Commitments and Contingencies
|12 Months Ended|
Dec. 31, 2017
|Commitments and Contingencies Disclosure [Abstract]|
|Commitments and Contingencies||COMMITMENTS AND CONTINGENCIES
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 $2.0 million, $1.8 million and $1.5 million during 2017, 2016 and 2015, respectively.
Future minimum lease obligations as of December 31, 2017 are as follows (in thousands):
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, 2017, the Company was in compliance with the exclusivity provision.
The Company has a supply agreement with one of its suppliers to maintain worldwide exclusivity in return for purchasing a minimum of $6.6 million of product in 2018, 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 one year commencing January 2018 and shall automatically renew for a successive one year term unless notice of termination is provided by either party.
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.
Securities Class Action
In January 2016, two putative securities class action complaints were filed against the Company and its top executives in the United States District Court for the Central District of California. On March 29, 2016, the Court consolidated these actions under the caption Ford v. Natural Health Trends Corp., Case No. 2:16-cv-00255-TJH-AFMx, appointed two Lead Plaintiffs, Mahn Dao and Juan Wang, 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 the Company and Chris T. Sharng, Timothy S. Davidson and George K. Broady (together, the “Individual Defendants”), and (ii) Section 20(a) of the Securities Exchange Act of 1934 against the Individual Defendants. The consolidated complaint alleges, among other things, that the Company has been running an allegedly illegal multilevel marketing business in China and that it has made materially false and misleading statements regarding the legality of its business operations in China. The consolidated complaint seeks an indeterminate amount of damages, plus interest and costs. On June 15, 2016, the Company filed a motion to dismiss the consolidated complaint, which was denied on December 5, 2016. On February 17, 2017, the Company filed an answer to the consolidated complaint. On July 10, 2017, the Court entered a stipulation between the parties, postponing all deadlines and staying the case to allow the parties to engage in settlement discussions. On July 17, 2017, the parties reached an agreement in principle to settle the action. The proposed class-wide settlement of $1.75 million was submitted to the Court on October 3, 2017. The Court entered an order preliminarily approving the settlement on November 17, 2017, which was amended on January 4, 2018. Plaintiffs have provided notice to the settlement class in accordance with the amended order, and a final approval hearing is currently set for April 2, 2018. If approved, the proposed settlement will be fully funded by the Company’s insurers. Defendants continue to believe that these claims are without merit and intend to vigorously defend against them if a settlement is not finalized and approved by the Court.
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, among other things, that the Company has been running an allegedly illegal multilevel marketing business in China, and it has made materially false and misleading statements regarding the legality of its business operations in China, 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. A nearly identical stipulated stay was entered in the Kleinfeldt case on February 28, 2017. On November 10, 2017, the parties to both the Zhou and Kleinfeldt actions entered into a Memorandum of Understanding (“MOU”) to resolve both actions, subject to the negotiation of a written settlement agreement and approval by the federal court in the Kleinfeldt matter. On November 15, 2017, the parties filed a joint status report and stipulation in the Zhou matter, alerting the court to the MOU and seeking to maintain the stay pending finalization and court approval of the parties’ tentative settlement. The Zhou court entered an order continuing the stay on November 17, 2017. On March 9, 2018, the parties filed a Stipulation of Settlement and supporting papers in the Kleinfeldt action. On March 22, 2018, plaintiffs filed a motion for preliminary approval of the tentative settlement. The settlement is subject to both preliminary and final approval by the court. If approved, the proposed settlement will require certain corporate governance reforms and permit an award of up to $250,000 in attorneys’ fees to plaintiffs’ counsel, all of which will be fully funded by the Company’s insurers. Defendants continue to believe that these claims are without merit and intend to vigorously defend against them if the derivative settlement is not finalized and approved.
The consolidated class action (if the settlement is not approved by the Court) and the Derivative Complaints (if the tentative settlement is not finalized or approved), or other actions alleging similar facts, could result in monetary or other penalties that may materially affect the Company’s operating results and financial condition.
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.
The entire disclosure for commitments and contingencies.
Reference 1: http://www.xbrl.org/2003/role/presentationRef