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1. Nature Of Operations And Summary Of Significant Accounting
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Dec. 31, 2011
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| Business Description and Accounting Policies [Text Block] |
1. NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations
Natural
Health Trends Corp. (the “Company”), a Delaware
corporation, is an international direct-selling and e-commerce
company headquartered in Dallas, Texas. Subsidiaries
controlled by the Company sell personal care, wellness, and
“quality of life” products under the “NHT
Global” brand. In most markets, we sell our
products to an independent distributor network that either uses
the products themselves or resells them to consumers.
Our
majority-owned subsidiaries have an active physical presence in
the following markets: North America; Greater China,
which consists of Hong Kong, Taiwan and China; Russia; South
Korea; Japan; and Europe, which consists of Italy and
Slovenia. In July 2009, the Company activated an
engagement with a service provider in Russia to provide storage,
distribution and order processing services.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the
Company and all of its majority-owned
subsidiaries. All significant inter-company balances
and transactions have been eliminated in consolidation.
In
December 2011, the Company completed the liquidation of its
non-operating, 51%-owned subsidiary MyLexxus Europe AG, a Swiss
corporation, and thereupon recognized a gain of $65,000 within
other income. Cash of $57,000 was distributed to the
noncontrolling interest. As such, no noncontrolling
interests are held in any consolidated subsidiary at December 31,
2011.
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 obsolete inventory and the fair value of acquired
intangible assets, including goodwill, as well as those used in
the determination of liabilities related to sales returns 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.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original
maturities of three months or less, when purchased, to be cash
equivalents. The Company includes in its cash and cash
equivalents credit card receivables due from its major credit
card processor, which serves the Hong Kong, North America,
Europe, and Japan markets, as the cash proceeds from credit card
receivables are received within two to five days.
The
Company maintains certain cash balances at several institutions
located in the United States 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
The
Company maintains a cash reserve with certain credit card
processing companies to provide for potential uncollectible
amounts and chargebacks. Historically, cash reserves
held by the Company’s primary credit card processor were
generally calculated as a percentage of sales over a rolling
monthly time period. In April 2010, the processing
company required that the Company gradually increase to and
maintain the reserve balance at $500,000. In January
2012, 50% of the reserve balance was returned to the
Company. The Company’s expectation is that its
reserve requirement will revert back to a percentage of sales
calculation in the near future. These cash reserves
are included in current assets.
Those
cash reserves held by credit card companies located in South
Korea are reflected in noncurrent assets since those cards
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, 2010
and 2011, the reserve for obsolescence totaled $59,000 and
$43,000, 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, five to seven years for furniture and fixtures,
and five years for plant equipment. 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.
Goodwill
The
value of residual goodwill is not amortized, but is tested at
least annually for impairment. During the fourth
quarter of 2011, the Company early adopted new guidance which
simplifies the goodwill impairment test by allowing the option to
first assess 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. We did not recognize any
impairment charges for goodwill during the periods
presented.
Impairment
of Long-Lived Assets
The
Company reviews property and equipment and determinable-lived
intangibles 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 and
determinable-lived intangibles 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.
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 differences are
expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be ultimately realized. 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 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.
The
Company and its subsidiaries file income tax returns in the
United States, various states, and foreign
jurisdictions. The Company is no longer subject to
U.S. federal income tax examinations for years prior to 2008, and
is no longer subject to state income tax examinations for years
prior to 2007. No jurisdictions are currently
examining any income tax returns of the Company or its
subsidiaries.
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 a separate component of stockholders’
equity and represents the only component of accumulated other
comprehensive income.
Revenue
Recognition
Product
sales are recorded when the products are shipped and title passes
to independent distributors. Product sales to
distributors are made pursuant to a distributor agreement that
provides for transfer of both title and risk of loss upon our
delivery to the carrier that completes delivery to the
distributors, which is commonly referred to as “F.O.B.
Shipping Point.” The Company primarily receives
payment by credit card at the time distributors 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
distributors 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 distributors are included in net
sales. Costs associated with shipments are included in
cost of sales.
Various
taxes on the sale of products and enrollment packages to
distributors 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.
Distributor
Commissions
Independent
distributors earn commissions paid on product purchases made by
their down-line distributors. Each of our products are
designated a specified number of sales volume points, which is
essentially a percentage of the product’s wholesale price,
and commissions are based on total personal and group sales
volume points per sales period. The Company accrues
commissions when earned and pays commissions on product sales
generally two weeks following the end of the sales period.
Independent
distributors may also earn incentives based on meeting certain
qualifications during a designated incentive period, which may
range from several weeks to several months. These
incentives may be both monetary and non-monetary in nature.
The Company accrues all costs associated with the incentives as
the distributors meet the qualification requirements.
Selling,
General and Administrative Expenses
During
2011 the Company successfully negotiated and entered into
agreements with certain legacy and on-going vendors to settle
prior outstanding payable balances. The impact of such
agreements to settle outstanding payable balances was $477,000
less than carrying value, or $0.04 per share, which was
immediately recognized as a credit to selling, general and
administrative expenses upon settlement.
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 is computed by dividing net income applicable to
common stockholders by the weighted-average number of common
shares outstanding during the period. 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, consisting of
non-vested restricted stock and shares that might be issued upon
the exercise of outstanding stock options and warrants and the
conversion of preferred stock.
The
dilutive effect of non-vested restricted stock, stock options and
warrants is reflected by application of the treasury stock
method. Under the treasury stock method, the amount
the employee must pay for exercising stock options, 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. The
potential tax benefit derived from exercise of non-qualified
stock options has been excluded from the treasury stock
calculation as the Company is uncertain that the benefit will be
realized.
The
following tables illustrate the computation of basic and diluted
income per share for the periods indicated (in thousands, except
per share data):
In
periods where losses are reported, the weighted-average number of
common shares outstanding excludes common stock equivalents
because their inclusion would be anti-dilutive. In
periods where income is reported, 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. Other common stock
equivalents are also anti-dilutive since the average market price
of the related common stock for the period exceeds the exercise
price.
The
following securities were not included for the time periods
indicated as their effect would have been anti-dilutive:
Warrants
to purchase 3,704,854 shares of common stock were still
outstanding at December 31, 2011. Such warrants have
expirations through April 21, 2015.
Certain
Risks and Concentrations
A
substantial portion of the Company’s sales are generated in
Hong Kong (see Note 11). Most of the Company’s
Hong Kong revenue is 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 that the Company does
not have, 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 a third party that acts as the importer
of record under an agreement to pay applicable
duties. In addition, through a Chinese entity the
Company has launched an e-commerce retail platform in
China. The Chinese entity operates separately from the
Hong Kong entity, although a Chinese member may elect to
participate separately in both.
The
Company believes that the laws and regulations in China regarding
direct selling and multi-level marketing are not specifically
applicable to the Company’s Hong Kong based e-commerce
activity, and that the Company’s Chinese entity 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 e-commerce activity violates 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 the Company’s
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, and
activities by individual distributors 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 the
Company’s individual distributors 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
the Company’s 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.
Four
major product lines -
Premium Noni
Juice™, Skindulgence™,
Alura™
and
La
Vie™ - generated a significant majority of the
Company’s sales for 2010 and 2011. The Company
obtains
Skindulgence™
and
La
Vie™ product from a single supplier, and
Premium Noni
Juice™ and
Alura™
from two other suppliers. The Company believes that,
in the event it is unable to source products from these suppliers
or other suppliers of its products, its revenue, income and cash
flow could be adversely and materially impacted.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, restricted cash, accounts
receivable, 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.
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.
Recently
Issued and Adopted Accounting Pronouncements
In
September 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2011-08,
Intangibles—Goodwill
and Other (Topic 350) — Testing Goodwill for
Impairment, to allow entities to use a qualitative approach
to test goodwill for impairment. ASU 2011-08 permits an
entity to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value. If it is
concluded that this
is
the case, it is necessary to perform the currently prescribed
two-step goodwill impairment test. Otherwise, the
two-step
goodwill
impairment test is not required. ASU 2011-08 is
effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011, with
early adoption permitted.
The
Company adopted the amended accounting standard in the fourth
quarter of 2011. The adoption did not have an impact on
the Company's financial position or results of
operations.
In
June 2011, the FASB issued ASU No. 2011-05,
Comprehensive
Income (Topic 220) —Presentation of Comprehensive
Income, to require an entity to present the total of
comprehensive income, the components of net income, and the
components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate
but consecutive statements. ASU 2011-05 eliminates the
option to present the components of other comprehensive income as
part of the statement of equity. In December 2011, the
FASB issued ASU No. 2011-12,
Comprehensive
Income (Topic 220) — Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out
of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05, to defer the requirement for entities
to present reclassification adjustments on the face of the
financial statements where net income is presented, by component
of net income, and on the face of the financial statements where
other comprehensive income is presented, by component of other
comprehensive income. All other requirements in ASU
2011-05 are not affected. Both ASU 2011-05 and ASU
2011-12 are effective for interim and annual financial periods
beginning after December 15, 2011. The Company
does not expect adoption of this standard to have a material
impact on its consolidated financial statements.
In
May 2011, the FASB issued ASU 2011-04,
Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and
IFRS. ASU 2011-04 provides a consistent definition of fair
value and ensures that the fair value measurement and disclosure
requirements are similar between U.S. GAAP and International
Financial Reporting Standards. ASU 2011-04 changes
certain fair value measurement principles and enhances the
disclosure requirements particularly for level 3 fair value
measurements. This guidance will be effective for
interim and annual reporting periods beginning after
December 15, 2011, and will be applied
prospectively. The Company is currently evaluating the
impact of adopting ASU 2011-04, but believes there will be no
significant impact 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.
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