NHT Global(NHTC) - 2023 Q2 - Quarterly Report

FORM 10-Q General Information This section provides general information regarding the Quarterly Report on Form 10-Q filing Filing Details 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] - The Commission File Number is 001-36849[1] Registrant Information Natural Health Trends Corp. is a Delaware corporation with its principal executive offices located in Kowloon, Hong Kong - Registrant: NATURAL HEALTH TRENDS CORP[1] - Jurisdiction of incorporation: Delaware[1] - Principal executive offices: Units 1205-07, 12F, Mira Place Tower A, 132 Nathan Road, Tsimshatsui, Kowloon, Hong Kong[1] Common Stock Information 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 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] - The registrant has submitted electronically every Interactive Data File required pursuant to Rule 405 of Regulation S-T during the preceding 12 months[2] - The registrant is a Non-accelerated filer and a Smaller reporting company[3] - The registrant is not a shell company[3] Shares Outstanding 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] Forward-Looking Statements and Risk Factors This section addresses future-oriented statements and potential risks that could impact the company's performance Forward-Looking Statements 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] - Statements are based on certain assumptions and involve risks and uncertainties that could cause actual results to differ materially[7] Summary of Risk Factors 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] - Adverse political and social developments in Hong Kong and the uncertain geopolitical environment can negatively impact operations and financial performance[7] - Business in China is subject to complex laws and regulations, and any violations or government actions could materially harm the company[7] - Experienced negative operating cash flows in 2022 and modest positive flows in 2020-2021, indicating a need for improved operating cash flows[7] - 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] - 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][8] - Financial risks include currency exchange rate fluctuations, changes in tax laws, and unanticipated tax liabilities[8] - 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][9] PART I - FINANCIAL INFORMATION This section contains the company's unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements 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 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 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 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 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 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 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 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] - 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] - Unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information[29] - Consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries, with all significant inter-company balances and transactions eliminated[30] - 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] - 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] Note 2. Revenue 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] - 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] - 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] 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] Note 3. Balance Sheet Components 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] Note 4. Fair Value Measurements 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] 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] Note 5. Leases 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][56] 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 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] - 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] - 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] - 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] Note 7. Commitments and Contingencies 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] Note 8. Stock-Based Incentive Plans 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] - On February 6, 2023, 97,900 shares of restricted common stock were granted to employees, vesting quarterly over three years[68] 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] - 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][74] - 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] - Compensation expense for phantom shares was $133,000 for Q2 2023 and $260,000 for H1 2023[75] Note 9. Stockholders' Equity 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] - As of June 30, 2023, $21.9 million of the $70.0 million stock repurchase program remained available for future purchases[78] 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 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] - Royalties of $11,000 and $13,000 were recognized during the three months ended June 30, 2023 and 2022, respectively[80] - Royalties of $22,000 and $26,000 were recognized during the six months ended June 30, 2023 and 2022, respectively[80] Note 11. Segment Information 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] - China and Russia/Kazakhstan are reported as separate segments due to different operating models (e-commerce retail and third-party service provider, respectively)[82] 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] Note 12. Subsequent Event 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] - The dividend is payable on August 25, 2023, to stockholders of record on August 15, 2023[86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - 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] - 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] - 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][95] - 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][97] - 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] Statement of Operations Presentation 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] - 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] - Member commissions are the most significant expense, paid weekly based on accumulated bonus volume from down-line member purchases across all geographic markets[104] - Commissions represented 43% and 42% of net sales for the first six months of 2023 and 2022, respectively[107] - Selling, general and administrative expenses include administrative compensation, travel, credit card fees, professional fees, occupancy costs, and selling/marketing/promotion expenses[108] - 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] Results of Operations 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 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] - 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] - 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][113] - 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] Gross Profit 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] - 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] Commissions Expense 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] - Commissions were 42.5% of net sales for the six months ended June 30, 2023, compared with 42.2% in the prior year[115] - 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] Selling, General and Administrative Expenses 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] - For the six months ended June 30, 2023, these expenses were $8.3 million, consistent with the prior year[116] Other Income, Net 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] - 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] - The increase in other income is primarily due to greater interest earned on cash equivalents[117] Income Taxes 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] - 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] - 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] Liquidity and Capital Resources 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] - The decrease in cash was primarily due to cash used in operating activities and dividend payments during the first six months of 2023[120] - 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] - 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] - Quarterly cash dividends of $0.20 per common share, totaling $4.6 million, were paid in H1 2023 and are expected to continue[122] - As of June 30, 2023, $21.9 million remained available under the $70.0 million stock repurchase program[123] - The company believes existing internal liquidity is adequate to fund normal business operations and financial commitments for the foreseeable future[124] - 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] Critical Accounting Policies and Estimates 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] - Revenue recognition involves estimating product returns and accounting for deferred revenue from unshipped orders, unredeemed vouchers, and auto ship advances[128][129] - 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][130] - Income taxes involve recognizing deferred income taxes, evaluating the probability of realizing deferred tax assets (including valuation allowances), and assessing uncertain tax positions[132] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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] - 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] PART II - OTHER INFORMATION This section contains other required disclosures, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings There are no legal proceedings to report - No legal proceedings to report[140] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities to report - No defaults upon senior securities to report[141] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[141] Item 5. Other Information There is no other information to report - No other information to report[141] Item 6. Exhibits 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 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] Exhibit Index 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][146]