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Note 1 - Nature of Operations and Summary of Significant Accounting Policies
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Dec. 31, 2012
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| Basis of Presentation and Significant 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 member 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.
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 or beyond 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 periodically maintains a cash reserve with certain
credit card processing companies to provide for potential
uncollectible amounts and chargebacks. In April
2010, the Company’s primary credit card processor
required that the Company gradually increase to and maintain
the reserve balance at $500,000. The Company
reached the necessary reserve requirement during the second
quarter of 2011. One-half of the reserve balance
was returned to the Company in January 2012 and the remainder
was returned in May 2012. These cash reserves were
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, 2011 and 2012, the reserve
for obsolescence totaled $43,000 and $72,000,
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
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.
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 2009,
and is no longer subject to state income tax examinations for
years prior to 2008. 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.
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
$125,000 was recognized during 2012, whereas gain on foreign
exchange totaling $226,000 was recognized during 2011.
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.
In
some markets, we also pay certain bonuses on purchases by
several generations of personally sponsored distributors, as
well as bonuses on commissions earned by several generations
of personally sponsored distributors. 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.
From
time to time we make modifications and enhancements to our
compensation plan to help motivate distributors, which can
have an impact on distributor
commissions. From time to time we also enter
into agreements for business or market development, which may
result in additional compensation to specific
distributors.
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 fully-diluted
share, which was immediately recognized as a credit to
selling, general and administrative expenses upon
settlement. Credits resulting from adjustments to
certain other legacy vendors recognized during 2012 were
$227,000, or $0.02 per fully-diluted share.
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 table illustrates the computation of basic and
diluted income per share for the periods indicated (in
thousands, except per share data):
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, 2012. 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 10). 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 2011 and 2012. 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, 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
On
January 1, 2012, the Company adopted the new Financial
Accounting Standards Board ("FASB") guidance on the
presentation of comprehensive
income. Specifically, the new guidance requires an
entity to present components of net income and other
comprehensive income in either a single continuous statement
of comprehensive income, or in two separate but consecutive
statements, which is the approach the Company has
selected. The new guidance eliminated the option
to present the components of other comprehensive income as
part of the statement of changes in stockholders’
equity. While the new guidance changed the
presentation of comprehensive income, there were no changes
to the components that are recognized in net income or other
comprehensive income from that of previous accounting
guidance.
In
February 2013, the FASB issued Accounting Standards Update
("ASU") No. 2013-02, Comprehensive
Income (Topic 220) —Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, to
require an entity to provide information about the amounts
reclassified out of accumulated other comprehensive income by
component. In addition, an entity is required to
present, either on the face of the statement where net income
is presented or in the notes, significant amounts
reclassified out of accumulated other comprehensive income by
the respective line items in net income but only if the
amount reclassified is required under U.S. generally accepted
accounting principles ("GAAP") to be reclassified to net
income in its entirety in the same reporting
period. For other amounts that are not required
under U.S. GAAP to be reclassified in their entirety to net
income, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional
detail about those amounts. ASU 2013-02 is
effective prospectively for reporting periods, including
interim periods, beginning after December 15,
2012. The Company does not expect adoption of this
standard to have a material impact on its consolidated
financial statements.
In
March 2013, the FASB issued ASU No. 2013-05, Foreign
Currency Matters (Topic 830) —Parent’s
Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets
within a Foreign Entity or of an Investment in a Foreign
Entity, to clarify the guidance for entities that
cease to hold a controlling financial interest in a
subsidiary or group of assets within a foreign entity when
(1) the subsidiary or group of assets is a nonprofit
activity or a business (other than a sale of in substance
real estate or conveyance of oil and gas mineral rights)
and (2) there is a cumulative translation adjustment
balance associated with that foreign entity. ASU
2013-05 is effective prospectively for reporting periods,
including interim periods, beginning after December 15,
2013. Early adoption is
permitted. The
Company is currently evaluating the impact of adopting ASU
2013-05.
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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