Core Viewpoint - Natural Health Trends Corp. is set to report its financial results for the fourth quarter of 2023 on February 7, 2024, with a conference call scheduled to discuss these results [1] Group 1: Financial Reporting - The financial results for the fourth quarter ended December 31, 2023, will be announced on February 7, 2024, at 9:00 a.m. Eastern Time [1] - A conference call will be hosted by the President and CFO of Natural Health Trends to discuss the financial results on the same day at 11:30 a.m. Eastern Time [1] - Details for the conference call include dial-in numbers for domestic and international participants, as well as a webcast link for online access [1] Group 2: Company Overview - Natural Health Trends Corp. operates as an international direct-selling and e-commerce company, marketing premium quality personal care products under the NHT Global brand [2] - The company has subsidiaries operating throughout Asia, the Americas, and Europe [2] - Additional information about the company can be found on its official website [2]

Natural Health Trends Corp (NASDAQ:NHTC) Q3 2023 Earnings Conference Call November 1, 2023 11:30 AM ET Company Participants Michelle Glidewell - Senior Manager of NHT Global Corp Chris Sharng - President and Director Timothy Davidson - Senior VP, CFO and Secretary Operator Greetings. Welcome to Natural Health Trends Corp. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Michelle Glidewell with Natural ...

[Forward-Looking Statements](index=3&type=section&id=Forward-Looking%20Statements) This section highlights various risks that could materially affect the company's future results, including significant reliance on Hong Kong/China operations, geopolitical and economic instability, and regulatory compliance challenges [Summary of Risks](index=3&type=section&id=Summary%20of%20Risks) The company faces material risks from reliance on Hong Kong/China, geopolitical instability, negative cash flows, competition, and regulatory compliance - Substantial portion of overall business derived from Hong Kong operations, with sales primarily to members in China, making the company highly susceptible to adverse changes in these regions[10](index=10&type=chunk) - Experienced negative operating cash flows in 2022 and modest positive flows in 2020-2021, indicating a need for improved operating cash flows to avoid material adverse effects on business and stock price[10](index=10&type=chunk) - The business is subject to various laws and regulations, especially direct-selling laws in China, and faces risks from political and social developments in Hong Kong, epidemics (like COVID-19), and potential challenges to business legality[10](index=10&type=chunk)[11](index=11&type=chunk) [PART I - FINANCIAL INFORMATION](index=6&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed accounting notes [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) | Metric | Sep 30, 2023 (Unaudited) (in Thousands) | Dec 31, 2022 (in Thousands) | | :-------------------------------- | :------------------------------------- | :-------------------------- | | **ASSETS** | | | | Cash and cash equivalents | $58,412 | $69,667 | | Total current assets | $66,969 | $77,551 | | Total assets | $71,821 | $82,817 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Total current liabilities | $20,778 | $20,438 | | Total liabilities | $28,511 | $32,666 | | Total stockholders' equity | $43,310 | $50,151 | | Total liabilities and stockholders' equity | $71,821 | $82,817 | - Total assets decreased by **$11.0 million** from December 31, 2022, to September 30, 2023, primarily driven by a decrease in cash and cash equivalents[17](index=17&type=chunk) - Total stockholders' equity decreased by **$6.8 million**, mainly due to accumulated deficit and accumulated other comprehensive loss[17](index=17&type=chunk) [Consolidated Statements of Operations](index=7&type=section&id=Consolidated%20Statements%20of%20Operations) | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :--------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Net sales | $10,615 | $11,716 | $32,987 | $36,622 | | Gross profit | $7,926 | $8,618 | $24,601 | $27,224 | | Loss from operations | $(292) | $(145) | $(1,429) | $(313) | | Other income, net | $585 | $187 | $1,708 | $472 | | Income before income taxes | $293 | $42 | $279 | $159 | | Net income | $172 | $47 | $210 | $125 | | Basic Net income per common share | $0.02 | $0.00 | $0.02 | $0.01 | | Diluted Net income per common share | $0.02 | $0.00 | $0.02 | $0.01 | - Net sales decreased by 9% for the three months ended September 30, 2023, and by 10% for the nine months ended September 30, 2023, compared to the prior year periods[19](index=19&type=chunk) - Net income significantly increased for both the three-month period (from **$47 thousand** to **$172 thousand**) and the nine-month period (from **$125 thousand** to **$210 thousand**) year-over-year, despite a loss from operations, primarily due to higher other income[19](index=19&type=chunk) [Consolidated Statements of Comprehensive Income (Loss)](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :------------------------------------------ | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Net income | $172 | $47 | $210 | $125 | | 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) | - Comprehensive income improved significantly from a loss of **$354 thousand** in Q3 2022 to an income of **$150 thousand** in Q3 2023, largely due to a reduced negative impact from foreign currency translation adjustments[21](index=21&type=chunk) [Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) | Metric | Dec 31, 2022 (in Thousands) | Sep 30, 2023 (in Thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total Stockholders' Equity | $50,151 | $43,310 | | Accumulated Deficit | $(9,056) | $(15,757) | | Accumulated Other Comprehensive Loss | $(1,004) | $(1,267) | | Treasury Stock (shares) | (1,556,875) | (1,462,641) | | Treasury Stock (amount) | $(25,904) | $(24,336) | - Total stockholders' equity decreased by **$6.8 million** from December 31, 2022, to September 30, 2023, primarily due to net income being offset by dividends declared and an increase in accumulated deficit[23](index=23&type=chunk) - The company reissued 97,900 treasury shares, reducing the treasury stock balance by **$1.6 million**, while also recognizing share-based compensation[23](index=23&type=chunk) [Consolidated Statements of Cash Flows](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) | Metric | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Net cash used in operating activities | $(4,209) | $(5,790) | | Net cash used in investing activities | $(32) | $(130) | | Net cash used in financing activities | $(6,911) | $(6,855) | | Effect of exchange rates on cash | $(145) | $(858) | | Net decrease in cash, cash equivalents and restricted cash | $(11,297) | $(13,633) | | Cash, cash equivalents and restricted cash, end of period | $58,449 | $70,732 | - Net cash used in operating activities improved from **$5.8 million** in 2022 to **$4.2 million** in 2023, driven by increased interest earned and more orders[26](index=26&type=chunk)[122](index=122&type=chunk) - Cash, cash equivalents, and restricted cash decreased by **$11.3 million** during the first nine months of 2023, primarily due to operating activities and dividend payments[26](index=26&type=chunk)[120](index=120&type=chunk) [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=12&type=section&id=1.%20NATURE%20OF%20OPERATIONS%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Details the company's direct-selling and e-commerce operations under "NHT Global," global market, and key accounting policies - The Company operates as an international direct-selling and e-commerce entity, marketing personal care, wellness, and 'quality of life' products under the 'NHT Global' brand[28](index=28&type=chunk) - The Company maintains cash balances in the United States, Hong Kong, and China, with **$3.6 million** in China subject to foreign currency controls as of September 30, 2023[32](index=32&type=chunk) - The adoption of ASU 2016-13 and ASU 2019-11 (Credit Losses) effective after December 15, 2022, did not have a material impact on the Company's financial statements[36](index=36&type=chunk) [2. REVENUE](index=14&type=section&id=2.%20REVENUE) Outlines revenue recognition policies, including product sales, returns, shipping, deferred revenue, and sales concentration in Hong Kong/China - Revenue is recognized when performance obligations are satisfied, primarily from product sales upon shipment and title transfer to independent members[38](index=38&type=chunk) | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | 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 | - Deferred revenue, primarily from unshipped product orders and unredeemed product vouchers, totaled **$4.5 million** as of September 30, 2023, up from **$3.8 million** at December 31, 2022[42](index=42&type=chunk)[49](index=49&type=chunk) [3. BALANCE SHEET COMPONENTS](index=16&type=section&id=3.%20BALANCE%20SHEET%20COMPONENTS) Provides a detailed breakdown of balance sheet accounts, including cash, inventories, accrued expenses, and deferred revenue | Component | Sep 30, 2023 (in Thousands) | Dec 31, 2022 (in Thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Cash, cash equivalents and restricted cash | $58,449 | $69,746 | | Inventories | $4,882 | $4,525 | | Other accrued expenses | $1,100 | $1,181 | | Deferred revenue | $6,248 | $5,597 | - Cash and cash equivalents decreased by **$11.3 million** from December 31, 2022, to September 30, 2023[49](index=49&type=chunk) - Deferred revenue increased by **$651 thousand**, primarily due to an increase in unshipped product and unredeemed product vouchers[49](index=49&type=chunk) [4. FAIR VALUE MEASUREMENTS](index=16&type=section&id=4.%20FAIR%20VALUE%20MEASUREMENTS) Details fair value measurements for financial instruments, including money market, government, and corporate debt securities, categorized by fair value hierarchy levels | Investment Category | Sep 30, 2023 Fair Value (in Thousands) | Dec 31, 2022 Fair Value (in Thousands) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | | Money market funds (Level 1) | $19,102 | $2,143 | | Government and municipal debt securities (Level 2) | $5,625 | $6,759 | | Corporate debt securities (Level 2) | $24,137 | $47,931 | | Total investments | $48,864 | $56,833 | - Total investments classified as cash equivalents decreased by **$8.0 million** from December 31, 2022, to September 30, 2023[54](index=54&type=chunk) - Unrealized losses on available-for-sale securities were primarily driven by market risk, not credit risk, and no allowance for credit losses was deemed necessary[56](index=56&type=chunk) [5. LEASES](index=17&type=section&id=5.%20LEASES) Details operating lease commitments for global office and retail spaces, including lease costs, terms, and discount rates - The company leases office and retail spaces in multiple countries, including significant operations in Hong Kong and China, with terms extending up to September 2030[57](index=57&type=chunk)[58](index=58&type=chunk) | Lease Cost Component | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Operating leases | $320 | $292 | $971 | $954 | | Short-term leases | $38 | $36 | $114 | $124 | | Total lease cost | $358 | $328 | $1,085 | $1,078 | | Metric | As of Sep 30, 2023 | | :--------------------------------- | :----------------- | | Weighted-average remaining lease term | 4.3 years | | Weighted-average discount rate | 4.5% | | Present value of lease liabilities | $3,721 thousand | [6. INCOME TAXES](index=18&type=section&id=6.%20INCOME%20TAXES) Discusses income tax provisions, effective tax rate, deferred tax assets/liabilities, valuation allowances, and the impact of U.S. tax legislation - The company has a valuation allowance against deferred tax assets in certain foreign jurisdictions with an overall net operating loss, but not against U.S. deferred tax assets[62](index=62&type=chunk)[134](index=134&type=chunk) - Income taxes payable for the repatriation tax on deemed repatriation of deferred foreign income totaled **$9.0 million** as of September 30, 2023, with **$5.1 million** classified as a noncurrent liability[64](index=64&type=chunk) - The company intends to reinvest all undistributed earnings in excess of 50% of current earnings annually indefinitely, and has not recorded a state deferred tax liability for future repatriations as all earnings no longer deemed indefinitely reinvested have already been repatriated[65](index=65&type=chunk)[135](index=135&type=chunk) [7. COMMITMENTS AND CONTINGENCIES](index=18&type=section&id=7.%20COMMITMENTS%20AND%20CONTINGENCIES) Discloses commitments and contingencies, particularly employment agreements with management regarding change in control or termination - The company has employment agreements with management that include provisions for payments upon a change in control or termination without cause[67](index=67&type=chunk) [8. STOCK-BASED INCENTIVE PLANS](index=20&type=section&id=8.%20STOCK-BASED%20INCENTIVE%20PLANS) Details stock-based incentive plans, including restricted stock and phantom equity, with information on grants, vesting, and compensation expense - Under the 2016 Equity Incentive Plan, 97,900 shares of restricted common stock were granted in February 2023, with 70,115 nonvested shares remaining at September 30, 2023[70](index=70&type=chunk)[71](index=71&type=chunk) | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | | :------------------------------------ | :------------------------------------- | :------------------------------------ | | Share-based compensation expense (Restricted Stock) | $38 | $123 | | Share-based compensation expense (Phantom Equity) | $144 | $404 | - Phantom shares, accounted for as liabilities, resulted in compensation expense of **$144 thousand** for the three months and **$404 thousand** for the nine months ended September 30, 2023, related to cash settlement[76](index=76&type=chunk)[77](index=77&type=chunk) [9. STOCKHOLDERS' EQUITY](index=22&type=section&id=9.%20STOCKHOLDERS'%20EQUITY) Details changes in stockholders' equity, including dividends, stock repurchases, and components of accumulated other comprehensive loss - The company declared and paid quarterly cash dividends of **$0.20** per common share, totaling **$6.9 million** for each of the nine-month periods ended September 30, 2023 and 2022[79](index=79&type=chunk) - As of September 30, 2023, **$21.9 million** remained available under the **$70.0 million** stock repurchase program[80](index=80&type=chunk) | Component of Accumulated Other Comprehensive Loss | Dec 31, 2022 (in Thousands) | Sep 30, 2023 (in Thousands) | | :------------------------------------------------ | :-------------------------- | :-------------------------- | | Foreign Currency Translation Adjustments | $(988) | $(1,260) | | Unrealized Gains (Losses) on Available-For-Sale Investments | $(16) | $(7) | | Total Accumulated Other Comprehensive Loss | $(1,004) | $(1,267) | [10. RELATED PARTY TRANSACTIONS](index=22&type=section&id=10.%20RELATED%20PARTY%20TRANSACTIONS) Discloses a related party royalty agreement with Broady Health Sciences, L.L.C. for ReStor™, involving a former director's family - The company has a Royalty Agreement with Broady Health Sciences, L.L.C. (BHS) for the product ReStor™, where BHS is indirectly owned by a former director and managed by his daughter[82](index=82&type=chunk) | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :--------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Royalties paid | $11 | $13 | $33 | $39 | [11. SEGMENT INFORMATION](index=23&type=section&id=11.%20SEGMENT%20INFORMATION) Provides disaggregated financial information by operating segment, including net sales and operating income for Primary Reporting, China, and Russia/Kazakhstan - The company operates in three reportable segments: Primary Reporting Segment (including Hong Kong), China, and Russia/Kazakhstan[84](index=84&type=chunk) | Segment | Three Months Ended Sep 30, 2023 Net Sales (in Thousands) | Three Months Ended Sep 30, 2022 Net Sales (in Thousands) | Nine Months Ended Sep 30, 2023 Net Sales (in Thousands) | Nine Months Ended Sep 30, 2022 Net Sales (in Thousands) | | :---------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | 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 | - Hong Kong, part of the Primary Reporting Segment, accounted for **$8.4 million** (79.2%) of total net sales for the three months ended September 30, 2023, with substantially all revenues derived from sales to members in China[86](index=86&type=chunk) [12. SUBSEQUENT EVENT](index=24&type=section&id=12.%20SUBSEQUENT%20EVENT) Reports a subsequent event: the Board declared a quarterly cash dividend of $0.20 per common share on October 30, 2023 - On October 30, 2023, the Board of Directors declared a quarterly cash dividend of **$0.20** per common share, payable on November 24, 2023[87](index=87&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, condition, operations, revenue, expenses, and liquidity, emphasizing Greater China's impact and regulatory challenges [Business Overview](index=25&type=section&id=Business%20Overview) Overview of the "NHT Global" direct-selling business, highlighting challenges in Greater China from declining members, currency, and regulatory issues - The company is an international direct-selling and e-commerce company selling personal care, wellness, and 'quality of life' products under the 'NHT Global' brand[88](index=88&type=chunk) | Metric | Sep 30, 2023 | Dec 31, 2022 | Sep 30, 2022 | | :------------- | :----------- | :----------- | :----------- | | Active members | 34,660 | 38,660 | 41,170 | - Approximately **92%** of net sales are generated from subsidiaries outside the Americas, with Hong Kong subsidiary sales (primarily to members in China) representing **79%** of net sales in the latest fiscal quarter[90](index=90&type=chunk) - The company does not hold a direct selling license in China and has faced significant adverse impacts from Chinese government campaigns (e.g., 100-day campaign) and COVID-19 control measures, which disrupted operations and member activities[91](index=91&type=chunk)[93](index=93&type=chunk)[95](index=95&type=chunk) [Statement of Operations Presentation](index=28&type=section&id=Statement%20of%20Operations%20Presentation) Explains revenue recognition, cost of sales, member commissions, SG&A expenses, and foreign currency impact on financial results - Revenue is primarily derived from product sales to independent members, recognized upon shipment and title transfer, with shipping charges included in net sales[100](index=100&type=chunk) - Member commissions are the most significant expense, paid weekly based on personal and group bonus volume points from product purchases by down-line networks[102](index=102&type=chunk) - Sales and net earnings are affected by changes in currency exchange rates, generally increasing with a weakening U.S. dollar and decreasing with a strengthening U.S. dollar[107](index=107&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) Analyzes financial performance for Q3 and YTD 2023, detailing changes in net sales, gross profit, expenses, and other income, noting decreased sales but increased net income | Metric (% of Net Sales) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | 100.0% | 100.0% | 100.0% | 100.0% | | Gross profit | 74.7% | 73.6% | 74.6% | 74.3% | | Commissions expense | 41.1% | 41.5% | 42.0% | 42.0% | | Selling, general and administrative expenses | 36.3% | 33.3% | 36.9% | 33.2% | | Loss from operations | (2.7)% | (1.2)% | (4.3)% | (0.9)% | | Other income, net | 5.5% | 1.6% | 5.2% | 1.3% | | Net income | 1.6% | 0.4% | 0.7% | 0.3% | [Net Sales](index=30&type=section&id=Net%20Sales) Net sales decreased by 9% (Q3) and 10% (YTD) due to lower Hong Kong sales, deferred revenue changes, and reduced administrative fees | Market | Three Months Ended Sep 30, 2023 Net Sales (in Thousands) | Three Months Ended Sep 30, 2022 Net Sales (in Thousands) | Nine Months Ended Sep 30, 2023 Net Sales (in Thousands) | Nine Months Ended Sep 30, 2022 Net Sales (in Thousands) | | :-------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Total Net Sales | $10,615 | $11,716 | $32,987 | $36,622 | | Hong Kong Net Sales | $8,412 | $9,424 | $26,391 | $28,916 | | China Net Sales | $254 | $346 | $917 | $1,313 | - Net sales decreased by **$1.1 million** (9%) for the three months and **$3.6 million** (10%) for the nine months ended September 30, 2023, year-over-year[112](index=112&type=chunk)[113](index=113&type=chunk) - Hong Kong net sales, primarily from products shipped to members in China, decreased by **$1.0 million** (11%) for the three months and **$2.5 million** (9%) for the nine months, mainly due to changes in deferred revenue and lower administrative fees[112](index=112&type=chunk)[113](index=113&type=chunk) [Gross Profit](index=30&type=section&id=Gross%20Profit) Gross profit margin slightly improved to 74.7% (Q3) and 74.6% (YTD), mainly due to lower logistics costs | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Gross profit | 74.7% | 73.6% | 74.6% | 74.3% | - The slight improvement in gross profit margin for the three-month period was primarily attributable to lower logistics costs, excluding the impact of decreased administrative fee revenue[114](index=114&type=chunk) [Commissions Expense](index=30&type=section&id=Commissions%20Expense) Commissions expense as a percentage of net sales slightly decreased to 41.1% (Q3) and remained 42.0% (YTD) due to lower incentives | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Commissions expense | 41.1% | 41.5% | 42.0% | 42.0% | - Commissions as a percentage of net sales decreased slightly due to lower supplemental incentive costs[115](index=115&type=chunk)[116](index=116&type=chunk) [Selling, General and Administrative Expenses](index=31&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) SG&A expenses remained stable in absolute terms but increased as a percentage of net sales due to decreased sales | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :------------------------------------------ | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Selling, general and administrative expenses | $3,857 | $3,900 | $12,169 | $12,167 | - SG&A expenses as a percentage of net sales increased in the current year periods due to decreased net sales and the inelastic nature of these expenses[117](index=117&type=chunk) [Other Income, Net](index=31&type=section&id=Other%20Income,%20Net) Other income, net, significantly increased to $585 thousand (Q3) and $1.7 million (YTD), primarily from higher interest on cash equivalents | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :---------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Other income, net | $585 | $187 | $1,708 | $472 | - The increase in other income is primarily due to greater interest earned on cash equivalents[118](index=118&type=chunk) [Income Taxes](index=32&type=section&id=Income%20Taxes) Income tax provision of $121 thousand (Q3) and $69 thousand (YTD) resulted from foreign income inclusions and tax benefits | Metric | Three Months Ended Sep 30, 2023 (in Thousands) | Three Months Ended Sep 30, 2022 (in Thousands) | Nine Months Ended Sep 30, 2023 (in Thousands) | Nine Months Ended Sep 30, 2022 (in Thousands) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------ | :------------------------------------ | | Income tax provision (benefit) | $121 | $(5) | $69 | $34 | - The tax provision primarily resulted from foreign income inclusions (GILTI and Subpart F income) and tax benefits in foreign jurisdictions[119](index=119&type=chunk) [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and equivalents decreased to $58.4 million, primarily due to operations and dividends, yet liquidity remains adequate with a 3.2:1 current ratio | Metric | Sep 30, 2023 (in Thousands) | Dec 31, 2022 (in Thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $58,412 | $69,667 | | Working capital | $46,191 | $57,113 | | Current assets to current liabilities ratio | 3.2 to 1.0 | 3.8 to 1.0 | - Cash and cash equivalents decreased by **$11.3 million** from December 31, 2022, to September 30, 2023, primarily due to cash used in operating activities and dividends paid[120](index=120&type=chunk) - Cash used in operations improved to **$4.2 million** for the first nine months of 2023, from **$5.8 million** in 2022, mainly due to increased interest earned and more orders[122](index=122&type=chunk) - The company expects to continue paying a quarterly cash dividend of **$0.20** per common share and has **$21.9 million** remaining in its stock repurchase program[124](index=124&type=chunk)[125](index=125&type=chunk) [Critical Accounting Policies and Estimates](index=33&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Outlines critical accounting policies and estimates, including revenue recognition, commissions expense, and income taxes, requiring significant management judgment - Critical accounting policies include revenue recognition, commissions expense, and income taxes, requiring significant management judgment and estimates[129](index=129&type=chunk) [Revenue Recognition](index=33&type=section&id=Revenue%20Recognition) Revenue is recognized upon product shipment, with deferred revenue from unshipped orders, vouchers, and auto ship advances totaling $4.5 million - Revenue is recognized when performance obligations are satisfied, primarily from product sales upon shipment and title transfer to independent members[130](index=130&type=chunk) | Deferred Revenue Component | Sep 30, 2023 (in Thousands) | Dec 31, 2022 (in Thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Unshipped product and unredeemed product vouchers | $4,492 | $3,822 | | Auto ship advances | $1,756 | $1,775 | | Total Deferred Revenue | $6,248 | $5,597 | [Commissions Expense](index=33&type=section&id=Commissions%20Expense) Commissions are accrued when earned and recognized with revenue, with estimates for incentives and promotions regularly reviewed - Independent members earn commissions based on total personal and group bonus volume points, accrued when earned and recognized with related revenue[132](index=132&type=chunk) - Accrued commissions, including estimated costs for international recognition and other supplemental programs, totaled **$2.6 million** at September 30, 2023[133](index=133&type=chunk) [Income Taxes](index=34&type=section&id=Income%20Taxes) Deferred income taxes are recognized for temporary differences, with valuation allowances and assessments of tax benefits and foreign earnings repatriation - Deferred income taxes are recognized for temporary differences, with a valuation allowance against deferred tax assets in certain foreign jurisdictions but not in the U.S[134](index=134&type=chunk) - The company periodically reassesses its indefinite reinvestment assertion for foreign earnings, expecting minimal federal tax impact on repatriation due to the Tax Act, but potential state income tax provisions[135](index=135&type=chunk) - The effective tax rate is estimated quarterly based on anticipated annual pre-tax income, with adjustments for business variations, corporate structure changes, and geographic income mix[137](index=137&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exempt from providing quantitative and qualitative market risk disclosures as a smaller reporting company - The company is not required to provide quantitative and qualitative disclosures about market risk under smaller reporting company disclosure rules[138](index=138&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) Management confirmed effective disclosure controls and procedures as of September 30, 2023, with no material changes in internal control - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[139](index=139&type=chunk) - There were no material changes in internal control over financial reporting during the fiscal quarter ended September 30, 2023[140](index=140&type=chunk) [PART II - OTHER INFORMATION](index=36&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=36&type=section&id=Item%201.%20Legal%20Proceedings) No legal proceedings to report - No legal proceedings to report[143](index=143&type=chunk) [Item 1A. Risk Factors](index=36&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors since the Annual Report on Form 10-K for December 31, 2022 - No material changes to the risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022[144](index=144&type=chunk) [Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities,%20Use%20of%20Proceeds,%20and%20Issuer%20Purchases%20of%20Equity%20Securities) No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report - No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report[145](index=145&type=chunk) [Item 3. Defaults Upon Senior Securities](index=36&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities to report - No defaults upon senior securities to report[146](index=146&type=chunk) [Item 4. Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[147](index=147&type=chunk) [Item 5. Other Information](index=36&type=section&id=Item%205.%20Other%20Information) No other information to report - No other information to report[148](index=148&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with Form 10-Q, including officer certifications and Inline XBRL taxonomy files - The exhibits include certifications from the Principal Executive Officer and Principal Financial Officer, as well as Inline XBRL taxonomy extension files[149](index=149&type=chunk) [Signatures](index=37&type=section&id=Signatures) [Exhibit Index](index=38&type=section&id=Exhibit%20Index)

Natural Health Trends Corp. (NASDAQ:NHTC) Q2 2023 Earnings Conference Call August 2, 2023 11:30 AM ET Company Participants Michelle Glidewell - Senior Manager, NHT Global Corp Chris Sharng - President Scott Davidson - SVP & CFO Conference Call Participants Operator Greetings, and welcome to the Natural Health Trends Corp. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now ...

[FORM 10-Q General Information](index=1&type=section&id=FORM%2010-Q%20General%20Information) This section provides general information regarding the Quarterly Report on Form 10-Q filing [Filing Details](index=1&type=section&id=Filing%20Details) This document is a Quarterly Report on Form 10-Q for the period ended June 30, 2023, filed by Natural Health Trends Corp. with the SEC - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2023[1](index=1&type=chunk) - The Commission File Number is **001-36849**[1](index=1&type=chunk) [Registrant Information](index=1&type=section&id=Registrant%20Information) Natural Health Trends Corp. is a Delaware corporation with its principal executive offices located in Kowloon, Hong Kong - Registrant: NATURAL HEALTH TRENDS CORP[1](index=1&type=chunk) - Jurisdiction of incorporation: Delaware[1](index=1&type=chunk) - Principal executive offices: Units 1205-07, 12F, Mira Place Tower A, 132 Nathan Road, Tsimshatsui, Kowloon, Hong Kong[1](index=1&type=chunk) [Common Stock Information](index=1&type=section&id=Common%20Stock%20Information) The company's Common Stock, par value $0.001 per share, trades under the symbol NHTC on The NASDAQ Stock Market LLC Common Stock Listing | 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 | [Filer Status](index=1&type=section&id=Filer%20Status) The registrant is a non-accelerated filer and a smaller reporting company, having filed all required reports during the preceding 12 months and submitted all Interactive Data Files - The registrant has filed all required reports by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months[2](index=2&type=chunk) - The registrant has submitted electronically every Interactive Data File required pursuant to Rule 405 of Regulation S-T during the preceding 12 months[2](index=2&type=chunk) - The registrant is a Non-accelerated filer and a Smaller reporting company[3](index=3&type=chunk) - The registrant is not a shell company[3](index=3&type=chunk) [Shares Outstanding](index=1&type=section&id=Shares%20Outstanding) As of July 28, 2023, the number of shares outstanding of the registrant's common stock was 11,516,773 shares - As of July 28, 2023, the number of shares outstanding of the registrant's common stock was **11,516,773 shares**[3](index=3&type=chunk) [Forward-Looking Statements and Risk Factors](index=3&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factors) This section addresses future-oriented statements and potential risks that could impact the company's performance [Forward-Looking Statements](index=3&type=section&id=Forward-Looking%20Statements) This report contains forward-looking statements regarding future revenue, earnings, growth strategies, new products, operations, and market opportunities - Forward-looking statements relate to future revenue, earnings, growth strategies, new products and initiatives, future operations and operating results, and future business and market opportunities[6](index=6&type=chunk) - Statements are based on certain assumptions and involve risks and uncertainties that could cause actual results to differ materially[7](index=7&type=chunk) [Summary of Risk Factors](index=3&type=section&id=Summary%20of%20Risk%20Factors) The company faces significant risks, particularly related to its substantial Hong Kong and China operations, including adverse political and social developments, regulatory compliance, and economic conditions - Substantial portion of business derived from Hong Kong operations, with sales primarily to members in China, making the business highly sensitive to changes in these regions[7](index=7&type=chunk) - Adverse political and social developments in Hong Kong and the uncertain geopolitical environment can negatively impact operations and financial performance[7](index=7&type=chunk) - Business in China is subject to complex laws and regulations, and any violations or government actions could materially harm the company[7](index=7&type=chunk) - Experienced negative operating cash flows in 2022 and modest positive flows in 2020-2021, indicating a need for improved operating cash flows[7](index=7&type=chunk) - Risks include product concentration, lack of revenue diversification, high competition, failure of new products, reliance on limited third-party manufacturers, and challenges in foreign markets[7](index=7&type=chunk) - Legal and regulatory risks include potential lawsuits, claims, governmental proceedings, anti-bribery laws (e.g., FCPA), and compliance with direct-selling, privacy, data protection, and product claim regulations[7](index=7&type=chunk)[8](index=8&type=chunk) - Financial risks include currency exchange rate fluctuations, changes in tax laws, and unanticipated tax liabilities[8](index=8&type=chunk) - Operational risks involve maintaining effective internal controls, management changes, inability to attract/retain key personnel, loss of members, and risks associated with information technology systems, cybersecurity, and third-party servers[7](index=7&type=chunk)[9](index=9&type=chunk) [PART I - FINANCIAL INFORMATION](index=6&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section contains the company's unaudited consolidated financial statements and management's discussion and analysis [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Natural Health Trends Corp., including the Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, and Cash Flows, along with detailed notes explaining the company's accounting policies, revenue recognition, balance sheet components, fair value measurements, leases, income taxes, commitments, stock-based compensation, and segment information [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show a decrease in total assets and stockholders' equity from December 31, 2022, to June 30, 2023, primarily driven by a reduction in cash and cash equivalents Consolidated Balance Sheet Highlights (In Thousands) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | |:-----------------------------|:--------------------------|:------------------| | Cash and cash equivalents | $61,567 | $69,667 | | Total current assets | $69,947 | $77,551 | | Total assets | $74,816 | $82,817 | | Total current liabilities | $21,538 | $20,438 | | Total liabilities | $29,391 | $32,666 | | Total stockholders' equity | $45,425 | $50,151 | [Consolidated Statements of Operations](index=7&type=section&id=Consolidated%20Statements%20of%20Operations) For the three and six months ended June 30, 2023, the company reported a net loss and significantly reduced net income, respectively, compared to the prior year, primarily due to decreased net sales and a shift from income to loss from operations Consolidated Statements of Operations Highlights (In Thousands, Except Per Share Data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:-------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net sales | $10,511 | $13,360 | $22,372 | $24,906 | | Gross profit | $7,845 | $9,968 | $16,675 | $18,606 | | Income (loss) from operations | $(743) | $215 | $(1,137) | $(168) | | Other income, net | $442 | $175 | $1,123 | $285 | | Net income (loss) | $(219) | $183 | $38 | $78 | | Basic Net income (loss) per share | $(0.02) | $0.02 | $0.00 | $0.01 | | Diluted Net income (loss) per share | $(0.02) | $0.02 | $0.00 | $0.01 | [Consolidated Statements of Comprehensive Loss](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Loss) The company reported a comprehensive loss for both the three and six months ended June 30, 2023, primarily influenced by foreign currency translation adjustments Consolidated Statements of Comprehensive Loss Highlights (In Thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:-----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net income (loss) | $(219) | $183 | $38 | $78 | | Foreign currency translation adjustment | $(152) | $(256) | $(249) | $(461) | | Unrealized gains on available-for-sale securities | $11 | $36 | $8 | $13 | | Comprehensive loss | $(360) | $(37) | $(203) | $(370) | [Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity decreased from December 31, 2022, to June 30, 2023, primarily due to net loss, dividends declared, and foreign currency translation adjustments, partially offset by share-based compensation Stockholders' Equity Changes (Six Months Ended June 30, 2023, In Thousands) | Item | Amount (December 31, 2022) | Net Income (Loss) | Dividends Declared | Share-based Compensation | Foreign Currency Translation Adjustments | Unrealized Gains/Losses | Amount (June 30, 2023) | |:-----------------------------------------|:---------------------------|:------------------|:-------------------|:-------------------------|:-----------------------------------------|:------------------------|:-----------------------| | Total Stockholders' Equity | $50,151 | $(219) | $(4,608) | $85 | $(249) | $8 | $45,425 | [Consolidated Statements of Cash Flows](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The company experienced a net decrease in cash, cash equivalents, and restricted cash for the six months ended June 30, 2023, primarily driven by cash used in operating and financing activities Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, In Thousands) | Cash Flow Activity | 2023 | 2022 | |:------------------------------------------------------|:----------|:----------| | Net cash used in operating activities | $(3,340) | $(3,500) | | Net cash used in investing activities | $(14) | $(78) | | Net cash used in financing activities | $(4,608) | $(4,570) | | Effect of exchange rates on cash, cash equivalents and restricted cash | $(179) | $(506) | | Net decrease in cash, cash equivalents and restricted cash | $(8,141) | $(8,654) | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $61,605 | $75,711 | [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on the company's operations, significant accounting policies, revenue recognition, balance sheet components, fair value measurements, lease obligations, income tax positions, commitments, stock-based compensation plans, related party transactions, segment reporting, and a subsequent dividend declaration [Note 1. Nature of Operations and Summary of Significant Accounting Policies](index=12&type=section&id=Note%201.%20Nature%20of%20Operations%20and%20Summary%20of%20Significant%20Accounting%20Policies) Natural Health Trends Corp. operates as an international direct-selling and e-commerce company, selling personal care, wellness, and 'quality of life' products under the 'NHT Global' brand across various global markets - Natural Health Trends Corp. is an international direct-selling and e-commerce company, selling 'NHT Global' branded products[28](index=28&type=chunk) - The company has an active physical presence in the Americas, Greater China, Southeast Asia, South Korea, Japan, India, and Europe, and operates in Russia and Kazakhstan through a local service provider[28](index=28&type=chunk) - Unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information[29](index=29&type=chunk) - Consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries, with all significant inter-company balances and transactions eliminated[30](index=30&type=chunk) - As of June 30, 2023, **$3.8 million** in cash and cash equivalents were held in bank accounts in China, subject to foreign currency controls[30](index=30&type=chunk) - The adoption of ASU 2016-13 and ASU 2019-11 (Credit Losses) did not have a material impact on the Company's financial statements[36](index=36&type=chunk) [Note 2. Revenue](index=14&type=section&id=Note%202.%20Revenue) Revenue is recognized when performance obligations are satisfied, primarily from product sales upon shipment, with Hong Kong sales, largely to China, representing a significant concentration - Revenue is recognized when performance obligations are satisfied, primarily from product sales upon shipment when title passes to independent members[38](index=38&type=chunk) - A reserve for product returns is estimated and accrued, based on return policies (14 days to one year) and historical rates (**1% to 4% of sales**); sales returns were **1% of sales** for the six months ended June 30, 2023 and 2022[39](index=39&type=chunk) - Deferred revenue, primarily from unshipped product orders and unredeemed product vouchers, totaled **$5.1 million** as of June 30, 2023, and **$3.8 million** as of December 31, 2022[41](index=41&type=chunk) Net Sales by Product and Service (In Thousands) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:-----------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Product sales | $10,154 | $12,033 | $21,202 | $22,355 | | Administrative fees, freight and other | $410 | $1,373 | $1,255 | $2,630 | | Less: sales returns | $(53) | $(46) | $(85) | $(79) | | Total net sales | $10,511 | $13,360 | $22,372 | $24,906 | - No single market other than Hong Kong had net sales greater than **10% of total net sales**; substantially all Hong Kong revenues are derived from sales to members in China[45](index=45&type=chunk) [Note 3. Balance Sheet Components](index=16&type=section&id=Note%203.%20Balance%20Sheet%20Components) This note details the composition of key balance sheet items, including cash, cash equivalents, restricted cash, inventories, other accrued expenses, and deferred revenue, showing changes between December 31, 2022, and June 30, 2023 Balance Sheet Components (In Thousands) | Component | June 30, 2023 | December 31, 2022 | |:--------------------------------------------|:--------------|:------------------| | Cash, cash equivalents and restricted cash | $61,605 | $69,746 | | Inventories | $4,715 | $4,525 | | Other accrued expenses | $1,235 | $1,181 | | Deferred revenue | $6,851 | $5,597 | - Deferred revenue includes **$5.1 million** for unshipped product and unredeemed product vouchers, and **$1.8 million** for auto ship advances as of June 30, 2023[50](index=50&type=chunk) [Note 4. Fair Value Measurements](index=16&type=section&id=Note%204.%20Fair%20Value%20Measurements) The company's cash equivalents include investments in money market funds, government and municipal debt securities, and corporate debt securities, classified as available-for-sale and carried at fair value - Cash equivalents include investments in money market funds, government and municipal debt securities, and corporate debt securities, classified as available-for-sale[51](index=51&type=chunk) Investments by Fair Value Level (In Thousands) | Investment Category | Fair Value Level | Adjusted Cost (June 30, 2023) | Gross Unrealized Gains (Losses) (June 30, 2023) | Fair Value (June 30, 2023) | |:------------------------------------|:-----------------|:------------------------------|:------------------------------------------------|:---------------------------| | Money market funds | Level 1 | $994 | $— | $994 | | Government and municipal debt securities | Level 2 | $28,343 | $2 | $28,345 | | Corporate debt securities | Level 2 | $21,173 | $(10) | $21,163 | | Total investments | | $50,510 | $(8) | $50,502 | - Unrealized losses as of June 30, 2023, were primarily driven by market risk and not credit risk, with no allowance required[54](index=54&type=chunk) [Note 5. Leases](index=17&type=section&id=Note%205.%20Leases) The company leases office and retail spaces in various global locations, with a total lease cost of $727,000 for the six months ended June 30, 2023, a weighted-average remaining lease term of 4.7 years, and a discount rate of 4.2% - The company leases office and retail spaces in Hong Kong, California, British Columbia, New Jersey, China, Peru, Japan, Taiwan, South Korea, Malaysia, Singapore, Thailand, India, and the Cayman Islands[55](index=55&type=chunk)[56](index=56&type=chunk) Lease Costs (In Thousands) | Lease Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:-------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Operating leases | $321 | $328 | $651 | $662 | | Short-term leases | $39 | $42 | $76 | $88 | | Total lease cost | $360 | $370 | $727 | $750 | Operating Lease Metrics (As of June 30, 2023) | Metric | Value | |:-----------------------------------------|:------| | Weighted-average remaining lease term (in years) | 4.7 | | Weighted-average discount rate | 4.2% | Annual Scheduled Lease Payments (In Thousands) | Year | Amount | |:----------------------|:-------| | Remainder of 2023 | $562 | | 2024 | $1,012 | | 2025 | $962 | | 2026 | $579 | | 2027 | $299 | | Thereafter | $679 | | Total lease payments | $4,093 | | Less: imputed interest | $(380) | | Present value of lease liabilities | $3,713 | [Note 6. Income Taxes](index=18&type=section&id=Note%206.%20Income%20Taxes) The company recognized an income tax benefit for the three and six months ended June 30, 2023, primarily due to foreign income inclusions and a year-to-date consolidated loss, maintaining a valuation allowance against deferred tax assets in certain foreign jurisdictions - Effective income tax rate for Q2 and H1 2023 includes estimates for foreign income inclusions (GILTI and Subpart F income)[62](index=62&type=chunk) - No valuation allowance against U.S. deferred tax assets; however, a valuation allowance is maintained against deferred tax assets in certain foreign jurisdictions with overall net operating losses[62](index=62&type=chunk) - As of June 30, 2023, income taxes payable for the repatriation tax on deemed foreign income totaled **$9.1 million**, with **$5.1 million** reflected as a noncurrent liability[63](index=63&type=chunk) - The company does not expect to have U.S. federal net operating loss carryover beyond 2023 but has **$438,000** in U.S. state net operating loss carryforwards and approximately **$1.4 million** in foreign net operating loss carryforwards[63](index=63&type=chunk) [Note 7. Commitments and Contingencies](index=18&type=section&id=Note%207.%20Commitments%20and%20Contingencies) The company has employment agreements with management that include provisions for specified payments in the event of a change in control or termination without cause - Employment agreements with management include provisions for specified payments upon a change in control or termination without cause[66](index=66&type=chunk) [Note 8. Stock-Based Incentive Plans](index=19&type=section&id=Note%208.%20Stock-Based%20Incentive%20Plans) The company operates the 2016 Equity Incentive Plan for restricted stock and a Phantom Equity Plan for cash-settled phantom shares, with grants and associated compensation expenses recognized in H1 2023 - The 2016 Equity Incentive Plan allows for various equity awards, with **1,121,683 shares** remaining available for issuance as of June 30, 2023[67](index=67&type=chunk) - On February 6, 2023, **97,900 shares** of restricted common stock were granted to employees, vesting quarterly over three years[68](index=68&type=chunk) Restricted Stock Activity (In Thousands, Except Issuance Price) | Metric | Shares | Issuance Price | |:-------------------------------------|:---------|:---------------| | Nonvested at December 31, 2022 | — | — | | Granted | 97,900 | $4.84 | | Vested | (16,324) | $4.84 | | Nonvested at June 30, 2023 | 81,576 | $4.84 | - Share-based compensation expense for restricted stock was **$39,000** for Q2 2023 and **$85,000** for H1 2023[69](index=69&type=chunk) - The Phantom Equity Plan grants phantom shares entitling grantees to a cash payment equal to the fair market value of common stock upon vesting, accounted for as liabilities[70](index=70&type=chunk)[74](index=74&type=chunk) - On February 7, 2023, **212,937 phantom shares** were granted to employees and non-employee directors, vesting in eight equal three-month increments subject to time-based and performance conditions, with a maximum payment value of **$12.00 per share**[73](index=73&type=chunk) - Compensation expense for phantom shares was **$133,000** for Q2 2023 and **$260,000** for H1 2023[75](index=75&type=chunk) [Note 9. Stockholders' Equity](index=21&type=section&id=Note%209.%20Stockholders'%20Equity) The company declared and paid quarterly cash dividends of $0.20 per share, totaling $4.6 million for the first six months of 2023 and 2022, with $21.9 million remaining under the stock repurchase program - Cash dividends of **$0.20 per common share** were declared and paid during each of the first two quarters of 2023 and 2022, totaling **$4.6 million** in each six-month period[77](index=77&type=chunk) - As of June 30, 2023, **$21.9 million** of the **$70.0 million** stock repurchase program remained available for future purchases[78](index=78&type=chunk) Changes in Accumulated Other Comprehensive Loss (Six Months Ended June 30, 2023, In Thousands) | Component | Balance, Dec 31, 2022 | Other Comprehensive Loss (Q1 2023) | Balance, Mar 31, 2023 | Other Comprehensive Income (Loss) (Q2 2023) | Balance, Jun 30, 2023 | |:----------------------------------------|:----------------------|:-----------------------------------|:----------------------|:--------------------------------------------|:----------------------| | Foreign Currency Translation Adjustments | $(988) | $(97) | $(1,085) | $(152) | $(1,237) | | (Losses) on Available-For-Sale Investments | $(16) | $(3) | $(19) | $11 | $(8) | | Total | $(1,004) | $(100) | $(1,104) | $(141) | $(1,245) | [Note 10. Related Party Transactions](index=21&type=section&id=Note%2010.%20Related%20Party%20Transactions) The company has a Royalty Agreement and License with Broady Health Sciences, L.L.C. (BHS) for the product ReStor™, paying royalties based on a price per unit - The company has a Royalty Agreement and License with Broady Health Sciences, L.L.C. (BHS) for the product ReStor™[80](index=80&type=chunk) - Royalties of **$11,000** and **$13,000** were recognized during the three months ended June 30, 2023 and 2022, respectively[80](index=80&type=chunk) - Royalties of **$22,000** and **$26,000** were recognized during the six months ended June 30, 2023 and 2022, respectively[80](index=80&type=chunk) [Note 11. Segment Information](index=22&type=section&id=Note%2011.%20Segment%20Information) The company operates primarily through a 'Primary Reporting Segment' which aggregates most markets, and separate segments for China (e-commerce retail) and Russia/Kazakhstan (third-party service provider), with Hong Kong remaining the largest revenue contributor - The company aggregates most operating segments into a 'Primary Reporting Segment' due to similar economic characteristics and product nature[82](index=82&type=chunk) - China and Russia/Kazakhstan are reported as separate segments due to different operating models (e-commerce retail and third-party service provider, respectively)[82](index=82&type=chunk) Net Sales by Geographic Area (In Thousands) | Geographic Area | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:--------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Hong Kong | $8,306 | $10,716 | $17,979 | $19,492 | | China | $247 | $486 | $663 | $967 | | Taiwan | $454 | $624 | $908 | $1,193 | | United States | $272 | $272 | $551 | $528 | | Total net sales | $10,511 | $13,360 | $22,372 | $24,906 | - Substantially all Hong Kong revenues are derived from the sale of products delivered to members in China[85](index=85&type=chunk) [Note 12. Subsequent Event](index=23&type=section&id=Note%2012.%20Subsequent%20Event) On July 31, 2023, the Board of Directors declared a quarterly cash dividend of $0.20 per common share, payable on August 25, 2023, to stockholders of record on August 15, 2023 - On July 31, 2023, the Board of Directors declared a quarterly cash dividend of **$0.20 per common share**[86](index=86&type=chunk) - The dividend is payable on August 25, 2023, to stockholders of record on August 15, 2023[86](index=86&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, highlighting a decrease in net sales and a net loss for the quarter, primarily driven by challenges in the Greater China market [Business Overview](index=24&type=section&id=Business%20Overview) Natural Health Trends Corp. is an international direct-selling and e-commerce company operating under the 'NHT Global' brand, with a significant presence in Greater China, facing ongoing challenges from political, social, and regulatory developments - Natural Health Trends Corp. is an international direct-selling and e-commerce company selling personal care, wellness, and 'quality of life' products under the 'NHT Global' brand[89](index=89&type=chunk) - Active members decreased to **36,730** at June 30, 2023, from **38,660** at December 31, 2022, and **43,020** at June 30, 2022[90](index=90&type=chunk) - Approximately **91% of net sales** are generated from subsidiaries outside the Americas, with Hong Kong subsidiary sales representing **79% of net sales** in the latest fiscal quarter, substantially derived from sales to members in China[91](index=91&type=chunk) - The company operates an e-commerce direct selling platform in Hong Kong and a separate e-commerce retail platform in China, neither of which currently requires a direct selling license in China[92](index=92&type=chunk) - The '100-day campaign' by the Chinese government targeting health product companies, along with its extension and aftermath, continues to negatively impact business in China[94](index=94&type=chunk)[95](index=95&type=chunk) - The COVID-19 pandemic and related control measures, particularly in China and Hong Kong, significantly disrupted operations in 2022, though a less restrictive business environment continued through Q2 2023[96](index=96&type=chunk)[97](index=97&type=chunk) - Hong Kong net sales for the first six months of 2023 were lower than 2022, primarily due to changes in deferred revenue, resulting in a loss from operations and negative cash flows[101](index=101&type=chunk) [Statement of Operations Presentation](index=27&type=section&id=Statement%20of%20Operations%20Presentation) The company's revenue is primarily derived from product sales to independent members, recognized upon shipment, with member commissions being the most significant operating expense, representing 42.5% of net sales for the six months ended June 30, 2023 - Revenue is mainly from product sales to independent members, recognized upon shipment, with a reserve for product returns[102](index=102&type=chunk) - Cost of sales includes products from third-party manufacturers, freight, import duties, packing materials, product royalties, promotional materials, purchasing, receiving, inspection, and warehousing costs[103](index=103&type=chunk) - Member commissions are the most significant expense, paid weekly based on accumulated bonus volume from down-line member purchases across all geographic markets[104](index=104&type=chunk) - Commissions represented **43%** and **42% of net sales** for the first six months of 2023 and 2022, respectively[107](index=107&type=chunk) - Selling, general and administrative expenses include administrative compensation, travel, credit card fees, professional fees, occupancy costs, and selling/marketing/promotion expenses[108](index=108&type=chunk) - Operating results are affected by foreign currency exchange rates, as sales are transacted in local currencies and most product purchases are in U.S. dollars[109](index=109&type=chunk) [Results of Operations](index=28&type=section&id=Results%20of%20Operations) Net sales decreased by 21% for Q2 2023 and 10% for H1 2023 compared to the prior year, primarily due to a decline in Hong Kong sales and a slowdown in China and Taiwan, while other income significantly increased due to higher interest earned on cash equivalents Operating Results as a Percentage of Net Sales | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:-------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net sales | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of sales | 25.4% | 25.4% | 25.5% | 25.3% | | Gross profit | 74.6% | 74.6% | 74.5% | 74.7% | | Commissions expense | 42.9% | 43.2% | 42.5% | 42.2% | | Selling, general and administrative expenses | 38.8% | 29.8% | 37.1% | 33.2% | | Income (loss) from operations | (7.1)% | 1.6% | (5.1)% | (0.7)% | | Other income, net | 4.2% | 1.3% | 5.0% | 1.2% | | Net income (loss) | (2.1)% | 1.4% | 0.2% | 0.3% | [Net Sales](index=29&type=section&id=Net%20Sales) Net sales decreased by 21% to $10.5 million for Q2 2023 and 10% to $22.4 million for H1 2023, primarily due to a $2.4 million (22%) decrease in Hong Kong net sales, influenced by deferred revenue changes and lower administrative fees - Net sales decreased by **$2.8 million (21%)** to **$10.5 million** for the three months ended June 30, 2023, compared to **$13.4 million** in the prior year[112](index=112&type=chunk) - Hong Kong net sales decreased by **$2.4 million (22%)** over the comparable period, primarily due to a **$1.2 million** increase in deferred revenue in Q2 2023 versus a **$1.4 million** decrease in Q2 2022, and lower administrative fees[112](index=112&type=chunk) - Net sales outside Hong Kong decreased by **$439,000 (17%)** for Q2 2023 and **$1.0 million (19%)** for H1 2023, attributed to a slowdown in China and Taiwan, partially offset by improved results in the Americas[112](index=112&type=chunk)[113](index=113&type=chunk) - As of June 30, 2023, deferred revenue was **$6.9 million**, consisting of **$5.1 million** for unshipped product orders/unredeemed vouchers and **$1.8 million** in auto ship advances[113](index=113&type=chunk) [Gross Profit](index=29&type=section&id=Gross%20Profit) Gross profit margin remained consistent at 74.6% for the three months ended June 30, 2023 and 2022, and 74.5% for the six months ended June 30, 2023, compared to 74.7% in the prior year, indicating stable product profitability - Gross profit was **74.6% of net sales** for the three months ended June 30, 2023 and 2022[114](index=114&type=chunk) - Gross profit was **74.5% of net sales** for the six months ended June 30, 2023, compared with **74.7%** for the six months ended June 30, 2022[114](index=114&type=chunk) [Commissions Expense](index=29&type=section&id=Commissions%20Expense) Commissions expense as a percentage of net sales slightly decreased to 42.9% for Q2 2023 (from 43.2%) and increased to 42.5% for H1 2023 (from 42.2%), primarily due to lower commission payouts partially offset by higher supplemental incentive costs - Commissions were **42.9% of net sales** for the three months ended June 30, 2023, compared with **43.2%** in the prior year[115](index=115&type=chunk) - Commissions were **42.5% of net sales** for the six months ended June 30, 2023, compared with **42.2%** in the prior year[115](index=115&type=chunk) - The slight decrease in commissions as a percentage of net sales (excluding administrative fee impact) was primarily due to lower commission payouts, partially offset by higher supplemental incentive costs[115](index=115&type=chunk) [Selling, General and Administrative Expenses](index=29&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling, general and administrative expenses increased to $4.1 million for Q2 2023 from $4.0 million in the prior year, while remaining consistent at $8.3 million for H1 2023 compared to H1 2022 - Selling, general and administrative expenses increased to **$4.1 million** for the three months ended June 30, 2023, from **$4.0 million** in the same period a year ago[116](index=116&type=chunk) - For the six months ended June 30, 2023, these expenses were **$8.3 million**, consistent with the prior year[116](index=116&type=chunk) [Other Income, Net](index=30&type=section&id=Other%20Income,%20Net) Other income significantly increased to $442,000 for Q2 2023 (from $175,000) and $1.1 million for H1 2023 (from $285,000), primarily driven by greater interest earned on cash equivalents - Other income increased to **$442,000** for the three months ended June 30, 2023, compared with **$175,000** in the same period a year ago[117](index=117&type=chunk) - For the six months ended June 30, 2023, other income increased to **$1.1 million** compared with **$285,000** in the comparable period a year ago[117](index=117&type=chunk) - The increase in other income is primarily due to greater interest earned on cash equivalents[117](index=117&type=chunk) [Income Taxes](index=31&type=section&id=Income%20Taxes) The company recognized an income tax benefit of $82,000 for Q2 2023 and $52,000 for H1 2023, primarily due to foreign income inclusions (GILTI and Subpart F income) and a year-to-date consolidated loss - An income tax benefit of **$82,000** was recognized during the three months ended June 30, 2023, compared to a provision of **$207,000** in the prior year[119](index=119&type=chunk) - An income tax benefit of **$52,000** was recognized during the six months ended June 30, 2023, compared to a provision of **$39,000** in the prior year[119](index=119&type=chunk) - The tax benefit in H1 2023 resulted primarily from foreign income inclusions (GILTI and Subpart F income), tax benefits in foreign jurisdictions, and a year-to-date consolidated loss[119](index=119&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2023, the company had $61.6 million in cash and cash equivalents, a decrease of $8.1 million from December 31, 2022, primarily due to operating cash usage and dividend payments, but believes existing liquidity is adequate for foreseeable operations - Cash and cash equivalents totaled **$61.6 million** at June 30, 2023, a decrease of **$8.1 million** from December 31, 2022[120](index=120&type=chunk) - The decrease in cash was primarily due to cash used in operating activities and dividend payments during the first six months of 2023[120](index=120&type=chunk) - Working capital decreased by **$8.7 million** to **$48.4 million** as of June 30, 2023, with a current assets to current liabilities ratio of **3.2 to 1.0**[120](index=120&type=chunk) - Cash used in operations was **$3.3 million** for H1 2023, an improvement of **$1.6 million** (excluding repatriation tax payments) compared to H1 2022, due to more orders and less employee-related payouts[121](index=121&type=chunk) - Quarterly cash dividends of **$0.20 per common share**, totaling **$4.6 million**, were paid in H1 2023 and are expected to continue[122](index=122&type=chunk) - As of June 30, 2023, **$21.9 million** remained available under the **$70.0 million** stock repurchase program[123](index=123&type=chunk) - The company believes existing internal liquidity is adequate to fund normal business operations and financial commitments for the foreseeable future[124](index=124&type=chunk) - Priority is to invest resources in Greater China, Southeast Asia, India, South America, and Europe, including establishing China-based manufacturing, increasing brand awareness, and building infrastructure for a potential China direct selling license[125](index=125&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies and estimates involve revenue recognition, member commissions, and income taxes, which require significant management judgment and assumptions - Critical accounting policies and estimates are related to revenue recognition, member commissions, and income taxes[127](index=127&type=chunk) - Revenue recognition involves estimating product returns and accounting for deferred revenue from unshipped orders, unredeemed vouchers, and auto ship advances[128](index=128&type=chunk)[129](index=129&type=chunk) - Commissions expense involves accruing commissions when earned and estimating costs for incentives based on qualifiers and per qualifier cost, which are regularly reviewed and updated[129](index=129&type=chunk)[130](index=130&type=chunk) - Income taxes involve recognizing deferred income taxes, evaluating the probability of realizing deferred tax assets (including valuation allowances), and assessing uncertain tax positions[132](index=132&type=chunk) - The company's effective tax rate is estimated quarterly and adjusted based on business variations, corporate structure changes, geographic income mix, and tax laws[135](index=135&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable to the company under smaller reporting company disclosure rules - This item is not applicable under smaller reporting company disclosure rules[136](index=136&type=chunk) [Item 4. Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[137](index=137&type=chunk) - No changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[139](index=139&type=chunk) [PART II - OTHER INFORMATION](index=35&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section contains other required disclosures, including legal proceedings, risk factors, and exhibits [Item 1. Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) There are no legal proceedings to report - No legal proceedings to report[140](index=140&type=chunk) [Item 1A. Risk Factors](index=35&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors since the Annual Report on Form 10-K for the year ended December 31, 2022[141](index=141&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There are no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities and use of proceeds to report[141](index=141&type=chunk) [Item 3. Defaults Upon Senior Securities](index=35&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There are no defaults upon senior securities to report - No defaults upon senior securities to report[141](index=141&type=chunk) [Item 4. Mine Safety Disclosures](index=35&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[141](index=141&type=chunk) [Item 5. Other Information](index=35&type=section&id=Item%205.%20Other%20Information) There is no other information to report - No other information to report[141](index=141&type=chunk) [Item 6. Exhibits](index=35&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and various XBRL-related documents Exhibits Filed | Exhibit Number | Exhibit Description | |:---------------|:---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | 31.1 | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 31.2 | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 32.1 | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | 101.SCH | Inline XBRL Taxonomy Extension Schema | | 101.CAL | Inline XBRL Taxonomy Extension Calculation | | 101.DEF | Inline XBRL Taxonomy Extension Definition | | 101.LAB | Inline XBRL Taxonomy Extension Labels | | 101.PRE | Inline XBRL Taxonomy Extension Presentation | | 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | [Signatures](index=36&type=section&id=Signatures) The report was duly signed on August 2, 2023, by Timothy S. Davidson, Senior Vice President and Chief Financial Officer (Principal Financial Officer) of Natural Health Trends Corp - The report was signed on August 2, 2023, by Timothy S. Davidson, Senior Vice President and Chief Financial Officer[144](index=144&type=chunk) [Exhibit Index](index=37&type=section&id=Exhibit%20Index) This section provides an index of the exhibits included in the Form 10-Q filing, detailing certifications and XBRL-related documents - The Exhibit Index lists certifications from the Principal Executive Officer and Principal Financial Officer, and various XBRL-related documents[145](index=145&type=chunk)[146](index=146&type=chunk)

Natural Health Trends Corp. (NASDAQ:NHTC) Q1 2023 Results Earnings Conference Call May 3, 2023 11:30 AM ET Company Participants Michelle Glidewell - Senior Manager, NHT Global Corp Chris Sharng - President Scott Davidson - Senior Vice President and Chief Financial Officer Conference Call Participants Operator Greetings. Welcome to the Natural Health Trends Corp. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note, this c ...

Financial Performance - Net sales for the three months ended March 31, 2023, were $11,861,000, an increase from $11,546,000 in the same period of 2022, representing a growth of 2.7%[15] - Gross profit for the same period was $8,830,000, compared to $8,638,000 in the prior year, indicating a slight increase of 2.2%[15] - Net income for the three months ended March 31, 2023, was $257,000, a turnaround from a net loss of $105,000 in the same period of 2022[15] - The company reported a comprehensive income of $157,000 for the three months ended March 31, 2023, compared to a comprehensive loss of $333,000 in the same period of 2022[18] - Product sales for the three months ended March 31, 2023, were $11.048 million, compared to $10.322 million for the same period in 2022, reflecting an increase of 7.0%[41] - The primary reporting segment's income from operations for the three months ended March 31, 2023, was $1.827 million, compared to $1.915 million for the same period in 2022, reflecting a decrease of 4.6%[83] - Other income increased to $681,000 for the three months ended March 31, 2023, compared to $110,000 in the same period last year[118] Assets and Liabilities - Total current assets decreased to $75,012,000 as of March 31, 2023, down from $77,551,000 at the end of 2022, reflecting a decline of 3.3%[13] - Total liabilities decreased to $32,132,000 as of March 31, 2023, compared to $32,666,000 at the end of 2022, a reduction of 1.6%[13] - Cash and cash equivalents as of March 31, 2023, were $66,610,000, down from $69,667,000 at the end of 2022, a decrease of 4.0%[13] - Working capital decreased by $2.1 million to $55.0 million as of March 31, 2023, compared to December 31, 2022[121] Expenses - Operating expenses for the three months ended March 31, 2023, totaled $9,224,000, slightly higher than $9,021,000 in the same period of 2022, an increase of 2.3%[15] - Selling, general and administrative expenses decreased to $4.2 million for the three months ended March 31, 2023, from $4.3 million in the same period last year[117] - Compensation expense related to phantom shares for the three months ended March 31, 2023, was $127,000, down from $196,000 for the same period in 2022[73] - Commissions expense was 42.1% of net sales for the three months ended March 31, 2023, up from 41.0% in the prior year[116] Cash Flow - The company reported a net cash used in operating activities of $696,000 for the three months ended March 31, 2023, significantly improved from $2.348 million used in the same period of 2022[24] - Cash, cash equivalents, and restricted cash at the end of the period were $66.648 million, down from $79.464 million at the end of March 31, 2022[24] - The effect of exchange rates on cash, cash equivalents, and restricted cash resulted in a loss of $91,000 for the three months ended March 31, 2023[24] Market and Operations - The company operates in multiple international markets, including the Americas, Greater China, Southeast Asia, and Europe, with a focus on direct-selling and e-commerce for personal care and wellness products[26] - The company generated approximately 94% of its net sales from subsidiaries located outside the Americas, with the Hong Kong subsidiary accounting for 82% of net sales in the latest fiscal quarter[91] - The company plans to focus resources on investing in Greater China and other key markets, including Southeast Asia, India, South America, and Europe[126] Challenges and Outlook - The company anticipates continued adverse impacts on financial performance in the near term due to ongoing challenges in the market[101] - The Chinese government has not issued any new direct selling licenses since the 100-day campaign began in January 2019, which has negatively affected the company's operations[94] - Recent political and social developments in Hong Kong have adversely affected operations, leading to the cessation of member meetings and events in the region[99] - The COVID-19 pandemic and related government control measures have significantly disrupted operations, particularly in 2022, but there are signs of improvement in 2023[97] Shareholder Returns - The company declared and paid cash dividends of $0.20 per common share during the first quarter of 2023, totaling $2.3 million[75] - The company has $21.9 million remaining available for future purchases under its stock repurchase program, which was authorized for a total of $70.0 million[76] Tax and Regulatory Matters - The effective income tax rate for the three months ended March 31, 2023, includes estimates for foreign income inclusions such as global intangible low-taxed income (GILTI)[59] - The company has a valuation allowance against deferred tax assets in certain foreign jurisdictions with an overall net operating loss as of March 31, 2023[59] - The Company does not expect a material impact on its financial statements from the finalized U.S. tax regulations effective March 7, 2022[135] Membership and Commissions - As of March 31, 2023, the company had 38,330 active members, a decrease from 38,660 at December 31, 2022, and 44,490 at March 31, 2022[90] - Member commissions represented 42% of net sales in the first three months of 2023, compared to 41% in the same period of 2022[107]

Membership and Revenue - The total number of active members decreased from 45,760 in 2021 to 38,660 in 2022, representing a decline of approximately 15.4%[33] - Approximately 78% of the company's revenue was generated in Hong Kong, with substantially all derived from sales to members in China[79] - Net sales for the year ended December 31, 2022, were $49,134,000, a decrease of 18.2% from $60,005,000 in 2021[247] - The company experienced a 16% decrease in active members at the end of 2022 compared to the end of 2021, contributing to a decline in year-over-year sales[104] - The company reported a net income of $313,000 for 2022, a decline of 71.1% from $1,085,000 in 2021[247] Operational Challenges - Revenue from Hong Kong, primarily derived from product sales delivered to members in China, has been significantly impacted by regulatory changes and market conditions[35] - Recent disruptions, including the COVID-19 pandemic and political developments in Hong Kong, have adversely affected business operations and market performance[35] - The ongoing 100-day campaign in China is expected to negatively impact the company's business in the near term but may benefit the market in the long term by eliminating substandard products[68] - The business environment in China remains challenging due to regulatory scrutiny and negative social media sentiment towards health product companies[68] - The company has ceased conducting member meetings and events in Hong Kong due to political unrest and COVID-19, negatively affecting marketing and distribution efforts[82] Regulatory Environment - The regulatory environment in China imposes restrictions on multi-level compensation and member recruitment activities, impacting the company's operations in that market[56] - The company is subject to extensive governmental regulations regarding product marketing and safety, including compliance with FDA and FTC requirements in the U.S.[59] - The product registration process in China can take from nine months to over 18 months, affecting the launch of new products in that market[62] - The company is subject to various regulatory issues, including foreign exchange control and scrutiny from government authorities regarding compliance with local laws[69] - The company is subject to evolving privacy and data protection laws, including the Data Security Law enacted in China in September 2021, which imposes significant compliance obligations[130] Financial Performance - Gross profit for 2022 was $36,473,000, down 18.9% from $44,995,000 in the previous year[247] - Total operating expenses decreased to $36,743,000 in 2022, compared to $43,424,000 in 2021, reflecting a reduction of 15.4%[247] - Basic net income per common share for 2022 was $0.03, down from $0.10 in 2021[247] - Total assets decreased to $82,817,000 as of December 31, 2022, from $98,355,000 at the end of 2021, a reduction of 15.7%[245] - The company experienced a foreign currency translation adjustment loss of $514,000 in 2022, compared to a loss of $149,000 in 2021[250] Compensation and Member Engagement - The compensation plan allows members to earn income through commissions based on bonus volume points from product purchases made by their down-line members, with commissions paid weekly[45] - Members can earn commissions based on the accumulated bonus volume from product purchases, with specific requirements for eligibility, including potential nominal monthly purchases[46] - Compensation to members represented approximately 42% of net sales in 2022, which poses a risk to profitability if increased[110] - The company employs a binary compensation plan with unilevel features, allowing members to sponsor others across different countries, enhancing global reach[45] - The marketing strategy includes sponsoring promotional meetings and training events to educate members about products and marketing plans, fostering community engagement[34] Product and Supply Chain - The company sources products from various global suppliers, ensuring compliance with regulatory requirements and maintaining product quality[24] - The company continues to innovate by sourcing unique and proprietary products based on market trends and scientific findings, enhancing its product portfolio[22] - The introduction of new products is critical for member productivity; failure to do so may harm business results[93] - The company relies on a limited number of independent third parties for manufacturing, which poses risks related to supply chain disruptions[94] - At least 10% of total revenue is derived from Premium Noni Juice, Enhanced Essential Probiotics, and Triotein™ products, all sourced from a single supplier[89] Market Competition - The company faces competitive risks from larger multinational corporations and local operators in the network marketing industry[74] - The company competes with other direct selling organizations for member recruitment, which may affect its ability to attract and retain members[99] - The company faces significant competition from larger organizations with more resources and a wider array of products, impacting member recruitment and retention[91] - Political and economic risks in foreign markets may impede growth and profitability[95] - Trade tensions between the United States and China may adversely affect global economic conditions and the company's financial results[123] Technology and Data Security - The company utilizes a proprietary web-based system for order processing and has automated financial reporting through Oracle's E-Business Suite, improving operational efficiency[36] - The company has implemented technical and administrative safeguards to maintain the security of its information technology systems, but risks of data breaches and system disruptions remain[166] - The company relies on third-party vendors for hosting most of its systems and data, exposing it to risks related to disruptions or intrusions of those servers[170] - Any interruption in information technology systems could have a material adverse effect on the company's business and financial results[162] - The company is exposed to regulatory scrutiny and potential fines due to compliance with privacy and data protection laws, which could adversely affect its financial condition[169]

Natural Health Trends Corp. (NASDAQ:NHTC) Q4 2022 Earnings Conference Call February 8, 2023 11:30 AM ET Company Participants Michelle Glidewell – Senior Manager, NHT Global Corp Chris Sharng – President Scott Davidson – Senior Vice President and Chief Financial Officer Conference Call Participants Operator Greetings. Welcome to the Natural Health Trends Corp. Fourth Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I will now turn the con ...

Financial Data and Key Metrics Changes - Total revenue for Q3 2022 was $11.7 million, a decrease of 12% compared to $13.4 million in Q2 2022 and an 18% decrease from $14.3 million in Q3 2021 [7][13] - Active member base decreased by 4% to 41,170 from 43,020 at the end of Q2 2022, and down 10% from 45,950 at the end of Q3 2021 [13] - Gross profit margin was 73.6%, down from 74.3% in Q3 2021 due to fixed costs on lower net sales [14] - Net income for Q3 2022 was $47,000 or breakeven per diluted share, compared to $471,000 or $0.04 per diluted share in Q3 2021 [15] Business Line Data and Key Metrics Changes - The company hosted an incentive trip in Xiamen, China, with around 150 members participating, indicating efforts to maintain member engagement despite challenges [8] - Successful training events were held in North America, including three Healthy Lifestyle Center Plus locations, which helped attract new customers [9] Market Data and Key Metrics Changes - The ongoing COVID-related measures in China have adversely impacted results, affecting consumer-facing businesses [6][13] - The company is focusing on digital initiatives to improve customer acquisition and overall shopping experience, which is expected to drive future growth [11] Company Strategy and Development Direction - The company is committed to customer growth, market expansion, new product innovation, and digital enhancement initiatives to improve performance and productivity [11] - There is a focus on local sales initiatives to support teams and strengthen member connections [10] Management Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by COVID-19 regulations and global economic factors but expressed confidence in the company's fundamentals [11] - The company anticipates that challenges will continue to impact financial results due to ongoing Zero COVID policies in China [13] Other Important Information - Total cash and cash equivalents were $70.7 million at the end of Q3 2022, down from $75.6 million at the end of Q2 2022 [15] - A quarterly cash dividend of $0.20 per share was declared, payable on November 25, 2022 [15] Q&A Session Summary Question: What are the impacts of COVID-19 on the business? - Management noted that extended COVID-related measures in China have adversely impacted results and consumer engagement [6][13] Question: What initiatives are being taken to improve member engagement? - The company is implementing digital initiatives and hosting in-person events to enhance member engagement and training [11][9] Question: How does the company plan to address the decline in active members? - The focus is on local sales initiatives and enhancing the overall shopping experience to attract and retain members [10][11]