Natural Health Trends Corp. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

REVENUE

REVENUE

9 Months Ended

Sep. 30, 2018

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 7% of sales. Sales returns were 2% for each of the nine months ended September 30, 2018 and 2017, respectively. No material changes in estimates have been recognized during the periods presented. See Note 5 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 occur. 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 increase in deferred revenue for the three months ended September 30, 2018 is primarily due to $2.3 million of cash payments received for unshipped product during the third quarter offset by $1.7 million of revenue recognized during the quarter that was included in deferred revenue as of June 30, 2018. See Note 5 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,
	2018				2017				2018				2017
Americas¹	$	1,970	4.2	%	$	1,239	3.1	%	$	5,361	3.6	%	$	4,340	2.9	%
Hong Kong²	41,447		88.1		35,049		87.3		133,681		88.9		135,304		89.3
China	1,698		3.6		1,731		4.3		5,510		3.7		4,732		3.1
Taiwan	935		2.0		1,229		3.1		2,933		1.9		4,116		2.7
South Korea	133		0.3		128		0.3		392		0.3		379		0.3
Japan	51		0.1		29		0.1		160		0.1		89		0.1
Singapore	52		0.1		40		0.1		134		0.1		124		0.1
Malaysia	216		0.5		—		—		316		0.2		—		—
Russia and Kazakhstan	184		0.4		209		0.5		626		0.4		655		0.4
Europe	357		0.7		478		1.2		1,207		0.8		1,732		1.1
Total	$	47,043	100.0	%	$	40,132	100.0	%	$	150,320	100.0	%	$	151,471	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 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,
	2018			2017			2018			2017
Product sales	$	44,434		$	37,666		$	142,258		$	143,771
Freight and other	3,365			2,960			10,550			10,775
Less: sales returns	(756		)	(494		)	(2,488		)	(3,075		)
Total net sales	$	47,043		$	40,132		$	150,320		$	151,471

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, 2018 and 2017. 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.