with applicable laws and regulations, and this process can and has
resulted in the identification of certain matters of potential noncompliance,
which we work to satisfactorily address. For further information regarding some
of the risks associated with the conduct of our business in
see “Item 1A. Risk Factors,” and more specifically under the captions “Risk
Factors – Because our
our overall business…”, “Risk Factors – Our Hong Kong operations are being
adversely affected by recent political and social developments in Hong Kong….”,
and “Risk Factors – Our business in
of applicable laws and regulations…”.
project. We operate an e-commerce direct selling platform in
generates revenue derived from the sale of products to members in
elsewhere, including
derived from the sale of products that are delivered to members in
Through a separate Chinese entity, we operate an e-commerce retail platform in
license in
preliminary application for a direct selling license in
Chinese governmental authority recommended that we withdraw our application. We
expect to reapply for a direct selling license in
circumstances are again ripe for doing so. If we are ultimately able to obtain a
direct selling license in
direct selling model in
We do not expect that any increased sales in
direct selling license would initially be material and, in any event may be
partially offset by the higher fixed costs associated with the establishment and
maintenance of required service centers, branch offices, manufacturing
facilities, certification programs and other legal requirements. We are unable
to predict whether and when we will be successful in obtaining a direct selling
license to operate in
to conduct direct selling operations and whether such operations would be
profitable.
29
——————————————————————————–
Table of Contents
In
companies involved in the sale of food, equipment, daily necessities, small home
electrical appliances and services that are claimed to promote health. The
Chinese government ministries in charge of this campaign indicated that they are
targeting illegal practices in the industry, particularly the manufacture and
sale of counterfeit and substandard products, and false advertising and
misleading claims as to the health benefits of products and services. It is
understood that the campaign is specifically focused on the business practices
of direct selling companies. During the campaign, we understand that the
government is not issuing any additional direct selling licenses, is not issuing
certifications of quality or other approvals of various healthcare products, and
is reviewing its regulatory oversight of the industry. Since it was implemented,
the campaign and associated negative media coverage have had a significant
adverse impact on our business, as consumers have widely curtailed their
purchases within the affected industries. We, like some of our peers,
voluntarily decided in
activities, such as product roadshows, product trainings and larger
company-sponsored events, in
100-day campaign was announced in broad outlines by the central government, and
the interpretation and enforcement of the campaign was delegated to the
provincial and local governments. We consider it a top priority for our business
to develop an understanding of and cooperate with all levels and jurisdictions
of the government agencies, and did not want to run the risk of being
inadvertently entangled in government enforcement actions as the provincial and
local governments formulate and implement their interpretive guidance and
rule-making. Although we have been able to relax some restrictions on member
activities in certain markets, it may again in the future be necessary or
advisable to suspend member activities or take similar actions from time to
time, and such periods of reduced activity may have a material adverse effect on
our business.
Although the 100-day campaign was due to expire on or about
are not aware of any information indicating that the campaign has formally
concluded. However, on
would conduct a “look-back review” to evaluate the 100-day campaign. As part of
this review, we understand that various Chinese governmental agencies formed a
working group to assess the 100-day campaign, particularly focusing on the
health market and its supervision in certain provinces. We understand that
during
a number of organizations and governmental departments in these provinces and
made recommendations for various improvements. It was noted that each province
had opened a number of investigative cases, had successfully closed numerous
cases, and had imposed various fines and penalties. We understand that the
look-back review continued after
review has been completed. As a result, the business environment in
health product companies continues to be challenging, which has been exacerbated
by negative social media sentiment expressed for these types of companies. We
believe that the campaign, as well as its extension and aftermath (including the
look-back review), will continue to negatively impact our business in
the near-term, but will ultimately benefit us and Chinese consumers in the
long-term as purveyors of substandard products are driven from the market.
In late 2019 or early 2020 an outbreak of COVID-19 was first identified in
and subsequently spread around the world. On
Organization
caused the Chinese government to implement powerful measures to control the
virus, such as requiring businesses to close throughout various areas of
and restricting public gatherings and certain travel within the country. We
have significant business in
our revenue in
of products to members in
governments of the other countries in which we operate, continue to adjust the
restrictive measures that they impose to control COVID-19 based on then-current
local circumstances; however, it should be noted that the Chinese and
governments have to date imposed some of the most restrictive COVID-19 control
measures of any country in the world. The scope and impact of the pandemic and
related control measures are uncertain, but we have taken steps to adapt some of
our marketing programs, such as relying on certain product promotions and
webcast training, to overcome the physical restrictions imposed in response to
the pandemic. We have also canceled or rescheduled a number of in-person member
events over the course of the pandemic. While the Chinese and
governments took comprehensive steps to relax many of the COVID-19 control
measures in late 2022, the severity of the impact on us of the COVID-19 pandemic
will depend on future developments, including the duration and spread of the
virus, and related control measures, which we are unable to accurately predict.
Of particular note, the spread of the Omicron variant in
along with the imposition of strong government control measures, significantly
disrupted our operations and negatively affected our results of operations in
2022. During the first half of the year, our third-party logistics providers
experienced substantial difficulties importing and distributing our products in
its more stringent policies and we found that the difficulties encountered by
our third-party logistics providers were largely resolved by the end of the
month. Further, after four consecutive quarters during which we were unable to
sponsor any in-person member events in
an in-person event at the end of the third quarter of 2022 in
planning more such events. Additionally, we were able to conduct a series of
roadshows throughout September, though the size of the gatherings was
limited. Notwithstanding this modestly improved state of affairs, through late
2022 the Chinese and
measures that were negatively impacting our ability to interact with our members
and the ability of our members to interact with each other and their customers.
In late 2022, the Chinese and
relax many of their COVID-19 control measures, which may enable us to resume
more normal operations in
accurately predict the impact on us of this relaxation of control measures and
whether it will prove enduring. We will continue to assess the financial and
operational impact of the COVID-19 pandemic, including its impact on the
operations of our third-party providers. See “Item 1A. Risk Factors – Epidemics,
such as the COVID-19 pandemic, or natural disasters, terrorist attacks or acts
of war…”.
Recent political and social developments in
the COVID-19 pandemic and related government control measures, are also
adversely affecting our
sponsoring member meetings and events in
and events located in
component of our product marketing and distribution efforts, we believe that
this action has negatively affected our operations and financial performance.
The cumulative effect of these developments has adversely affected our
operations and may continue to adversely affect our overall business, results of
operations and financial condition. See “Item 1A. Risk Factors – Our Hong Kong
operations are being adversely affected by recent political and social
developments in
30
——————————————————————————–
Table of Contents
Our
shipped to members residing in
in net sales during 2022 resulted in a loss from operations for the year, as
well as negative cash flows from operations for the year. We anticipate that our
financial performance for the near-term may continue to be adversely impacted.
Statement of Operations Presentation
We mainly derive revenue from sales of products. Substantially all of our
product sales are to independent members at published wholesale prices. Product
sales are recognized when the products are shipped and title passes to
independent members, which generally is upon our delivery to the carrier that
completes delivery to the members. We estimate and accrue a reserve for product
returns based on our return policies and historical experience. We bill members
for shipping charges and recognize the freight revenue in net sales. We have
elected to account for shipping and handling activities performed after title
has passed to members as a fulfillment cost, and accrue for the costs of
shipping and handling if revenue is recognized before the contractually
obligated shipping and handling activities occurs. Event and training revenue is
deferred and recognized as the event or training occurs.
Cost of sales consists primarily of products purchased from third-party
manufacturers, freight cost for transporting products to our foreign
subsidiaries and shipping products to members, import duties, packing materials,
product royalties, costs of promotional materials sold to our members at or near
cost, and provisions for slow moving or obsolete inventories. Cost of sales also
includes purchasing costs, receiving costs, inspection costs and warehousing
costs.
Member commissions are our most significant expense and are classified as an
operating expense. Under our compensation plan, members are paid weekly
commissions by our subsidiary in which they are enrolled, generally in their
home country currency, for product purchases by their down-line member network
across all geographic markets. Our
retail platform and does not pay commissions, although our Chinese members may
participate in our compensation plan through our other subsidiaries. This
“seamless” compensation plan enables a member located in one country to enroll
other members located in other countries where we are authorized to conduct our
business. Currently, there are basically two ways in which our members can earn
income:
• through commissions paid on the accumulated bonus volume from product
purchases made by their down-line members and customers; and
• through retail profits on sales of products purchased by members at wholesale
prices and resold at retail prices (for purchasers in some of our smaller
markets and purchasers from our China subsidiary, sales are for personal
consumption only and income may not be earned through retail profits).
Each of our products is designated a specified number of bonus volume points.
Commissions are based on total personal and group bonus volume points per weekly
sales period. Bonus volume points are essentially a percentage of a product’s
wholesale price. As the member’s business expands from successfully enrolling
other members
other members, the member receives higher commissions from purchases made by an
expanding down-line network. In some of our markets, to be eligible to receive
commissions, a member may be required to make nominal monthly or other periodic
purchases of our products. Certain of our subsidiaries do not require these
nominal purchases for a member to be eligible to receive commissions. In
determining commissions, the number of levels of down-line members included
within the member’s commissionable group increases as the number of memberships
directly below the member increases.
31
——————————————————————————–
Table of Contents
Under our current compensation plan, certain of our commission payouts may be
limited to a hard cap dollar amount per week or a specific percentage of total
product sales. In some markets, commissions may be further limited. In some
markets, we also pay certain bonuses on purchases by up to three generations of
personally sponsored members, as well as bonuses on commissions earned by up to
seven generations of personally sponsored members. Members can also earn
additional income, trips and other prizes in specific time-limited promotions
and contests we hold from time to time. Member commissions are dependent on the
sales mix and, for fiscal 2022 and 2021 represented 42% and 43% of net sales,
respectively. Occasionally, we make modifications and enhancements to our
compensation plan to help motivate members, which can have an impact on member
commissions. We may also enter into performance-based agreements for business or
market development, which can result in additional compensation to specific
members.
Selling, general and administrative expenses consist of administrative
compensation and benefits, travel, credit card fees and assessments,
professional fees, certain occupancy costs, and other corporate administrative
expenses (including stock-based compensation). In addition, this category
includes selling, marketing, and promotion expenses (including the costs of
member training events and conventions that are designed to increase both
product awareness and member recruitment). Because our various member
conventions are not always held at the same time each year, interim period
comparisons will be impacted accordingly.
The functional currency of our international subsidiaries is generally their
local currency. Local currency assets and liabilities are translated at the
rates of exchange on the balance sheet date, and local currency revenues and
expenses are translated at average rates of exchange during the period. Equity
accounts are translated at historical rates. The resulting translation
adjustments are recorded directly into stockholders’ equity.
Sales by our foreign subsidiaries are generally transacted in the respective
local currencies and are translated into
exchange for each monthly accounting period to which they relate. Most of our
product purchases from third-party manufacturers are transacted in
dollars. Consequently, our sales and net earnings are affected by changes in
currency exchange rates, with sales and earnings generally increasing with a
weakening
Results of Operations
The following table sets forth our operating results as a percentage of net
sales for the periods indicated:
Year Ended December 31,
2022 2021
Net sales 100.0 % 100.0 %
Cost of sales 25.8 25.0
Gross profit 74.2 75.0
Operating expenses:
Commissions expense 42.2 42.6
Selling, general and administrative expenses 32.6 29.8
Total operating expenses 74.8 72.4
Income (loss) from operations (0.6 ) 2.6
Other income (expense), net 1.8 (0.1 )
Income before income taxes 1.2 2.5
Income tax provision 0.6 0.7
Net income 0.6 % 1.8 %
32
——————————————————————————–
Table of ContentsNet Sales The following table sets forth revenue by market for the periods indicated (in thousands): Year Ended December 31, 2022 2021 Americas1$ 3,256 6.6 %$ 4,283 7.2 % Hong Kong2 38,436 78.2 46,699 77.8 China 2,017 4.1 2,237 3.7 Taiwan 2,493 5.1 2,706 4.5 South Korea 172 0.4 251 0.4 Japan 676 1.4 938 1.6 Malaysia and Singapore 393 0.8 458 0.8 Russia and Kazakhstan 559 1.1 854 1.4 Europe 891 1.8 1,136 1.9 India 241 0.5 443 0.7 Total$ 49,134 100.0 %$ 60,005 100.0 %
——————————————————————————–
1 United States,
2 Substantially all of our
products that are delivered to members in
Net sales were
sales, substantially all of which were derived from the sale of products shipped
to members residing in
year. We believe that the decrease in
recurring COVID-19 outbreaks in
control measures. These measures severely impacted our ability to interact with
our members and the ability of our members to interact with each other and their
customers, and earlier in 2022 resulted in significant supply chain and
distribution challenges. Late in 2022 the Chinese and
comprehensive steps to relax many of their COVID-19 control measures, which may
enable us to resume more normal operations in
is still too early to accurately predict the impact on us of this relaxation of
control measures and whether it will prove enduring. The decrease in
net sales was also due to the recognition of lower administrative fees in 2022,
as compared to the prior year. We believe that our
continue to be negatively impacted by outbreaks of COVID-19 in
Kong
including restrictions on business activities, public gatherings and
travel. Outside of our
20%, compared with the prior year. We believe that this decrease is also largely
attributable to the spread of the COVID-19 virus and the imposition of control
measures in various markets outside of
As of
consisted of
product vouchers, as well as
Gross Profit
Gross profit was 74.2% of net sales for the year ended
compared with 75.0% of net sales for the year ended
the impact of decreased administrative fee revenue referred to above, gross
profit margin decreased slightly in 2022 as compared to 2021, primarily due to
higher logistics costs.
Commissions Expense
Commissions were 42.2% of net sales for the year ended
compared with 42.6% of net sales for the year ended
the impact of decreased administrative fee revenue referred to above,
commissions as a percentage of net sales decreased slightly in 2022 as compared
to the prior year due to less supplemental incentive costs.
33
——————————————————————————–
Table of Contents
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
ended
well as lower event costs in 2022, as we held a major event in
However, selling, general and administrative expenses as a percentage of net
sales increased to 32.6% of net sales in 2022 from 29.8% of net sales in 2021
primarily due to the impact of relatively fixed costs on a lower level of net
sales in 2022.
Income Taxes
An income tax provision of
2021
global intangible low-taxed income (“GILTI”) inclusion offset by income tax
benefits recognized for GILTI-related return to provision true-ups related to
the year ended
for carrying back net operating losses generated from the year ended
31, 2020
for the year ended
2021
during the year ended
operating loss carryback.
Liquidity and Capital Resources
At
cash and cash equivalents decreased by
dividends paid during 2022. We consider all highly liquid investments with
original maturities of three months or less, when purchased, to be cash
equivalents. As of
investments classified as cash equivalents. In addition, cash and cash
equivalents included
foreign currency controls.
As of
3.79 to 1.00 and we had
Cash used in operations was
by operations of
in 2022 resulted primarily from the reduction in product orders received during
2022 in comparison to the prior year.
Cash used in investing activities totaled
2021, respectively.
34
——————————————————————————–
Table of Contents
Cash used in financing activities during 2022 and 2021 consisted solely of
quarterly dividend payments of
each period. Subsequent to
Directors declared another quarterly cash dividend of
common stock outstanding. The dividend will be payable on
stockholders of record on
quarterly cash dividend of
the foreseeable future. However, any future cash dividends will be at the sole
discretion of the Board of Directors, and will depend on our financial
condition, results of operations, capital requirements and other factors
considered relevant by the Board of Directors.
On
Company’s stock repurchase program first approved on
million
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. As of
remained available for future purchases, inclusive of related estimated income
tax.
We believe that our existing internal liquidity, supported by cash and cash
equivalents, as well as cash flows from operations should be adequate to fund
normal business operations and address our financial commitments for the
foreseeable future.
We do not have any significant unused sources of liquid assets. If necessary, we
may attempt to generate more funding from the capital markets, but currently do
not believe that will be necessary.
Our priority is to focus our resources on investing in our most important
markets, which we consider to be
members may have the connections to recruit prospects and sell our products,
such as
invest in our Mainland China entity for such purposes as establishing
and our products, sourcing more Chinese-made products, building a chain of
service stations, opening additional Healthy Lifestyle Centers or branch
offices, adding local staffing and other requirements for a prospective
direct selling license application.
35
——————————————————————————–
Table of Contents
Critical Accounting Policies and Estimates
A summary of our significant accounting policies is provided in Note 1 of the
Notes to Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” of this report. The preparation of financial statements in
accordance with accounting principles generally accepted in
America
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reported period. The
process of determining significant estimates is fact specific and takes into
account historical experience and current and expected economic conditions. To
the extent that there are material differences between the estimates and actual
results, future results of operations will be affected.
Critical accounting policies and estimates are defined as both those that are
material to the portrayal of our financial condition and results of operations
and as those that require management’s most subjective judgments. Management
believes our critical accounting policies and estimates are those related to
revenue recognition, as well as those used in the determination of liabilities
related to member commissions and income taxes.
Revenue Recognition. All revenue is recognized when the performance obligations
under a contract, including product vouchers sold on a stand-alone basis in
Kong
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 our delivery to the carrier that completes delivery to the members,
which is commonly referred to as “F.O.B. Shipping Point.” We primarily receive
payment by credit card at the time members place orders. Our sales arrangements
do not contain right of inspection or customer acceptance provisions other than
general rights of return. Amounts received for unshipped product orders and
unredeemed product vouchers are recorded as deferred revenue. Such amounts
totaled
respectively. 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.
Additionally, deferred revenue includes advances for auto ship orders. In
certain markets, when a member’s cumulative commission income reaches a certain
threshold, a percentage of the member’s weekly commission is held back as an
advance and applied to an auto ship order once the accumulated amount of the
advances is sufficient to pay for the pre-selected auto ship package of the
member. Such advances were
and 2021, respectively.
36
——————————————————————————–
Table of Contents
Commissions Expense. Independent members earn commissions based on total
personal and group bonus volume points per weekly sales period. Each of our
products are designated a specified number of bonus volume points, which is
essentially a percentage of the product’s wholesale price. We accrue
commissions when earned and as the related revenue is recognized and pay
commissions on product sales generally two weeks following the end of the weekly
sales period.
Independent members may also earn incentives based on meeting certain
qualifications during a designated incentive period, which may range from
several weeks to up to a year. For each individual incentive, we estimate the
total number of qualifiers as well as the expected per qualifier cost and accrue
all costs associated with incentives throughout the qualification period. We
regularly review and update, if necessary, the estimates of both qualifiers and
cost as more information is obtained during the qualification period. Any
resulting change in total cost is recognized over the remaining qualification
period. Long-term promotions and incentives (lasting up to one year) can, in
particular, result in uncertain ultimate cost. Accrued commissions, including
the estimated cost of our international recognition incentive program and other
supplemental programs, totaled
2022
Income Taxes. Deferred income taxes are recognized for differences between the
financial reporting and tax bases of assets and liabilities at enacted statutory
rates for the years in which the temporary differences are expected to be
recovered or settled. We evaluate the probability of realizing the future
benefits of any of our deferred tax assets and record a valuation allowance when
we believe a portion or all of our deferred tax assets may not be realized.
Deferred tax expense or benefit is a result of changes in deferred tax assets
and liabilities. Based on the technical merits of our tax position, tax benefits
may be recognized if we determine it is more likely than not that our position
will be sustained on examination by tax authorities. The complex nature of these
estimates requires us to anticipate the likely application of tax law and make
judgments on the largest benefit that has a greater than fifty percent
likelihood of being realized prior to the completion and filing of tax returns
for such periods. As of
against our
certain foreign jurisdictions with an overall tax 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.
Provision for income taxes depends on the statutory tax rates in each of the
jurisdictions in which we operate. As a result of capital return activities, we
determined that a portion of our current undistributed foreign earnings are no
longer deemed reinvested indefinitely by our non-
Cuts and Jobs Act (the “Tax Act”), enacted in 2017 by the
required a one-time repatriation tax on certain un-repatriated earnings of
foreign subsidiaries at a rate of 15.5% tax on post-1986 foreign earnings held
in cash and an 8% rate on all other post-1986 earnings. Due to the adoption of a
territorial tax regime, any foreign source portion of a qualified dividend
received by a 10%
therefore resulting in any future repatriation having a minimal effect on our
effective tax rate. For state income tax purposes, we will continue to
periodically reassess the needs of our foreign subsidiaries and update our
indefinite reinvestment assertion as necessary. To the extent that additional
foreign earnings are not deemed permanently reinvested, we expect to recognize
additional income tax provision at the applicable
rate(s). As of
liability for earnings to be repatriated in the future because the portion of
all earnings which are no longer deemed reinvested indefinitely as of
31, 2022
50% of current earnings on an annual basis are intended to be reinvested
indefinitely as of
The
enacted on
companies impacted by the COVID-19 pandemic. In addition to other broad changes,
the CARES Act allows for a 5-year carryback period for net operating losses
arising in tax years beginning after 2017 and before 2021, effectively taking
advantage of differences in tax rate as a result of enactment of the Tax Act. We
booked a tax benefit of
generated in the tax year ended
resulting from the carryback.
The Company has analyzed the recently finalized
by the
regulations overhaul various components of the foreign tax credit regime
including the determination of creditable foreign taxes and limit the amount of
foreign taxes that are creditable against
regulations are generally effective on
retroactive and may limit the Company’s ability to claim credits on certain
foreign taxes. Although the Company is still analyzing the full impact of the
new regulations, the Company does not expect a material impact to the Company’s
financial statements as a result of these final regulations.
We estimate what our effective tax rate will be for a full fiscal year at each
interim reporting period and record a quarterly tax provision based on that
estimated effective tax rate. Throughout the year that estimated rate may change
based on variations in our business, changes in our corporate structure, changes
in the geographic mix and amount of income, applicable tax laws and regulations,
communications with tax authorities, as well as our estimated and actual level
of annual pre-tax income. We adjust our income tax provision in the reporting
period in which the change in our estimated rate occurs so that the year-to-date
provision is consistent with the anticipated annual tax rate. The Company’s
effective tax rate for the year ended
ended
foreign operations during the year ended
benefit of the net operating loss carryback reflected in 2021 as a result of the
CARES Act.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable under smaller reporting company disclosure rules.
37
——————————————————————————–
Table of Contents
© Edgar Online, source
link
