nhtc20230930

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, 2023

☐	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 ☑ No ☐

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 ☑ No ☐

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	☐	Accelerated filer	☐
Non-accelerated filer	☑	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. ☐

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

At October 27, 2023, the number of shares outstanding of the registrant’s common stock was 11,516,773 shares.

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NATURAL HEALTH TRENDS CORP.

Quarterly Report on Form 10-Q

September 30, 2023

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	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

Signatures		25

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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:

•

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;

•

Epidemics, such as the COVID-19 pandemic, or natural disasters, terrorist attacks or acts of war or hostility may seriously harm our business;

•

Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong, and the negative impact on our operations and financial performance could continue or intensify;

	•	We experienced negative operating cash flows during the year ended December 31, 2022, and only modest positive operating cash flows during the years ended December 31, 2021 and 2020. Unless our operating cash flows improve, this negative financial performance could have a material adverse effect on our business and our stock price;
	•	Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results;
	•	Our business and financial performance may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment;
	•	We are subject to risks relating to product concentration and lack of revenue diversification;

•

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

•

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

•

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

•

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

	•	Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact our business and the market price of our common stock;
	•	We could be adversely affected by management changes or an inability to attract and retain key management, directors and consultants;
	•	Our recent loss of a significant number of members is adversely affecting our business, and if we cannot stabilize or increase the number of members our business could be further negatively impacted;
	•	Although virtually all of our members are independent contractors, improper member actions that violate laws or regulations could harm our business;
	•	An increase in the amount of compensation paid to members would reduce profitability;
	•	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;

	•	Our business in China is 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;
	•	Changes in government trade and economic policies, including the imposition or threatened imposition of tariffs and other restrictive trade policies, and ongoing political and economic 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;
	•	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;

	•	Our business is subject to a variety of laws, regulations and other obligations regarding privacy, data protection and information security. Any actual or perceived failure by us or our third-party vendors to comply with such laws, regulations or other obligations could materially adversely affect our business;
	•	Challenges by third parties to the legality of our business operations could harm our business;

•

We have in the past been involved in, and may in the future face, lawsuits, claims, and governmental proceedings and inquiries that could harm our business;

•

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;

•

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;

•

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

•

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

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•

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

•

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, or the failure to comply with related laws and regulations, 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;

•

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

•

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.

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.

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

NATURAL HEALTH TRENDS CORP.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

	September 30, 2023			December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	58,412		$	69,667
Inventories		4,882			4,525
Other current assets		3,675			3,359
Total current assets		66,969			77,551
Property and equipment, net		284			394
Operating lease right-of-use assets		3,549			3,992
Restricted cash		37			79
Deferred tax asset		303			195
Other assets		679			606
Total assets	$	71,821		$	82,817
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	666		$	810
Income taxes payable		4,092			2,972
Accrued commissions		2,589			2,943
Other accrued expenses		1,100			1,181
Deferred revenue		6,248			5,597
Amounts held in eWallets		4,154			4,895
Operating lease liabilities		1,182			1,135
Other current liabilities		747			905
Total current liabilities		20,778			20,438
Income taxes payable		5,054			9,098
Deferred tax liability		140			141
Operating lease liabilities		2,539			2,989
Total liabilities		28,511			32,666
Commitments and contingencies (Note 7)
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, 2023 and December 31, 2022		13			13
Additional paid-in capital		84,657			86,102
Accumulated deficit		(15,757	)		(9,056	)
Accumulated other comprehensive loss		(1,267	)		(1,004	)
Treasury stock, at cost; 1,462,641 and 1,556,875 shares at September 30, 2023 and December 31, 2022, respectively		(24,336	)		(25,904	)
Total stockholders’ equity		43,310			50,151
Total liabilities and stockholders’ equity	$	71,821		$	82,817

See accompanying notes to consolidated financial statements.

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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,
	2023			2022			2023			2022
Net sales	$	10,615		$	11,716		$	32,987		$	36,622
Cost of sales		2,689			3,098			8,386			9,398
Gross profit		7,926			8,618			24,601			27,224
Operating expenses:
Commissions expense		4,361			4,863			13,861			15,370
Selling, general and administrative expenses		3,857			3,900			12,169			12,167
Total operating expenses		8,218			8,763			26,030			27,537
Loss from operations		(292	)		(145	)		(1,429	)		(313	)
Other income, net		585			187			1,708			472
Income before income taxes		293			42			279			159
Income tax provision (benefit)		121			(5	)		69			34
Net income	$	172		$	47		$	210		$	125
Net income per common share:
Basic	$	0.02		$	0.00		$	0.02		$	0.01
Diluted	$	0.02		$	0.00		$	0.02		$	0.01
Weighted average common shares outstanding:
Basic		11,440			11,423			11,432			11,341
Diluted		11,454			11,423			11,449			11,423

See accompanying notes to consolidated financial statements.

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NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net income	$	172		$	47		$	210		$	125
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(23	)		(367	)		(272	)		(828	)
Unrealized gains (losses) on available-for-sale securities		1			(34	)		9			(21	)
Comprehensive income (loss)	$	150		$	(354	)	$	(53	)	$	(724	)

See accompanying notes to consolidated financial statements.

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NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In Thousands, Except Share Data)

Nine months ended September 30, 2023

															Accumulated
									Additional						Other
	Preferred Stock				Common Stock				Paid-In			Accumulated			Comprehensive			Treasury Stock
	Shares		Amount		Shares		Amount		Capital			Deficit			Loss			Shares			Amount			Total

BALANCE, December 31, 2022		—	$	—		12,979,414	$	13	$	86,102		$	(9,056	)	$	(1,004	)		(1,556,875	)	$	(25,904	)	$	50,151
Net income		—		—		—		—		—			257			—			—			—			257
Reissuance of treasury shares		—		—		—		—		(1,629	)		—			—			97,900			1,629			—
Share-based compensation		—		—		—		—		46			—			—			—			—			46
Dividends declared, $0.20/share		—		—		—		—		—			(2,304	)		—			—			—			(2,304	)
Foreign currency translation adjustments		—		—		—		—		—			—			(97	)		—			—			(97	)
Unrealized losses on available-for-sale securities		—		—		—		—		—			—			(3	)		—			—			(3	)
BALANCE, March 31, 2023		—		—		12,979,414		13		84,519			(11,103	)		(1,104	)		(1,458,975	)		(24,275	)		48,050
Net loss		—		—		—		—		—			(219	)		—			—			—			(219	)
Share-based compensation		—		—		—		—		39			—			—			—			—			39
Dividends declared, $0.20/share		—		—		—		—		—			(2,304	)		—			—			—			(2,304	)
Foreign currency translation adjustments		—		—		—		—		—			—			(152	)		—			—			(152	)
Unrealized gains on available-for-sale securities		—		—		—		—		—			—			11			—			—			11
BALANCE, June 30, 2023		—		—		12,979,414		13		84,558			(13,626	)		(1,245	)		(1,458,975	)		(24,275	)		45,425
Net income		—		—		—		—		—			172			—			—			—			172
Restricted stock forfeiture		—		—		—		—		61			—			—			(3,666	)		(61	)		—
Share-based compensation		—		—		—		—		38			—			—			—			—			38
Dividends declared, $0.20/share		—		—		—		—		—			(2,303	)		—			—			—			(2,303	)
Foreign currency translation adjustments		—		—		—		—		—			—			(23	)		—			—			(23	)
Unrealized gains on available-for-sale securities		—		—		—		—		—			—			1			—			—			1
BALANCE, September 30, 2023		—	$	—		12,979,414	$	13	$	84,657		$	(15,757	)	$	(1,267	)		(1,462,641	)	$	(24,336	)	$	43,310

Nine months ended September 30, 2022

														Accumulated
									Additional					Other
	Preferred Stock				Common Stock				Paid-In		Accumulated			Comprehensive			Treasury Stock
	Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Shares			Amount			Total
BALANCE, December 31, 2021		—	$	—		12,979,414	$	13	$	86,102	$	(231	)	$	(492	)		(1,556,875	)	$	(25,904	)	$	59,488
Net loss		—		—		—		—		—		(105	)		—			—			—			(105	)
Dividends declared, $0.20/share		—		—		—		—		—		(2,285	)		—			—			—			(2,285	)
Foreign currency translation adjustments		—		—		—		—		—		—			(205	)		—			—			(205	)
Unrealized losses on available-for-sale securities		—		—		—		—		—		—			(23	)		—			—			(23	)
BALANCE, March 31, 2022		—		—		12,979,414		13		86,102		(2,621	)		(720	)		(1,556,875	)		(25,904	)		56,870
Net income		—		—		—		—		—		183			—			—			—			183
Dividends declared, $0.20/share		—		—		—		—		—		(2,285	)		—									(2,285	)
Foreign currency translation adjustments		—		—		—		—		—		—			(256	)		—			—			(256	)
Unrealized gains on available-for-sale securities		—		—		—		—		—		—			36			—			—			36
BALANCE, June 30, 2022		—		—		12,979,414		13		86,102		(4,723	)		(940	)		(1,556,875	)		(25,904	)		54,548
Net income		—		—		—		—		—		47			—			—			—			47
Dividends declared, $0.20/share		—		—		—		—		—		(2,285	)		—									(2,285	)
Foreign currency translation adjustments		—		—		—		—		—		—			(367	)		—			—			(367	)
Unrealized losses on available-for-sale securities		—		—		—		—		—		—			(34	)		—			—			(34	)
BALANCE, September 30, 2022		—	$	—		12,979,414	$	13	$	86,102	$	(6,961	)	$	(1,341	)		(1,556,875	)	$	(25,904	)	$	51,909

See accompanying notes to consolidated financial statements.

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NATURAL HEALTH TRENDS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

	Nine Months Ended September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	210		$	125
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		130			156
Share-based compensation		123			—
Noncash lease expense		830			889
Deferred income taxes		(117	)		(2	)
Changes in assets and liabilities:
Inventories		(420	)		140
Other current assets		(425	)		1,000
Other assets		(92	)		(44	)
Accounts payable		(141	)		228
Income taxes payable		(2,923	)		(1,382	)
Accrued commissions		(315	)		(1,055	)
Other accrued expenses		(58	)		(540	)
Deferred revenue		674			(3,209	)
Amounts held in eWallets		(725	)		(1,150	)
Operating lease liabilities		(812	)		(950	)
Other current liabilities		(148	)		4
Net cash used in operating activities		(4,209	)		(5,790	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(32	)		(130	)
Net cash used in investing activities		(32	)		(130	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(6,911	)		(6,855	)
Net cash used in financing activities		(6,911	)		(6,855	)
Effect of exchange rates on cash, cash equivalents and restricted cash		(145	)		(858	)
Net decrease in cash, cash equivalents and restricted cash		(11,297	)		(13,633	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period		69,746			84,365
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	58,449		$	70,732
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Right-of-use assets obtained in exchange for operating lease liabilities	$	115		$	2,218

See accompanying notes to consolidated financial statements.

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NATURAL HEALTH TRENDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 Malaysia, Singapore and Thailand; 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 2022 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 3, 2023.

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.

Cash and Cash Equivalents

The Company maintains substantially all of its cash balances at several institutions located in the United States, Hong Kong and China which at times may exceed insured limits. As of September 30, 2023, there was $10,000 and $1.4 million in bank accounts located in the United States and Hong Kong, respectively, in excess of insured limits. As of September 30, 2023, cash and cash equivalents included $3.6 million held in bank accounts located in China subject to foreign currency controls. The Company has not experienced any losses on such accounts. See Note 4 for additional information regarding the Company's investments in cash equivalents held in brokerage accounts. The Company believes that it is not exposed to significant credit risk due to the financial strength of the depository institutions in which its cash and cash equivalents are held.

Net Income 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 table illustrates the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):

	Three Months Ended September 30,
	2023						2022
	Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic net income per common share:
Net income available to common stockholders	$	172		11,440	$	0.02	$	47		11,423	$	0.00
Effect of dilutive securities:
Non-vested restricted stock		—		14				—		—
Diluted net income per common share:
Net income available to common stockholders plus assumed dilution	$	172		11,454	$	0.02	$	47		11,423	$	0.00

	Nine Months Ended September 30,
	2023						2022
	Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic net income per common share:
Net income available to common stockholders	$	210		11,432	$	0.02	$	125		11,341	$	0.01
Effect of dilutive securities:
Non-vested restricted stock		—		17				—		82
Diluted net income per common share:
Net income available to common stockholders plus assumed dilution	$	210		11,449	$	0.02	$	125		11,423	$	0.01

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Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis and added Topic 326 to the FASB Accounting Standards Codification (“ASC”). In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments to ASU 2019-11 clarify, correct and make improvements to Topic 326. ASU 2016-13 as well as the updates in ASU 2019-11 are effective for interim and annual periods beginning after December 15, 2022. The adoption of this standard did not have a material impact on the Company's 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.

2. REVENUE

Revenue Recognition

All revenue is recognized when the performance obligations under a contract, including any product vouchers sold on a stand-alone basis in Hong Kong, 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 4% of sales. Sales returns were 1% of sales for each of the nine months ended September 30, 2023 and 2022. No material changes in estimates have been recognized during the periods presented. See Note 3 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 orders and unredeemed product vouchers are considered a contract liability and are recorded as deferred revenue. As of September 30, 2023 and December 31, 2022, the Company had $4.5 million and $3.8 million, respectively, of contract liabilities where performance obligations have not yet been satisfied. The Company expects to satisfy its remaining performance obligations and recognize the revenue within the next twelve months.

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. See Note 11 for revenue by market information.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Product sales	$	10,303		$	10,534		$	31,505		$	32,889
Administrative fees, freight and other		373			1,235			1,628			3,865
Less: sales returns		(61	)		(53	)		(146	)		(132	)
Total net sales	$	10,615		$	11,716		$	32,987		$	36,622

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, 2023 and 2022. 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.

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3. BALANCE SHEET COMPONENTS

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

	September 30, 2023			December 31, 2022
Cash, cash equivalents and restricted cash:
Cash	$	9,548		$	12,834
Cash equivalents		48,864			56,833
		58,412			69,667
Restricted cash		37			79
	$	58,449		$	69,746
Inventories:
Finished goods	$	3,942		$	3,653
Raw materials		949			890
Reserve for obsolescence		(9	)		(18	)
	$	4,882		$	4,525
Other accrued expenses:
Sales returns	$	72		$	70
Employee-related expense		574			737
Warehousing, inventory-related and other		454			374
	$	1,100		$	1,181
Deferred revenue:
Unshipped product and unredeemed product vouchers	$	4,492		$	3,822
Auto ship advances		1,756			1,775
	$	6,248		$	5,597

4. FAIR VALUE MEASUREMENTS

As of September 30, 2023, cash and cash equivalents include the Company’s investments in money market funds, government and municipal debt securities, and corporate debt securities. 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 ASC 320, Investments - Debt and Equity Securities. As such, the Company determined its investments in debt securities held at September 30, 2023 should be classified as available-for-sale and are carried at fair value with unrealized gains and losses reported 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 (expense). Realized gains and losses, as well as interest income, are also included in other income (expense). 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.

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

		September 30, 2023							December 31, 2022
	Fair Value Level¹	Adjusted Cost		Gross Unrealized Losses			Fair Value		Adjusted Cost		Gross Unrealized Losses			Fair Value
Money market funds	Level 1	$	19,102	$	—		$	19,102	$	2,143	$	—		$	2,143
Government and municipal debt securities	Level 2		5,625		—			5,625		6,759		—			6,759
Corporate debt securities	Level 2		24,144		(7	)		24,137		47,947		(16	)		47,931
Total investments		$	48,871	$	(7	)	$	48,864	$	56,849	$	(16	)	$	56,833

¹FASB Topic 820, Fair Value Measurements, establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

As of September 30, 2023, the Company's unrealized losses result from investments in an unrealized loss position for less than 12 months. The gross unrealized losses related to these investments were primarily driven by factors other than credit risk, including market risk. The Company anticipates that it will recover the entire amortized cost basis of such available-for-sale debt securities and has determined that no allowance was required to be recognized during the three and nine months ended September 30, 2023 and 2022.

5. LEASES

The Company leases 7,300 square feet of office space in Hong Kong with a term expiring in June 2026, and 4,900 square feet of office space in Rolling Hills Estates, California for its corporate staff with a term expiring in September 2030. To help further develop the market for its products in North America, the Company leases 1,600 square feet of retail space in each of Rowland Heights, California and Richmond, British Columbia and 2,000 square feet of retail space in Metuchen, New Jersey. The Rowland Heights, Richmond and Metuchen locations have terms expiring in November 2025, February 2024 and December 2028, respectively.

The Company leases seven branch offices throughout China, and additional office space in Peru, Japan, Taiwan, South Korea, Malaysia, Thailand, India and the Cayman Islands. The Company contracts with third parties for fulfillment and distribution operations in all of its international markets. None of the Company’s third party logistics contracts contain a lease as the Company does not have the right to access the warehouses or move its inventories at will.

The components of lease cost were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating leases	$	320	$	292	$	971	$	954
Short-term leases		38		36		114		124
Total lease cost	$	358	$	328	$	1,085	$	1,078

Cash paid for amounts included in the measurement of operating leases liabilities was $253,000 and $309,000 for the three months ended September 30, 2023 and 2022, respectively, and $929,000 and $946,000 for the nine months ended September 30, 2023 and 2022, respectively.

The weighted-average remaining lease term and discount rate related to operating leases as of September 30, 2023 were as follows:

Weighted-average remaining lease term (in years)			4.3
Weighted-average discount rate			4.5	%

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As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, or the rate of each of its subsidiaries if available, based on the information available at the lease commencement date to determine the present value of lease payments.

The annual scheduled lease payments of our operating lease liabilities as of September 30, 2023 were as follows (in thousands):

Remainder of 2023	$	342
2024		1,146
2025		1,032
2026		579
2027		299
Thereafter		679
Total lease payments		4,077
Less: imputed interest		(356	)
Present value of lease liabilities	$	3,721

For all asset classes, the Company elected not to recognize assets or liabilities at the acquisition date for leases that, at the acquisition date, have a remaining lease term of 12 months or less. Additionally, for all asset classes, the Company choose not to separate nonlease components from lease components and instead account for the combined lease and nonlease components associated with that lease component as a single lease component.

6. INCOME TAXES

The effective income tax rate for the three and nine months ended September 30, 2023 includes estimates for foreign income inclusions such as global intangible low-taxed income (“GILTI”) and Subpart F income. As of September 30, 2023, the Company does not have a valuation allowance against its U.S. deferred tax assets. The Company analyzed all sources of available income and determined that they are more likely than not to realize the tax benefits of their deferred assets. As of September 30, 2023, the Company has a valuation allowance against deferred tax assets in certain foreign jurisdictions with an overall net operating loss. The valuation allowance will be reduced at such time as management believes it is more likely than not that the deferred tax assets will be realized. Any reductions in the valuation allowance will reduce future income tax provision.

As a result of return to provision adjustments, the Company does not expect to have any U.S. federal net operating loss available for carryover beyond the year ending December 31, 2023. The Company has post-apportioned U.S. state net operating loss carryforwards of $438,000 that begin expiring in 2038. At September 30, 2023, the Company has foreign net operating loss carryforwards of approximately $1.4 million in various jurisdictions with various expirations.

As of September 30, 2023, income taxes payable for the repatriation tax on the deemed repatriation of deferred foreign income required by the U.S. Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government, totaled $9.0 million, of which $5.1 million is reflected as a noncurrent liability.

As a result of capital return activities, the Company determined that a portion of its current undistributed foreign earnings not deemed reinvested indefinitely by its non-U.S. subsidiaries. For state income tax purposes, the Company will continue to periodically reassess the needs of its foreign subsidiaries and update its indefinite reinvestment assertion as necessary. To the extent that additional foreign earnings are not deemed permanently reinvested, the Company expects to recognize additional income tax provision at the applicable state corporate income tax rate(s). As of September 30, 2023, the Company has not recorded a state deferred tax liability for earnings that the Company plans to repatriate out of accumulated earnings in future periods because all earnings as of September 30, 2023 have already been repatriated. Due to the Tax Act, repatriation from foreign subsidiaries will be offset with a dividends received deduction, resulting in little to no impact on federal tax expense. All undistributed earnings in excess of 50% of current earnings on an annual basis are intended to be reinvested indefinitely as of September 30, 2023.

The Company and its subsidiaries file tax returns in the United States, California, New Jersey, Texas and various foreign jurisdictions. The Company is no longer subject to state income tax examinations for years prior to 2018. The Company is not aware of any jurisdiction that is currently examining any of its income tax returns.

7. COMMITMENTS AND CONTINGENCIES

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 payment of specified amounts in the event of a change in control (together with a termination without cause), as defined, or if the employee is otherwise terminated without cause, as defined, or terminates employment for good reason, as defined.

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8. STOCK-BASED INCENTIVE PLANS

Restricted Stock

At the Company’s annual meeting of stockholders held on April 7, 2016, the Company’s stockholders approved the Natural Health Trends Corp. 2016 Equity Incentive Plan (the “2016 Plan”) to replace its 2007 Equity Incentive Plan. The 2016 Plan allows for the grant of various equity awards including incentive stock options, non-statutory options, stock, stock units, stock appreciation rights and other similar equity-based awards to the Company’s employees, officers, non-employee directors, contractors, consultants and advisors of the Company. Up to 2,500,000 shares of the Company’s common stock (subject to adjustment under certain circumstances) may be issued pursuant to awards granted. At September 30, 2023, 1,125,349 shares remained available for issuance under the 2016 Plan.

On February 6, 2023, the Company granted 97,900 shares of restricted common stock to certain of its employees. The shares vest in equal parts on a quarterly basis over the next three years and are subject to forfeiture in the event of an employee's termination of service to the Company under specified circumstances.

The following table summarizes the Company’s restricted stock activity under the 2016 Plan:

	Shares			Wtd. Avg. Price at Date of Issuance
Nonvested at December 31, 2022		—		$	—
Granted		97,900		$	4.84
Vested		(24,119	)	$	4.84
Forfeited		(3,666	)	$	4.84
Nonvested at September 30, 2023		70,115		$	4.84

Share-based compensation expense of $38,000 and $123,000 was recognized during the three and nine months ended September 30, 2023, respectively. As of September 30, 2023, total unrecognized share-based compensation expense related to non-vested restricted stock was $333,000, which is expected to be recognized over a weighted-average period of 1.2 years.

Phantom Equity

On March 15, 2021, the Company’s Board of Directors approved and adopted a Phantom Equity Plan (the “Phantom Plan”). Under the terms of the Phantom Plan, the Board of Directors' Compensation Committee may grant to the Company’s employees, officers, directors, contractors, consultants, or advisors awards of phantom shares entitling grantees the right to receive a cash payment equal to the fair market value of an equal number of shares of the Company’s common stock upon the close of a vesting period, subject to any maximum payment value that the Compensation Committee may set. The vesting of phantom shares is subject to such vesting conditions as the Compensation Committee may specify in a grantee’s award agreement. Grantees of phantom shares shall not by virtue of their receipt of phantom shares have any ownership rights in shares of the Company’s common stock. The Phantom Plan shall continue for a period of ten years, after which no further phantom shares may be awarded (although any phantom shares awarded prior to the expiration of such 10-year period shall be unaffected by the termination of the Phantom Plan).

Also on March 15, 2021, awards for 223,307 phantom shares were granted to the Company’s employees and its non-employee directors. The phantom shares vested in eight equal three-month vesting increments, subject to the satisfaction of both a time-based vesting condition and a performance vesting condition. Both of these vesting conditions were deemed satisfied on the grant date for the initial vesting increment, and were satisfied for each of the following three vesting periods in 2021 and the first vesting period in 2022. The time-based vesting condition was also satisfied for the final three vesting periods in 2022. In order for the time-based vesting condition to be satisfied for each vesting period, the grantee must have remained continuously employed by, or be otherwise continuously providing services to, the Company through the end of the vesting period, and in order for the performance vesting condition to be satisfied for each performance period, the performance criteria designated by the Compensation Committee must have been satisfied. The initial performance vesting condition to be applied to measure performance for the period between March 15, 2021 and June 15, 2021 was designated by the Compensation Committee on or before April 14, 2021, and applied to all future performance periods unless the Compensation Committee elected to change the performance vesting condition on a prospective basis. Future changes to the performance vesting condition must have been made on or before the fifteenth day of any future performance period. If either vesting condition was not satisfied for a vesting date, then the phantom shares scheduled to vest on such date would be forfeited. These phantom shares were subject to a maximum payment value of $12.00 per phantom share. An additional award with similar vesting conditions for 9,074 phantom shares was granted on May 14, 2021 to the Company's new non-employee director, while unvested 9,074 phantom shares granted to the Company's departing non-employee director were forfeited on or about the same date. On each of May 23, 2022, August 31, 2022, and November 25, 2022 the Compensation Committee determined to amend the outstanding awards to provide that the performance criteria shall be deemed satisfied for the three-month performance periods relating to the June 15, 2022, September 15, 2022 and December 15, 2022 vesting dates, respectively. In making its determination, the Compensation Committee noted that the fact that the performance criteria were not achieved for the relevant performance periods was due to extraordinary business circumstances in China that were clearly beyond the Company’s control. The phantom shares awarded in 2021 are now fully vested.

On February 7, 2023, the Company granted 212,937 phantom shares to certain of the Company’s employees and its non-employee directors. The phantom shares vest in eight equal three-month vesting increments, subject to the satisfaction of both a time-based vesting condition and a performance vesting condition. Both of these vesting conditions were deemed satisfied on the grant date for the initial vesting increment. In order for the time-based vesting condition to be satisfied for each vesting period, the grantee must remain continuously employed by, or be otherwise continuously providing services to, the Company through the end of the vesting period, and in order for the performance vesting condition to be satisfied for each performance period, the performance criteria designated by the Compensation Committee must be satisfied. The initial performance vesting condition will be designated by the Compensation Committee and will apply to all future performance periods, unless the Compensation Committee elects to change the performance vesting condition on a prospective basis. Future changes to the performance vesting condition must be made on or before the fifteenth day of any future performance period. If either vesting condition is not satisfied for a vesting date, then the phantom shares scheduled to vest on such date will be forfeited. These phantom shares are subject to a maximum payment value of $12.00 per phantom share.

The phantom share awards are accounted for as liabilities in accordance with FASB ASC Topic 718, Compensation – Stock Compensation since they require cash settlement. The grant date of each vesting increment will be established when the Company and the grantees reach a mutual understanding of the key terms and conditions of an award, which is the date upon which each performance vesting condition is communicated to the grantees. Compensation expense is recognized over the requisite service period if it is probable that the performance vesting condition will be achieved. The fair value of the liability incurred is remeasured at the end of each reporting period with any changes in fair value recognized as compensation expense over the requisite service period.

Awards totaling 26,617 and 27,913 phantom shares vested during the three months ended September 30, 2023 and 2022, respectively, resulting in compensation expense of $144,000 and $126,000 during the three months ended September 30, 2023 and 2022, respectively, related to their cash settlement. Awards totaling 79,851 and 83,739 phantom shares vested during the nine months ended September 30, 2023 and 2022, respectively, resulting in compensation expense of $404,000 and $475,000 during the nine months ended September 30, 2023 and 2022, respectively, related to their cash settlement.

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9. STOCKHOLDERS’ EQUITY

Dividends

The Company declared and paid cash dividends of $0.20 per common share during each of the first three quarters of 2023 and 2022, totaling $6.9 million in each nine month period. Declaration and payment of any future dividends on shares of common stock will be at the sole discretion of the Company’s Board of Directors.

Stock Repurchases

On January 12, 2016, the Board of Directors authorized an increase to the Company’s stock repurchase program first approved on July 28, 2015 from $15.0 million to $70.0 million. Any repurchases will be made in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. For all or a portion of the authorized repurchase amount, the Company may enter into one or more plans that are compliant with Rule 10b5-1 of the Exchange Act that are designed to facilitate these purchases. The stock repurchase program does not require the Company to acquire a specific number of shares, and may be suspended from time to time or discontinued. As of September 30, 2023, $21.9 million of the $70.0 million stock repurchase program remained available for future purchases, inclusive of related estimated income tax.

Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component for the first nine months of 2023 were as follows (in thousands):

	Foreign Currency Translation Adjustments			Unrealized Gains (Losses) on Available-For-Sale Investments			Total
Balance, December 31, 2022	$	(988	)	$	(16	)	$	(1,004	)
Other comprehensive loss		(97	)		(3	)		(100	)
Balance, March 31, 2023		(1,085	)		(19	)		(1,104	)
Other comprehensive income (loss)		(152	)		11			(141	)
Balance, June 30, 2023		(1,237	)		(8	)		(1,245	)
Other comprehensive income (loss)		(23	)		1			(22	)
Balance, September 30, 2023	$	(1,260	)	$	(7	)	$	(1,267	)

10. RELATED PARTY TRANSACTIONS

The Company is a party to a Royalty Agreement and License with Broady Health Sciences, L.L.C., a Texas limited liability company, (“BHS”) regarding the manufacture and sale of a product called ReStor™. George K. Broady, a former director of the Company and beneficial owner of more than 5% of its outstanding common stock, is an indirect owner of BHS. Brunde E. Broady, also a former director of the Company and daughter of Mr. Broady, is the President and Chief Executive Officer of BHS. Under this agreement (as amended), the Company agreed to pay BHS a royalty based on a price per unit in return for the right to manufacture (or have manufactured), market, import, export and sell this product worldwide by or through multi-level marketing or network marketing. The Company recognized royalties of $11,000 and $13,000 during the three months ended September 30, 2023 and 2022, respectively, and $33,000 and $39,000 during the nine months ended September 30, 2023 and 2022, respectively, under this agreement. The Company is not required to purchase any product under the agreement, and the agreement may be terminated under certain circumstances with no notice. The agreement terminates March 31, 2025, after which it shall be automatically renewed for successive one-year terms unless notice is given by either party at least 90 days in advance of the expiration of the then-current term.

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11. SEGMENT INFORMATION

The Company sells products to a member network that operates in a seamless manner from market to market, except for the China market where it sells to some consumers through an e-commerce platform, and the Russia and Kazakhstan market where the Company’s engagement of a third-party service provider results in a different economic structure than its other markets. Otherwise, the Company believes that all of its other operating segments have similar economic characteristics and are similar in the nature of the products sold, the product acquisition process, the types of customers products are sold to, the methods used to distribute the products, and the nature of the regulatory environment. Therefore, the Company aggregates its other operating segments (including its Hong Kong operating segment) into a single reporting segment (the “Primary Reporting Segment”).

The Company reviews its net sales and operating income (loss) by operating segment, and reviews its assets and capital expenditures on a consolidated basis and not by operating segment. As such, net sales and operating income (loss) are presented by reportable segment and assets and capital expenditures by operating segment are not presented. Segment operating income is adjusted for certain direct costs and commission allocation.

The Company’s operating information by geographic area are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net sales:
Primary Reporting Segment	$	10,249		$	11,241		$	31,719		$	34,888
China		254			346			917			1,313
Russia and Kazakhstan		112			129			351			421
Total net sales	$	10,615		$	11,716		$	32,987		$	36,622

Income (loss) from operations:
Primary Reporting Segment	$	1,880		$	1,967		$	5,208		$	6,124
China		(160	)		(71	)		(423	)		(86	)
Russia and Kazakhstan		(47	)		(36	)		(131	)		(132	)
Income from operations for reportable segments, net		1,673			1,860			4,654			5,906
Unallocated corporate expenses		(1,965	)		(2,005	)		(6,083	)		(6,219	)
Other income, net		585			187			1,708			472
Income before income taxes	$	293		$	42		$	279		$	159

The Company’s net sales by geographic area are as follows (in thousands):

Three Months Ended September 30,