NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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: North America; Greater China, which consists of Hong Kong, Taiwan and China; South Korea; Singapore; Malaysia; Japan; and Europe. The Company also operates in Russia and Kazakhstan through its engagement with a local service provider.
In September 2015, the Company relocated its corporate headquarters from Dallas, Texas to Rolling Hills Estates, California.
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.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the 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 most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates associated with revenue recognition, as well as those used in the determination of liabilities related to sales returns, commissions and income taxes. Various assumptions and other factors prompt the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account historical experience and current and expected economic conditions. The actual results may differ materially and adversely from the Company’s estimates. To the extent that there are material differences between the estimates and actual results, future results of operations will be affected.
Reclassification
Certain accounts receivable balances have been reclassified in the prior year consolidated financial statements to conform to current year presentation. No change in total current assets occurred. Additionally, deferred tax liability balances have been reclassified from current to long-term in the prior year consolidated financial statements to conform to the early adoption of ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
.
Cash and Cash Equivalents
As of
December 31, 2016
, cash and cash equivalents include
$6.8 million
held in banks located within China subject to foreign currency controls. The Company includes credit card receivables due from certain of its credit card processors in its cash and cash equivalents as the cash proceeds are received within two to five days.
Additionally, as of
December 31, 2016
, cash and cash equivalents include the Company's investments in debt securities, comprising municipal notes, bonds and corporate debt, money market funds and time deposits. The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. Debt securities classified as cash equivalents are required to be accounted for in accordance with ASC 320,
Investments - Debt and Equity Securities
. As such, the Company determined its investments in debt securities held at
December 31, 2016
should be classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income 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.
Cash and cash equivalents at the end of each period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Cash
|
$
|
52,453
|
|
|
$
|
47,431
|
|
Cash equivalents
|
73,468
|
|
|
57,483
|
|
Total cash and cash equivalents
|
$
|
125,921
|
|
|
$
|
104,914
|
|
The Company maintains certain cash balances at several institutions located in the United States, Hong Kong and Malaysia which at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Restricted Cash
In June 2015, the Company funded a bank deposit account in the amount of CNY
20 million
(USD
2.9 million
at
December 31, 2016
) 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 periodically maintains a cash reserve with certain credit card processing companies to provide for potential uncollectible amounts and chargebacks. Those cash reserves held by credit card processing companies located in South Korea are reflected in noncurrent assets since they require the Company to provide 100% collateral before processing transactions, which must be maintained indefinitely.
Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost or market, using the first-in, first-out method. The Company reviews its inventory for obsolescence and any inventory identified as obsolete is reserved or written off. The Company’s determination of obsolescence is based on assumptions about the demand for its products, product expiration dates, estimated future sales, and management’s future plans. At
December 31, 2016
and
2015
, the reserve for obsolescence totaled
$82,000
, and
$29,000
, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally
three
to
five
years for office equipment and office software and
five
to
seven
years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets. Expenditures for maintenance and repairs are charged to expense as incurred.
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of its carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value.
Goodwill
The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step impairment test is performed. The Company’s policy is to test for impairment annually during the fourth quarter. Considerable management judgment is necessary to measure fair value. The Company did not recognize any impairment charges for goodwill during the periods presented.
Income Taxes
The Company recognizes income taxes under the liability method of accounting for income taxes. Deferred income taxes are recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is a result of changes in deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized based on the more likely than not recognition criteria. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has evaluated its tax positions and determined that there are no uncertain tax positions for the current year or years prior. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. Deferred taxes are not provided on the portion of undistributed earnings of subsidiaries outside of the United States when these earnings are considered permanently reinvested.
Amounts Held in eWallets
Commencing in October 2014, the Company requires commission payments of certain members in Hong Kong to be first deposited into an electronic wallet (eWallet) account in lieu of being paid out directly to members. The eWallet functionality allows members to place new product orders utilizing eWallet available funds and/or request commission payout via multiple payment methods. Amounts held in eWallets are reflected on the balance sheet as a current liability.
Long-Term Incentive
Financial rewards earned under the 2014 Long-Term Incentive Plan (the “LTI Plan”) are recognized over the performance period as specified performance or other goals are achieved or exceeded. In accordance with the LTI Plan,
fifty percent
of any cash payment earned is payable in
thirty-five
equal consecutive monthly installments commencing in February of the calendar year immediately following the conclusion of the performance period and the remaining
fifty percent
of the payment earned is payable in
thirty-five
equal consecutive monthly installments commencing in February 2021 and ending in December 2023. As such, certain installments to be paid are reflected on the balance sheet as a non-current liability, and the current portion of the installments is reflected in other accrued expenses.
At the sole discretion of the Compensation Committee of the Company’s Board of Directors, distributions under the LTI Plan are made in cash, or alternatively awarded in the form of common stock or other common stock rights having an equivalent cash value under the terms of the Natural Health Trends Corp. 2016 Equity Incentive Plan. A determination of the form of distribution, if any, is made by the Compensation Committee subsequent to the end of each calendar year. As such, amounts earned are considered non-equity awards. See Note 5 for grant information of distributions settled in common stock.
Foreign Currency
The functional currency of the Company’s 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 accumulated other comprehensive income.
Aggregate transaction gains or losses, including gains or losses related to foreign-denominated cash and cash equivalents and the re-measurement of certain inter-company balances, are included in the statement of operations as other income and expense. Loss on foreign exchange totaling
$333,000
,
$204,000
and
$202,000
was recognized during 2016, 2015 and 2014, respectively.
Revenue Recognition
Product sales are recorded 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 primarily receives payment by credit card at the time members place orders. Amounts received for unshipped product are recorded as deferred revenue. The Company’s sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return.
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.
Enrollment package revenue, including any nonrefundable set-up fees, is deferred and recognized over the term of the arrangement, generally twelve months. Enrollment packages provide members access to both a personalized marketing website and a business management system. No upfront costs are deferred as the amount is nominal.
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 and enrollment packages 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.
Commissions
Independent members earn commissions based on total personal and group bonus volume points per weekly sales period. Each of the Company’s products are designated a specified number of bonus volume points, which is essentially a percentage of the product’s wholesale price. The Company accrues commissions when earned and pays commissions on product sales generally two weeks following the end of the weekly sales period.
In some markets, the Company also pays certain bonuses on purchases by up to three generations of personally enrolled members, as well as bonuses on commissions earned by up to three generations of personally enrolled members. 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. These incentives may be both monetary and non-monetary in nature. The Company estimates and accrues all costs associated with the incentives as the members meet the qualification requirements.
From time to time the Company makes modifications and enhancements to the Company’s compensation plan to help motivate members, which can have an impact on member commissions. From time to time the Company also enters into agreements for business or market development, which may result in additional compensation to specific members.
Operating Leases
The Company leases its physical properties under operating leases. Certain lease agreements include rent holidays. The Company recognizes rent holiday periods on a straight-line basis over the lease term beginning when the Company has the right to the leased space.
Stock-Based Compensation
Stock-based compensation expense is determined based on the grant date fair value of each award, net of estimated forfeitures which are derived from historical experience, and is recognized on a straight-line basis over the requisite service period for the award.
Income Per Share
Basic income per share for 2014 was computed via the “two-class” method by dividing net income allocated to common stockholders by the weighted-average number of common shares outstanding during the period. Net income available to common stockholders is allocated to both common stock and participating securities as if all of the income for the period had been distributed. The Company’s Series A convertible preferred stock was a participating security due to its participation rights related to dividends declared by the Company. If dividends were distributed to common stockholders, the Company was also required to pay dividends to the holders of the preferred stock in an amount equal to the greater of (1) the amount of dividends then accrued and not previously paid on such shares of preferred stock or (2) the amount payable if dividends were distributed to the common stockholders on an as-converted basis.
Diluted income per 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 and warrants 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 and the amount of tax benefit that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. For 2014, the dilutive effect of the Company’s Series A convertible preferred stock was calculated using the more dilutive of the “two-class” method and the “if-converted” method, which assumes that the preferred stock was converted into common stock at the beginning of each period presented.
All shares of the Company’s Series A convertible preferred stock were converted into shares of common stock in December 2014. Warrants to purchase
88,097
shares of common stock were still outstanding at December 31, 2014. Such warrants were exercised during April 2015.
The following table illustrates the computation of basic and diluted income per share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Income
|
|
Shares
|
|
Per Share
|
|
Income
|
|
Shares
|
|
Per Share
|
|
Income
|
|
Shares
|
|
Per Share
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
55,086
|
|
|
|
|
|
|
|
|
$
|
47,241
|
|
|
|
|
|
|
|
|
$
|
20,360
|
|
|
|
|
|
|
|
Less: undistributed earnings to participating securities
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
Net income allocated to common stockholders
|
$
|
55,086
|
|
|
11,382
|
|
|
$
|
4.84
|
|
|
$
|
47,241
|
|
|
12,302
|
|
|
$
|
3.84
|
|
|
$
|
20,233
|
|
|
12,131
|
|
|
$
|
1.67
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
21
|
|
|
|
|
|
—
|
|
|
421
|
|
|
|
|
Non-vested restricted stock
|
—
|
|
|
25
|
|
|
|
|
|
—
|
|
|
49
|
|
|
|
|
|
—
|
|
|
48
|
|
|
|
|
Plus: reallocation of undistributed earnings to participating securities
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stockholders plus assumed conversions
|
$
|
55,086
|
|
|
11,407
|
|
|
$
|
4.83
|
|
|
$
|
47,241
|
|
|
12,372
|
|
|
$
|
3.82
|
|
|
$
|
20,238
|
|
|
12,600
|
|
|
$
|
1.61
|
|
Certain non-vested restricted stock is anti-dilutive upon applying the treasury stock method since the amount of compensation cost for future service results in the hypothetical repurchase of shares exceeding the actual number of shares to be vested. For the year ended
December 31, 2016
,
345
shares of non-vested restricted stock were not included as their effect would have been anti-dilutive.
Certain Risks and Concentrations
A substantial portion of the Company’s sales are generated in Hong Kong (see Note 10). Substantially all of the Company’s Hong Kong revenues are derived from the sale of products that are delivered to members in China. In contrast to the Company’s operations in other parts of the world, the Company has not implemented a direct sales model in China. The Chinese government permits direct selling only by organizations that have a license, which the Company has applied for, and has also adopted anti-multilevel marketing legislation. The Company operates an e-commerce direct selling model in Hong Kong and recognizes the revenue derived from sales to both Hong Kong and Chinese members as being generated in Hong Kong. Products purchased by members in China are delivered to third parties that act as the importers of record under agreements to pay applicable duties. In addition, through a Chinese entity, the Company sells products in China using an e-commerce retail model. The Chinese entity operates separately from the Hong Kong entity, and a Chinese member may elect to participate separately or in both.
The Company believes that its e-commerce direct selling model in Hong Kong does not violate any applicable laws in China, even though it is used for the internet purchase of the Company's products by members in China. The Company also believes that its Chinese entity, including its e-commerce retail platform, is operating in compliance with applicable Chinese laws. However, there can be no assurance that the Chinese authorities will agree with the Company’s interpretations of applicable laws and regulations or that China will not adopt new laws or regulations. Should the Chinese government determine that the Company’s activities violate China’s direct selling or anti-multilevel marketing legislation, or should new laws or regulations be adopted, there could be a material adverse effect on the Company’s business, financial condition and results of operations.
Although the Company attempts to work closely with both national and local Chinese governmental agencies in conducting its business, the Company’s efforts to comply with national and local laws may be harmed by a rapidly evolving regulatory climate, concerns about activities resembling violations of direct selling or anti-multi-level marketing legislation, subjective interpretations of laws and regulations, Chinese nationals collaborating with short traders to damage the Company's business and activities by individual members that may violate laws notwithstanding the Company’s strict policies prohibiting such activities. Any determination that the Company’s operations or activities, or the activities of its individual members or employee sales representatives, or importers of record are not in compliance with applicable laws and regulations could result in the imposition of substantial fines, extended interruptions of business, restrictions on the Company’s future ability to obtain business licenses or expand into new locations, changes to its business model, the termination of required licenses to conduct business, or other actions, any of which could materially harm the Company’s business, financial condition and results of operations.
The Company’s
Premium Noni Juice
and
Enhanced Essential Probiotics
®
products each account for more than 10% of the Company’s total revenue. The Company currently sources each such product from a single supplier. If demand decreases significantly, government regulation restricts their sale, the Company is unable to adequately source or deliver the products, or the Company ceases offering the products for any reason without suitable replacements, the Company’s business, financial condition and results of operations could be materially and adversely affected.
Sales are made to the Company’s members and no single customer accounted for 10% or more of its net sales. 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.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, 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. The Company’s cash equivalents are valued based on level 1 inputs which consist of quoted prices in active markets.
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.
Available-for-sale investments included in cash equivalents at the end of each period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Adjusted Cost
|
|
Gross Unrealized Gains/Losses
|
|
Fair Value
|
|
Adjusted Cost
|
|
Gross Unrealized Gains/Losses
|
|
Fair Value
|
Municipal bonds and notes
|
$
|
43,490
|
|
|
$
|
—
|
|
|
$
|
43,490
|
|
|
$
|
35,222
|
|
|
$
|
2
|
|
|
$
|
35,224
|
|
Corporate debt securities
|
1,673
|
|
|
(2
|
)
|
|
1,671
|
|
|
5,029
|
|
|
(5
|
)
|
|
5,024
|
|
Financial institution instruments
|
28,307
|
|
|
—
|
|
|
28,307
|
|
|
17,235
|
|
|
—
|
|
|
17,235
|
|
Total available-for-sale investments
|
$
|
73,470
|
|
|
$
|
(2
|
)
|
|
$
|
73,468
|
|
|
$
|
57,486
|
|
|
$
|
(3
|
)
|
|
$
|
57,483
|
|
Financial institution instruments include instruments issued or managed by financial institutions such as money market fund deposits and time deposits.
Recently Issued and Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18,
Statement of Cash Flows - Restricted Cash
, that requires amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual years, and early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, that requires organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will include qualitative and quantitative requirements. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual years, and early application is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. Under this guidance, entities are required to present deferred tax tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. This guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. Entities are permitted to adopt this guidance either prospectively or retrospectively. The Company elected to early adopt this guidance prospectively as of the quarter ended December 31, 2016.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory: Simplifying the Measurement of Inventory.
Under this guidance, inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and will be applied prospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue From Contracts With Customers
, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In July 2015, the FASB approved the deferral of the effective date for annual reporting periods that begin after December 15, 2017, including interim reporting periods. Early adoption is permitted to the original effective date of December 15, 2016, including interim reporting periods. The Company is currently assessing the impact that this standard will have 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. BALANCE SHEET COMPONENTS
The components of certain balance sheet amounts are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Property and equipment:
|
|
|
|
Office equipment
|
$
|
517
|
|
|
$
|
495
|
|
Office software
|
672
|
|
|
536
|
|
Machinery
|
28
|
|
|
24
|
|
Furniture and fixtures
|
241
|
|
|
222
|
|
Leasehold improvements
|
840
|
|
|
730
|
|
Construction in progress (including internal use software development costs)
|
157
|
|
|
10
|
|
Property and equipment, at cost
|
2,455
|
|
|
2,017
|
|
Accumulated depreciation and amortization
|
(1,067
|
)
|
|
(1,123
|
)
|
|
$
|
1,388
|
|
|
$
|
894
|
|
Other accrued expenses:
|
|
|
|
Sales returns
|
$
|
1,632
|
|
|
$
|
1,552
|
|
Employee-related expense
|
10,541
|
|
|
11,064
|
|
Warehousing, inventory-related and other
|
2,816
|
|
|
4,087
|
|
|
$
|
14,989
|
|
|
$
|
16,703
|
|
Deferred revenue:
|
|
|
|
|
|
Unshipped product
|
$
|
2,191
|
|
|
$
|
1,783
|
|
Auto ship advances
|
2,327
|
|
|
1,597
|
|
Enrollment package revenue
|
430
|
|
|
331
|
|
Market development fees
|
—
|
|
|
300
|
|
|
$
|
4,948
|
|
|
$
|
4,011
|
|
3. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into non-cancelable operating lease agreements for locations within the United States and for its international subsidiaries, with expirations through September 2025. Rent expense in connection with operating leases was
$1.8 million
,
$1.5 million
and
$777,000
during 2016, 2015 and 2014, respectively.
Future minimum lease obligations as of
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
1,559
|
|
2018
|
752
|
|
2019
|
402
|
|
2020
|
314
|
|
2021
|
196
|
|
Thereafter
|
700
|
|
Total minimum lease obligations
|
$
|
3,923
|
|
Purchase Commitments
In May 2013, the Company entered into an exclusive distribution agreement with one of its suppliers to purchase its product through July 2016 which automatically renews annually unless terminated 90 days prior to the termination date. To maintain exclusivity, the Company is required to purchase a minimum of
$40,000
of product per month until the termination date. As of
December 31, 2016
, the Company was in compliance with the exclusivity provision.
In February 2016, the Company amended a supply agreement with one of its suppliers to maintain worldwide exclusivity in return for purchasing a minimum of
$9.4 million
of product annually on average over the next three years, plus certain raw material guarantees. If the Company does not purchase the minimum product as required, then a Cure Payment, as defined, will be due to the supplier. The term of the agreement is
three
years commencing February 2016 and shall automatically renew for successive
three
year terms unless notice of termination is provided by either party.
Employment Agreements
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 payments of specified amounts in the event of a change in control, as defined, or if the employee is terminated without cause, as defined, or terminates employment for good reason, as defined.
Consumer Indemnity
As required by the Door-to-Door Sales Act in South Korea, the Company maintains insurance for consumer indemnity claims with a mutual aid cooperative by possessing a mutual aid contract with Mutual Aid Cooperative & Consumer (the “Cooperative”). The contract secures payment to members in the event that the Company is unable to provide refunds to members. Typically, requests for refunds are paid directly by the Company according to the Company’s normal Korean refund policy, which requires that refund requests be submitted within three months. Accordingly, the Company estimates and accrues a reserve for product returns based on this policy and its historical experience. Depending on the sales volume, the Company may be required to increase or decrease the amount of the contract. The maximum potential amount of future payments the Company could be required to make to address actual member claims under the contract is equivalent to three months of rolling sales. At
December 31, 2016
, non-current other assets include KRW
223 million
(USD
$185,000
) underlying the contract, which can be utilized by the Cooperative to fund any outstanding member claims. The Company believes that the likelihood of utilizing these funds to provide for members claims is remote.
Securities Class Action
In January 2016, two putative securities class action complaints were filed against the Company and its top executives. On March 29, 2016, the court consolidated these actions, appointed two Lead Plaintiffs, Messrs. Dao and Juan, and appointed the Rosen Law Firm and Levi & Korsinsky LLP as co-Lead Counsel for the purported class. Plaintiffs filed a consolidated complaint on April 29, 2016. The consolidated complaint purports to assert claims on behalf of all persons who purchased or otherwise acquired our common stock between March 6, 2015 and March 15, 2016 under (i) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Natural Health Trends Corp., Chris T. Sharng, and Timothy S. Davidson, and (ii) Section 20(a) of the Securities Exchange Act of 1934 against Chris T. Sharng, Timothy S. Davidson, and George K. Broady. The consolidated complaint alleges, inter alia, that the Company made materially false and misleading statements regarding the legality of its business operations in China, including running an allegedly illegal multi-level marketing business. The consolidated complaint seeks an indeterminate amount of damages, plus interest and costs. The Company filed a motion to dismiss the consolidated complaint on June 15, 2016 and a reply in support of its motion to dismiss on August 22, 2016. On December 5, 2016, the Court denied the Company’s motion to dismiss. On February 17, 2017, the Company filed an answer to the consolidated complaint. The Company believes that these claims are without merit and intends to vigorously defend against them.
Shareholder Derivative Claims
In February 2016, a purported shareholder derivative complaint was filed in the Superior Court of the State of California, County of Los Angeles:
Zhou v. Sharng
. In March 2016, a purported shareholder derivative complaint was filed in the United States District Court for the Central District of California:
Kleinfeldt v. Sharng
(collectively the “Derivative Complaints”). The Derivative Complaints purport to assert claims for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement and corporate waste against certain of the Company’s officers and directors. The Derivative Complaints also purport to assert fiduciary duty claims based on alleged insider selling and conspiring to enter into several stock repurchase agreements, which allegedly harmed the Company and its assets. The Derivative Complaints allege, inter alia, that the Company made materially false and misleading statements regarding the legality of its business operations in China, including running an allegedly illegal multi-level marketing business, and that certain officers and directors sold common stock on the basis of this allegedly material, adverse non-public information. The Derivative Complaints seek an indeterminate amount of damages, plus interest and costs, as well as various equitable remedies. On February 1, 2017, pursuant to a stipulation among the parties, the Los Angeles Superior Court entered a stay of the
Zhou
action pending conclusion of the related federal class action in the United States District Court for the Central District of California:
Ford v. Natural Health Trends Corp.
and
Li v. Natural Health Trends Corp
. A nearly identical stipulated stay was entered in the
Kleinfeldt
case on February 8, 2017. The Company believes that these claims are without merit and intend to vigorously defend against them.
The consolidated class action and the Derivative Complaints, or others filed alleging similar facts, could result in monetary or other penalties that may materially affect the Company’s operating results and financial condition.
Other Claims
The Company is currently involved in a legal matter with one of its vendors and an outside party. Per the royalty agreement with the vendor, the Company believes that it is fully indemnified in the event of an unfavorable outcome and any potential settlement costs related to the matter would be fully covered by the Company’s vendor.
4. STOCKHOLDERS’ EQUITY
Authorized Shares
The Company is authorized to issue
two
classes of capital stock consisting of up to
5,000,000
shares of preferred stock,
$0.001
par value, and
50,000,000
shares of common stock,
$0.001
par value. On May 4, 2007, the Board of Directors designated up to
1,761,900
shares of preferred stock as Series A preferred stock with the following rights and preferences:
|
|
•
|
Priority
– the Series A preferred stock shall rank, in all respects, including the payment of dividends and upon liquidation, senior and prior to the common stock and other equity of the Company not expressly made senior or pari passu with the Series A preferred stock (collectively, “Junior Securities”).
|
|
|
•
|
Dividends
–dividends at the rate per annum of
$0.119
per share shall accrue from the date of issuance of any shares of Series A preferred stock, payable upon declaration by the Board of Directors. Accruing dividends shall be cumulative; provided, however, that except as set forth below for the liquidation preference, the Company shall be under no obligation to pay such dividends. No dividends shall be declared on Junior Securities (other than dividends on shares of common stock payable in shares of common stock) unless the holders of the Series A preferred stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A preferred stock in an amount at least equal to the greater of (i) the amount of the aggregate accrued dividends on such share of Series A preferred stock and not previously paid and (ii) in the case of a dividend on common stock or any class or series of Junior Securities that is convertible into common stock, that dividend per share of Series A preferred stock as would equal the product of (1) the dividend payable on each share as if all shares of such class or series had been converted into common stock and (2) the number of shares of common stock issuable upon conversion of a share of Series A preferred stock.
|
|
|
•
|
Liquidation preference
– in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Junior Securities, the holders of the Series A preferred stock then outstanding shall be entitled to be paid in cash out of the assets of the Company available for distribution to its stockholders (on a pari passu basis with the holders of any series of preferred stock ranking on liquidation on a parity with the Series A preferred stock) an amount per share equal to the sum of the Series A Original Issue Price plus any dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. If the assets of the Company are insufficient to pay the aggregate liquidation preference and the liquidation preference of any series of preferred stock ranking on liquidation on a parity with the Series A preferred stock, the holders of the Series A preferred stock and the holders of any series of preferred stock ranking on liquidation on a parity with the Series A preferred stock shall share ratably with one another in any such distribution or payment in proportion to the full amounts to which they would otherwise be respectively entitled before any distribution shall be made to the holders of the Junior Securities. The “Series A Original Issue Price” shall mean
$1.70
per share, subject to adjustment.
|
|
|
•
|
Voting rights
– the holders of shares of Series A preferred stock shall be entitled to vote with the holders of the common stock, and with the holders of any other series of preferred stock, voting together as a single class, upon all matters submitted to a vote of stockholders of the Company. Each holder of shares of Series A preferred stock shall be entitled to the number of votes equal to the product (rounded down to the nearest number of whole shares) of
0.729
times the largest number of shares of common stock into which all shares of Series A preferred stock held of record by such holder could then be converted.
|
|
|
•
|
Conversion
– each share of Series A preferred stock shall be convertible, subject to adjustment only in the event of stock splits, stock dividends, recapitalizations and similar events that would affect all of stockholders, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock as determined by dividing the Series A Original Issue Price by the Series A Conversion Price (as defined) in effect at the time of conversion. The “Series A Conversion Price” shall initially be equal to
$1.70
. Each share of Series A preferred stock shall automatically be converted into shares of common stock at the then effective conversion price immediately upon such date as the average closing price of the common stock over a consecutive, trailing
6
-month period equals or exceeds
$10.00
per share.
|
On December 3, 2014, the Company filed a Certificate of Elimination of the Series A Convertible Preferred Stock (the “Certificate”) with the Secretary of State of the State of Delaware. The Certificate, which was effective upon filing, canceled the Company’s Series A preferred stock. At the time of filing the Certificate, no shares of Series A preferred stock remained outstanding as a result of the automatic conversion of all outstanding shares into the Company’s common stock due to the fact that the average closing price of the Company’s common stock equaled or exceeded
$10.00
per share over a consecutive, trailing
6
-month period that ended November 18, 2014.
Common Stock Purchase Warrants
On October 19, 2007, the Company issued warrants to purchase
3,141,499
shares of common stock in connection with a convertible debentures financing. The warrants consisted of
seven
-year warrants to purchase
1,495,952
shares of common stock,
one
-year warrants to purchase
1,495,952
shares of common stock, and
five
-year warrants to purchase
149,595
shares of common stock. The term for each of the warrants began six months and one day after their respective issuance and each have an exercise price of
$3.52
per share. The exercise price and the number of shares underlying the warrants are subject to adjustment for stock dividends and splits, combinations, and reclassifications, certain rights offerings and distributions to common stockholders, and mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges. In addition, subject to certain exceptions, the exercise price and number of shares underlying the warrants are subject to anti-dilution adjustments from time to time if the Company issues its common stock or equivalent securities at below the exercise price for the warrants. If, at any time after the earlier of October 19, 2008 and the completion of the then applicable holding period under Rule 144, there is no effective registration statement for the underlying shares of common stock that are then required to be registered, the warrants may be exercised by means of a cashless exercise. Such
one
-year warrants expired unexercised on April 21, 2009 and such
five
-year warrants expired unexercised on April 21, 2013.
Seven
-year warrants to purchase
1,407,855
shares of common stock were exercised during 2014 at exercise prices ranging from
$3.5108
to
$3.52
per share for total proceeds of
$4.9 million
. As a result of the cash dividends declared on each share of outstanding common stock and in accordance with the terms of the related warrant agreement, the exercise price per share for each warrant was adjusted from
$3.52
per share to
$3.5082
per share. In April 2015, the remaining warrants to purchase
88,097
shares of common stock were exercised at
$3.5043
per share for total proceeds of
$309,000
.
Dividends
The following tables summarize the Company’s cash dividend activity during 2016, 2015 and 2014 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Per Common Share
|
|
Amount
|
|
Payment Date
|
October 23, 2016 (special)
|
|
$
|
0.35
|
|
|
$
|
3,941
|
|
|
November 25, 2016
|
October 23, 2016
|
|
0.08
|
|
|
901
|
|
|
November 25, 2016
|
July 19, 2016
|
|
0.07
|
|
|
787
|
|
|
August 26, 2016
|
April 21, 2016
|
|
0.06
|
|
|
686
|
|
|
May 20, 2016
|
March 1, 2016
|
|
0.05
|
|
|
576
|
|
|
March 24, 2016
|
Total
|
|
$
|
0.61
|
|
|
$
|
6,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Per Common Share
|
|
Amount
|
|
Payment Date
|
October 21, 2015
|
|
$
|
0.05
|
|
|
$
|
598
|
|
|
November 20, 2015
|
July 28, 2015
|
|
0.04
|
|
|
489
|
|
|
August 28, 2015
|
May 4, 2015
|
|
0.03
|
|
|
372
|
|
|
May 29, 2015
|
February 27, 2015
|
|
0.02
|
|
|
250
|
|
|
March 27, 2015
|
Total
|
|
$
|
0.14
|
|
|
$
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Share
|
|
|
|
|
Declaration Date
|
|
Preferred
|
|
Common
|
|
Amount
|
|
Payment Date
|
November 4, 2014
|
|
$
|
0.032
|
|
|
$
|
0.010
|
|
|
$
|
128
|
|
|
December 3, 2014
|
July 29, 2014
|
|
0.027
|
|
|
0.010
|
|
|
127
|
|
|
August 27, 2014
|
May 6, 2014
|
|
0.020
|
|
|
0.005
|
|
|
62
|
|
|
June 4, 2014
|
March 7, 2014
|
|
0.815
|
|
|
0.005
|
|
|
159
|
|
|
April 8, 2014
|
Total
|
|
$
|
0.894
|
|
|
$
|
0.030
|
|
|
$
|
476
|
|
|
|
Payment of any future dividends on shares of common stock will be at the discretion of the Company’s Board of Directors.
Treasury Stock
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.
During February 2016, pursuant to the stock repurchase program, the Company authorized its broker to proceed with the purchase of shares of the Company’s common stock in the open market. During the year ended
December 31, 2016
, the Company purchased a total of
903,031
shares of its common stock for an aggregate purchase price of
$23.7 million
, plus transaction costs. As of
December 31, 2016
,
$32.0 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.
On July 28, 2015, the Board of Directors approved a stock repurchase program of up to
$15.0 million
of the Company’s outstanding shares of common stock. Repurchases are expected to be executed to the extent that the Company’s earnings and cash-on-hand allow, are anticipated to be conducted through December 2016, 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 repurchase program does not require the Company to acquire a specific number of shares, and may be suspended from time to time or discontinued. In connection therewith, the Company was advised that George K. Broady, a director of the Company and owner of more than 5% of its outstanding shares of common stock, would participate in the stock repurchase program on a basis roughly proportional to his family’s ownership interest. See Note 8.
During August 2015, pursuant to the foregoing stock repurchase program, 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
$3.5 million
. The open market repurchases were completed on August 4, 2015. The stock repurchase program, which included both open market purchases and the purchase of shares from Mr. Broady, resulted in the Company purchasing a total of
162,442
shares of its common stock for an aggregate purchase price of
$5.0 million
, plus transaction costs. During October 2015, 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
$3.6 million
. The open market repurchases were completed on October 30, 2015. The stock repurchase program, which included both open market purchases and the purchase of shares from Mr. Broady, resulted in the Company purchasing a total of
106,264
shares of its common stock for an aggregate purchase price of
$5.0 million
, plus transaction costs.
On May 4, 2015, the Board of Directors approved a separate, prior stock repurchase program of up to
$5.0 million
of the Company’s outstanding shares of common stock. In connection therewith, the Company was advised by Mr. Broady that he would participate in the stock repurchase program on a basis roughly proportional to his family’s ownership interest (see Note 8). As such, 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
$3.5 million
in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act. The stock repurchase program, which included both open market purchases and the purchase of shares from Mr. Broady, was completed on May 13, 2015, and resulted in the Company purchasing a total of
186,519
shares of its common stock for an aggregate purchase price of
$5.0 million
, plus transaction costs.
On January 22, 2015, the Company entered into a stock repurchase agreement with Mr. Broady that provided for the Company’s purchase from Mr. Broady in off-the-market, private transactions of a total of
91,817
shares of the Company’s common stock, which would be purchased at the rate of
5,000
shares each trading day following the date of the agreement until all of such shares were purchased (see Note 8). The shares were purchased at a per share price equal to the closing price per share of the Company’s common stock on the preceding trading day, as reported on the primary market in which the Company’s common stock is publicly traded. The Company’s purchases concluded on February 19, 2015, and resulted in an aggregate purchase price of
$1.1 million
.
On November 4, 2014, the Board of Directors approved a special stock repurchase program of up to
$5.0 million
of the Company’s outstanding shares of common stock (the “Repurchase Plan”). In connection therewith, the Company was advised that Mr. Broady desired to participate in the Repurchase Plan on a basis roughly proportional to his family’s ownership interest, with an estimate of generating approximately
$1.5 million
through the sale of a portion of the shares of the Company’s common stock held by him (see Note 8). After noting Mr. Broady’s participation interest, 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
$3.0 million
in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act. The Repurchase Plan was completed on December 17, 2014. The Repurchase Plan, which included both open market purchases and the purchase of shares from Mr. Broady, resulted in the Company purchasing a total of
359,840
shares of its common stock for an aggregate purchase price of
$4.5 million
, plus transaction costs.
On August 13, 2012, the Board of Directors authorized the Company, acting as trustee for certain of its non-officer, overseas employees, to execute a Rule 10b5-1 plan to purchase
100,000
shares of its common stock in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act and the Company’s policies regarding stock transactions. Pursuant to this authority, the Company, as Trustee, entered into a 10b5-1 plan and began purchasing shares in December 2012. The latest 10b5-1 plan terminated in November 2014 and the Company, as Trustee, has not entered into a new 10b5-1 plan. See Note 5.
5. STOCK-BASED COMPENSATION
Stock-based compensation expense totaled approximately
$104,000
,
$86,000
and
$49,000
for 2016, 2015 and 2014, respectively.
No
tax benefits were attributed to the stock-based compensation because a valuation allowance was maintained for substantially all net deferred tax assets. During March 2016, the Company modified the vesting feature of an award granted to a director who decided to not stand for re-election at the Company’s 2016 annual meeting of stockholders. The modification of the award resulted in an additional
$64,000
in stock-based compensation expense for the three months ended March 31, 2016.
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.
On April 8, 2016, the Company initially granted
51,015
shares of restricted common stock under the 2016 Plan to certain employees for the purpose of further aligning their interest with those of its stockholders and settling fiscal 2015 performance incentives. The shares vest on a quarterly basis over
three
years and are subject to forfeiture in the event of the employee’s termination of service to the Company under specified circumstances.
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, 2015
|
—
|
|
|
$
|
—
|
|
Granted
|
51,015
|
|
|
34.13
|
|
Vested
|
(12,759
|
)
|
|
34.13
|
|
Nonvested at December 31, 2016
|
38,256
|
|
|
34.13
|
|
On January 20, 2015, the Company’s Board of Directors granted
60,960
shares of restricted common stock to certain employees and its then-existing outside directors for the purpose of further aligning their interest with those of its stockholders and as to the employee shares, settling fiscal 2014 performance incentives. The shares vest on a quarterly basis over the next
three years
and are subject to forfeiture in the event of their termination of service to the Company under specified circumstances. On February 11, 2015, the Board of Directors granted an additional
6,116
shares of restricted common stock to its newly-elected outside directors subject to the same conditions.
The following table summarizes the Company’s other restricted stock activity:
|
|
|
|
|
|
|
|
|
Shares
|
|
Wtd. Avg. Price at Date of Issuance
|
Nonvested at December 31, 2014
|
—
|
|
|
$
|
—
|
|
Granted
|
67,076
|
|
|
12.15
|
|
Vested
|
(22,364
|
)
|
|
12.15
|
|
Nonvested at December 31, 2015
|
44,712
|
|
|
12.15
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(22,364
|
)
|
|
12.15
|
|
Nonvested at December 31, 2016
|
22,348
|
|
|
12.15
|
|
As of
December 31, 2016
, total unrecognized stock-based compensation expense related to non-vested restricted stock was
$38,000
, which is expected to be recognized over a weighted-average period of
one year
.
On August 13, 2012, the Board of Directors authorized the Company, acting as trustee for certain of its non-officer, overseas employees, to execute a Rule 10b5-1 plan to purchase
100,000
shares of its common stock in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act and the Company’s policies regarding stock transactions. Pursuant to this authority, the Company, as Trustee, entered into a 10b5-1 plan and began purchasing in December 2012. The latest 10b5-1 plan terminated in November 2014, and the Company, as Trustee, did not enter into a new 10b5-1 plan. The employees received the stock as incentive compensation in quarterly increments over
three
years beginning March 15, 2013, provided that they were employees of the Company on the date of the distribution. Any common stock that was forfeited by an employee whose employment terminated was delivered to the Company and held as treasury stock.
|
|
|
|
|
|
|
|
|
Shares
|
|
Wtd. Avg. Grant-Date Fair Value
|
Nonvested at December 31, 2013
|
53,324
|
|
|
$
|
1.37
|
|
Vested
|
(25,342
|
)
|
|
1.37
|
|
Forfeited
|
(3,998
|
)
|
|
1.37
|
|
Nonvested at December 31, 2014
|
23,984
|
|
|
1.37
|
|
Vested
|
(23,984
|
)
|
|
1.37
|
|
Forfeited
|
—
|
|
|
—
|
|
Nonvested at December 31, 2015
|
—
|
|
|
—
|
|
6. INCOME TAXES
The components of income before income taxes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Domestic
|
$
|
(3,106
|
)
|
|
$
|
(7,820
|
)
|
|
$
|
4,502
|
|
Foreign
|
67,183
|
|
|
55,613
|
|
|
16,134
|
|
Income before income taxes
|
$
|
64,077
|
|
|
$
|
47,793
|
|
|
$
|
20,636
|
|
The components of the income tax provision consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
7,151
|
|
|
$
|
12
|
|
|
$
|
104
|
|
State
|
(81
|
)
|
|
100
|
|
|
11
|
|
Foreign
|
1,648
|
|
|
456
|
|
|
194
|
|
Total current taxes
|
8,718
|
|
|
568
|
|
|
309
|
|
Deferred taxes
|
273
|
|
|
(16
|
)
|
|
(43
|
)
|
Income tax provision
|
$
|
8,991
|
|
|
$
|
552
|
|
|
$
|
266
|
|
A reconciliation of the reported income tax provision to the provision that would result from applying the domestic federal statutory tax rate to pretax income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Income tax at federal statutory rate
|
$
|
22,427
|
|
|
$
|
16,250
|
|
|
$
|
7,016
|
|
Effect of permanent differences
|
12,496
|
|
|
370
|
|
|
9
|
|
Change in valuation allowance
|
(3,877
|
)
|
|
2,017
|
|
|
(2,070
|
)
|
Foreign rate differential
|
(21,713
|
)
|
|
(18,099
|
)
|
|
(5,240
|
)
|
Other reconciling items
|
(342
|
)
|
|
14
|
|
|
551
|
|
Income tax provision
|
$
|
8,991
|
|
|
$
|
552
|
|
|
$
|
266
|
|
Income before income taxes and the statutory tax rate for each country that materially contributed to the foreign rate differential presented above is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Statutory Tax Rate
|
|
2016
|
|
2015
|
|
2014
|
Cayman Islands
|
—
|
%
|
|
$
|
58,169
|
|
|
$
|
50,993
|
|
|
$
|
16,267
|
|
Hong Kong
|
16.5
|
%
|
|
3,992
|
|
|
2,645
|
|
|
1,129
|
|
China
|
25.0
|
%
|
|
3,855
|
|
|
1,493
|
|
|
153
|
|
Deferred income taxes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Net operating losses
|
$
|
235
|
|
|
$
|
3,197
|
|
Stock-based compensation
|
623
|
|
|
—
|
|
Accrued expenses
|
3,174
|
|
|
3,367
|
|
Tax credits
|
—
|
|
|
418
|
|
Other
|
—
|
|
|
32
|
|
Total deferred tax assets
|
4,032
|
|
|
7,014
|
|
Valuation allowance
|
(235
|
)
|
|
(4,112
|
)
|
Net deferred tax assets
|
3,797
|
|
|
2,902
|
|
Deferred tax liabilities:
|
|
|
|
Foreign earnings
|
(3,650
|
)
|
|
(2,789
|
)
|
Other
|
(415
|
)
|
|
(173
|
)
|
Total deferred tax liabilities
|
(4,065
|
)
|
|
(2,962
|
)
|
Net deferred tax liability
|
$
|
(268
|
)
|
|
$
|
(60
|
)
|
As of December 31, 2016, the Company has released its valuation allowance against its U.S. deferred tax assets. In addition to having a net deferred tax liability and no indefinite lived intangibles, 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 in future periods or carryback years.
As of December 31, 2016, the Company has a valuation allowance against certain foreign deferred tax assets. The Company is recording a valuation allowance in foreign jurisdictions with an overall deferred 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. As of December 31, 2016, the Company has
no
U.S. federal net operating loss or credit carryforwards as any remaining attributes are expected to be fully utilized to offset tax in the current year.
At December 31, 2016, the Company has foreign net operating loss carryforwards of approximately
$1.3 million
in various jurisdictions with various expirations.
As a result of capital return activities approved by the Board of Directors during the first quarter of 2016 and anticipated future capital return activities, the Company determined that a portion of its current undistributed foreign earnings are no longer deemed reinvested indefinitely by its non-U.S. subsidiaries. The Company repatriated
$19.8 million
to the U.S. during the three months ended March 31, 2016, part of which was offset by U.S. net operating losses. Accordingly, the deferred tax liability previously established for undistributed foreign earnings up to its existing U.S. net operating losses was reduced. The excess amount repatriated during the year ended December 31, 2016 was generated from current foreign earnings. 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 U.S. corporate tax rate. As of December 31, 2016, the Company has recorded a deferred tax liability for earnings that the Company plans to repatriate out of accumulated earnings in future periods. All undistributed earnings in excess of 50% of current earnings on an annual basis are intended to be reinvested indefinitely as of December 31, 2016.
The Company and its subsidiaries file tax returns in the United States, California and Texas and various foreign jurisdictions. For federal income tax purposes, fiscal years 2007 through 2015 remain 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. The Company is no longer subject to state income tax examinations for years prior to 2011. No jurisdictions are currently examining any income tax returns of the Company or its subsidiaries.
7. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Cash paid during the year for:
|
(In Thousands)
|
Income taxes, net of refunds
|
$
|
8,791
|
|
|
$
|
707
|
|
|
$
|
60
|
|
Interest
|
9
|
|
|
—
|
|
|
1
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
Conversion of preferred stock
|
—
|
|
|
—
|
|
|
111
|
|
Issuance of treasury stock
|
1,741
|
|
|
666
|
|
|
—
|
|
8. RELATED PARTY TRANSACTIONS
Product Royalties
On April 29, 2015, the Company entered into 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
Soothe
™. The Company began selling this product in the fourth quarter of 2012 with the permission of BHS. Mr. Broady is owner of BHS. Under the agreement, the Company agreed to pay BHS a royalty of
2.5%
of sales revenue in return for the right to manufacture (or have manufactured), market, import, export and sell this product worldwide. Further, the Company agreed to pay BHS
$11,700
as royalties for the period it began selling the product in the fourth quarter of 2012 through 2014. The Company recognized royalties of
$3,400
,
$7,000
and
$6,400
during 2016, 2015 and 2014, respectively. The Company is not required to purchase any product under the agreement, and the agreement may be terminated at any time on
120 days
’ notice. Otherwise, the agreement terminates March 31, 2020.
In February 2013, the Company entered into a Royalty Agreement and License with BHS regarding the manufacture and sale of a product called
ReStor™.
Under this agreement, the Company agreed to pay BHS a royalty of
2.5%
of sales revenue in return for the right to manufacture (or have manufactured), market, import, export and sell this product worldwide, with certain rights being exclusive outside the United States. On April 29, 2015, the Company and BHS amended the Royalty and Agreement and License to change the royalty to a price per unit instead of 2.5% of sales revenue. This provision was effective retroactive to January 1, 2015. The Company recognized royalties of
$475,000
,
$555,000
and
$144,000
during 2016, 2015 and 2014, respectively. The Company is not required to purchase any product under the agreement, and the agreement may be terminated at any time on
120
days’ notice or, under certain circumstances, with no notice. Otherwise, the agreement terminates March 31, 2020.
Stock Repurchase
Agreements
On October 28, 2015, the Company entered into a Stock Repurchase Agreement with Mr. Broady that provided for the Company’s purchase of common stock from Mr. Broady in off-the-market, private transactions at a rate equal to
0.4066
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 July 28, 2015. The Company’s purchases from Mr. Broady concluded on November 2, 2015, 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 an aggregate purchase price of
$1.4 million
. See Note 4.
On July 31, 2015, the Company entered into a Stock Repurchase Agreement with Mr. Broady that provided for the Company’s purchase of common stock from Mr. Broady in off-the-market, private transactions at a rate equal to
0.4085
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 July 28, 2015. The Company’s purchases from Mr. Broady concluded on August 6, 2015, 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 an aggregate purchase price of
$1.5 million
. See Note 4.
On May 7, 2015, the Company entered into a Stock Repurchase Agreement with Mr. Broady that provided for the Company’s purchase of common stock from Mr. Broady in off-the-market, private transactions at a rate equal to
0.4286
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 4, 2015. The Company’s purchases from Mr. Broady concluded on May 13, 2015, 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 an aggregate purchase price of
$1.5 million
. See Note 4.
On January 22, 2015, the Company entered into a Stock Repurchase Agreement with Mr. Broady that provided for the Company’s purchase from Mr. Broady in off-the-market, private transactions of a total of
91,817
shares of the Company’s common stock, which would be purchased at the rate of
5,000
shares each trading day following the date of the agreement until all of such shares were purchased. The shares were purchased at a per share price equal to the closing price per share of the Company’s common stock on the preceding trading day, as reported on the primary market in which the Company’s common stock was publicly traded. The Company’s purchases concluded on February 19, 2015, and resulted in an aggregate purchase price of
$1.1 million
. See Note 4.
On November 14, 2014, the Company entered into a Stock Repurchase Agreement with Mr. Broady that provided for the Company’s purchase from Mr. Broady of one-half of the number of shares of common stock purchased by the Company’s broker in the open market under the Repurchase Plan approved by the Company’s Board of Directors on November 4, 2014. The Stock Repurchase Agreement with Mr. Broady required that the Company report to Mr. Broady on a weekly basis information regarding the broker’s open market purchases, and that the Company purchase from Mr. Broady on a weekly basis at a per share purchase price equal to the weighted average price per share paid by the Company’s broker to purchase shares in the open market. The Company’s purchases concluded on December 17, 2014, totaled
119,947
shares of its common stock and resulted in an aggregate purchase price of
$1.5 million
. See Note 4.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan which permits participating employees in the United States to defer up to a maximum of
90%
of their compensation, subject to limitations established by the Internal Revenue Service. Employees age
21
and older are eligible to contribute to the plan starting the first day of the following month of employment. Participating employees are eligible to receive discretionary matching contributions and profit sharing, subject to certain conditions, from the Company. In 2016, 2015 and 2014, the Company matched employee deferral contributions up to
4.5%
of salary, which vested
100%
immediately. No profit sharing has been paid under the plan. The Company recorded compensation expense of
$134,000
,
$115,000
and
$60,000
for 2016, 2015 and 2014, respectively, related to its matching contributions to the plan. Certain of the Company’s employees located outside the United States participate in employee benefit plans that are statutory in nature.
10. SEGMENT INFORMATION
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. Outside of the China e-commerce retail platform, the Company believes that all of its other operating segments have similar economic characteristics, except for its operations located within the Commonwealth of Independent States (“CIS”). In making this determination, the Company believes that its operating segments 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. The Company’s engagement of a third-party service provider in the CIS market results in a different economic structure than its other markets.
However, there is no separate segment manager who is held accountable by the Company’s chief operating decision-makers, or anyone else, for operations, operating results and planning for the either Chinese or the CIS markets on a stand-alone basis, and neither market is material for the two years presented. As such, the Company believes that all operating segments should be aggregated into a single reportable segment for disclosure purposes.
The Company’s net sales by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net sales from external customers:
|
|
|
|
|
|
United States
|
$
|
4,100
|
|
|
$
|
3,246
|
|
|
$
|
1,438
|
|
Canada
|
1,809
|
|
|
2,746
|
|
|
1,374
|
|
Hong Kong
|
263,482
|
|
|
245,737
|
|
|
111,028
|
|
China
|
9,086
|
|
|
4,425
|
|
|
1,538
|
|
Taiwan
|
6,213
|
|
|
5,965
|
|
|
4,628
|
|
South Korea
|
691
|
|
|
1,129
|
|
|
1,009
|
|
Commonwealth of Independent States (Russia, Kazakhstan and Ukraine)
1
|
858
|
|
|
1,139
|
|
|
3,113
|
|
Europe
|
1,234
|
|
|
382
|
|
|
373
|
|
Other foreign countries
|
255
|
|
|
91
|
|
|
89
|
|
Total net sales
|
$
|
287,728
|
|
|
$
|
264,860
|
|
|
$
|
124,590
|
|
1
The Company
discontinued its Ukraine operations during the second quarter of 2015.
The Company’s net sales by product and service are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net sales by product and service:
|
|
|
|
|
|
Product sales
|
$
|
269,731
|
|
|
$
|
253,041
|
|
|
$
|
118,843
|
|
Enrollment package revenue, freight and other
|
25,616
|
|
|
17,623
|
|
|
7,927
|
|
Less: sales returns
|
(7,619
|
)
|
|
(5,804
|
)
|
|
(2,180
|
)
|
Total net sales
|
$
|
287,728
|
|
|
$
|
264,860
|
|
|
$
|
124,590
|
|
Due to system constraints, it is impracticable for the Company to separately disclose sales by product category for the years presented.
The Company’s long-lived assets by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Long-lived assets:
|
|
|
|
United States
|
$
|
763
|
|
|
$
|
283
|
|
Hong Kong
|
140
|
|
|
204
|
|
China
|
199
|
|
|
252
|
|
Other foreign countries
|
286
|
|
|
155
|
|
Total long-lived assets
|
$
|
1,388
|
|
|
$
|
894
|
|
11. SUBSEQUENT EVENTS
On
January 24, 2017
, the Board of Directors declared a cash dividend of
$0.09
and a special cash dividend of
$0.35
on each share of common stock outstanding. Such dividends were paid on
March 3, 2017
to stockholders of record on
February 21, 2017
. Payment of any future dividends on shares of common stock will be at the discretion of the Company’s Board of Directors.
On January 24, 2017, the Company granted
56,260
shares of restricted common stock under the 2016 Plan to certain employees for the purpose of settling fiscal 2016 performance incentives. The shares vest on a quarterly basis over the next three years and are subject to forfeiture in the event of their termination of service to the Company under specified circumstances.