Quarterly report pursuant to Section 13 or 15(d)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

v3.5.0.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
6 Months Ended
Jun. 30, 2016
Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
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.
 
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, the fair value of goodwill, revenue recognition, as well as those used in the determination of liabilities related to sales returns, commissions 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
 
As of June 30, 2016, cash and cash equivalents include $6.5 million held in banks located within China subject to foreign currency controls.
 
Additionally, as of June 30, 2016, cash and cash equivalents include the Company’s investments in debt securities, comprising municipal notes and bonds and corporate debt, money market funds and time deposits. 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 ASC 320, Investments - Debt and Equity Securities. As such, the Company determined its investments in debt securities held at June 30, 2016 should be classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income 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. Realized gains and losses, as well as interest income, are also included in other income. The fair values of securities are based on quoted market prices.
 
Cash and cash equivalents at the end of each period were as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Cash
$
54,976

 
$
47,431

Cash equivalents
54,673

 
57,483

Total cash and cash equivalents
$
109,649

 
$
104,914



Restricted Cash
 
In June 2015, the Company funded a bank deposit account in the amount of CNY 20 million (USD 3.0 million at June 30, 2016) in anticipation of submitting a direct selling license application in China. Such deposit is required by Chinese laws to establish a consumer protection fund.

Other Accrued Expenses
 
Other accrued expenses at the end of each period were as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Sales returns
$
1,388

 
$
1,552

Employee-related
12,888

 
11,064

Warehousing, inventory-related and other
3,294

 
4,087

Total other accrued expenses
$
17,570

 
$
16,703



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.

As a result of capital return activities approved by the Board of Directors during the first quarter of 2016 and anticipated future capital return activities, the Company determined that a portion of its current undistributed foreign earnings are no longer deemed reinvested indefinitely by its non-U.S. subsidiaries. The Company repatriated $19.8 million to the U.S. during the three months ended March 31, 2016, of which $7.7 million was previously taxed in the U.S. and $8.4 million was offset by U.S. net operating losses. Accordingly, the deferred tax liability previously established for undistributed foreign earnings up to its existing U.S. net operating losses was reduced. The excess amount repatriated during the six months ended June 30, 2016 was generated from current foreign earnings. 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 U.S. corporate tax rate.

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 2012, and is no longer subject to state income tax examinations for years prior to 2011. No jurisdictions are currently examining any income tax returns of the Company or its subsidiaries.
 
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. The Company's cash equivalents are valued based on level 1 inputs which consist of quoted prices in active markets.
 
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.

Available-for-sale investments included in cash equivalents at the end of each period were as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Adjusted Cost
 
Gross Unrealized Gains
 
Fair Value
 
Adjusted Cost
 
Gross Unrealized Gains
 
Fair Value
Municipal bonds and notes
$
39,890

 
$
5

 
$
39,895

 
$
35,222

 
$
2

 
$
35,224

Corporate debt securities
1,995

 

 
1,995

 
5,029

 
(5
)
 
5,024

Financial institution instruments
12,783

 

 
12,783

 
17,235

 

 
17,235

Total available-for-sale investments
$
54,668

 
$
5

 
$
54,673

 
$
57,486

 
$
(3
)
 
$
57,483


 
Financial institution instruments include instruments issued or managed by financial institutions such as money market fund deposits and time deposits.
 
Accumulated Other Comprehensive Loss
 
The changes in accumulated other comprehensive loss by component for the first six months of 2016 were as follows (in thousands):
 
Foreign Currency Translation Adjustment
 
Unrealized (Losses) Gains on Available-For-Sale Investments
 
Total
Balance, December 31, 2015
$
(99
)
 
$
(2
)
 
$
(101
)
Other comprehensive (loss) income
(275
)
 
7

 
(268
)
Amounts reclassified out of accumulated other comprehensive loss
132

 

 
132

Balance, June 30, 2016
$
(242
)
 
$
5

 
$
(237
)

 
Revenue Recognition
 
Product sales are recorded 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 primarily receives payment by credit card at the time members 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 members 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 members 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 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.
 
Income Per Share

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. The dilutive effect of non-vested restricted stock and warrants 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 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.

Warrants to purchase 88,087 shares of common stock were exercised in April 2015.
 
The following tables illustrates the computation of basic and diluted income per share for the periods indicated (in thousands, except per share data): 
 
Three Months Ended June 30,
 
2016
 
2015
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share Amount
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
$
12,201

 
11,333

 
$
1.08

 
$
12,273

 
12,403

 
$
0.99

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Warrants to purchase common stock

 

 
 

 

 
6

 
 

Non-vested restricted stock

 
26

 
 

 

 
52

 
 

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders plus assumed conversions
$
12,201

 
11,359

 
$
1.07

 
$
12,273

 
12,461

 
$
0.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2016
 
2015
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share Amount
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
$
23,481

 
11,553

 
$
2.03

 
$
19,011

 
12,428

 
$
1.53

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Warrants to purchase common stock

 

 
 

 

 
39

 
 

Non-vested restricted stock

 
26

 
 

 

 
46

 
 

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders plus assumed conversions
$
23,481

 
11,579

 
$
2.03

 
$
19,011

 
12,513

 
$
1.52



Recently Issued and Adopted Accounting Pronouncements
 
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual years, and early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will include qualitative and quantitative requirements. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual years, and early application is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
 
Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future financial statements.