Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2019



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

For the transition period from ______ to _______

Commission File Number: 001-36849

NATURAL HEALTH TRENDS CORP.

(Exact name of registrant as specified in its charter)



Delaware	59-2705336
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Units 1205-07, 12F

Mira Place Tower A

132 Nathan Road, Tsimshatsui

Kowloon, Hong Kong

(Address of principal executive offices, including zip code)

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	NHTC	The NASDAQ Stock Market LLC

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

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

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



Large accelerated filer	o	Accelerated filer	þ
Non-accelerated filer	o	Smaller reporting company	☑
		Emerging growth company	☐

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

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

At November 1, 2019, the number of shares outstanding of the registrant’s common stock was 11,520,324 shares.

NATURAL HEALTH TRENDS CORP.

Quarterly Report on Form 10-Q

September 30, 2019

INDEX



		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29

Signatures		30

FORWARD-LOOKING STATEMENTS

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

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

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


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


•	Because our Hong Kong operations account for a substantial portion of our overall business, and substantially all of our Hong Kong business is derived from the sale of products to members in China, any material adverse change in our business relating to either Hong Kong or China would likely have a material adverse impact on our overall business;


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


•	Our failure to maintain and expand our member relationships could adversely affect our business;


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


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


•	Direct-selling laws and regulations may prohibit or severely restrict our direct sales efforts and cause our revenue and profitability to decline, and regulators could adopt new regulations that harm our business;


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


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


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


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


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


•	Transfer pricing regulations affect our business and results of operations;


•	Our products and related activities are subject to extensive government regulation, which could delay, limit or prevent the sale of some of our products in some markets;


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


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


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


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


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


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


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


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


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


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


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


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


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


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


•	We identified a material weakness in our internal control over financial reporting. If we do not adequately address this material weakness or if other material weaknesses or significant deficiencies in our internal control over financial reporting are discovered, our financial statements could contain material misstatements and our business, operations and stock price may be adversely affected;


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


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


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


•	Terrorist attacks, acts of war, epidemics or natural disasters may seriously harm our business;


•	We may experience negative cash flows, which may require that we seek debt or equity financing and could have a significant adverse effect on our business and threaten our solvency;


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


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


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


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

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

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	101,113		$	132,653
Inventories	7,999			12,165
Other current assets	6,997			5,369
Total current assets	116,109			150,187
Property and equipment, net	821			934
Operating lease right-of-use assets	3,515			—
Goodwill	1,764			1,764
Restricted cash	2,881			2,998
Deferred tax asset	1,210			1,207
Other assets	807			831
Total assets	$	127,107		$	157,921
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	627		$	1,631
Accrued commissions	3,798			12,502
Other accrued expenses	3,392			6,121
Deferred revenue	3,302			6,795
Amounts held in eWallets	13,090			14,611
Operating lease liabilities	1,689			—
Other current liabilities	1,188			1,424
Total current liabilities	27,086			43,084
Income taxes payable	15,365			16,982
Deferred tax liability	186			186
Long-term incentive	—			7,808
Operating lease liabilities	1,903			—
Total liabilities	44,540			68,060
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,979,414 shares issued at September 30, 2019 and December 31, 2018	13			13
Additional paid-in capital	86,102			86,415
Retained earnings	23,567			44,431
Accumulated other comprehensive loss	(1,764		)	(1,250		)
Treasury stock, at cost; 1,459,090 and 1,603,322 shares at September 30, 2019 and December 31, 2018, respectively	(25,351		)	(39,748		)
Total stockholders’ equity	82,567			89,861
Total liabilities and stockholders’ equity	$	127,107		$	157,921

See accompanying notes to consolidated financial statements.

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Net sales	$	17,023		$	47,043	$	59,779		$	150,320
Cost of sales	4,371			9,926		15,002			30,546
Gross profit	12,652			37,117		44,777			119,774
Operating expenses:
Commissions expense	7,362			22,001		28,258			67,291
Selling, general and administrative expenses	6,354			7,269		20,296			24,484
Total operating expenses	13,716			29,270		48,554			91,775
Income (loss) from operations	(1,064		)	7,847		(3,777		)	27,999
Other income, net	323			249		1,128			465
Income (loss) before income taxes	(741		)	8,096		(2,649		)	28,464
Income tax provision	502			467		120			2,988
Net income (loss)	$	(1,243	)	$	7,629	$	(2,769	)	$	25,476
Net income (loss) per common share:
Basic	$	(0.12	)	$	0.67	$	(0.25	)	$	2.25
Diluted	$	(0.12	)	$	0.67	$	(0.25	)	$	2.25
Weighted-average number of common shares outstanding:
Basic	10,623			11,309		11,010			11,298
Diluted	10,623			11,322		11,010			11,307

See accompanying notes to consolidated financial statements.

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	(1,243	)	$	7,629		$	(2,769	)	$	25,476
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(584		)	(433		)	(537		)	(798		)
Unrealized gains on available-for-sale securities	12			5			23			9
Comprehensive income (loss)	$	(1,815	)	$	7,201		$	(3,283	)	$	24,687

See accompanying notes to consolidated financial statements.

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Share Data)

Nine months ended September 30, 2019



	Preferred Stock			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock
	Shares	Amount		Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shares		Amount			Total
BALANCE, December 31, 2018	—	$	—	12,979,414	$	13	$	86,415		$	44,431		$	(1,250	)	(1,603,322	)	$	(39,748	)	$	89,861
Net loss	—	—		—	—		—			(1,923		)	—			—		—			(1,923		)
Common stock issued	—	—		—	—		(166		)	—			—			22,603		543			377
Dividends declared, $0.24/share	—	—		—	—		—			(2,736		)	—			—		—			(2,736		)
Foreign currency translation adjustments	—	—		—	—		—			—			259			—		—			259
Unrealized gains on available-for-sale securities	—	—		—	—		—			—			17			—		—			17
BALANCE, March 31, 2019	—	—		12,979,414	13		86,249			39,772			(974		)	(1,580,719	)	(39,205		)	85,855
Net income	—	—		—	—		—			397			—			—		—			397
Repurchase of common stock	—	—		—	—		—			—			—			(612,729	)	(6,682		)	(6,682		)
Foreign currency translation adjustments	—	—		—	—		—			—			(212		)	—		—			(212		)
Unrealized losses on available-for-sale securities	—	—		—	—		—			—			(6		)	—		—			(6		)
BALANCE, June 30, 2019	—	—		12,979,414	13		86,249			40,169			(1,192		)	(2,193,448	)	(45,887		)	79,352
Net loss	—	—		—	—		—			(1,243		)	—			—		—			(1,243		)
Repurchase of common stock	—	—		—	—		—			—			—			(383,127	)	(2,882		)	(2,882		)
Common stock issued	—	—		—	—		(147		)	(15,359		)	—			1,117,485		23,418			7,912
Foreign currency translation adjustments	—	—		—	—		—			—			(584		)	—		—			(584		)
Unrealized gains on available-for-sale securities	—	—		—	—		—			—			12			—		—			12
BALANCE, September 30, 2019	—	$	—	12,979,414	$	13	$	86,102		$	23,567		$	(1,764	)	(1,459,090	)	$	(25,351	)	$	82,567

Nine months ended September 30, 2018



	Preferred Stock			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock
	Shares	Amount		Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Shares		Amount			Total
BALANCE, December 31, 2017	—	$	—	12,979,414	$	13	$	86,683		$	44,908		$	(413	)	(1,637,524	)	$	(40,570	)	$	90,621
Net income	—	—		—	—		—			8,824			—			—		—			8,824
Common stock issued	—	—		—	—		(268		)	—			—			34,202		822			554
Dividends declared, $0.13/share	—	—		—	—		—			(1,479		)	—			—		—			(1,479		)
Foreign currency translation adjustments	—	—		—	—		—			—			397			—		—			397
Unrealized losses on available-for-sale securities	—	—		—	—		—			—			(11		)	—		—			(11		)
BALANCE, March 31, 2018	—	—		12,979,414	13		86,415			52,253			(27		)	(1,603,322	)	(39,748		)	98,906
Net income	—	—		—	—		—			9,023			—			—		—			9,023
Dividends declared, $1.90/share	—	—		—	—		—			(21,614		)	—			—		—			(21,614		)
Foreign currency translation adjustments	—	—		—	—		—			—			(762		)	—		—			(762		)
Unrealized gains on available-for-sale securities	—	—		—	—		—			—			15			—		—			15
BALANCE, June 30, 2018	—	—		12,979,414	13		86,415			39,662			(774		)	(1,603,322	)	(39,748		)	85,568
Net income	—	—		—	—		—			7,629			—			—		—			7,629
Dividends declared, $0.40/share	—	—		—	—		—			(4,551		)	—			—		—			(4,551		)
Foreign currency translation adjustments	—	—		—	—		—			—			(433		)	—		—			(433		)
Unrealized gains on available-for-sale securities	—	—		—	—		—			—			5			—		—			5
BALANCE, September 30, 2018	—	$	—	12,979,414	$	13	$	86,415		$	42,740		$	(1,202	)	(1,603,322	)	$	(39,748	)	$	88,218

See accompanying notes to consolidated financial statements.

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(2,769	)	$	25,476
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	290			332
Noncash lease expense	1,336			—
Deferred income taxes	(3		)	—
Changes in assets and liabilities:
Inventories	4,104			(2,828		)
Other current assets	(1,674		)	2,548
Other assets	2			(83		)
Accounts payable	(1,002		)	967
Accrued commissions	(8,683		)	2,003
Other accrued expenses	(1,779		)	314
Deferred revenue	(3,485		)	26
Amounts held in eWallets	(1,508		)	(930		)
Operating lease liabilities	(1,392		)	—
Income taxes payable	(1,617		)	(2,201		)
Other current liabilities	(235		)	438
Long-term incentive	(333		)	(800		)
Net cash provided by (used in) operating activities	(18,748		)	25,262
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(181		)	(176		)
Net cash used in investing activities	(181		)	(176		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock	(9,564		)	—
Dividends paid	(2,736		)	(27,644		)
Net cash used in financing activities	(12,300		)	(27,644		)
Effect of exchange rates on cash, cash equivalents and restricted cash	(428		)	(711		)
Net decrease in cash, cash equivalents and restricted cash	(31,657		)	(3,269		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period	135,651			138,478
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	103,994		$	135,209
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
Issuance of treasury stock for employee awards, net	$	8,289		$	554
Right-of-use assets obtained in exchange for operating lease liabilities	$	5,058		$	—

See accompanying notes to consolidated financial statements.

NATURAL HEALTH TRENDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND CONSOLIDATION

Nature of Operations

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

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

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2018 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on April 26, 2019.

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.

Reclassification

Certain prior year amounts in the balance sheet have been reclassified to conform to current year presentation.

Recent Accounting Pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. Effective January 1, 2019, the Company adopted the new standard using the effective date as its date of initial application. The new standard provided a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. Upon adoption, the Company recognized operating lease liabilities on its balance sheet for $4.5 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. See Note 7 for additional information.

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the requirement to disclose in interim periods on Form 10-Q the changes in stockholder’s equity as prescribed by Rule 3-04 of Regulation S-X.

Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

2. REVENUE

Revenue Recognition

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

Actual product returns are recorded as a reduction to net sales. The Company estimates and accrues a reserve for product returns based on its return policies and historical experience. The reserve is based upon the return policy of each country, which varies from 14 days to one year, and their historical return rates, which range from 1% to 5% of sales. Sales returns were 2% of sales for each of the nine months ended September 30, 2019 and 2018, respectively. No material changes in estimates have been recognized during the periods presented. See Note 4 for additional information.

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

Various taxes on the sale of products to members are collected by the Company as an agent and remitted to the respective taxing authority. These taxes are presented on a net basis and recorded as a liability until remitted to the respective taxing authority.

Deferred Revenue

The Company primarily receives payment by credit card at the time members place orders. Amounts received for unshipped product are considered a contract liability and are recorded as deferred revenue. The decrease in deferred revenue for the three months ended September 30, 2019 is primarily due to $1.2 million of revenue recognized during the quarter that was included in deferred revenue as of June 30, 2019 offset by $1.1 million of cash payments received for unshipped product during the third quarter. See Note 4 for additional information.

Disaggregation of Revenue

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

The following table sets forth revenue by market for the periods indicated (in thousands):



	Three Months Ended September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
Americas¹	$	1,445	8.5	%	$	1,970	4.2	%	$	4,353	7.3	%	$	5,361	3.6	%
Hong Kong²	13,575		79.7		41,447		88.1		48,465		81.0		133,681		88.9
China	525		3.1		1,698		3.6		2,138		3.6		5,510		3.7
Taiwan	649		3.8		935		2.0		2,340		3.9		2,933		1.9
South Korea	98		0.6		133		0.3		288		0.5		392		0.3
Japan	47		0.3		51		0.1		141		0.2		160		0.1
Singapore	13		0.1		52		0.1		43		0.1		134		0.1
Malaysia	51		0.3		216		0.5		170		0.3		316		0.2
Russia and Kazakhstan	244		1.4		184		0.4		662		1.1		626		0.4
Europe	343		2.0		357		0.7		1,017		1.7		1,207		0.8
India	33		0.2		—		—		162		0.3		—		—
Total	$	17,023	100.0	%	$	47,043	100.0	%	$	59,779	100.0	%	$	150,320	100.0	%

¹ United States, Canada, Mexico and Peru

² Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China. See “Item 1A. Risk Factors” in this report and in our most recent Annual Report on Form 10-K.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Product sales	$	15,732		$	44,434		$	56,355		$	142,258
Freight and other	1,468			3,365			4,713			10,550
Less: sales returns	(177		)	(756		)	(1,289		)	(2,488		)
Total net sales	$	17,023		$	47,043		$	59,779		$	150,320

Concentration

No single market other than Hong Kong had net sales greater than 10% of total net sales. Sales are made to the Company’s members and no single customer accounted for 10% or more of net sales for the three and nine months ended September 30, 2019 and 2018. However, the Company’s business model can result in a concentration of sales to several different members and their network of members. Although no single member accounted for 10% or more of net sales, the loss of a key member or that member’s network could have an adverse effect on the Company’s net sales and financial results.

Arrangements with Multiple Performance Obligations

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

Practical Expedients

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

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

3. NET INCOME (LOSS) PER COMMON SHARE

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

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



	Three Months Ended September 30,
	2019							2018
	Income (loss) (Numerator)			Shares (Denominator)	Per Share Amount			Income (loss) (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income (loss) per common share:
Net income (loss) available to common stockholders	$	(1,243	)	10,623	$	(0.12	)	$	7,629	11,309	$	0.67
Effect of dilutive securities:
Non-vested restricted stock	—			—				—		13
Diluted net income per common share:
Net income available to common stockholders plus assumed conversions	$	(1,243	)	10,623	$	(0.12	)	$	7,629	11,322	$	0.67

	Nine Months Ended September 30,
	2019							2018
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income (loss) per common share:
Net income (loss) available to common stockholders	$	(2,769	)	11,010	$	(0.25	)	$	25,476	11,298	$	2.25
Effect of dilutive securities:
Non-vested restricted stock	—			—				—		9
Diluted net income per common share:
Net income (loss) available to common stockholders plus assumed conversions	$	(2,769	)	11,010	$	(0.25	)	$	25,476	11,307	$	2.25

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

4. BALANCE SHEET COMPONENTS

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



	September 30, 2019			December 31, 2018
Cash, cash equivalents and restricted cash:
Cash	$	17,711		$	47,323
Cash equivalents	83,402			85,330
	101,113			132,653
Restricted cash	2,881			2,998
	$	103,994		$	135,651
Inventories:
Finished goods	$	7,817		$	11,171
Raw materials	1,104			1,145
Reserve for obsolescence	(922		)	(151		)
	$	7,999		$	12,165
Other accrued expenses:
Sales returns	$	290		$	801
Employee-related expense	1,998			4,051
Warehousing, inventory-related and other	1,104			1,269
	$	3,392		$	6,121
Deferred revenue:
Unshipped product	$	1,171		$	4,574
Auto ship advances	1,983			1,876
Other	148			345
	$	3,302		$	6,795

5. FAIR VALUE MEASUREMENTS

As of September 30, 2019, cash and cash equivalents include the Company’s investments in municipal and corporate debt securities, money market funds, and time deposits. The Company considers all highly liquid investments with original maturities of three months or less when purchased and have insignificant interest rate risk to be cash equivalents. Debt securities classified as cash equivalents are required to be accounted for in accordance with the FASB Accounting Standards Codification (“ASC”) 320, Investments - Debt and Equity Securities. As such, the Company determined its investments in debt securities held at September 30, 2019 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 to the extent available or alternative pricing sources and models utilizing market observable inputs.

The carrying amounts of the Company’s financial instruments, including cash and accounts payable, approximate fair value because of their short maturities. The carrying amount of the noncurrent restricted cash approximates fair value since, absent the restrictions, the underlying assets would be included in cash and cash equivalents.

Accounting standards permit companies, at their option, to choose to measure many financial instruments and certain other items at fair value. The Company has elected to not fair value existing eligible items.

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

September 30, 2019

December 31, 2018

Fair Value Level¹

Adjusted Cost

Gross Unrealized Losses

Fair Value

Adjusted Cost