Our wholly-owned subsidiaries have an active physical presence in the following markets: North America; Greater China, which consists of Hong Kong, Taiwan and China; South Korea; Singapore; Malaysia; Japan; and Europe, which consists of Italy and Slovenia.Europe. We also operate within certain Commonwealth of Independent States (Russia,in Russia and Kazakhstan and Ukraine) through our engagement with a local service provider.
We seek See Note 10 of the Notes to sellConsolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report for further information about our products into many markets, primarilynet sales by geographic area.
| Product Category | Description | Products | ||||||
| Wellness | ||||||||
Products formulated and designed to meet specific wellness goals of our customers. Includes targeted nutrition such as joint health, antioxidant support, digestive health, heart health, vision health, immune support and cellular health. | Liquid, encapsulated, tableted and powder dietary and nutritional supplements, |
| ||||||
| Products formulated incorporating ingredients commonly found in traditional Chinese medicine | Herbal supplements | LivaPro®, Cordyceps Mycelia CS-4, Purus | ||||||
Beauty | ||||||||
| Products to help improve skin health and bring an appearance of youthful vibrancy. This product line includes anti-aging and hydrating cleansers, creams, lotions, serums and toners to moisturize, protect and improve the appearance of skin. | Facial skin care and body care |
| ||||||
Lifestyle | ||||||||
Products uniquely formulated to improve overall quality of life and to support active, physical and healthy lifestyles including weight management, intimacy support and energy enhancing supplements. | Supplements and topical gels for improved vitality |
| ||||||
| Home | ||||||||
| Products designed to create a clean and natural living environment for the home | Home and car appliances | PurAir Air Purifier, AquaPur Water Purifier | ||||||
vendor proposals.
��
|
|
|
|
|
|
|
|
|
|
|
|
Our field leaders are experienced and culturally coherent. They work effectively with our management, implementing our strategies and providing continuous feedback to improve our services.
rights. December 31, 2013 2014 North America Hong Kong Taiwan South Korea Japan Russia, Kazakhstan and Ukraine Europe Total negligible. members. Suite, and have integrated other critical business processes such as inventory management in our most significant markets. member that introduced them to our business. Members Direct Selling ActivitiesBecause our current main products all came to us originally as proposals from our vendors, we have incurred minimal “out-of-pocket” research and development costs through December 31, 2014. In addition, some of our local markets introduce their own products from time to time and these products are sometimes adopted by our other markets. or certain of our subsidiaries generally purchase finished goods from manufacturers and sell them to our distributorsmembers for their resale or personal consumption. We believe that in the event we are unable to source products from our current or alternate suppliers, our revenue, income and cash flow could be adversely and materially impacted. We have a contract with Two Harbors Trading Company (forPremium Noni Juice™)one of our suppliers through December 2017February 2019 with automatic renewal rights and a contract with 40Js LLC (forAlura™) through July 2016.distributorsmembers primarily refer our products to prospective consumers or they may buy at wholesale prices for personal consumption or for resale to consumers and for personal consumption.consumers. The concept of network marketing is based on the strength of personal recommendations that frequently come from friends, neighbors, relatives, and close acquaintances. We believe that network marketing is an effective way to distribute our products because it allows person-to-person product education and testimonials as well as higher levels of customer service, all of which are not as readily available through other distribution channels. In this document, we generically use the term “distributor”“member” to refer to distributorsmembers who purchase for their own consumption or for resale, or both, as well as to members who only sign up to consume our products.distributorsmembers are independent full-time or part-time contractors who purchase products directly from our subsidiaries via the internet for their own personal consumption or for resale to retail consumers (other than in China and certain other markets) or for their own personal consumption.consumers. Purchasers of our products in China and certain other markets may purchase only for their own personal consumption and not for resale.distributorsmembers by market foras of the time periodsdates indicated. We consider a distributormember “active” if they have placed at least one product order with us during the preceding year. 1,720 1,660 20,190 46,710 1,710 2,370 510 450 150 130 2,970 2,600 270 440 27,520 54,360 December 31, 2016 2015 North America 3,720 2,870 108,570 100,820 Taiwan 4,030 3,280 South Korea 290 420 Japan 100 100 Singapore 80 — 940 1,460 Europe 1,230 410 Total 118,960 109,360 NHT Global distributorsdistributormember agreement posted on our website and generally pay an annual enrollment fee. The distributormember agreement sets forth our policies and procedures, and we may elect to terminate a distributormember for non-compliance.NHT Global distributorsmembers based on product purchases by such distributors’members’ down-line distributorsmembers during a given commission period. To be eligible to receive commissions, distributorsmembers in some countries may be required to make nominal monthly or other periodic purchases of products. See “Working with DistributorsMembers.”Distributorsminimal.NHT Global distributors.members. These events are designed to inform prospective and existing distributorsmembers about both existing and new product lines, our latest marketing and promotional plans, and new services improvements. These events also serve as a venue for recognition of distributormember accomplishments. DistributorsMembers typically share their experiences in using our products and developing their business at these events. We are continually developing or updating our marketing strategies and programs to motivate our distributors.The NHT Globaldistributors. Other than this proprietary system, we have not fully automated and integrated other critical business processes such as inventory management.members. We have automated a substantial amount of our financial reporting processes through implementation of Oracle’s E-Business Suite.2014,2016, we employed 113143 total full-time employees worldwide, of which 1425 were located in North America, 79101 in Greater China (Hong Kong, China, and Taiwan), 13five in Commonwealth of Independent States (Russia, Kazakhstan and Ukraine), threeRussia, two in Singapore, two in Malaysia, four in South Korea, three in Europe, and one in Japan.quarter, whichquarter. This generally has a significant impact on that quarter.the services of our third-party providers, and can negatively impact our net sales. We believe that net sales arecan also generallybe negatively impacted during the third quarter, when many of our distributorsmembers traditionally take time off for vacations. In addition, the national holidays in Hong Kong, China and Taiwan in early October tend to have an adverse effect on sales in those markets. materially affected by the major events planned at different times of the year. A major promotional event could significantly increase the reported expenses during the quarter in which the event actually takes place, while the revenue that might be generated by the event may not occur in the same reporting period."private label"“private label” arrangement. We have obtained or applied for trademark registration for certain names, logos and various product names in several countries in which we are doing business or considering expanding. We also rely on common law trademark rights to protect our unregistered trademarks. These common law trademark rights do not provide us with the same level of protection as afforded by a United States federal trademark. Common law trademark rights are limited to the geographic area in which the trademark is actually utilized, while a United States federal registration of a trademark enables the registrant to discontinue the unauthorized use of the trademark by a third party anywhere in the United States even if the registrant has never used the trademark in the geographic area where the trademark is being used; provided, however, that the unauthorized third party user has not, prior to the registration date, perfected its common law rights in the trademark within that geographic area.we and some of our United States subsidiariesentities have granted an exclusive license to some of our non-United States subsidiaries to use outside of the United States all of their intangible property, including trademarks, trade secrets and other proprietary information.
SponsorshipWorking with DistributorsSponsorshipSponsoringdistributorsmembers creates multiple levels in theour direct selling structure of NHT Global.structure. The persons that a distributor sponsorsmember enrolls within the network are referred to as "sponsored" distributors,“sponsored” members, who may purchase solely for their own personal consumption, for resale, or both. Persons newly recruitedenrolled are assigned by sponsoring distributors into network positions that can be “under” other distributors,members, and thus they can be called “down-line” distributors.members. If down-line distributorsmembers also sponsorenroll new distributors,members, they create additional levels within the structure, but their down-line distributorsmembers remain in the same down-line network as theirthe original sponsoring distributor.distributorsmembers are primarily responsible for recruitingenrolling and educating their new distributorsmembers with respect to products, the compensation plan and how to build a successful distributorshipmembership network.Distributorssponsorenroll other distributorsmembers as their down-line, and we do not pay any commissions for sponsoringenrolling new distributors.members. However, because of the financial incentives provided to those who succeed in building a distributormember network that consumes and resells products, we believe that many of our distributorsmembers attempt, with varying degrees of effort and success, to sponsorenroll additional distributors.members. Because they are seeking new opportunities for income, people are often attracted to become distributorsmembers after using our products or after attending introductory seminars. Once a person becomes a distributor,member, he or she is able to purchase products directly from us at wholesale prices via the internet. The distributormember is also entitled to sponsorenroll other distributorsmembers in order to build a network of distributorsmembers and product users.NHT Global employsthe NHT Globalour compensation plan, distributorsmembers are paid weekly commissions by our subsidiary, in which they are enrolled for product purchases by their down-line distributormember network across all geographic markets, exceptmarkets. Our China where we maintainsubsidiary maintains an e-commerce retail platform and dodoes not pay any commissions. This “seamless” compensation plan enables a distributormember located in one country to sponsor other distributorsmembers located in other countries. Currently, there are basically two ways in which NHT Global distributorsmembers can earn income:●Through retail markups on sales of products purchased by distributors at wholesale prices (in some markets, sales are for personal consumption only and income may not be earned through retail mark-ups on sales in that market); and●Through commissions paid on product purchases made by their down-line distributors.distributor’smember’s business expands, the distributormember receives higher commissions from purchases made by an expanding down-line network. To be eligible to receive commissions, a distributormember may be required to make nominal monthly or other periodic purchases of our products. Certain of our subsidiaries do not require these nominal purchases for a distributormember to be eligible to receive commissions. In determining commissions, the number of levels of down-line distributorsmembers included within the distributor'smember’s commissionable group increases as the number of distributorshipsmemberships directly below the distributormember increases. Under our current compensation plan, certainsome of our commission payout may be limited to a hard cap dollar amount per week or a specific percentage of the total product sales. In some markets, commissions may be further limited.distributors,members, as well as bonuses on commissions earned by up to three generations of personally sponsored distributors. Distributorsmembers. Members can also earn income, trips and other prizes in specific time-limited promotions and contests we hold from time to time.From time to timedistributors,members, which can have an impact on distributormember commissions. From time to time weWe may also enter into agreements for business or market development, which maycould result in additional compensation to specific distributors.Distributormembers.distributorsmembers in each marketplacemarket we are serving. We attempt to meet the needs and build the loyalty of distributorsmembers by providing personalized distributormember services and by maintaining a generous product return policy (see “Product Warranties and Returns”). We believe that maximizing a distributor’smember’s efforts by providing effective distributormember support has been, and could continue to be, important to our success.distributormember focus groups, regular telephone conference calls and other personal contacts with distributors,members, we seek to understand and satisfy the needs of our distributors.members. Via our websites, we provide product fulfillment and tracking services that result in user-friendly and timely product distribution.distributors,members, we offer the following support programs:●Teleconferences – we hold teleconferences with associate field leadership on various subjects such as technical product discussions, distributor organization building and management techniques.●Internet –we maintain a website at www.nhtglobal.com. On this website, the user can read company news, learn more about various products, sign up to be a distributor, place orders, and track the fulfillment and delivery of their orders.●Product Literature – we offer a variety of literature to distributors, including product catalogs, informational brochures, pamphlets and posters for individual products.●Broadcast E-mail and Text Messages – we send announcements via e-mail and/or text messages to all active distributors.●Social Media tools – in some countries we maintain country-specific social media sites to foster a community environment around our product offering and business opportunity.distributorsmembers to take advantage of the internet. Substantially all of our sales take place via the internet. NHT Global offersWe offer a global web page that allows a distributormember to have a personalized replicating website through which he or she can sell products in all of the countries in which we do business. Links to these websites can be found at our main website for distributorsmembers at www.nhtglobal.com. The information provided on these websites should not be considered part of this report.Distributorsdistributormember policies and procedures establish the rules that distributorsmembers must follow in each market. We also monitor distributormember activity in an attempt to provide our distributorsmembers with a “level playing field” so that one distributormember may not be disadvantaged by the activities of another. We require our distributorsmembers to present products and business opportunities in an ethical and professional manner. DistributorsMembers further agree that their presentations to customers must be consistent with, and limited to, the product claims and representations made in our literature.We requiredistributorsmembers such as presentations videotapes, audiotapes, brochures and promotional clothing. Further, distributorsmembers may not use any form of media advertising to promote products unless it is pre-approved by us. Products may be promoted only by personal contact or by literature produced or approved by us. DistributorsMembers are not entitled to use our trademarks or other intellectual property without our prior consent.distributormember misbehavior. If we determine that a distributormember has violated our distributormember policies or procedures, we may terminate the distributor’smember’s rights completely. Alternatively, we may impose sanctions, such as warnings, probation, withdrawal or denial of an award, suspension of privileges of the distributorship,membership, fines, withholding commissions, until specified conditions are satisfied or other appropriate injunctive relief. Our distributorsmembers are independent contractors, not employees, and may act independently of us. Further, our distributorsmembers may resign or terminate their distributorshipmembership at any time without notice. See “Item 1A. Risk Factors.”Government Regulations
|
|
|
|
|
|
|
|
examinations.
As a result of restrictions in China on direct selling activities, we are not conducting direct selling in China. Consumers and members purchase the Company’s products via our Hong Kong-based website or our e-commerce platform in China. The regulatory environment in China is complex. Because we operate a direct selling model outside of China, our operations in China have received regulatory and media attention.
Because of thein China. Rather, consumers and members purchase our products via our Hong Kong-based website or our e-commerce retail platform in China. The regulatory environment in China is complex, and our operations in China can receive regulatory and media attention.
To augment
are successful, when we will be permitted to conduct direct selling operations and whether such operations would be profitable.
our understanding of current regulations.
members. two complainants. Even though the Beijing City governmental officials advised our staff and the complainants at that meeting that there was insufficient evidence to warrant an investigation of us, gross mischaracterizations of the meeting immediately appeared in several “news reports.” Similarly, a subsequent meeting between several Guangzhou City government officials and members of our Guangzhou office staff that resulted in our providing routine information about our operations to the government officials was also grossly mischaracterized in an online posting made immediately following the meeting. Although we initiated by third parties members. materially adversely affected. They also seek to ensure that claims regarding the ability of participants to earn money are truthful and substantiated. us. Our future success will also depend on our ability to reduce our dependence on these few products by developing and introducing new products and product or feature enhancements in a timely manner. Even if we are able to develop and commercially introduce new products and enhancements, they may not achieve market acceptance and the revenue generated from these new products and enhancements may not offset the costs, which could substantially impair our business, financial condition and results of operations. We may be held responsible for certain taxes or assessments relating to the activities of our NHT Globaldistributorsmembers who timely return unopened product that is in resalable condition may receive a refund. The amount of the refund may be dependent on the country in which the sale occurred, the timeliness of the return, and any applicable re-stocking fee. NHT Global must be notified of the return in writing and such written requests would be considered a termination notice of the distributorship. From time to time, wemembership. We may alter our return policy in response to special circumstances.enhancement products, cosmetics, personal care and dietary supplements.home products. More specifically, we are engaged in what is called network marketing or multi-level marketing. This type of organizational structure and approach to marketing and sales include companies selling lifestyle enhancement products, cosmetics and dietary supplements, or selling other types of consumer products. Generally, direct selling is based upon an organizational structure in which independent distributors ofmembers purchasing a company’s products are compensated for sales made directly to consumers.NHT Global distributorsdistributorsmembers they have recruitedenrolled and all subsequent distributors recruitedmembers enrolled by their "down-line"“down-line” network of distributors.members. The experience of the direct selling industry has been that once a sizeable network of distributorsmembers is established, new and alternative products and services can be offered to those distributorsmembers for sale to consumers and additional distributors.Mannatech, Incorporated., Reliv’ International, Inc, and Herbalife, Ltd, which have much greater name recognition and financial resources than we do and also have many more distributors.members. They are publicly traded and therefore serve as informational benchmarks. Butbenchmarks, but we don’t overlap with them in terms of marketplace or product range. On the other hand, many medium- and small-sized privately held Chinese, Taiwanese and Hong Kong companies are fierce competitors and are much closer to directly competing with us. Also, a number of our former employees and distributorsmembers now work for competitors, and sometimes try to use relationships and knowledge obtained to compete with us.distributors.members. There can be no assurance that our programs for attracting and retaining distributorsmembers will be successful. The pool of individuals interested in network marketing is limited in each market and is reduced to the extent other network marketing companies successfully attract these individuals into their businesses. Although we believe that we offer an attractive opportunity for our distributors,members, there can be no assurance that other network marketing companies will not be able to recruit our existing distributorsmembers or deplete the pool of potential distributorsmembers in a given market.Item 1A.RISK FACTORSmajoritysubstantial portion of our overall business, and mostsubstantially all of our Hong Kong business is derived from the sale of products to members in China, any material adverse change in our business relating to either Hong Kong or China would likely have a material adverse impact on our overall business.20132016, 2015 and 2014, approximately 77%92%, 93% and 89% of our revenue, respectively, was generated in Hong Kong. MostSubstantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China. This geographic concentration in our business means that events or conditions that could negatively impact this geographic region or our operations in this region would have a greater adverse impact upon our overall business and financial results than would be the case with a company having greater geographic diversification. thatwhich we do not have,are in the process of applying for, and has also adopted anti-multilevel marketing legislation. We operate an e-commerce direct selling model in Hong Kong and recognize the revenue derived from sales to both Hong Kong and Chinese members as being generated in Hong Kong. Products purchased by members in China are delivered to third parties that act as the importers of record under agreements to pay applicable duties. In addition, through a Chinese entity, we sell products in China using an e-commerce retail model. The Chinese entity operates separately from the Hong Kong entity, althoughand a Chinese member may elect to participate separately or in both.Wetheour e-commerce direct selling model in Hong Kong does not violate any applicable laws and regulations in China, regarding direct selling and multi-level marketing are not specifically applicable toeven though it is used for the internet purchase of our Hong Kong-based e-commerce activity, andproducts by members in China. We also believe that our Chinese entity, including its e-commerce retail platform, is operating in compliance with applicable Chinese laws. However, there can be no assurance that the Chinese authorities will agree with our interpretations of applicable laws and regulations or that China will not adopt new laws or regulations. Should the Chinese government determine that our e-commerce activity violatesactivities violate China’s direct selling or anti-multilevel marketing legislation, or should new laws or regulations be adopted, there could be a material adverse effect on our business, financial condition and results of operations.Because of Chinese government’s significant concerns about direct selling activities, it scrutinizes very closely activities of direct selling companies. Our business continues to be subject to regulations and examinations by municipal and provincial level regulators. At times, investigations and related actions by government regulators have impacted our members’ activities in certain locations and have resulted in a few cases where we have paid substantial fines.of enforcement actions. In each of these cases, we have been allowed to recommence operations afterhelped our members with their defense of the government’s investigation,legality of their conduct, and no material changes to our business model were requiredrequired.connection with these finesinvestigations of our operations. For example, one or more parties encouraged the Beijing City governmental authorities to conduct an investigation of our business, which resulted in a meeting in January 2016 involving members of our Beijing office staff, Beijing City governmental officials, and impediments.attemptremain in regular contact with Chinese government officials and take other steps to work closely with both national and local Chinese governmental agencies in conductingaddress the risks posed by these events, our business and the value of our effortscompany remain vulnerable to comply with national and local laws may be harmed by a rapidly evolving regulatory climate, concerns about activities resembling violationsChinese government scrutiny of direct selling or anti-multi-level marketing legislation, subjective interpretations of laws and regulations, and activities by individual distributors that may violate laws notwithstanding our strict policies prohibiting such activities. Any determination that our operations, whether or activities, or the activities of our individual distributors or employee sales representatives, or importers of record are not in compliance with applicable laws and regulations could result in the imposition of substantial fines, extended interruptions of business, restrictions on our future ability to obtain business licenses or expand into new locations, changes to our business model, the termination of required licenses to conduct business, or other actions, any of which could materially harm our business, financial condition and results of operations.distributormember relationships could adversely affect our business.distributors,members, and we depend upon them directly for all of our sales in most of our markets. Accordingly, our success depends in significant part upon our ability to attract, retain and motivate a large base of distributors.members. Our direct selling organization is headed by a relatively small number of key distributors.members. The loss of a significant number of distributors, especiallymembers, or the loss of one or more key distributors,members, could materially and adversely affect sales of our products and could impair our ability to attract new distributors.members. Moreover, the replacement of distributorsmembers could be difficult because, in our efforts to attract and retain distributors,members, we compete with other direct selling organizations, including but not limited to those in the personal care, cosmetic product and nutritional supplement industries. Our distributorsmembers may terminate their services with us at any time and, in fact, like most direct selling organizations, we have a high rate of attrition.distributorsmembers or their productivity may not increase and could decline in the future. We cannot accurately predict any fluctuation in the number and productivity of distributorsmembers because we primarily rely upon existing distributorsmembers to sponsorenroll and train new distributorsmembers and to motivate new and existing distributors.members. Operating results could be adversely affected if our existing and new business opportunities and products do not generate sufficient economic incentive or interest to retain existing distributorsmembers and to attract new distributors.distributorsmembers could be harmed by several factors, including:●adverse publicity or negative perceptions regarding us, our products, our method of distribution or our competitors;● in, or the technical failure of, existing or new products;●lack of interest in our existing compensation plan for distributors or in enhancements or other changes to that compensation plan;●our actions to enforce our policies and procedures;●regulatory actions or charges or private actions against us or others in our industry;●general economic and business conditions;●changes in management or the loss of one or more key distributor leaders;●entry of new competitors, or new products or compensation plan enhancements by existing competitors, in our markets; and●potential saturation or maturity levels in a given country or market which could negatively impact our ability to attract and retain distributors in such market.The high level of competition in our industryexisting compensation plan for members or in enhancements or other changes to that compensation plan;business.Theoperating results and financial condition. Moreover, the negative publicity stemming from these complaints and the allegations they make could harm our business of marketing personal care, cosmetic, nutritional supplements, and lifestyle enhancement products is highly competitive. This market segment includes numerous manufacturers, distributors, marketers, and retailers that actively compete foroperations. Accordingly, any adverse determination against us in these suits, or even the business of consumers bothallegations contained in the United Statessuits regardless of whether they are ultimately found to be without merit, could harm our business, operations and abroad. The market is highly sensitivefinancial condition.introduction of new products, which may rapidly capture a significant share of the market. Sales of similar products by competitors may materiallymoney, time and effort spent in defending these matters will not adversely affect our business, financial condition and results of operations.Wesubject to significant competition for the recruitment of distributors from other direct selling organizations, including thoseindependent contractors, improper member actions that market similar products. Many ofviolate laws or regulations could harm our competitorsbusiness.substantially larger thanindependent contractors and, accordingly, we are offernot in a wider array of products, have far greater financial resources and many more active distributors than we have. Even more numerous are thosemedium- and small-sized, all privately held Chinese, Taiwanese and Hong Kong companies that are fierce competitors and are much closerposition to directly competing with us. Our ability to remain competitive depends, in significant part, onprovide the same direction, motivation and oversight as we would if members were our success in recruiting and retaining distributors with our products, attractive compensation plan and other incentives. We believe that we have an attractive product line and that our compensation and incentive programs provide our distributors with significant earning potential. However, we cannot be sure that our programs for recruitment and retention of distributors would be successful.Some of our competitors have employed or otherwise contracted for the services of our former officers, employees, consultants, and distributors, who may try to use information and contacts obtained while under contract with us for competitive advantage. While we seek to protect our information through contractual and other means,own employees. As a result, there can be no assurance that weour members will timely learn of such activity, have the resources to attempt to stop it,participate in our marketing strategies or have adequate remedies available to us.An increase in the amount of compensation paid to distributors would reduce profitability.A significant expense is the payment of compensation toplans, accept our distributors, which represented approximately 46% of net sales during each of 2013 and 2014. We compensate our distributors by paying commissions, bonuses, and certain awards and prizes. Factors impacting the overall commission payout include the growth and depth of the distributor network, the distributor retention rate, the level of promotions, local promotional programs and business development agreements. Any increase in compensation payments to distributors as a percentage of net sales will reduce our profitability. Our compensation plan includes a cap that may be enforced on distributor compensation paid out on a weekly dollar limit or as a percentage of product sales. There can be no assurance that enforcement of this cap will ensure profitability (which depends on many other factors). Moreover, enforcement of this cap could cause key distributors affected by the cap to leave and join other companies.Failureintroduction of new products, or comply with our member policies and procedures. Extensive federal, state, local and foreign laws regulate our business, our products and our network marketing program. Because we have expanded into foreign countries, our policies and procedures for our members differ due to the different legal requirements of each country in which we do business. While we have implemented member policies and procedures designed to govern member conduct and to protect the goodwill associated with our trademarks and trade names, it can be difficult to enforce these policies and procedures because of the large number of members and their independent status. distributoran advantage in the marketplace. Improper member activity in new geographic markets could result in adverse publicity and market acceptance could harm our business.An important component of our business iscan be particularly harmful to our ability to develop newultimately enter these markets. Violations by our members of applicable law or of our policies and procedures in dealing with customers could reflect negatively on our products and operations, and harm our business reputation. In addition, it is possible that create enthusiasm amonga judicial or administrative body could hold us civilly or criminally accountable based on vicarious liability because of the actions of our distributor force.members. If we fail to introduce new products on a timely basis,any of the above or related events involving our distributor productivitymembers occur, our business, financial condition, or results of operations could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements, or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce new products include, among others, limited capital and human resources, government regulations, proprietary protections of competitors that may limit our ability to offer comparable products and any failure to anticipate changes in consumer tastes and buying preferences.distributorsmembers are in compliance with all of these regulations. Our failure or our distributors’members’ failure to comply with these regulations or new regulations could lead to the imposition of significant penalties or claims and could negatively impact our business. If we are unable to continue business in existing markets or commence operations in new markets because of these laws, our revenue and profitability may decline. For example,Federal Trade Commission (the “FTC”) released a proposed New Business Opportunity Rulebusiness of consumers both in April 2006. As initially drafted, the proposed rule would have required pre-sale disclosures for all business opportunities,United States and abroad. The market is highly sensitive to the introduction of new products, which may rapidly capture a significant share of the market. Sales of similar products by competitors may materially and adversely affect our business, financial condition and results of operations.included network marketing compensation plans such as ours. However, in November 2011, the FTC issued a final rule that does not apply to multi-level marketingfar greater financial resources and many more active members than we have. Even more numerous are those medium- and small-sized, all privately held Chinese, Taiwanese and Hong Kong companies that do not representare fierce competitors and are much closer to directly competing with us. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining members with our products, attractive compensation plan and other incentives. We believe that theywe have an attractive product line and that our compensation and incentive programs provide our members with significant earning potential. However, we cannot be sure that our programs for recruitment and retention of members will be successful.another designated person will do any of the following: (a) provide locationsotherwise contracted for the operationservices of equipment, displays, vending machinesour former officers, employees, consultants, and members, who may try to use information and contacts obtained while under contract with us for competitive advantage. While we seek to protect our information through contractual and other means, there can be no assurance that we will timely learn of such activity, have the resources to attempt to stop it, or similar devices owned, leased, controlled or paid for by the purchaser of the opportunity; (b) provide outlets, accounts, or customers (including but not limitedhave adequate remedies available to internet outlets, accounts, or customers) for the purchaser’s goods or services (advertising and general advice about business development and training is not considered as “providing locations, outlets, accounts, or customers”); or (c) buy back any or all of the goods or services that the purchaser makes or provides. As we understand the final regulation, the Company does not make any of these representations and therefore is not covered by the final rule, which took effect on March 1, 2012.formlegality of our business modeloperations could harm our business.distributorsmembers against us and other direct selling companies. Moreover, challenges to our business system and operations in important markets may come from short sellers, hedge funds, other investors, bloggers and other investors.reporters. Other companies in our industry have recently faced such challenges. Any challenges regarding us or others in our industry could harm our business if such challenges result in the investigation of our business model and operations or the imposition of any fines or damages on our business, create adverse publicity, increase scrutiny or investigations of us or our industry, detrimentally affect our efforts to recruit or motivate distributorsmembers and attract customers, or interpret laws in a manner inconsistent with our current business practices.distributorsmembers or us to comply with those regulations could lead to the imposition of significant penalties or claims and could materially and adversely affect our business. If we are not able to satisfy the various regulations, then we would have to cease sales of that product in that market. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and may adversely affect the marketing of our products, resulting in significant loss of revenues.effective December 1, 2009, the FTC approved revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Guides”) that require disclosure of material connections between an endorser and the company they are endorsing and do not allow marketing using atypical results.require the disclosure of typical results when these are different from those reported by the endorser. The requirements and restrictions of the revised Guides may diminish the impact of our marketing efforts and negatively impact our sales results. If we or our distributorsmembers fail to comply with these Guides, the FTC could bring an enforcement action against us and we could be fined and/or forced to alter our operations. Our operations also could be harmed if new laws or regulations are enacted that restrict our ability to market or distribute nutritional supplements or impose additional burdens or requirements on nutritional supplement companies or require us to reformulate our products.distributors,members, may lead to a determination that such products require pre-market approval as a drug. Such regulations in any given market can limit our ability to import products and can delay product launches as we go through the registration and approval process for those products. Furthermore, if we fail to comply with these regulations, we could face enforcement action against us and we could be fined, forced to alter or stop selling our products and/or required to adjust our operations. Our operations also could be harmed if new laws or regulations are enacted that restrict our ability to market or distribute our personal care products or impose additional burdens or requirements on the contents of our personal care products or require us to reformulate our products.FDA regulationsnow required to report serious adverse events associated with consumer use of our products. Our operations could be harmed if regulatory authorities make determinations that we or our vendors are not in compliance with the new regulations. A finding of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling certain of our products. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance.distributorsmembers for which we may be held responsible, may result in enforcement actions and imposition of penalties or otherwise materially and adversely affect the distribution and sale of our products. DistributorMember activities in our existing markets that violate applicable governmental laws or regulations could result in governmental or private actions against us in markets where we operate. Given the size of our distributormember force, we cannot ensure that our distributors wouldmembers will comply with applicable legal requirements.Although our distributors are independent contractors, improper distributor actions that violate laws or regulations could harm our business.Our distributors are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation and oversight as we would if distributors were our own employees. As a result, there can be no assurance that our distributors will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our distributor policies and procedures. Extensive federal, state and local laws regulate our business, our products and our network marketing program. Because we have expanded into foreign countries, our policies and procedures for our distributors differ due to the different legal requirements of each country in which we do business. While we have implemented distributor policies and procedures designed to govern distributor conduct and to protect the goodwill associated with our trademarks and trade names, it can be difficult to enforce these policies and procedures because of the large number of distributors and their independent status. Given the size and diversity of our distributor force, we experience problems with distributors from time to time, especially with respect to our distributors in foreign markets. Distributors often desire to enter a market, before we have received approval to do business, to gain an advantage in the marketplace. Improper distributor activity in new geographic markets could result in adverse publicity and can be particularly harmful to our ability to ultimately enter these markets. Violations by our distributors of applicable law or of our policies and procedures in dealing with customers could reflect negatively on our products and operations, and harm our business reputation. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability because of the actions of our distributors. If any of these events occur, our business, financial condition, or results of operations could be materially adversely affected.distributorsmembers to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, the regulation of our network marketing program, the licensing of our products for sale in our target markets or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse effect on our goodwill and could negatively affect our ability to attract, motivate and retain distributors,members, which would negatively impact our ability to generate revenue. We cannot ensure that all distributorsmembers will comply with applicable legal requirements relating to the advertising, labeling, licensing or distribution of our products.distributors’members’ and consumers’ perception of the safety and quality of our products and ingredients, as well as similar products and ingredients distributed by other companies, can be significantly influenced by national media attention, publicized scientific research or findings, widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not accurate or resulting from consumers’ use or misuse of our products, that associates consumption of our products or ingredients or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could negatively impact our reputation or the market demand for our products.WeAlthough we have a limited product line.We offer a limited numberin recent years expanded our line of products, under our NHT Global brand. Our Premium Noni Juice™ product accounts for a significant portionwe derive more than 10% of our total revenue.revenue from each of our Premium Noni Juice and Enhanced Essential Probiotics® products. Further, we currently source each such product from a single supplier. If demand decreases significantly, government regulation restricts itstheir sale, we are unable to adequately source or deliver the product,products, or we cease offeringare unable to offer the productproducts for any reason without a suitable replacement,replacements, our business, financial condition and results of operations could be materially and adversely affected.distributormember population to a new opportunity or to make it more difficult for us to recruit qualified distributors.members. There can be no assurance that, even if we are able to commence operations in foreign countries, there would be a sufficiently large population of potential distributorsmembers inclined to participate in a direct selling system offered by us. We believe our future success could depend in part on our ability to seamlessly integrate our business methods, including distributormember compensation plan, across all markets in which our products are sold. There can be no assurance that we would be able to further develop and maintain a seamless compensation program.Currency exchange rate fluctuations could lower our revenue and net income.In 2014, approximately 98% of our revenue was recorded by subsidiaries located outside of North America. Revenue transactions and related commission payments, as well as other incurred expenses, are typically denominated in the local currency. Accordingly, our international subsidiaries use the local currency as their functional currency. The results of operations of our international subsidiaries are exposed to foreign currency exchange rate fluctuations during consolidation since we translate into U.S. dollars using the average exchanges rates for the period. As exchange rates vary, revenue and other operating results may differ materially from our expectations. Additionally, we may record significant gains or losses related to foreign-denominated cash and cash equivalents and the re-measurement of inter-company balances. We believe that our foreign currency exchange rate exposure is somewhat limited since the Hong Kong dollar is pegged to the U.S. dollar. We also purchase a significant majority of inventories in U.S. dollars. Our foreign currency exchange rate exposure, mainly to South Korean won, Taiwan dollar, Japanese yen, Chinese yuan, Russian ruble, Kazakhstani tenge, Ukrainian hryrnia and European euro, represented approximately 18% and 9% of our revenue in 2013 and 2014, respectively. Our foreign currency exchange rate exposure may increase in the near future as we intend to develop opportunities in Southeast Asia, Canada and Europe. Additionally, our foreign currency exchange rate exposure would significantly increase if the Hong Kong dollar were no longer pegged to the U.S. dollar. Given our inability to predict the degree of exchange rate fluctuations, we cannot estimate the effect these fluctuations may have upon future reported results, product pricing or our overall financial condition. Further, to date we have not attempted to reduce our exposure to short-term exchange rate fluctuations by using foreign currency exchange contracts.Changes in tax or duty laws, and unanticipated tax or duty liabilities, could adversely affect our net income.In the course of doing business we may be subject to various taxes, such as sales and use, value-added, and franchise. We are also subject to income taxes in the United States and numerous foreign jurisdictions. We earn a substantial portion of our income in foreign jurisdictions. If our capital or financing needs in the United States require us to repatriate earnings from foreign jurisdictions above our current levels, our effective income tax rates for the affected periods could be negatively impacted. Economic and political conditions make tax rules in any jurisdiction, including the United States, subject to significant change. There have been proposals to reform U.S. and foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows.Our principal domicile is the United States. Under tax treaties, we are eligible to receive foreign tax credits in the United States for taxes paid abroad. Taxes paid to foreign taxing authorities may exceed the credits available to us, resulting in the payment of a higher overall effective tax rate on our worldwide operations.Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.We may also be subject to examinations of our tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes, which is subject to significant discretion. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, particularly in the U.S., or if the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our financial results or operations could be adversely affected.In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products. The failure to properly calculate, report and pay such duties when we are subject to them could have a material adverse effect on our financial condition and results of operations. Any change in the laws or regulations regarding such duties, or any interpretation thereof, could result in an increase in the cost of doing business.Transfer pricing regulations affect our business and results of operations.In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by our United States or local entities and are taxed accordingly. We have adopted transfer pricing agreements with our subsidiaries to regulate inter-company transfers, which agreements are subject to transfer pricing laws that regulate the flow of funds between the subsidiaries and the parent corporation for product purchases, management services, and contractual obligations, such as the payment of distributor compensation. We believe that we operate in compliance with all applicable transfer pricing laws, and we intend to continue to operate in compliance with such laws. However, there can be no assurance that we will continue to be found to be operating in compliance with transfer pricing laws, or that those laws would not be modified, which, as a result, may require changes in our operating procedures or otherwise may have a material adverse effect on our financial results or operations.distributors,members, which could harm our financial condition and operating results.
We may face litigation that could harm our business.
We have been a party to lawsuits and other proceedings in the past. Prosecuting and defending potential litigation and other governmental proceedings may require significant expense and attention of our management. There can be no assurance that the significant money, time and effort spent will not adversely affect our business, financial condition and results of operations.
We may be unable to protect or use our intellectual property rights.
|
| |
|
| |
|
|
2013 2014 High Low High Low First quarter Second quarter Third quarter Fourth quarter Dividends Per Share Declaration Date Preferred Common Amount Date Payable March 7, 2014 April 8, 2014 May 6, 2014 June 4, 2014 July 29, 2014 August 27, 2014 November 4, 2014 December 3, 2014 Total Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders – Total Period Total Number of Shares Purchased(a) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(c) October 1–31, 2014 November 1—30, 2014 December 1—31, 2014 geographic area. South America. For further information regarding some of the risks associated with the conduct of our business in China, see “Item 1A. Risk Factors,” and more specifically under the captions “Risk Factors - Because our Hong Kong operations account for a substantial portion of our overall business...” and “Risk Factors - Our operations in China are subject to compliance with a myriad of applicable laws and regulations...”. We bill members for shipping charges and recognize the freight revenue in net sales. Event and training revenue is deferred and recognized as the event or training occurs. members. dollar, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and more specifically under the caption “Foreign Currency Exchange Risk” for further information. Year Ended December 31, 2013 2014 Net sales Cost of sales Gross profit Operating expenses: Distributor commissions Selling, general and administrative expenses Depreciation and amortization Total operating expenses Income from operations Other expense, net Income before income taxes Income tax provision Net income indicated: Year Ended December 31, 2013 2014 North America Hong Kong China Taiwan South Korea Japan Russia, Kazakhstan and Ukraine Europe Total During 2015, our on-going member cash and incentive programs, including a supplemental incentive trip promotion to the U.S. offered during part of 2015, were more appealing to our members than those offered during the prior year and contributed to increased sales. Additionally, we hosted the largest event in our company’s history in Hong Kong during August 2015, and launched new As of December 31, revenue, respectively. programs. non-U.S. subsidiaries as of December 31, 2015. We consider all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. As of December 31, 2016, we had $73.5 million in available-for-sale investments classified as cash equivalents. In addition, cash and cash equivalents included $120.0 million held in bank accounts overseas, which included $6.8 million held in banks located in China subject to foreign currency controls. our inventory purchases and increased net income during 2016. companies. Additionally, buildout costs of $608,000 were incurred during 2015 for new offices located in California, Hong Kong and Singapore, at the multi-purpose facility in Zhongshan, China and at the new Healthy Lifestyle Center in Monterey Park, California. Dividends Per Share Declaration Date Preferred Common Amount Date Payable March 7, 2014 April 8, 2014 May 6, 2014 June 4, 2014 July 29, 2014 August 27, 2014 November 4, 2014 December 3, 2014 Total audited consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” of this annual report. These quarterly operating results are not necessarily indicative of our operating results for any future period. September 2025 totaling $3.9 million. Event and training revenue is deferred and recognized as the event or training occurs. provision. opinions. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in December 31, 2013 2014 ASSETS Current assets: Cash and cash equivalents Accounts receivable Inventories, net Other current assets Total current assets Property and equipment, net Goodwill Restricted cash Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Income taxes payable Accrued distributor commissions Other accrued expenses Deferred revenue Deferred tax liability Amounts held in distributor eWallets Other current liabilities Total current liabilities Commitments and contingencies Stockholders’ equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,761,900 shares designated Series A convertible preferred stock at December 31, 2013, 123,693 shares issued and outstanding at December 31, 2013 Common stock, $0.001 par value; 50,000,000 shares authorized; 11,359,769 and 12,891,317 shares issued at December 31, 2013 and 2014, respectively Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss): Foreign currency translation adjustments Treasury stock, at cost; 26,998 and 384,220 shares at December 31, 2013 and 2014, respectively Total stockholders’ equity Total liabilities and stockholders’ equity Year Ended December 31, 2013 2014 Net sales Cost of sales Gross profit Operating expenses: Distributor commissions Selling, general and administrative expenses (including stock-based compensation expense of $110 and $49 during 2013 and 2014, respectively) Depreciation and amortization Total operating expenses Income from operations Other expense, net Income before income taxes Income tax provision Net income Preferred stock dividends Net income available to common stockholders Basic Diluted Basic Diluted Year Ended December 31, 2013 2014 Net income Other comprehensive income, net of tax: Foreign currency translation adjustments Comprehensive income Shares Amount Shares Amount Shares Amount Total BALANCE, December 31, 2012 Net income Conversion of Series A preferred stock Repurchase of common stock Shares issued for stock-based compensation awards Foreign currency translation adjustments Stock-based compensation BALANCE, December 31, 2013 Net income Conversion of Series A preferred stock Exercise of warrants Repurchase of common stock Shares issued for stock-based compensation awards Dividends declared Foreign currency translation adjustments Stock-based compensation BALANCE, December 31, 2014 Year Ended December 31, 2013 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Deferred income taxes Changes in assets and liabilities: Accounts receivable Inventories, net Other current assets Other assets Accounts payable Income taxes payable Accrued distributor commissions Other accrued expenses Deferred revenue Amounts held in distributor eWallets Other current liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment Increase in restricted cash Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants Repurchase of common stock Dividends paid Net cash used in financing activities Effect of exchange rates on cash and cash equivalents Net increase in cash and cash equivalents CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period Additionally, deferred tax liability balances have been reclassified from current to long-term in the prior year consolidated financial statements to conform to the early adoption of ASU No. 2015-17, $82,000, and $29,000, respectively. Financial rewards earned under the 2014 Long-Term Incentive Plan (the “LTI Plan”) are recognized over the performance period as specified performance or other goals are achieved or exceeded. In accordance with the LTI Plan, fifty percent of any cash payment earned is payable Event and training revenue is deferred and recognized as the event or training occurs. Costs of events and member training are included within selling, general and administrative expenses. members. Stock-based compensation expense is determined based on the grant date fair value of each award, net of estimated forfeitures which are derived from historical experience, and is recognized on a straight-line basis over the requisite service period for the award. Year Ended December 31, 2013 2014 Income (Numerator) Shares (Denominator) Per Share Amount Income (Numerator) Shares (Denominator) Per Share Amount Basic EPS: Net income available to common stockholders Less: undistributed earnings to participating securities Net income allocated to common stockholders Effect of dilutive securities: Warrants to purchase common stock Non-vested restricted stock Plus: reallocation of undistributed earnings to participating securities Diluted EPS: Net income allocated to common stockholders plus assumed conversions would have been anti-dilutive. The Company’s cash equivalents are valued based on level 1 inputs which consist of quoted prices in active markets. quarter ended December 31, 2016. December 31, 2013 2014 Property and equipment: Office equipment Office software Furniture and fixtures Construction in progress Property and equipment, at cost Accumulated depreciation and amortization Other accrued expenses: Sales returns Employee-related expense Warehousing and inventory-related expense Other Deferred revenue: Unshipped product Auto ship advances Enrollment package revenue Market development fees Other current liabilities: Unclaimed checks Other 3. COMMITMENTS AND CONTINGENCIES 2015 Total minimum lease obligations 4. STOCKHOLDERS’ EQUITY were exercised at $3.5043 per share for total proceeds of $309,000. Dividends Per Share Declaration Date Preferred Common Amount Date Payable March 7, 2014 April 8, 2014 May 6, 2014 June 4, 2014 July 29, 2014 August 27, 2014 November 4, 2014 December 3, 2014 Total an aggregate purchase price of $1.1 million. Shares Wtd. Avg. Price at Date of Issuance Nonvested at December 31, 2012 Vested Nonvested at December 31, 2013 Vested Nonvested at December 31, 2014 On August 13, 2012, the Board of Directors authorized the Company, acting as trustee for certain of its non-officer, overseas employees, to execute a Rule 10b5-1 plan to purchase 100,000 shares of its common stock in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act and the Shares Wtd. Avg. Grant-Date Fair Value Nonvested at December 31, 2012 Vested Forfeited Nonvested at December 31, 2013 Vested Forfeited Nonvested at December 31, 2014 Year Ended December 31, 2013 2014 Domestic Foreign Income before income taxes Year Ended December 31, 2013 2014 Current: Federal State Foreign Total current taxes Deferred foreign taxes Income tax provision Year Ended December 31, 2013 2014 Income tax at federal statutory rate Effect of permanent differences Change in valuation allowance Foreign rate differential Change in enacted tax rates Expiration of net operating loss carryforward Other reconciling items Income tax provision December 31, 2013 2014 Deferred tax assets: Net operating losses Accrued expenses Tax credits Impairment of long-lived assets Other Total deferred tax assets Valuation allowance Deferred tax liabilities: Intangible assets Accrued expenses Prepaids Other Total deferred tax liabilities Net deferred tax liability 7. SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, 2013 2014 (In Thousands) Cash paid during the year for: Income taxes, net of refunds Interest $1.1 million. See Note 4. 10. SEGMENT INFORMATION The Company’s for disclosure purposes. Year Ended December 31, 2013 2014 Net sales from external customers: United States Canada Hong Kong China Taiwan South Korea Russia, Kazakhstan and Ukraine Other foreign countries Total net sales December 31, 2013 2014 Net sales by product and service: Product sales Enrollment package revenue, freight and other Less: sales returns Total net salesdistributormember records, accurately track purchases and distributormember compensation payments, manage accounting operations, generate reports, and provide customer service and technical support. Any interruption in these systems could have a material adverse effect on our business, financial condition, and results of operations.distributorsmembers to leave our business, or otherwise materially adversely affect our business.distributormember compensation plans, our business is highly dependent on the efficient functioning of our information technology systems and operations, which are vulnerable to damage or interruption from fires, earthquakes, telecommunications failures, computer viruses and worms, hacking, denial of service attacks, software defects and other events. They are also subject to break-ins, sabotage, acts of vandalism and similar misconduct, as well as human error. Despite precautions implemented by our information technology staff, problems could result in interruptions in services and materially and adversely affect our business, financial condition and results of operations.distributorsmembers and customers, which could impact our revenues, expenses and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility, such as challenges to Chinese sovereignty claims in the South China Sea or Chinese objection to the Taiwan independence movement and itsthe resultant tension in the Taiwan Strait, could materially and adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict. Additionally, natural disasters less severe than the Indian Ocean tsunami that occurred in December 2004 may adversely affect our business, financial condition and results of operations.20082009 and 2009,2008, primarily due to declines in our revenues greater than the decreases in expenditures we could manage. If we again experience negative cash flows, any resulting decreasing cash balance could impair our ability to support our operations and, eventually, threaten our solvency, which would have a material adverse effect on our business, results of operations and financial condition, as well as our stock price. Negative cash flows and the related adverse market perception associated therewith may have negatively affected, and may in the future negatively affect, our ability to attract new distributorsmembers and/or sell our products. There can be no assurance that we will be successful in maintaining an adequate level of cash resources and we could be forced to act more aggressively in the area of expense reduction in order to conserve cash resources as we look for alternative solutions. at least maintain revenues, control expenses and achieve positive cash flows, our ability to support our obligations could be impaired and our liquidity could be adversely affected and our solvency and our ability to repay our debts when they come due could be threatened. We may need to seek additional debt or equity financing on acceptable terms in order to improve our liquidity. However, we may not be able to obtain additional debt or equity financing on satisfactory terms, or at all, and any new financing could have a dilutive effect to our existing stockholders.The historic price of ourhas been volatilecontinues to experience wide fluctuations in trading volumes and the future market price of our common stock is likely to continue to be volatile. Further, the limited trading volume in our common stock has, and in the future may, contribute significantly to the high volatility in the market price of our common stock.prices. This may make it more difficult for holders of our common stock to sell shares when they want and at prices they find attractive.Prior to February 17, 2015,Notwithstanding the transition in trading of our common stock was quoted on the OTCQB tier offrom the OTC Market and, like many other stocks quoted onto the OTCQB, tradingNASDAQ Capital Market in February 2015, our common stock was often thin and characterized bycontinues to experience wide fluctuations in trading volumes and prices. Although we are hopeful that the transition to trading our common stock on the NASDAQ Capital Market will reduce the historical volatility in our common stock, it is likely that our common stock will continue to experience volatility for some time. There are a number of factors that may contribute to this volatility, butincluding the limited trading volumefollowing:common stock has,(including short sellers);the future may, contribute significantly to volatility. our operating results. common stock to sell shares when they want and at prices they find attractive. There can be no assurance that a larger or more liquid market will be developed or maintained for our common stock.theour common stock.Item 1B.Not applicable.Item 2.PROPERTIES3,800 square feet of office space in Dallas, Texas for our corporate headquarters. In January 2015, we entered into a lease for 3,7004,900 square feet of office space in Rolling Hills Estates, California for our corporate headquarters with the intention of relocating some Dallas-based employees and hiring additional staff. The California location will make traveling to and communicating with Asia easier.terms expiring in September 2025. In addition, we are intending to execute a lease for 2,400 and 1,600 square footfeet of retail space in MonterreyMonterey Park, California and Vancouver, British Columbia, respectively, to help further develop the Chinese-American market for our products in Southern California. North America. The Monterey Park and Vancouver locations have terms expiring in August 2020 and February 2021, respectively. We also maintain an office in Dallas, Texas.the United States,of North America, we lease 7,300 square feet of office space in Hong Kong with terms expiring in February 2018, nine branch offices throughout China, and additional office space in Japan, Taiwan, South Korea, Singapore, Malaysia, Vietnam and Singapore.the Cayman Islands. We also lease a multi-purposedmulti-purpose facility and factory in Zhongshan, China and 11 service stations throughout the city of Guangzhou, China that servesserve or will in the future serve the needs of our Chinese consumers. We contract with third parties for fulfillment and distribution operations in mostall of our international markets. Through a local service provider, we maintain marketing and distributormember centers in Almaty, Kazakhstan and Odessa, Ukraine.Moscow, Russia. We believe that our existing office space is in good condition, and is suitable and adequate for the conduct of our business.Item 3.LEGAL PROCEEDINGSNone.Item 4.MINE SAFETY DISCLOSURESPart IIItem 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES $ 1.44 $ 1.01 $ 4.95 $ 2.81 1.30 0.80 7.50 4.80 2.20 0.93 19.85 6.76 3.40 1.86 13.80 8.05 2016 2015 High Low High Low First quarter $ 36.19 $ 17.75 $ 18.29 $ 10.49 Second quarter 38.25 26.24 44.18 17.78 Third quarter 34.30 25.89 43.33 21.91 Fourth quarter 29.95 21.44 53.72 32.96 February 27, 2015,March 7, 2017, the closing price of our common stock as reported by Nasdaq was $13.05$27.95 per share.February 27, 2015,March 7, 2017, there were approximately 160125 record holders of our common stock (although we believe that the number of beneficial owners of our common stock is substantially greater).No dividendsever declared or paid onmade to holders of our common stock prior to 2014. At December 31, 2013, we had accrued unpaid dividends of $98,000 with respect to outstanding shares of Series A preferred stock, but such dividends had not been declared and we were under no obligation to pay such accrued dividends except in certain extraordinary circumstances. On March 7, 2014,stock:Declaration Date Per Share Amount Payment Date October 23, 2016 (special) $ 0.35 $ 3,941 November 25, 2016 October 23, 2016 0.08 901 November 25, 2016 July 19, 2016 0.07 787 August 26, 2016 April 21, 2016 0.06 686 May 20, 2016 March 1, 2016 0.05 576 March 24, 2016 Total $ 0.61 $ 6,891 Declaration Date Per Share Amount Payment Date October 21, 2015 $ 0.05 $ 598 November 20, 2015 July 28, 2015 0.04 489 August 28, 2015 May 4, 2015 0.03 372 May 29, 2015 February 27, 2015 0.02 250 March 27, 2015 Total $ 0.14 $ 1,709 dividend on each share of outstanding Series A preferred stock in the amount of $0.81507 per share representing the accrued unpaid dividends from May 4, 2007 through March 7, 2014. All outstanding shares of Series A preferred stock were converted into common stock during 2014. The following table summarizes all cash dividend activity during 2014 (in thousands, except per share data): $ 0.815 $ 0.005 $ 159 0.020 0.005 62 0.027 0.010 127 0.032 0.010 128 $ 0.894 $ 0.030 $ 476 Additionally, on February 27, 2015, the Board of Directors declared$0.09 and a special cash dividend of $0.02$0.35 on each share of common stock outstanding. Such dividends are payable in cashwere paid on March 27, 20153, 2017 to stockholders of record on March 17, 2015.February 21, 2017. Payment of any future dividends on shares of common stock will be at the discretion of the Company’sour Board of Directors.
Period NHTC S&P 500 Peer Group December 31, 2011 $ 100 $ 100 $ 100 December 31, 2012 155 116 74 December 31, 2013 492 154 224 December 31, 2014 1,766 175 135 December 31, 2015 5,194 177 167 December 31, 2016 3,944 198 161 Equity Compensation Plan InformationThe following table sets forth information regarding all compensation plans under which Company equity securities are authorized for issuance as of December 31, 2014: – $ – 1,083 – $ – – $ – 1,083 Purchases of Equity Securities by the Issuer and Affiliated PurchasersA summary of the Company’s purchases of shares of its common stock during the quarter ended December 31, 2014 is as follows: 2,100 $ 9.98 53,835 $ 262,015 216,737 $ 12.26 270,572 $ 2,148,200 146,927 $ 12.82 417,499 $ 235,100 (a)The shares were purchased in open market transactions as described in footnote (b) below, except for those shares purchased under the Stock Repurchase Agreement also described in footnote (b) below.(b)On August 13, 2012, the Company disclosed in its Quarterly Report on Form 10-Q that its Board of Directors had, on that day, authorized the Company, acting as trustee for certain of its employees, to execute a Rule 10b5-1 plan to purchase 100,000 shares of its common stock in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act and the Company's policies regarding stock transactions (the “Employee Plan”). The Company may terminate the plan at any time. The employees for whom the Company will purchase stock as trustee under the plan will receive the stock as incentive compensation in quarterly increments over three years beginning March 15, 2013, provided that they are employees of the Company on the date of the distribution. Any stock that is purchased under the plan that is forfeited by an employee whose employment terminates will be delivered to the Company and held by it as treasury stock.On November 4, 2014, the Board of Directors approved a special, stock repurchase program of up to $5 million of the Company’s outstanding shares of common stock (the “Repurchase Plan”). In connection therewith, the Company was advised by George K. Broady, a director of the Company and owner of more than 5% of its outstanding common stock, that Mr. Broady desired to participate in the Repurchase Plan on a basis roughly proportional to his ownership interest, with an estimate of generating approximately $1.5 million through the sale of a portion of the shares of the Company’s common stock held by him. After noting Mr. Broady’s participation interest, the Company authorized its broker to proceed with the purchase of shares of the Company’s common stock in the open market for a total purchase price of $3.0 million in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act.On November 14, 2014, the Company entered into a Stock Repurchase Agreement (the “Stock Repurchase Agreement”) with Mr. Broady in accordance with Rule 10b5-1 under the Exchange Act. The Stock Repurchase Agreement provided for the Company’s purchase from Mr. Broady of one-half of the number of shares of common stock purchased by the Company’s broker in the open market under the Repurchase Plan approved by the Company’s Board of Directors on November 4, 2014. The Stock Repurchase Agreement with Mr. Broady required that the Company report to Mr. Broady on a weekly basis information regarding the broker’s open market purchases, and that the Company purchase from Mr. Broady on a weekly basis at a per share purchase price equal to the weighted average price per share paid by the Company’s broker to purchase shares in the open market.(c)The Company, as Trustee, began purchasing under the Employee Plan in December 2012. Under the initial 10b5-1 plan executed by the Company, as Trustee, with the Board’s authorization, the Company would not purchase more than 2,800 shares per month. That 10b5-1 plan was replaced by a new 10b5-1 plan effective November 11, 2013, which was amended on May 13, 2014 and again on October 23, 2014. The latest 10b5-1 plan terminated in November 2014, and the Company, as Trustee, has not entered into a new 10b5-1 plan.The Repurchase Plan was completed on December 17, 2014, and resulted in the Company purchasing an aggregate of 359,840 shares of its common stock for a purchase price of $4.5 million, plus transaction costs. Of that total, the Company purchased 119,947 shares from Mr. Broady under the Stock Repurchase Agreement for an aggregate purchase price of $1.5 million.Item 6.SELECTED FINANCIAL DATANot applicable under smaller reporting company disclosure rules. Year Ended December 31 2016 2015 2014 2013 2012 Consolidated Statements of Operations Data: Net sales $ 287,728 $ 264,860 $ 124,590 $ 52,527 $ 37,514 Cost of sales 54,903 54,098 26,981 12,551 9,685 Gross profit 232,825 210,762 97,609 39,976 27,829 Operating expenses: Commissions expense 125,050 126,598 56,997 24,053 15,724 Selling, general and administrative expenses 43,245 36,024 19,687 11,634 9,415 Depreciation and amortization 394 263 105 66 45 Total operating expenses 168,689 162,885 76,789 35,753 25,184 Income from operations 64,136 47,877 20,820 4,223 2,645 Other expense, net (59 ) (84 ) (184 ) (32 ) (39 ) Income before income taxes 64,077 47,793 20,636 4,191 2,606 Income tax provision (benefit) 8,991 552 266 102 (24 ) Net income 55,086 47,241 20,370 4,089 2,630 Preferred stock dividends — — (10 ) (15 ) (17 ) Net income available to common stockholders $ 55,086 $ 47,241 $ 20,360 $ 4,074 $ 2,613 Income per common share: Basic $ 4.84 $ 3.84 $ 1.67 $ 0.36 $ 0.24 Diluted $ 4.83 $ 3.82 $ 1.61 $ 0.36 $ 0.23 Weighted-average number of common shares outstanding: Basic 11,382 12,302 12,131 11,154 10,944 Diluted 11,407 12,372 12,600 11,331 11,234 Cash dividends declared per common share $ 0.61 $ 0.14 $ 0.03 $ — $ — Consolidated Balance Sheets Data: Cash and cash equivalents $ 125,921 $ 104,914 $ 44,816 $ 14,550 $ 4,207 Inventories, net 11,257 10,455 3,760 1,828 867 Working capital 84,090 56,199 25,253 3,598 (325 ) Long-term incentive 8,190 5,770 1,665 — — Total assets 148,051 124,152 52,540 19,827 8,219 Total stockholders’ equity 82,439 56,809 26,450 6,077 1,909 Consolidated Statements of Cash Flows Data: Net cash provided by (used in): Operating activities $ 53,174 $ 81,326 $ 30,613 $ 10,686 $ 2,214 Investing activities (905 ) (3,738 ) (339 ) (292 ) 397 Financing activities (30,595 ) (17,471 ) (189 ) (52 ) (3 ) Repurchase of common stock (23,704 ) (16,071 ) (4,661 ) (52 ) (3 ) Income taxes paid, net of refunds 8,791 707 60 71 34 Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSIn most markets, we sell our products to an independent distributor network that either uses the products themselves or resells them to consumers. Our wholly-owned subsidiaries have an active physical presence in the following markets: North America; Greater China, which consists of Hong Kong, Taiwan and China; Commonwealth of Independent States, which consists ofRussia, Kazakhstan and Ukraine; South Korea; Singapore; Malaysia; Japan; and Europe, which consists of ItalyEurope. We also operate in Russia and Slovenia.Our distributor network operates inKazakhstan through our engagement with a seamless manner from market to market, except for the Chinese market, where we sell to consumers through an e-commerce platform. We believe that all of our operating segments should be aggregated into a single reportable segment as they have similar economic characteristics. Additionally, we believe that alllocal service provider. See Note 10 of the operating segments are similarNotes to Consolidated Financial Statements in the nature“Item 8. Financial Statements and Supplementary Data” of the products sold, the product acquisition process, the types of customers products are sold to, the methods used to distribute the products, and the nature of the regulatory environment. Our e-commerce retail business in China does not require a direct selling license and allowsthis report for discounts on volume purchases. There is no separate segment manager who is held accountablefurther information about our net sales by our chief operating decision-makers, or anyone else, for operations, operating results and planning for the Chinese market on a stand-alone basis. Accordingly, we consider ourselves to be in a single reporting segment and operating unit structure. 2014,2016, we were conducting business through 118,960 active members, compared to 109,360 in 2015 and 54,360 active distributors.in 2014. We consider a distributormember “active” if they have placed at least one product order with us during the preceding year. Our priority is to focus our resources in our most promising markets, which we consider to be Greater China and countries where our existing members have the connections to recruit prospects and sell our products, such as Southeast Asia. Up to $10.0 million of our available cash may be investedWe have also begun investing some resources in our Mainland China entity within the next 18 months for such purposes as establishing China-based manufacturing capabilities, opening additional Healthy Lifestyle Centers or branch offices,Central and ultimately, funding the mandated deposit and other requirements for a China direct selling license application. We also may evaluate product or distribution opportunities to diversify from our current Greater China concentration. approximately 98% of our net sales from subsidiaries located outside North America, with sales inof our Hong Kong subsidiary representing 89%92% of net sales in the latest fiscal year. Because of the size of our foreign operations, operating results can be impacted negatively or positively by factors such as foreign currency fluctuations, and economic, political and business conditions around the world. In addition, our business is subject to various laws and regulations, in particular, regulations related to direct selling activities that create certainuncertain risks for our business, including improper claims or activities by our distributorsmembers and potential inability to obtain necessary product registrations.In June 2004, we obtained a general business licenseWe operate an e-commerce direct selling model in Hong Kong that generates revenue derived from the sale of products to members in Hong Kong and elsewhere, including China. Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China. Direct selling is prohibitedThrough a separate Chinese entity, we operate an e-commerce retail platform in China withoutChina. We believe that neither of these activities require a direct selling license in China, which we do not have. In December 2005, we submittedcurrently hold. We have previously sought to obtain a direct selling license, and in August 2015 initiated the process for submitting a new preliminary application for a direct selling license. In June 2006,license in China. If we submittedare able to obtain a revised application packagedirect selling license in accordance with new requirements issued byChina, we believe that the Chinese government. In June 2007, we launched a new e-commerce retail platformincentives inherent in the direct selling model in China would incrementally benefit our existing business. Increased sales in China that does not requirecould be derived from obtaining a direct selling license. We believe this model, which offers discounts based on volume purchases, will encourage repeat purchases of our products for personal consumption in the Chinese market. The platform is designed tolicense may be in compliance with our understanding of current laws and regulations in China. In November 2007, we filed a new, revised direct selling application incorporating a name change, our new e-commerce model and other developments. These direct selling applications were not approved or rejectedpartially offset by the pertinent authorities, but did not appear to materially progress. By 2009, the information contained in the most recent application was stale. The Company applied to temporarily withdraw the license application in February 2009 to furnish new information and intends to amend its applicationhigher fixed costs associated with the goal to re-apply in the future.establishment and maintenance of required service centers and branch offices. We are unable to predict whether and when we will be successful in obtaining a direct selling license to operate in China, and if we are successful, when we will be permitted to enhance our e-commerce retail platform withconduct direct selling operations.Most of our Hong Kong revenue is derived from the sale of products that are delivered to members in China. After consulting with outside professionals, we believe that our Hong Kong e-commerce business does not violate any applicable laws in China even though it is used for the internet purchase of our products by buyers in China. But the government in China could, in the future, officially interpret its lawsoperations and regulations – or adopt new laws and regulations – to prohibit some or all of our e-commerce activities with China and, if our members engage in illegal activities in China, those actions couldwhether such operations would be attributed to us. In addition, other Chinese laws regarding how and when members may assemble and the activities that they may conduct, or the conditions under which the activities may be conducted, in China are subject to interpretations and enforcement attitudes that sometimes vary from province to province, among different levels of government, and from time to time. Members sometimes violate one or more of the laws regulating these activities, notwithstanding training that we attempt to provide. Enforcement measures regarding these violations, which can include arrests, raise the uncertainty and perceived risk associated with conducting this business, especially among those who are aware of the enforcement actions but not the specific activities leading to the enforcement action. We believe that this has led some existing members in China – who are signed up as distributors in Hong Kong – to leave the business or curtail their selling activities and has led some potential members to choose not to participate. Among other things, we are combating this with more training and public relations efforts that are designed, among other things, to distinguish the Company from businesses that make no attempt to comply with the law. This environment creates uncertainty about the future of doing this type of business in China generally and under our business model, specifically.See “Item 1A. Risk Factors—Because our Hong Kong operations account for a majority of our overall business….”products, enrollment packages, and shipping charges.products. Substantially all of our product sales are to independent distributorsmembers at published wholesale prices. Product sales are recorded when the products are shipped and title passes to independent distributors,members, which generally is upon our delivery to the carrier that completes delivery to the distributors.members. We estimate and accrue a reserve for product returns based on our return policies and historical experience. Enrollment package revenue, including any nonrefundable set-up fees, is deferred and recognized over the term of the arrangement, generally twelve months.distributors,members, import duties, packing materials, product royalties, costs of promotional materials sold to the Company’s distributorsour members at or near cost, and provisions for slow moving or obsolete inventories. Cost of sales also includes purchasing costs, receiving costs, inspection costs and warehousing costs.Distributor typically our most significant expense and are classified as an operating expense. Under our compensation plan, distributorsmembers are paid weekly commissions by our subsidiary in which they are enrolled, generally in their home country currency, for product purchases by their down-line distributormember network across all geographic markets, exceptmarkets. Our China where we launchedsubsidiary maintains an e-commerce retail platform and dodoes not pay any commissions. This "seamless"“seamless” compensation plan enables a distributormember located in one country to sponsorenroll other distributorsmembers located in other countries where we are authorized to conduct our business. Currently, there are basically two ways in which our distributorsmembers can earn income:●Through retail markups on sales of products purchased by distributors at wholesale prices (in some markets, sales are for personal consumption only and income may not be earned through retail mark-ups on sales in that market); and●Through commissions paid on product purchases made by their down-line distributors.cost.price. As the distributor’smember’s business expands from successfully sponsoringenrolling other distributorsmembers who in turn expand their own businesses by sponsoringselling product to other distributors,members, the distributormember receives higher commissions from purchases made by an expanding down-line network. ToIn some of our markets, to be eligible to receive commissions, a distributormember may be required to make nominal monthly or other periodic purchases of our products. Certain of our subsidiaries do not require these nominal purchases for a distributormember to be eligible to receive commissions. In determining commissions, the number of levels of down-line distributorsmembers included within the distributor'smember’s commissionable group increases as the number of distributorshipsmemberships directly below the distributormember increases. Under our current compensation plan, certain of our commission payouts may be limited to a hard cap dollar amount per week or a specific percentage of total product sales. In some markets, commissions may be further limited. In some markets, we also pay certain bonuses on purchases by up to three generations of personally sponsored distributors,enrolled members, as well as bonuses on commissions earned by up to three generations of personally sponsored distributors. Distributorsenrolled members. Members can also earn income, trips and other prizes in specific time-limited promotions and contests we hold from time to time. DistributorMember commissions are dependent on the sales mix and, for each of fiscal 20132016, 2015 and 2014 represented 44%, 48% and 46%, respectively, of net sales. From time to timeOccasionally, we make modifications and enhancements to our compensation plan to help motivate distributors,members, which can have an impact on distributormember commissions. From time to time weWe may also enter into agreements for business or market development, which maycould result in additional compensation to specific distributors. (including stock-based compensation), travel, credit card fees and assessments, professional fees, certain occupancy costs, and other corporate administrative expenses.expenses (including stock-based compensation). In addition, this category includes selling, marketing, and promotion expenses including(including the costs of distributormember training events and conventions whichthat are designed to increase both product awareness and distributor recruitment.member recruitment). Because our various distributormember conventions are not always held at the same time each year, interim period comparisons will be impacted accordingly. a separate component of stockholders’ equity and represent the only component of accumulated other comprehensive income.dollar. indicated. 100.0 % 100.0 % 23.9 21.7 76.1 78.3 45.8 45.7 22.2 15.8 0.1 0.1 68.1 61.6 8.0 16.7 – (0.2 ) 8.0 16.5 0.2 0.2 7.8 % 16.3 % Net Sales Year Ended December 31, 2016 2015 2014 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 19.1 20.4 21.7 Gross profit 80.9 79.6 78.3 Operating expenses: Commissions expense 43.5 47.8 45.7 Selling, general and administrative expenses 15.0 13.6 15.8 Depreciation and amortization 0.1 0.1 0.1 Total operating expenses 58.6 61.5 61.6 Income from operations 22.3 18.1 16.7 Other expense, net — — (0.2 ) Income before income taxes 22.3 18.1 16.5 Income tax provision 3.1 0.2 0.2 Net income 19.2 % 17.9 % 16.3 % $ 2,361 4.5 % $ 2,812 2.3 % 40,585 77.3 111,028 89.1 791 1.5 1,538 1.2 3,387 6.4 4,628 3.7 702 1.3 1,009 0.8 106 0.2 89 0.1 4,354 8.3 3,113 2.5 241 0.5 373 0.3 $ 52,527 100.0 % $ 124,590 100.0 % Year Ended December 31, 2016 2015 2014 North America $ 5,909 2.0 % $ 5,992 2.3 % $ 2,812 2.3 % 263,482 91.6 245,737 92.8 111,028 89.1 China 9,086 3.2 4,425 1.7 1,538 1.2 Taiwan 6,213 2.2 5,965 2.3 4,628 3.7 South Korea 691 0.2 1,128 0.4 1,009 0.8 Japan 86 — 92 — 89 0.1 Singapore 169 0.1 — — — — 858 0.3 1,139 0.4 3,113 2.5 Europe 1,234 0.4 382 0.1 373 0.3 Total $ 287,728 100.0 % $ 264,860 100.0 % $ 124,590 100.0 % $124.6$287.7 million for the year ended December 31, 20142016 compared with $52.5$264.9 million a year ago, an increase of $72.1$22.8 million, or 137%9%. Hong Kong net sales, substantially all of which were shipped to members residing in China, increased $70.4$17.7 million, or 174%7%, over the prior year. Hong Kong experienced an increase of 7,800 active members, or 8%, during 2016, which contributed to the increase in product sales volume. We also launched new Wellness products during 2016, which contributed approximately $11.2 million to our top-line growth. However, we believe our net sales increase was adversely impacted by the following:the Company’sour leadership development, promotional programs, incentives, events, new products, training, commission plans and services.Commonwealth of Independent States (“CIS”)CIS market, werewhich continued to be negatively impacted in 2014 by the political unrest in the region, as well as the devaluation of the Russian ruble, and decreased $1.2$2.0 million, or 29%63%, overcompared with the prior year. Elsewhere, net sales increased $2.9 million, or 38%, over the prior year, resulting in a total net sales increase in 2014 outside of our Hong Kong business of $1.7 million, or 14%, over the prior year.2014, our operating subsidiaries had 54,360 active distributors, compared with 27,520 active distributors at December 31, 2013. Hong Kong experienced an increase of 26,520 active distributors, or 131%, from December 31, 2013 to December 31, 2014. This substantial increase in the number of active distributors is attributable to the same factors that contributed to the increase in net sales and product sale volumes on a year-over-year basis.As of December 31, 2014,2015, deferred revenue was $2.7$4.0 million, which primarily consisted of $1.2$1.8 million pertaining toin unshipped product orders, $815,000and $1.6 million and $331,000 pertaining to auto ship advances and $222,000 pertaining to unamortized enrollment package revenue.2014 compared with 76.1%2014. The gross profit margin percentage increase was primarily attributable to higher product margins, lower third party service provider fees in Russia and lower logistics costs in Hong Kong.2013. The gross profit margin percentage increase is primarily attributable to lower fees paid to our third-party service provider in the CIS market and less importation costs as a percentage of overall net sales, which occurs when sales from the CIS market comprise a lower percentage of our overall net sales. Additionally, the increase is attributable to higher product margins in Hong Kong due to a more favorable product mix. The margin increase is somewhat offset by a cost increase assessed by one of our Hong Kong third-party logistics service providers effective in the fourth quarter of 2013.Distributor CommissionsDistributor commissions were2015 compared with 45.7% of net sales for the year ended December 31, 2014 compared with 45.8%2014. The increase as a percentage of net sales for the year ended December 31, 2013. Though overall commissions as a percentage of net sales were flat year over year, there was a change2015 primarily resulted from an increase in the composition. During 2014, commissions earned on a weekly basis increased 1%, mainly in Hong Kong; but that increase was offset by a comparable decrease incost of our on-going member cash and other incentive program costs during 2014, primarily the Supreme Bonus Plan, which is tied to our international recognition program.2014 compared with $11.6 million for the year ended December 31, 2013.2014. Selling, general and administrative expenses increased by $8.1$16.3 million, or 69%83%, mainly due to an increase in employee-related costs and incentive program accruals, professional fees, director costs, and facility costs, as well as an increase in credit card fees and assessments due to higher net sales as compared to the same period in the prior year.Other Expense, NetLoss on foreign exchange was $202,000 for the year ended December 31, 2014 primarily due to the impact2014.CIS market currency devaluation (against the U.S. dollar) on inter-company balances, namely the Ukrainian hryvnia, the Russian ruble and the Kazakhstani tenge. A loss on foreign exchange totaling $32,000$552,000 was recognized for the year ended December 31, 2013.Income TaxesAn income tax provision of2015 compared with $266,000 was recognized for the year ended December 31, 2014 compared with $102,0002014. The increase was due to greater profitability of our international operations, as well as the repatriation of foreign earnings back to the U.S. during the year. As a result of capital return activities approved by the Board of Directors during the three months ended September 30, 2015, and anticipated future capital return activities intended to take full advantage of existing U.S. net operating losses, we determined that a portion of our undistributed foreign earnings were no longer deemed reinvested indefinitely by our non-U.S. subsidiaries beginning in the quarter ended September 30, 2015. As such, an accumulated deferred tax liability of $9.3 million was recorded against these undistributed earnings, which included the impact of utilization of foreign tax credits. However, because it was anticipated that these earnings would be offset by U.S. net operating losses that had previously been fully offset by a valuation allowance, we also released a similar amount of valuation allowance. Accordingly, there was no significant impact on the income tax provision for the year ended December 31, 2013. The increase is due to increased profitability2015.our operations both domestically and internationally. The Company did not recognizeDecember 31, 2015 there was a remaining deferred tax benefit forliability of $2.8 million, which was offset by an equivalent amount of net operating loss deferred tax assets. This represented the remaining balance of the U.S. tax purposesimpact of undistributed foreign earnings that was planned to be repatriated to the U.S. as of December 31, 2015. All other undistributed foreign earnings were intended to be permanently reinvested in 2013 duenon-U.S. operations to uncertainty thatfund and expand the benefit will be realized.2014, the Company’s2016, our cash and cash equivalents totaled $44.8$125.9 million. Total cash and cash equivalents increased by $10.3$21.0 million and $30.3$60.1 million during 20132016 and 2014,2015, respectively.2014,2016, the ratio of current assets to current liabilities was 2.032.47 to 1.00 and the Companywe had $25.2$84.1 million of working capital. Current liabilities included deferred revenue of $2.7 million that consisted primarily of unshipped product orders, auto ship advances and unamortized enrollment package revenues. The ratio of current assets to current liabilities excluding deferred revenue was 2.28 to 1.00. Working capital as of December 31, 20142016 increased $21.8$27.9 million compared to the Company’sour working capital as of December 31, 2013,2015, primarily due to cash generated from operations.20142016 was $30.6$53.2 million compared to $10.7$81.3 million during 2013.2015. The increasedecrease in operating cash flows resultsresulted primarily from the net sales increase year over year. Additionally, the timing difference of cash outlays associated with both distributor and employee incentive programs contributed toincreased commission-related payments, the increase asof our members' utilization of our eWallet functionality and U.S. income tax payments resulting from the current year expenses were greater than those recognizedrepatriation of overseas profits of $7.4 million, offset by a reduction in the prior year.$339,000$905,000 during 2014, primarily2016. Software development costs of $666,800 were incurred during the resultyear ended December 31, 2016 for our Oracle ERP upgrade and enhancement of buildout costs incurred at the multi-purposed facility in Zhongshan, China and renovations in the Taipei, Taiwan office.our back office software platform. Cash flows used in investing activities totaled $292,000$3.7 million during 2013,the year ended December 31, 2015 and consisted primarily of which $210,000 were purchasesour June 2015 funding of property and equipment. The buildouta bank deposit amount in the amount of the multi-purposed facility in Zhongshan, China began in November 2013 and such costs totaled $102,000 during 2013. Also, asCNY 20 million (USD $3.3 million at June 30, 2015) for our direct selling license application. Such deposit is required by Chinese laws to establish a result of increased sales in South Korea during 2013, additionalconsumer protection fund. In August 2015, cash deposits in the amount of $82,000$218,000 were required to be held by areceived from certain South Korean credit card processing company.20142016 totaled $189,000. Warrants$30.6 million. We used $23.7 million to purchase 1,407,855repurchase shares of our common stock were exercised during 2014 at exercise prices ranging from $3.5108 to $3.52 per share for total proceeds of $4.9 million. Offsetting this amount, on November 4, 2014,stock. On January 12, 2016, the Board of Directors approved a specialauthorized an increase to our stock repurchase program of upfirst approved on July 28, 2015 from $15.0 million to $5.0 million$70.0 million. Repurchases are expected to be executed to the extent that our earnings and cash-on-hand allow, and will be made in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Company’s outstanding sharesExchange Act. For all or a portion of common stock.the authorized repurchase amount, we may enter into one or more plans that are compliant with Rule 10b5-1 of the Exchange Act that are designed to facilitate these purchases. The stock repurchase program was completed ondoes not require us to acquire a specific number of shares, and may be suspended from time to time or discontinued. During February 2016, pursuant to the stock repurchase program, we authorized our broker to proceed with the purchase of shares of our common stock in the open market. During the year ended December 17, 2014 and31, 2016, the stock repurchase program resulted in our purchasing a total of 903,031 shares of our common stock repurchases totaling $4.5for an aggregate purchase price of $23.7 million, plus transaction costs. George K. Broady, a director and an ownerAs of more than 5% of the Company’s outstanding common stock, participated in the Company’s repurchase program on a basis roughly proportional to his ownership interest, selling approximately $1.5December 31, 2016, $32.0 million of the Company’s$70.0 million stock repurchase program approved on July 28, 2015 and increased on January 12, 2016 remained available for future purchases, inclusive of related estimated income tax. Cash flows used in financing activities during 2015 totaled $17.5 million, and consisted primarily of $16.1 million used to repurchase a total of 547,042 shares of our common stock held by him (see Note 8 of the Notes to Consolidated Financial Statementsand $1.7 million in Item 8 of this report). Additionally, othercash dividends.outflowsflows during 2016 included the following cash dividend payments of $476,000 and the repurchase of shares of common stock pursuant to Rule 10b5-1 under a program authorized by the Board of Directors for the Company to purchase 100,000 shares, acting as Trustee for certain of its non-officer, overseas employees. Such repurchases totaled $159,000 and $52,000 during 2014 and 2013, respectively. No additional financing activities occurred during 2013.The following table summarizes the Company’s cash dividend activity during 2014 (in thousands, except per share data): $ 0.815 $ 0.005 $ 159 0.020 0.005 62 0.027 0.010 127 0.032 0.010 128 $ 0.894 $ 0.030 $ 476 On February 27, 2015,amounts) to holders of our common stock:Declaration Date Per Share Amount Record Date Payment Date October 23, 2016 (special) $ 0.35 $ 3,941 November 15, 2016 November 25, 2016 October 23, 2016 0.08 901 November 15, 2016 November 25, 2016 July 19, 2016 0.07 787 August 16, 2016 August 26, 2016 April 21, 2016 0.06 686 May 10, 2016 May 20, 2016 March 1, 2016 0.05 576 March 16, 2016 March 24, 2016 Total $ 0.61 $ 6,891 $0.02$0.09 and a special cash dividend of $0.35 on each share of common stock outstanding. Such dividends are payablewere paid on March 27, 20153, 2017 to stockholders of record on March 17, 2015.February 21, 2017. Payment of any future dividends on shares of common stock will be at the discretion of the Company’sour Board of Directors.The Company believesitsour existing internal liquidity, supported by cash on hand and cash flows from operations should be adequate to fund normal business operations and address itsour financial commitments for at least the next 12 months, assuming no significant unforeseen expense or revenue decline. If the Company’s foregoing beliefs or assumptions prove to be incorrect, however, the Company’s business, results of operations and financial condition could be materially adversely affected. See “Item 1A. Risk Factors.”The Company doesforeseeable future.the Companywe may attempt to generate more funding from the capital markets, but currently doesdo not believe that will be necessary.On October 19, 2007, the Company issued warrants to purchase 3,141,499 shares of common stock in connection with a convertible debentures financing. The warrants consisted of seven-year warrants to purchase 1,495,952 shares of common stock, one-year warrants to purchase 1,495,952 shares of common stock, and five-year warrants to purchase 149,595 shares of common stock. The term for each of the warrants began six months and one day after their respective issuance and each had an exercise price of $3.52 per share. Such one-year warrants expired unexercised on April 21, 2009 and such five-year warrants expired unexercised on April 21, 2013. Of the seven-year warrants to purchase 1,495,952 shares of common stock, as of February 27, 2015, warrants to purchase 88,097 shares of common stock remain outstanding with an exercise price of $3.5082 per share. Such exercise price was adjusted as a result of cash dividends declared during 2014 on each share of outstanding common stock in accordance with the terms of the related warrant agreement. The exercise price per share may be further adjusted on March 17, 2015, the record date for the dividends declared on February 27, 2015. The unexercised warrants expire April 21, 2015 if not previously exercised.UpWe will continue to $10.0 million of our available cash may be investedinvest in our Mainland China entity within the next 18 months for such purposes as establishing China-based manufacturing capabilities, increasing public awareness of our brand and our products, sourcing more Chinese-made products, building a chain of service stations, opening additional Healthy Lifestyle Centers or branch offices, adding local staffing and ultimately, funding the required depositother requirements for a China direct selling license application. We have also may evaluate product or distribution opportunitiesbegun to diversify frominvest some resources in Central and South America.current Greater China concentration. 2016 2015 4th
Quarter 3rd
Quarter 2nd
Quarter 1st
Quarter (In Thousands, Except Per Share Data) Net sales $ 62,312 $ 70,679 $ 80,391 $ 74,346 $ 73,656 $ 80,779 $ 69,716 $ 40,709 Gross profit 50,375 57,052 65,332 60,066 58,583 64,778 55,622 31,779 Income from operations 20,014 15,208 14,927 13,987 13,893 14,803 12,263 6,918 Net income 19,048 12,557 12,201 11,280 13,699 14,531 12,273 6,738 Income per common share: Basic 1.70 1.12 1.08 0.96 1.13 1.19 0.99 0.54 Diluted 1.70 1.12 1.07 0.95 1.13 1.18 0.98 0.54 Company hasfollowing table summarizes our contractual obligations as of December 31, 2016 and the expected effect on our cash flow and liquidity in future periods (in thousands): Total 2017 2018-2019 2020-2021 Thereafter Operating leases $ 3,923 $ 1,559 $ 1,154 $ 510 $ 700 Purchase obligations 20,745 9,725 11,020 — — Long-term incentive 10,064 1,874 2,390 1,963 3,837 Other commitments 357 107 163 87 — Total $ 35,089 $ 13,265 $ 14,727 $ 2,560 $ 4,537 itsour international subsidiaries, with expirations through March 2018.the Companywe entered into an exclusive distribution agreement with one of itsour suppliers to purchase itstheir product through July 2016.2016 which automatically renews annually unless terminated 90 days prior to the termination date. To maintain exclusivity, the Company iswe are required to purchase a minimum of $40,000 of product per month until the termination date. As of December 31, 2014, the Company was2016, we were in compliance with the exclusivity provision.December 2014, the CompanyFebruary 2016, we amended a supply agreement with one of itsour suppliers to obtainmaintain worldwide exclusivity in return for purchasing a minimum of $3.3$9.4 million of product annually.annually on average over the next three years, plus certain raw material guarantees. If the Company doeswe do not purchase the minimum product as required, then a Cure Payment, as defined, will be due to the supplier. The term of the agreement is three years commencing on January 1, 2015February 2016 and shall automatically renew for successive three year terms unless notice of termination is provided by either party.The Company hasitsour management team that can be terminated by either the employee or the Companyus upon four weeks’ notice. The employment agreements entered into with the management team contain provisions that guarantee the payments of specified amounts in the event of a change in control, as defined, or if the employee is terminated without cause, as defined, or terminates employment for good reason, as defined. In addition, the Company has an employment agreement with another employee that can be terminated at will by either the employee or the Company, provided that the Company must pay a specified amount if it terminates the agreement without cause, as defined, or the employee terminates the agreement with good reason, as defined. Accrued severance totaling $12,000 as of December 31, 2014 was paid in January 2015.Item 8“Item 8. Financial Statements and Supplementary Data” of this report. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. The process of determining significant estimates is fact specific and takes into account historical experience and current and expected economic conditions. To the extent that there are material differences between the estimates and actual results, future results of operations will be affected.the Company’sour critical accounting policies and estimates are those related to obsolete inventory and the fair value of acquired intangible assets, including goodwill, revenue recognition, as well as those used in the determination of liabilities related to sales returns, distributormember commissions and income taxes.Inventory Valuation.The Company reviews its inventory carrying value and compares it to the net realizable value of its inventory and any inventory value in excess of net realizable value is written down. In addition, the Company reviews its inventory for obsolescence and any inventory identified as obsolete is reserved or written off. The Company’s determination of obsolescence is based on assumptions about the demand for its products, product expiration dates, estimated future sales, and management’s future plans. Also, if actual sales or management plans are less favorable than those originally projected by management, additional inventory reserves or write-downs may be required. At December 31, 2013 and 2014, the Company’s inventory value was $1.8 million and $3.8 million, respectively, net of reserves of zero and $18,000, respectively. No significant provision was recorded during the periods presented.Valuation of Goodwill.The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step impairment test is performed. The Company’s policy is to test for impairment annually during the fourth quarter. At December 31, 2013 and 2014, goodwill of $1.8 million was reflected on the Company’s balance sheet. No impairment of goodwill was recognized during the periods presented.Allowance for Sales Returns.An allowance for sales returns is provided during the period the product is shipped. The allowance is based upon the return policy of each country, which varies from 14 days to one year, and their historical return rates, which range from 1% to 7% of sales. Sales returns were 1% and 2% of sales for the years ended December 31, 2013 and 2014, respectively. The allowance for sales returns was $504,000 and $654,000 at December 31, 2013 and 2014, respectively. No material changes in estimates have been recognized during the periods presented.distributors.members. Product sales to distributorsmembers are made pursuant to a distributormember agreement that provides for transfer of both title and risk of loss upon our delivery to the carrier that completes delivery to the distributors,members, which is commonly referred to as “F.O.B. Shipping Point.” The CompanyWe primarily receivesreceive payment by credit card at the time distributorsmembers place orders. The Company’sOur sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return. Amounts received for unshipped product are recorded as deferred revenue. Such amounts totaled $1.9$2.2 million and $1.2$1.8 million at December 31, 20132016 and 2014,2015, respectively. Shipping charges billed to distributorsmembers are included in net sales. Costs associated with shipments are included in cost of sales.distributorsmembers access to both a personalized marketing website and a business management system. No upfront costs are deferred as the amount is nominal. At December 31, 20132016 and 2014,2015, enrollment package revenue totaling $182,000$430,000 and $222,000$331,000 was deferred, respectively. Although the Company haswe have no immediate plans to significantly change the terms or conditions of enrollment packages, any changes in the future could result in additional revenue deferrals or could cause us to recognize the deferred revenue over a longer period of time. Additionally, deferred revenue includes advances for auto ship orders. In certain markets, when a distributor’smember’s cumulative commission income reaches a certain threshold, a percentage of the distributor’smember’s weekly commission is held back as an advance and applied to an auto ship order once the accumulated amount of the advances is sufficient to pay for the pre-selected auto ship package of the distributor.member. Such advances were $449,000$2.3 million and $815,000$1.6 million at December 31, 20132016 and 2014,2015, respectively.Distributor distributorsmembers earn commissions based on total personal and group bonus volume points per weekly sales period. Each of our products are designated a specified number of bonus volume points, which is essentially a percentage of the product’s wholesale price. The Company accruesWe accrue commissions when earned and paysas the related revenue is recognized and pay commissions on product sales generally two weeks following the end of the weekly sales period.In some markets, we also pay certain bonuses on purchases by up to three generations of personally sponsored distributors, as well as bonuses on commissions earned by up to three generations of personally sponsored distributors. distributorsmembers may also earn incentives based on meeting certain qualifications during a designated incentive period, which may range from several weeks to up to a year. These incentives may be both monetary and non-monetary in nature. The Company estimatesFor each individual incentive, we estimate the total number of qualifiers as well as the expected per qualifier cost and accrues theaccrue all costs associated with incentives throughout the qualification period. We regularly review and update, if necessary, the estimates of both qualifiers and cost as more information is obtained during the qualification period. Any resulting change in total cost is recognized over the duration of theremaining qualification period based on distributor achievement of the qualification requirements.period. Accrued commissions, including the estimated cost of our international recognition incentive program and other supplemental programs,totaled $4.0$13.6 million and $8.9$19.6 million at December 31, 20132016 and 2014,2015, respectively.Tax Valuation Allowance.The Company evaluatesitsour deferred tax assets and recordsrecord a valuation allowance when it believeswe believe a portion or all of itsour deferred tax assets may not be realized. The Company increased the valuation allowance to equal its netDeferred tax expense or benefit is a result of changes in deferred tax assets during 2005 dueand liabilities. Based on the technical merits of our tax position, tax benefits may be recognized if we determine it is more likely than not that our position will be sustained on examination by tax authorities. The complex nature of these estimates requires us to anticipate the likely application of tax law and make judgments on the largest benefit that has a greater than fifty percent likelihood of being realized prior to the uncertaintycompletion and filing of future operating results.tax returns for such periods. As of December 31, 2016, we no longer have a valuation allowance against our U.S. deferred tax assets. We maintain a valuation allowance in certain foreign jurisdictions with an overall tax loss. The valuation allowance will be reduced at such time as management believes it is more likely than not that the deferred tax assets will be realized. During 2013 and 2014, no such reduction in the valuation allowance occurred. Any reductions in the valuation allowance will reduce future income tax provisions.We believeAs a result of capital return activities, we determined that we operate in compliance with all applicable transfer pricing laws and we intend to continue to operate in compliance with such laws. However, there can bea portion of our current undistributed foreign earnings are no assurance that welonger deemed reinvested indefinitely by our non-U.S. subsidiaries. We will continue to be foundperiodically reassess the needs of our foreign subsidiaries and update our indefinite reinvestment assertion as necessary. To the extent that additional foreign earnings are not deemed permanently reinvested, we expect to recognize additional income tax provision at the applicable U.S. corporate tax rate. As of December 31, 2016, we recorded a deferred tax liability for earnings that we plans to repatriate out of accumulated earnings in future periods. All undistributed earnings in excess of 50% of current earnings on an annual basis are intended to be operatingreinvested indefinitely as of December 31, 2016.compliance with transfer pricing laws, or that those laws would not be modified, which, as a result, may requireour business, changes in our operating procedures. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge these agreements, plans, or arrangements, or requirecorporate structure, changes in the geographic mix and amount of income, applicable tax laws and regulations, communications with tax authorities, as well as our transfer pricing practices, we could be required to pay higher taxes, interestestimated and penalties, andactual level of annual pre-tax income. We adjust our earnings would be adversely affected. Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKNot applicable under smaller reporting company disclosure rules.Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAPage 33343536373839Dallas, Texas20142016 and 2013,2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-yearthree-year period ended December 31, 2014.2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements.statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management's Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration ofmisstatement and whether effective internal control over financial reporting as a basis for designing audit procedures that are appropriatewas maintained in the circumstances, but not for the purpose of expressing an opinion on the effectivenessall material respects. Our audits of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesstatements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.20142016 and 2013,2015, and the results of its operations and its cash flows for each of the years in the two-yearthree-year period ended December 31, 2014,2016, in conformity with accounting principles generally accepted in the United States of America.PLLCDallas, TexasMarch 6, 2015 $ 14,550 $ 44,816 134 107 1,828 3,760 658 930 17,170 49,613 265 476 1,764 1,764 328 315 300 372 $ 19,827 $ 52,540 $ 3,058 $ 2,232 25 268 3,962 8,853 3,146 6,743 2,569 2,687 108 65 – 2,064 882 1,513 13,750 24,425 Long-term incentive – 1,665 Total liabilities 13,750 26,090 111 – 11 13 80,690 85,750 (74,619 ) (54,799 ) (81 ) 62 (35 ) (4,576 ) 6,077 26,450 $ 19,827 $ 52,540 December 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $ 125,921 $ 104,914 Inventories, net 11,257 10,455 Other current assets 4,066 2,343 Total current assets 141,244 117,712 Property and equipment, net 1,388 894 Goodwill 1,764 1,764 Restricted cash 2,963 3,166 Other assets 692 616 Total assets $ 148,051 $ 124,152 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,145 $ 2,862 Income taxes payable 663 379 Accrued commissions 13,611 19,634 Other accrued expenses 14,989 16,703 Deferred revenue 4,948 4,011 Amounts held in eWallets 19,165 16,414 Other current liabilities 1,633 1,510 Total current liabilities 57,154 61,513 Deferred tax liability 268 60 Long-term incentive 8,190 5,770 Total liabilities 65,612 67,343 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2016 and 2015 — — Common stock, $0.001 par value; 50,000,000 shares authorized; 12,979,414 shares issued at December 31, 2016 and 2015 13 13 Additional paid-in capital 86,574 85,963 Retained earnings (accumulated deficit) 38,548 (9,647 ) Accumulated other comprehensive loss (807 ) (101 ) Treasury stock, at cost; 1,692,218 and 840,202 shares at December 31, 2016 and 2015, respectively (41,889 ) (19,419 ) Total stockholders’ equity 82,439 56,809 Total liabilities and stockholders’ equity $ 148,051 $ 124,152 $ 52,527 $ 124,590 12,551 26,981 39,976 97,609 24,053 56,997 11,634 19,687 66 105 35,753 76,789 4,223 20,820 (32 ) (184 ) 4,191 20,636 102 266 4,089 20,370 (15 ) (10 ) $ 4,074 $ 20,360 Income per common share: $ 0.36 $ 1.67 $ 0.36 $ 1.61 Weighted-average number of common shares outstanding: 11,154 12,131 11,331 12,600 Year Ended December 31, 2016 2015 2014 Net sales $ 287,728 $ 264,860 $ 124,590 Cost of sales 54,903 54,098 26,981 Gross profit 232,825 210,762 97,609 Operating expenses: Commissions expense 125,050 126,598 56,997 Selling, general and administrative expenses 43,245 36,024 19,687 Depreciation and amortization 394 263 105 Total operating expenses 168,689 162,885 76,789 Income from operations 64,136 47,877 20,820 Other expense, net (59 ) (84 ) (184 ) Income before income taxes 64,077 47,793 20,636 Income tax provision 8,991 552 266 Net income 55,086 47,241 20,370 Preferred stock dividends — — (10 ) Net income available to common stockholders $ 55,086 $ 47,241 $ 20,360 Income per common share: Basic $ 4.84 $ 3.84 $ 1.67 Diluted $ 4.83 $ 3.82 $ 1.61 Weighted-average number of common shares outstanding: Basic 11,382 12,302 12,131 Diluted 11,407 12,372 12,600 Cash dividends declared per common share $ 0.61 $ 0.14 $ 0.03 $ 4,089 $ 20,370 21 143 $ 4,110 $ 20,513 Year Ended December 31, 2016 2015 2014 Net income $ 55,086 $ 47,241 $ 20,370 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (838 ) (79 ) 143 Release of cumulative translation adjustment 132 (82 ) — Net change in foreign currency translation adjustment (706 ) (161 ) 143 Unrealized losses on available-for-sale securities — (2 ) — Comprehensive income $ 54,380 $ 47,078 $ 20,513 Accumulated Additional Other Preferred Stock Common Stock Paid-In Accumulated Comprehensive Treasury Stock Capital Deficit Loss 138,400 $ 124 11,345,062 $ 11 $ 80,591 $ (78,708 ) $ (102 ) (21,014 ) $ (7 ) $ 1,909 – – – – – 4,089 – – – 4,089 (14,707 ) (13 ) 14,707 – 13 – – – – – – – – – – – – (32,660 ) (52 ) (52 ) – – – – (24 ) – – 26,676 24 – – – – – – – 21 – – 21 – – – – 110 – – – – 110 123,693 111 11,359,769 11 80,690 (74,619 ) (81 ) (26,998 ) (35 ) 6,077 – – – – – 20,370 – – – 20,370 (123,693 ) (111 ) 123,693 – 111 – – – – – – – 1,407,855 2 4,946 – – – – 4,948 – – – – – – – (382,564 ) (4,661 ) (4,661 ) – – – – (46 ) (74 ) – 25,342 120 – – – – – – (476 ) – – – (476 ) – – – – – – 143 – – 143 – – – – 49 – – – – 49 – $ – 12,891,317 $ 13 $ 85,750 $ (54,799 ) $ 62 (384,220 ) $ (4,576 ) $ 26,450 Preferred Stock Common Stock Treasury Stock Shares Amount Shares Amount Shares Amount Total BALANCE, December 31, 2013 123,693 $ 111 11,359,769 $ 11 $ 80,690 $ (74,619 ) $ (81 ) (26,998 ) $ (35 ) $ 6,077 Net income — — — — — 20,370 — — — 20,370 Conversion of Series A preferred stock (123,693 ) ) 123,693 — 111 — — — — — Exercise of warrants — — 1,407,855 2 4,946 — — — — 4,948 Repurchase of common stock — — — — — — — (382,564 ) (4,661 ) (4,661 ) Common stock issued — — — — (46 ) (74 ) — 25,342 120 — Dividends declared — — — — — (476 ) — — — (476 ) Foreign currency translation adjustments — — — — — — 143 — — 143 Stock-based compensation — — — — 49 — — — — 49 BALANCE, December 31, 2014 — — 12,891,317 13 85,750 (54,799 ) 62 (384,220 ) (4,576 ) 26,450 Net income — — — — — 47,241 — — — 47,241 Exercise of warrants — — 88,097 — 309 — — — — 309 Repurchase of common stock — — — — — — — (547,042 ) (16,071 ) (16,071 ) Common stock issued — — — — (182 ) (380 ) — 91,060 1,228 666 Dividends declared — — — — — (1,709 ) — — — (1,709 ) Elimination of CTA upon dissolution — — — — — — (82 ) — — (82 ) Foreign currency translation adjustments — — — — — — (79 ) — — (79 ) Unrealized loss on available-for-sale securities — — — — — — (2 ) — — (2 ) Stock-based compensation — — — — 86 — — — — 86 BALANCE, December 31, 2015 — — 12,979,414 13 85,963 (9,647 ) (101 ) (840,202 ) (19,419 ) 56,809 Net income — — — — — 55,086 — — — 55,086 Repurchase of common stock — — — — — — — (903,031 ) (23,704 ) (23,704 ) Common stock issued — — — — 507 — — 51,015 1,234 1,741 Dividends declared — — — — — (6,891 ) — — — (6,891 ) Elimination of CTA upon dissolution — — — — — — 132 — — 132 Foreign currency translation adjustments — — — — — — (838 ) — — (838 ) Stock-based compensation — — — — 104 — — — — 104 BALANCE, December 31, 2016 — $ — 12,979,414 $ 13 $ 86,574 $ 38,548 $ (807 ) (1,692,218 ) $ (41,889 ) $ 82,439 $ 4,089 $ 20,370 66 105 110 49 16 (43 ) (17 ) – (974 ) (2,029 ) (35 ) (501 ) (38 ) (85 ) 1,673 (822 ) 16 243 2,679 5,077 1,467 3,706 1,738 147 – 2,065 (104 ) 666 Long-term incentive – 1,665 10,686 30,613 (210 ) (339 ) (82 ) – (292 ) (339 ) – 4,948 (52 ) (4,661 ) – (476 ) (52 ) (189 ) 1 181 10,343 30,266 4,207 14,550 $ 14,550 $ 44,816 Year Ended December 31, 2016 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 55,086 $ 47,241 $ 20,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 394 263 105 Stock-based compensation 104 86 49 Cumulative translation adjustment realized in net income 132 (82 ) — Deferred income taxes 217 (15 ) (43 ) Changes in assets and liabilities: Inventories, net (851 ) (6,762 ) (2,029 ) Other current assets (1,681 ) (1,025 ) (501 ) Other assets (90 ) (267 ) (85 ) Accounts payable (714 ) 637 (822 ) Income taxes payable 303 (115 ) 243 Accrued commissions (6,031 ) 10,840 5,077 Other accrued expenses 51 10,714 3,706 Deferred revenue 947 1,331 147 Amounts held in eWallets 2,752 14,350 2,065 Other current liabilities 135 25 666 Long-term incentive 2,420 4,105 1,665 Net cash provided by operating activities 53,174 81,326 30,613 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (905 ) (710 ) (339 ) Increase in restricted cash — (3,028 ) — Net cash used in investing activities (905 ) (3,738 ) (339 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants — 309 4,948 Repurchase of common stock (23,704 ) (16,071 ) (4,661 ) Dividends paid (6,891 ) (1,709 ) (476 ) Net cash used in financing activities (30,595 ) (17,471 ) (189 ) Effect of exchange rates on cash and cash equivalents (667 ) (19 ) 181 Net increase in cash and cash equivalents 21,007 60,098 30,266 CASH AND CASH EQUIVALENTS, beginning of period 104,914 44,816 14,550 CASH AND CASH EQUIVALENTS, end of period $ 125,921 $ 104,914 $ 44,816 (the “Company”), a Delaware corporation (whether or not including its subsidiaries, the “Company”), is an international direct-selling and e-commerce company headquartered in Dallas, Texas.company. Subsidiaries controlled by the Company sell personal care, wellness, and “quality of life” products under the “NHT Global” brand. In most markets, we sell our products to an independent member network that either uses the products themselves or resells them to consumers.OurEurope, which consists of ItalyEurope. The Company also operates in Russia and Slovenia. We also operate within certain Commonwealth of Independent States (Russia, Kazakhstan and Ukraine) through ourits engagement with a local service provider.obsolete inventory and the fair value of acquired intangible assets, including goodwill, revenue recognition, as well as those used in the determination of liabilities related to sales returns, distributor commissions and income taxes. Various assumptions and other factors prompt the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account historical experience and current and expected economic conditions. The actual results may differ materially and adversely from the Company’s estimates. To the extent that there are material differences between the estimates and actual results, future results of operations will be affected.equityaccounts receivable balances have been reclassified in the prior year consolidated financial statements to conform to current year presentation of treasury stock.presentation. No change in total stockholders’ equitycurrent assets occurred.The Company considers all highly liquid investments with original maturitiesthree months or less, when purchased,December 31, 2016, cash and cash equivalents include $6.8 million held in banks located within China subject to be cash equivalents.foreign currency controls. The Company includes credit card receivables due from certain of its credit card processors in its cash and cash equivalents as the cash proceeds are received within two to five days. December 31, 2016 2015 Cash $ 52,453 $ 47,431 Cash equivalents 73,468 57,483 Total cash and cash equivalents $ 125,921 $ 104,914
In June 2015, the Company funded a bank deposit account in the amount of CNY 20 million (USD 2.9 million at December 31, 2016) in anticipation of submitting a direct selling license application in China. Such deposit is required by Chinese laws to establish a consumer protection fund.Restricted Cash2014,2016 and 2015, the reserve for obsolescence totaled $18,000. No such reserve existed at December 31, 2013.WeThe Company did not recognize any impairment charges for goodwill during the periods presented.reverse.be recovered or settled. Deferred tax expense or benefit is a result of changes in deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized.realized based on the more likely than not recognition criteria. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has evaluated its tax positions and determined that there are no uncertain tax positions for the current year or years prior. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. Deferred taxes are not provided on the portion of undistributed earnings of subsidiaries outside of the United States when these earnings are considered permanently reinvested.The Company and its subsidiaries file income tax returns in the United States, various states, and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2011, and is no longer subject to state income tax examinations for years prior to 2010. No jurisdictions are currently examining any income tax returns of the Company or its subsidiaries.Distributor eWalletsdistributorsmembers in Hong Kong to be first deposited into an electronic wallet (eWallet) account in lieu of being paid out directly to distributors.members. The eWallet functionality allows distributorsmembers to place new product orders utilizing eWallet available funds and/or request commission payout via multiple payment methods. Amounts held in eWallets are reflected on the balance sheet as a current liability.Long-Term Incentive in cash in thirty-five equal consecutive monthly installments commencing in February of the calendar year immediately following the conclusion of the performance period and the remaining fifty percent of the payment earned is payable in cash in thirty-five equal consecutive monthly installments commencing in February 2021 and ending in December 2023. As such, certain installments to be paid are reflected on the balance sheet as a non-current liability, and the current portion of the installments is reflected in other accrued expenses.a separate component of stockholders’ equity and represents the only component of accumulated other comprehensive income.$32,000$333,000, $204,000 and $202,000 was recognized during 20132016, 2015 and 2014, respectively.distributors.members. Product sales to distributorsmembers are made pursuant to a distributormember agreement that provides for transfer of both title and risk of loss upon ourthe Company’s delivery to the carrier that completes delivery to the distributors,members, which is commonly referred to as “F.O.B. Shipping Point.” The Company primarily receives payment by credit card at the time distributorsmembers place orders. Amounts received for unshipped product are recorded as deferred revenue. The Company’s sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return.distributorsmembers access to both a personalized marketing website and a business management system. No upfront costs are deferred as theamountthe amount is nominal.distributorsmembers are included in net sales. Costs associated with shipments are included in cost of sales.distributorsmembers are collected by the Company as an agent and remitted to the respective taxing authority. These taxes are presented on a net basis and recorded as a liability until remitted to the respective taxing authority.Distributor distributorsmembers earn commissions based on total personal and group bonus volume points per weekly sales period. Each of ourthe Company’s products are designated a specified number of bonus volume points, which is essentially a percentage of the product’s wholesale price. The Company accrues commissions when earned and pays commissions on product sales generally two weeks following the end of the weekly sales period.wethe Company also paypays certain bonuses on purchases by up to three generations of personally sponsored distributors,enrolled members, as well as bonuses on commissions earned by up to three generations of personally sponsored distributors.enrolled members. Independent distributorsmembers may also earn incentives based on meeting certain qualifications during a designated incentive period, which may range from several weeks to up to a year. These incentives may be both monetary and non-monetary in nature. The Company estimates and accrues all costs associated with the incentives as the distributorsmembers meet the qualification requirements.we makethe Company makes modifications and enhancements to ourthe Company’s compensation plan to help motivate distributors,members, which can have an impact on distributormember commissions. From time to time wethe Company also enterenters into agreements for business or market development, which may result in additional compensation to specific distributors.Stock-Based Compensationisfor 2014 was computed via the “two-class” method by dividing net income allocated to common stockholders by the weighted-average number of common shares outstanding during the period. Net income available to common stockholders is allocated to both common stock and participating securities as if all of the income for the period had been distributed. The Company’s Series A convertible preferred stock was a participating security due to its participation rights related to dividends declared by the Company. If dividends were distributed to common stockholders, the Company was also required to pay dividends to the holders of the preferred stock in an amount equal to the greater of (1) the amount of dividends then accrued and not previously paid on such shares of preferred stock or (2) the amount payable if dividends were distributed to the common stockholders on an as-converted basis.TheFor 2014, the dilutive effect of the Company’s Series A convertible preferred stock was calculated using the more dilutive of the “two-class” method and the “if-converted” method, which assumes that the preferred stock was converted into common stock at the beginning of each period presented. Year Ended December 31, 2016 2015 2014 Income Shares Per Share Income Shares Per Share Income Shares Per Share $ 4,074 $ 20,360 $ 55,086 $ 47,241 $ 20,360 (31 ) (127 ) — — (127 ) $ 4,043 11,154 $ 0.36 $ 20,233 12,131 $ 1.67 $ 55,086 11,382 $ 4.84 $ 47,241 12,302 $ 3.84 $ 20,233 12,131 $ 1.67 – – – 421 — — — 21 — 421 – 177 – 48 — 25 — 49 — 48 – 5 — — 5 $ 4,043 11,331 $ 0.36 $ 20,238 12,600 $ 1.61 $ 55,086 11,407 $ 4.83 $ 47,241 12,372 $ 3.82 $ 20,238 12,600 $ 1.61 Warrantspurchase 2,234,994be vested. For the year ended December 31, 2016, 345 shares of commonnon-vested restricted stock were not included in the computation of diluted income per share for 2013 as their effect is anti-dilutive since the applicable exercise price exceeds the average market price of the related common stock for the period. Warrants to purchase 88,097 shares of common stock were still outstanding at December 31, 2014. Such warrants expire April 21, 2015.MostSubstantially all of the Company’s Hong Kong revenues are derived from the sale of products that are delivered to members in China. In contrast to the Company’s operations in other parts of the world, the Company has not implemented a direct sales model in China. The Chinese government permits direct selling only by organizations that have a license, thatwhich the Company does not have,has applied for, and has also adopted anti-multilevel marketing legislation. The Company operates an e-commerce direct selling model in Hong Kong and recognizes the revenue derived from sales to both Hong Kong and Chinese members as being generated in Hong Kong. Products purchased by members in China are delivered by the Company to one or more third parties that act as the importers of record under agreements to pay applicable duties. In addition, through a Chinese entity, the Company sells products in China using an e-commerce retail model. The Chinese entity operates separately from the Hong Kong entity, althoughand a Chinese member may elect to participate separately or in both.theits e-commerce direct selling model in Hong Kong does not violate any applicable laws and regulations in China, regarding direct selling and multi-level marketing are not specifically applicable toeven though it is used for the Company’s Hong Kong basedinternet purchase of the Company's products by members in China. The Company also believes that its Chinese entity, including its e-commerce activity, and that the Company’s Chinese entityretail platform, is operating in compliance with applicable Chinese laws. However, there can be no assurance that the Chinese authorities will agree with the Company’s interpretations of applicable laws and regulations or that China will not adopt new laws or regulations. Should the Chinese government determine that the Company’s e-commerce activity violatesactivities violate China’s direct selling or anti-multilevel marketing legislation, or should new laws or regulations be adopted, there could be a material adverse effect on the Company’s business, financial condition and results of operations.the Company’sits business, the Company’s efforts to comply with national and local laws may be harmed by a rapidly evolving regulatory climate, concerns about activities resembling violations of direct selling or anti-multi-level marketing legislation, subjective interpretations of laws and regulations, Chinese nationals collaborating with short traders to damage the Company's business and activities by individual distributorsmembers that may violate laws notwithstanding the Company’s strict policies prohibiting such activities. Any determination that the Company’s operations or activities, or the activities of the Company’sits individual distributorsmembers or employee sales representatives, or importers of record are not in compliance with applicable laws and regulations could result in the imposition of substantial fines, extended interruptions of business, restrictions on the Company’s future ability to obtain business licenses or expand into new locations, changes to the Company’sits business model, the termination of required licenses to conduct business, or other actions, any of which could materially harm the Company’s business, financial condition and results of operations.™ product accounts and Enhanced Essential Probiotics®products each account for a significant portionmore than 10% of the Company’s total revenue. The Company currently sources iteach such product from a single supplier. If demand decreases significantly, government regulation restricts itstheir sale, the Company is unable to adequately source or deliver the product,products, or the Company ceases offering the productproducts for any reason without a suitable replacement,replacements, the Company’s business, financial condition and results of operations could be materially and adversely affected.Fair accounts receivable, accounts payable and accrued expenses, approximate fair value because of their short maturities. The carrying amount of the noncurrent restricted cash approximates fair value since, absent the restrictions, the underlying assets would be included in cash and cash equivalents. December 31, 2016 December 31, 2015 Adjusted Cost Gross Unrealized Gains/Losses Fair Value Adjusted Cost Gross Unrealized Gains/Losses Fair Value Municipal bonds and notes $ 43,490 $ — $ 43,490 $ 35,222 $ 2 $ 35,224 Corporate debt securities 1,673 (2 ) 1,671 5,029 (5 ) 5,024 Financial institution instruments 28,307 — 28,307 17,235 — 17,235 Total available-for-sale investments $ 73,470 $ (2 ) $ 73,468 $ 57,486 $ (3 ) $ 57,483 March 2013,November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830) —Parent’s2016-18, Statement of Cash Flows - Restricted Cash, that requires amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.Cumulative Translation Adjustment upon Derecognitionrights and obligations created by those leases with lease terms of Certain Subsidiaries or Groupsmore than 12 months. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of Assetscash flows arising from leases and will include qualitative and quantitative requirements. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within a Foreign Entity orthose annual years, and early application is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.an InvestmentDeferred Taxes. Under this guidance, entities are required to present deferred tax tax assets and deferred tax liabilities as noncurrent in a Foreign Entity, to clarify theclassified balance sheet. This guidance is effective for entities that cease to hold a controlling financial interest in a subsidiary or group of assets within a foreign entity when (1) the subsidiary or group of assets is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oilannual and gas mineral rights) and (2) there is a cumulative translation adjustment balance associated with that foreign entity. ASU 2013-05 was effective prospectively for reporting periods, including interim periods beginning after December 15, 2013.2016, with early adoption permitted. Entities are permitted to adopt this guidance either prospectively or retrospectively. The Company’s adoptionCompany elected to early adopt this guidance prospectively as of the standard on January 1, 2014 did not have a material impact on its consolidated financial statements.2013,2015, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) — Presentation2015-11, Inventory: Simplifying the Measurement of an Unrecognized Tax Benefit When AInventory. Under this guidance, inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, to provide explicit guidance onrealizable value is the financial statement presentationestimated selling price in the ordinary course of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.business, less reasonably predictable cost of completion, disposal, and transportation. The amendments in this update werenew standard will be effective for fiscal years, and interim periods within those years beginning after December 15, 20132016, including interim periods within those fiscal years, and shouldwill be applied prospectively to all tax benefits that exist at the effective date. Retrospective application wasprospectively. Early adoption is permitted. The Company’s adoption of the standard on January 1, 2014 didthis guidance is not expected to have a material impacteffect on itsthe Company’s consolidated financial statements.ASU 2014-09 becomesIn July 2015, the FASB approved the deferral of the effective date for annual reporting periods including interim periods, beginningthat begin after December 15, 2016.2017, including interim reporting periods. Early adoption is not permitted.permitted to the original effective date of December 15, 2016, including interim reporting periods. The companyCompany is currently assessing the impact that this standard will have on its consolidated financial statements. $ 354 $ 391 533 537 62 59 Leasehold improvements 256 345 102 75 1,307 1,407 (1,042 ) (931 ) $ 265 $ 476 $ 504 $ 654 1,860 4,620 595 987 187 482 $ 3,146 $ 6,743 December 31, 2016 2015 Property and equipment: Office equipment $ 517 $ 495 Office software 672 536 Machinery 28 24 Furniture and fixtures 241 222 Leasehold improvements 840 730 Construction in progress (including internal use software development costs) 157 10 Property and equipment, at cost 2,455 2,017 Accumulated depreciation and amortization (1,067 ) (1,123 ) $ 1,388 $ 894 Other accrued expenses: Sales returns $ 1,632 $ 1,552 Employee-related expense 10,541 11,064 Warehousing, inventory-related and other 2,816 4,087 $ 14,989 $ 16,703 $ 1,938 $ 1,150 $ 2,191 $ 1,783 449 815 2,327 1,597 182 222 430 331 – 500 — 300 $ 2,569 $ 2,687 $ 4,948 $ 4,011 $ 674 $ 1,266 208 247 $ 882 $ 1,513 March 2018.September 2025. Rent expense in connection with operating leases was $787,000$1.8 million, $1.5 million and $777,000 during 20132016, 2015 and 2014, respectively.20142016 are as follows (in thousands): $ 466 2016 178 2017 71 $ 1,559 2018 18 752 2019 – 402 2020 314 2021 196 Thereafter 700 $ 733 $ 3,923 2016.2016 which automatically renews annually unless terminated 90 days prior to the termination date. To maintain exclusivity, the Company is required to purchase a minimum of $40,000 of product per month until the termination date. As of December 31, 2014,2016, the Company was in compliance with the exclusivity provision.December 2014,February 2016, the Company amended a supply agreement with one of its suppliers to obtainmaintain worldwide exclusivity in return for purchasing a minimum of $3.3$9.4 million of product annually.annually on average over the next three years, plus certain raw material guarantees. If the Company does not purchase the minimum product as required, then a Cure Payment, as defined, will be due to the supplier. The term of the agreement is three years commencing on January 1, 2015February 2016 and shall automatically renew for successive three year terms unless notice of termination is provided by either party. In addition, the Company has an employment agreement with another employee that can be terminated at will by either the employee or the Company, provided that the Company must pay a specified amount if it terminates the agreement without cause, as defined, or the employee terminates the agreement with good reason, as defined. Accrued severance totaling $12,000 as of December 31, 2014 was paid in January 2015.distributorsmembers in the event that the Company is unable to provide refunds to distributors.members. Typically, requests for refunds are paid directly by the Company according to the Company’s normal Korean refund policy, which requires that refund requests be submitted within three months. Accordingly, the Company estimates and accrues a reserve for product returns based on this policy and its historical experience. Depending on the sales volume, the Company may be required to increase or decrease the amount of the contract. The maximum potential amount of future payments the Company could be required to make to address actual distributormember claims under the contract is equivalent to three months of rolling sales. At December 31, 2014,2016, non-current other assets include KRW 197223 million (USD $180,000)$185,000) underlying the contract, which can be utilized by the Cooperative to fund any outstanding distributormember claims. The Company believes that the likelihood of utilizing these funds to provide for distributorsmembers claims is remote.Registration Payment ArrangementsPursuanta Registration Rights Agreement withassert claims on behalf of all persons who purchased or otherwise acquired our common stock between March 6, 2015 and March 15, 2016 under (i) Section 10(b) of the investorsSecurities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Natural Health Trends Corp., Chris T. Sharng, and Timothy S. Davidson, and (ii) Section 20(a) of the Securities Exchange Act of 1934 against Chris T. Sharng, Timothy S. Davidson, and George K. Broady. The consolidated complaint alleges, inter alia, that the Company made materially false and misleading statements regarding the legality of its business operations in the Company’s October 2007 financing of variable rate convertible debentures havingChina, including running an aggregate faceallegedly illegal multi-level marketing business. The consolidated complaint seeks an indeterminate amount of $4,250,000, seven-year warrants to purchase 1,495,952 shares of the Company’s common stock,damages, plus interest and one-year warrants to purchase 1,495,952 shares of the Company’s common stock, the Company was obligated to (i) file a registration statement covering the resale of the maximum number of Registrable Securities (as defined) that is permitted by SEC Guidance (as defined) prior to November 18, 2007, (ii) cause the registration statement to be declared effective within certain specified periods of time and (iii) maintain the effectiveness of the registration statement until all Registrable Securities have been sold, or may be sold without volume restrictions pursuant to Rule 144(k) under the Securities Act. The Company timely filed that registration statement covering the shares of common stock underlying the debentures, which have been redeemed, and the one-year warrants, which have expired. At the time, the 1,495,952 shares of common stock underlying the seven-year warrants were not deemed Registrable Securities and were not included in the Registration Statement. If they are subsequently deemed Registrable Securities at a time when a registration statement covering them is required to be effective under the Registration Rights Agreement, and such registration statement is not then effective, then the warrants may be exercised by means of a cashless exercise. The maximum number of shares that could be required to be issued upon exercise of the warrants (whether on a cashless basis or otherwise) is limited to the number of shares indicated on the face of the warrants.costs. The Company filed a registration statementmotion to dismiss the consolidated complaint on NovemberJune 15, 2016 and a reply in support of its motion to dismiss on August 22, 2013 covering2016. On December 5, 2016, the maximum number of sharesCourt denied the Company’s motion to dismiss. On February 17, 2017, the Company filed an answer to the consolidated complaint. The Company believes that could be requiredthese claims are without merit and intends to be issued upon exercisevigorously defend against them.warrants,State of California, County of Los Angeles: Zhou v. Sharng. In March 2016, a purported shareholder derivative complaint was filed in the United States District Court for the Central District of California: Kleinfeldt v. Sharng (collectively the “Derivative Complaints”). The Derivative Complaints purport to assert claims for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement and such registration statementcorporate waste against certain of the Company’s officers and directors. The Derivative Complaints also purport to assert fiduciary duty claims based on alleged insider selling and conspiring to enter into several stock repurchase agreements, which allegedly harmed the Company and its assets. The Derivative Complaints allege, inter alia, that the Company made materially false and misleading statements regarding the legality of its business operations in China, including running an allegedly illegal multi-level marketing business, and that certain officers and directors sold common stock on the basis of this allegedly material, adverse non-public information. The Derivative Complaints seek an indeterminate amount of damages, plus interest and costs, as well as various equitable remedies. On February 1, 2017, pursuant to a stipulation among the parties, the Los Angeles Superior Court entered a stay of the Zhou action pending conclusion of the related federal class action in the United States District Court for the Central District of California: Ford v. Natural Health Trends Corp. and Li v. Natural Health Trends Corp. A nearly identical stipulated stay was declared effectiveentered in the Kleinfeldt case on December 5, 2013.February 8, 2017. The Company believes that these claims are without merit and intend to vigorously defend against them.post-effective amendmentlegal matter with one of its vendors and an outside party. Per the royalty agreement with the vendor, the Company believes that it is fully indemnified in the event of an unfavorable outcome and any potential settlement costs related to that registration statement on June 9, 2014, which was declared effective on June 16, 2014. As of December 31, 2014, no contingent obligations have been recognized under registration payment arrangements.$0.001$0.001 par value, and 50,000,000 shares of common stock, $0.001$0.001 par value. On May 4, 2007, the Board of Directors designated up to 1,761,900 shares of preferred stock as Series A preferred stock with the following rights and preferences:●• ●• $0.119$0.119 per share shall accrue from the date of issuance of any shares of Series A preferred stock, payable upon declaration by the Board of Directors. Accruing dividends shall be cumulative; provided, however, that except as set forth below for the liquidation preference, the Company shall be under no obligation to pay such dividends. No dividends shall be declared on Junior Securities (other than dividends on shares of common stock payable in shares of common stock) unless the holders of the Series A preferred stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A preferred stock in an amount at least equal to the greater of (i) the amount of the aggregate accrued dividends on such share of Series A preferred stock and not previously paid and (ii) in the case of a dividend on common stock or any class or series of Junior Securities that is convertible into common stock, that dividend per share of Series A preferred stock as would equal the product of (1) the dividend payable on each share as if all shares of such class or series had been converted into common stock and (2) the number of shares of common stock issuable upon conversion of a share of Series A preferred stock.●• $1.70$1.70 per share, subject to adjustment.●• ●• , at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock as determined by dividing the Series A Original Issue Price by the Series A Conversion Price (as defined) in effect at the time of conversion. The “Series A Conversion Price” shall initially be equal to $1.70.$1.70. Each share of Series A preferred stock shall automatically be converted into shares of common stock at the then effective conversion price immediately upon such date as the average closing price of the common stock over a consecutive, trailing 6-month period equals or exceeds $10.00$10.00 per share.$3.52$3.52 per share for total proceeds of $4.9 million.$4.9 million. As a result of the cash dividends declared on each share of outstanding common stock and in accordance with the terms of the related warrant agreement, the exercise price per share for each warrant was adjusted from $3.52 per share to $3.5082 per share. TheIn April 2015, the remaining warrants to purchase 88,097 shares of common stock expire April 21, 2015 if not previously exercised.table summarizestables summarize the Company’s cash dividend activity during 2016, 2015 and 2014 (in thousands, except per share data): $ 0.815 $ 0.005 $ 159 0.020 0.005 62 0.027 0.010 127 0.032 0.010 128 $ 0.894 $ 0.030 $ 476 Declaration Date Per Common Share Amount Payment Date October 23, 2016 (special) $ 0.35 $ 3,941 October 23, 2016 0.08 901 July 19, 2016 0.07 787 April 21, 2016 0.06 686 March 1, 2016 0.05 576 Total $ 0.61 $ 6,891 Declaration Date Per Common Share Amount Payment Date October 21, 2015 $ 0.05 $ 598 July 28, 2015 0.04 489 May 4, 2015 0.03 372 February 27, 2015 0.02 250 Total $ 0.14 $ 1,709 Dividends Per Share Declaration Date Preferred Common Amount Payment Date November 4, 2014 $ 0.032 $ 0.010 $ 128 July 29, 2014 0.027 0.010 127 May 6, 2014 0.020 0.005 62 March 7, 2014 0.815 0.005 159 Total $ 0.894 $ 0.030 $ 476 August 13, 2012,January 12, 2016, the Board of Directors authorized an increase to the Company’s stock repurchase program first approved on July 28, 2015 from $15.0 million to $70.0 million. Repurchases are expected to be executed to the extent that the Company’s earnings and cash-on-hand allow, and will be made in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. For all or a portion of the authorized repurchase amount, the Company acting as trustee for certain of its non-officer, overseas employees, to execute amay enter into one or more plans that are compliant with Rule 10b5-1 planof the Exchange Act that are designed to facilitate these purchases. The stock repurchase program does not require the Company to acquire a specific number of shares, and may be suspended from time to time or discontinued.100,000of shares of the Company’s common stock in the open market. During the year ended December 31, 2016, the Company purchased a total of 903,031 shares of its common stock for an aggregate purchase price of $23.7 million, plus transaction costs. As of December 31, 2016, $32.0 million of the $70.0 million stock repurchase program approved on July 28, 2015 and increased on January 12, 2016 remained available for future purchases, inclusive of related estimated income tax.guidelines specified underall applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. For all or a portion of the authorized repurchase amount, the Company may enter into one or more plans that are compliant with Rule 10b5-1 of the Securities Exchange Act that are designed to facilitate these purchases. The repurchase program does not require the Company to acquire a specific number of 1934 (the “Exchange Act”)shares, and may be suspended from time to time or discontinued. In connection therewith, the Company was advised that George K. Broady, a director of the Company and owner of more than 5% of its outstanding shares of common stock, would participate in the stock repurchase program on a basis roughly proportional to his family’s ownership interest. See Note 8.Company's policies regarding stock transactions. Pursuant to this authority,purchase of shares from Mr. Broady, resulted in the Company as Trustee,purchasing a total of 162,442 shares of its common stock for an aggregate purchase price of $5.0 million, plus transaction costs. During October 2015, the Company authorized its broker to proceed with the purchase of shares of the Company’s common stock in the open market for a total purchase price of $3.6 million. The open market repurchases were completed on October 30, 2015. The stock repurchase program, which included both open market purchases and the purchase of shares from Mr. Broady, resulted in the Company purchasing a total of 106,264 shares of its common stock for an aggregate purchase price of $5.0 million, plus transaction costs.10b5-1 planstock repurchase agreement with Mr. Broady that provided for the Company’s purchase from Mr. Broady in off-the-market, private transactions of a total of 91,817 shares of the Company’s common stock, which would be purchased at the rate of 5,000 shares each trading day following the date of the agreement until all of such shares were purchased (see Note 8). The shares were purchased at a per share price equal to the closing price per share of the Company’s common stock on the preceding trading day, as reported on the primary market in which the Company’s common stock is publicly traded. The Company’s purchases concluded on February 19, 2015, and began purchasing sharesresulted in December 2012. The latest 10b5-1 plan terminated in November 2014 and the Company, as Trustee, has not entered into a new 10b5-1 plan. See Note 5.$5$5.0 million of the Company’s outstanding shares of common stock (the “Repurchase Plan”). In connection therewith, the Company was advised by George K. Broady, a director of the Company and owner of more than 5% of its outstanding common stock, that Mr. Broady desired to participate in the Repurchase Plan on a basis roughly proportional to his family’s ownership interest, with an estimate of generating approximately $1.5 million through the sale of a portion of the shares of the Company’s common stock held by him (see Note 8). After noting Mr. Broady’s participation interest, the Company authorized its broker to proceed with the purchase of shares of the Company’s common stock in the open market for a total purchase price of $3.0 million in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act. The Repurchase Plan was completed on December 17, 2014. The Repurchase Plan, which included both open market purchases and the purchase of shares from Mr. Broady, resulted in the Company purchasing a total of 359,840 shares of its common stock for an aggregate purchase price of $4.5 million, plus transaction costs. 5. STOCK-BASED COMPENSATIONOn August 18, 2006, the Compensation Committee of Company’s Board of Directors approved, subject to stockholder approval, the Natural Health Trends Corp. 2007 Equity Incentive Plan (the “2007 Plan”). Under the 2007 Plan, the Company may grant (i) incentive stock options, (ii) nonqualified stock options, (iii) restricted stock, (iv) restricted stock units, (v) stock appreciation rights either in tandem with an option or alone and unrelated to an option, or SARs, (vi) performance shares, (vii) award shares, or (viii) stock awards. The 2007 Plan was approved by the Company’s stockholders on November 17, 2006.The purpose of the 2007 Plan is to enable the Company to attract and retain employees, officers, directors, consultants and advisors; to provide an incentive for them to assist in achieving long-range performance goals; and to enable them to participate in the long-term growth of the Company. The terms of any particular grant are determined by the Board of Directors or a committee appointed by the Board of Directors. Generally, the grants of restricted stock vest quarterly on a pro rata basis over a three-year period. The maximum number of shares available for issuance under the 2007 Plan was 1,550,000 shares. At the Company’s Annual Meeting of Stockholders held on December 30, 2008, the Company’s stockholders approved an increase in the maximum number of shares available for issuance under the 2007 Plan by 500,000 shares. As such, the maximum aggregate number of shares available for issuance under the 2007 Plan totals 2,050,000 shares.As of December 31, 2014, 1,083 shares remain available to be granted under the 2007 Plan.Valuation and Expense Information under FASB ASC Topic 718Stock-based compensation expense totaled approximately $110,000 and $49,000 for 2013 and 2014, respectively. No tax benefits were attributed to the stock-based compensation because a valuation allowance was maintained for substantially all net deferred tax assets. A following table summarizes the Company’s restricted stock activity under the 2007 Plan: 261,658 $ 0.37 (206,672 ) 0.37 54,986 0.37 (54,986 ) 0.37 – – Company'sCompany’s policies regarding stock transactions. Pursuant to this authority, the Company, as Trustee, entered into a 10b5-1 plan and began purchasing shares in December 2012. The latest 10b5-1 plan terminated in November 2014 and the Company, as Trustee, has not entered into a new 10b5-1 plan. See Note 5. Shares Wtd. Avg. Price at Date of Issuance Nonvested at December 31, 2015 — $ — Granted 51,015 34.13 Vested (12,759 ) 34.13 Nonvested at December 31, 2016 38,256 34.13 Shares Wtd. Avg. Price at Date of Issuance Nonvested at December 31, 2014 — $ — Granted 67,076 12.15 Vested (22,364 ) 12.15 Nonvested at December 31, 2015 44,712 12.15 Granted — — Vested (22,364 ) 12.15 Nonvested at December 31, 2016 22,348 12.15 hasdid not enteredenter into a new 10b5-1 plan. The employees will receivereceived the stock as incentive compensation in quarterly increments over three years beginning March 15, 2013, provided that they arewere employees of the Company on the date of the distribution. Any common stock that iswas forfeited by an employee whose employment terminates will beterminated was delivered to the Company and held as treasury stock. 100,000 $ 1.37 (26,676 ) 1.37 (20,000 ) 1.37 Shares Wtd. Avg. Grant-Date Fair Value 53,324 1.37 53,324 $ 1.37 (25,342 ) 1.37 (25,342 ) 1.37 (3,998 ) 1.37 (3,998 ) 1.37 23,984 1.37 23,984 1.37 Vested (23,984 ) 1.37 Forfeited — — Nonvested at December 31, 2015 — — As of December 31, 2014, total unrecognized stock-based compensation expense related to these stock awards was $31,000, which is expected to be recognized over a weighted-average period of one year. Year Ended December 31, 2016 2015 2014 $ 194 $ 4,502 $ (3,106 ) $ (7,820 ) $ 4,502 3,997 16,134 67,183 55,613 16,134 $ 4,191 $ 20,636 $ 64,077 $ 47,793 $ 20,636 $ 10 $ 104 – 11 76 194 86 309 16 (43 ) $ 102 $ 266 Year Ended December 31, 2016 2015 2014 Current: Federal $ 7,151 $ 12 $ 104 State (81 ) 100 11 Foreign 1,648 456 194 Total current taxes 8,718 568 309 Deferred taxes 273 (16 ) (43 ) Income tax provision $ 8,991 $ 552 $ 266 Year Ended December 31, 2016 2015 2014 $ 1,425 $ 7,016 $ 22,427 $ 16,250 $ 7,016 7 9 12,496 370 9 430 (2,070 ) (3,877 ) 2,017 (2,070 ) (1,218 ) (5,240 ) (21,713 ) (18,099 ) (5,240 ) (597 ) 38 – 519 55 (6 ) (342 ) 14 551 $ 102 $ 266 $ 8,991 $ 552 $ 266 Year Ended December 31, Statutory Tax Rate 2016 2015 2014 Cayman Islands — % $ 58,169 $ 50,993 $ 16,267 Hong Kong 16.5 % 3,992 2,645 1,129 China 25.0 % 3,855 1,493 153 December 31, 2016 2015 $ 13,115 $ 10,083 $ 235 $ 3,197 Stock-based compensation 623 — 268 837 3,174 3,367 512 519 — 418 88 69 1 – — 32 13,984 11,508 4,032 7,014 (13,927 ) (11,440 ) (235 ) (4,112 ) 57 68 Net deferred tax assets 3,797 2,902 (43 ) – (107 ) (64 ) (11 ) (32 ) Foreign earnings (3,650 ) (2,789 ) (4 ) (37 ) (415 ) (173 ) (165 ) (133 ) (4,065 ) (2,962 ) $ (108 ) $ (65 ) $ (268 ) $ (60 ) Therecordedreleased its valuation allowance against its U.S. deferred tax assets. In addition to having a net deferred tax liability and no indefinite lived intangibles, the Company analyzed all sources of available income and determined that they are more likely than not to realize the tax benefits of their deferred assets in future periods or carryback years.equal its netagainst certain foreign deferred tax assetsassets. The Company is recording a valuation allowance in the U.S. and certain of its foreign jurisdictions due to the uncertainty of future operating results.with an overall deferred tax loss. The valuation allowance will be reduced at such time as management believes it is more likely than not that the deferred tax assets will be realized. Any reductions in the valuation allowance will reduce future income tax provisions.Atprovision. As of December 31, 2014,2016, the Company has no U.S. federal net operating loss or credit carryforwards of $27.2 million that beginas any remaining attributes are expected to expirebe fully utilized to offset tax in 2021, if not utilized. Thethe current year. also has foreign net operating loss carryforwards totaling $3.4of approximately $1.3 million in various jurisdictions with various expirations, including $2.0 million in China with expirations from 2015 to 2017.expirations.has not providedrepatriated $19.8 million to the U.S. during the three months ended March 31, 2016, part of which was offset by U.S. net operating losses. Accordingly, the deferred tax liability previously established for undistributed foreign earnings up to its existing U.S. federal andnet operating losses was reduced. The excess amount repatriated during the year ended December 31, 2016 was generated from current foreign withholding taxes onearnings. The Company will continue to periodically reassess the undistributed earningsneeds of its foreign subsidiaries and update its indefinite reinvestment assertion as necessary. To the extent that additional foreign earnings are not deemed permanently reinvested, the Company expects to recognize additional income tax provision at the applicable U.S. corporate tax rate. As of December 31, 2014. Such2016, the Company has recorded a deferred tax liability for earnings that the Company plans to repatriate out of accumulated earnings in future periods. All undistributed earnings in excess of 50% of current earnings on an annual basis are intended to be reinvested indefinitely. Generally, such earnings becomeindefinitely as of December 31, 2016.U.S.state income tax uponexaminations for years prior to 2011. No jurisdictions are currently examining any income tax returns of the remittance of dividends and under certain other circumstances. At December 31, 2014, it is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.Company or its subsidiaries. Year Ended December 31, 2016 2015 2014 (In Thousands) $ 71 $ 60 $ 8,791 $ 707 $ 60 – 1 9 — 1 Non-cash financing activity: Conversion of preferred stock 13 111 — — 111 Issuance of treasury stock 1,741 666 — In February 2013,ReStor™Soothe™. The Company began selling this product in the fourth quarter of 2012 with the permission of BHS. Mr. Broady is owner of BHS. Under thisthe agreement, the Company agreed to pay BHS a royalty of 2.5% of sales revenue in return for the right to manufacture (or have manufactured), market, import, export and sell this product worldwide, with certain rights being exclusive outside the United States. George K. Broady, a director ofworldwide. Further, the Company and owneragreed to pay BHS $11,700 as royalties for the period it began selling the product in the fourth quarter of more than 5% of its outstanding common stock, is owner of BHS.2012 through 2014. The Company recognized royalties of $48,000$3,400, $7,000 and $144,000$6,400 during 20132016, 2015 and 2014, respectively. The Company is not required to purchase any product under the agreement, and the agreement may be terminated at any time on 120 days’ notice or, under certain circumstances, with no notice.The Otherwise, the agreement terminates March 31, 2020.is considering enteringentered into another royalty agreementa Royalty Agreement and licenseLicense with BHS regarding the manufacture and sale of a product called Soothe™, whichReStor™. Under this agreement, the Company began sellingagreed to pay BHS a royalty of 2.5% of sales revenue in return for the fourth quarter of 2012 with the permission of BHS. To continue sellingright to manufacture (or have manufactured), market, import, export and sell this product BHS has requested thatworldwide, with certain rights being exclusive outside the United States. On April 29, 2015, the Company payand BHS amended the Royalty and Agreement and License to change the royalty to a royaltyprice per unit instead of 2.5% of sales revenue for this product for 2012revenue. This provision was effective retroactive to January 1, 2015. The Company recognized royalties of $475,000, $555,000 and subsequent years.$144,000 during 2016, 2015 and 2014, respectively. The Company is consideringnot required to purchase any product under the agreement, and the agreement may be terminated at any time on 120 days’ notice or, under certain circumstances, with no notice. Otherwise, the agreement terminates March 31, 2020.proposalprovided for the Company’s purchase of common stock from Mr. Broady in off-the-market, private transactions at a rate equal to 0.4066 times the number of shares purchased by the Company’s broker in conjunction with the stock repurchase program authorized by the Company’s Board of Directors on July 28, 2015. The Company’s purchases from Mr. Broady concluded on November 2, 2015, were completed at a per share purchase price equal to the weighted average price per share paid by the Company’s broker in its open-market purchases, and discussingresulted in an aggregate purchase price of $1.4 million. See Note 4.termsCompany entered into a Stock Repurchase Agreement with Mr. Broady that provided for the Company’s purchase of common stock from Mr. Broady in off-the-market, private transactions at a rate equal to 0.4085 times the number of shares purchased by the Company’s broker in conjunction with the stock repurchase program authorized by the Company’s Board of Directors on July 28, 2015. The Company’s purchases from Mr. Broady concluded on August 6, 2015, were completed at a per share purchase price equal to the weighted average price per share paid by the Company’s broker in its open-market purchases, and resulted in an aggregate purchase price of $1.5 million. See Note 4.definitive agreement. Attotal of 91,817 shares of the Company’s common stock, which would be purchased at the rate of 5,000 shares each trading day following the date of the agreement until all of such shares were purchased. The shares were purchased at a royaltyper share price equal to the closing price per share of 2.5%the Company’s common stock on the preceding trading day, as reported on the primary market in which the Company’s common stock was publicly traded. The Company’s purchases concluded on February 19, 2015, and resulted in an aggregate purchase price of net sales, the Company calculates that royalties through the end of December 2014 would total $11,700.Stock Repurchase Agreement(the “Stock Repurchase Agreement”) with George K.Mr. Broady a director of the Company and owner of more than 5% of its outstanding common stock, in accordance with Rule 10b5-1 under the Exchange Act. The Stock Repurchase Agreementthat provided for the Company’s purchase from Mr. Broady of one-half of the number of shares of common stock purchased by the Company’s broker in the open market under the Repurchase Plan approved by the Company’s Board of Directors on November 4, 2014 (see Note 4).2014. The Stock Repurchase Agreement with Mr. Broady required that the Company report to Mr. Broady on a weekly basis information regarding the broker’s open market purchases, and that the Company purchase from Mr. Broady on a weekly basis at a per share purchase price equal to the weighted average price per share paid by the Company’s broker to purchase shares in the open market. The Company’s purchases from Mr. Broady under the Stock Repurchase Agreement, which concluded on December 17, 2014, totaled 119,947 shares of its common stock forand resulted in an aggregate purchase price of $1.5 million.$1.5 million. See Note 4.20132016, 2015 and 2014, the Company matched employee deferral contributions up to 4.5% of salary, which vested 100% immediately. No profit sharing has been paid under the plan. The Company recorded compensation expense of $62,000$134,000, $115,000 and $60,000 for 20132016, 2015 and 2014, respectively, related to its matching contributions to the plan. Certain of the Company’s employees located outside the United States participate in employee benefit plans that are statutory in nature.distributormember network that operates in a seamless manner from market to market, except for the Chinese market. Themarket where it sells to consumers through an e-commerce retail platform. Outside of the China e-commerce retail platform, the Company believes that all of its other operating segments should be aggregated into a single reportable segment as they have similar economic characteristics.characteristics, except for its operations located within the Commonwealth of Independent States (“CIS”). In making this determination, the Company believes that all of theits operating segments are similar in the nature of the products sold, the product acquisition process, the types of customers products are sold to, the methods used to distribute the products, and the nature of the regulatory environment.e-commerce retail business launchedengagement of a third-party service provider in China during June 2007 does not requirethe CIS market results in a direct selling license and allows for discounts on volume purchases. Theredifferent economic structure than its other markets.ourthe Company’s chief operating decision-makers, or anyone else, for operations, operating results and planning for the either Chinese marketor the CIS markets on a stand-alone basis. Accordingly, we consider ourselves tobasis, and neither market is material for the two years presented. As such, the Company believes that all operating segments should be inaggregated into a single reportingreportable segment and operating unit structure. Year Ended December 31, 2016 2015 2014 $ 2,289 $ 1,438 $ 4,100 $ 3,246 $ 1,438 72 1,374 1,809 2,746 1,374 40,585 111,028 263,482 245,737 111,028 791 1,538 9,086 4,425 1,538 3,387 4,628 6,213 5,965 4,628 702 1,009 691 1,129 1,009 4,354 3,113 858 1,139 3,113 Europe 1,234 382 373 347 462 255 91 89 $ 52,527 $ 124,590 $ 287,728 $ 264,860 $ 124,590 Year Ended December 31, 2016 2015 2014 $ 50,385 $ 118,843 $ 269,731 $ 253,041 $ 118,843 2,955 7,927 25,616 17,623 7,927 (813 ) (2,180 ) (7,619 ) (5,804 ) (2,180 ) $ 52,527 $ 124,590 $ 287,728 $ 264,860 $ 124,590
December 31, | December 31, | ||||||||||||||
2013 | 2014 | 2016 | 2015 | ||||||||||||
Long-lived assets: | |||||||||||||||
United States | $ | 35 | $ | 31 | $ | 763 | $ | 283 | |||||||
| Hong Kong | 140 | 204 | |||||||||||||
| China | 137 | 241 | 199 | 252 | |||||||||||
Other foreign countries | 93 | 204 | 286 | 155 | |||||||||||
Total long-lived assets | $ | 265 | $ | 476 | $ | 1,388 | $ | 894 | |||||||
On January 22, 2015, the Company entered into a Stock Repurchase Agreement with George K. Broady, a director of the Company and owner of more than 5% of its outstanding common stock. The agreement provided for the Company’s purchase from Mr. Broady in off-the-market, private transactions of a total of 91,817 shares of the Company’s common stock, which would be purchased at the rate of 5,000 shares each trading day following the date of the agreement until all of such shares were purchased. The shares would be purchased at a per share price equal to the closing price per share of the Company’s common stock on the preceding trading day, as reported on the primary market in which the Company’s common stock is publicly traded. The Company’s purchases concluded on February 19, 2015, and resulted in an aggregate purchase price of $1.1 million.
On February 11, 2015, the Board of Directors voted to expand its size to provide for five directors and, in accordance with the Company’s bylaws, elected Christopher R. O’Brien and Kin Y. Chung to fill the newly-created directorships. At the time of their election, Messrs. O’Brien and Chung, together with Randall A. Mason (an existing director), were also appointed to the Board’s Audit Committee, and Messrs. O’Brien and Mason were also appointed to the Board’s Compensation Committee and Nominating and Corporate Governance Committee. The Board determined that each of Messrs. O’Brien and Chung is an “independent director,” as such term is defined in Rule 5605 of The Nasdaq Stock Market Rules; in addition, each such newly-elected director qualifies as an “independent director,” as defined in Rule 10A-3(b), as promulgated under the Exchange Act.
Upon their election and in their capacity as non-employee directors of the Company, each of Messrs. O’Brien and Chung received $25,000 cash and 3,058 shares of restricted common stock, which shares vest on a quarterly basis over the next three years and are subject to forfeiture in the event of their termination of service to the Company under specified circumstances.
Also on February 11, 2015, the Company entered into an indemnification agreement (“Indemnification Agreement”) with each of its two recently elected directors, Messrs. O’Brien and Chung, as well as its existing directors and executive officers. The Indemnification Agreement confirms the Company’s obligation to indemnify its directors and executive officers against liability arising out of the performance of their duties. The Indemnification Agreement provides mandatory indemnification, on the terms and conditions set forth in the agreement, for expenses and losses actually and reasonably incurred by directors and executive officers in defending legal proceedings in which they are parties by reason of their service to the Company or other entities to which they provide services at the Company’s request or on its behalf. Pursuant to the Indemnification Agreement, the Company will advance reasonable expenses incurred by directors and executive officers in defending these legal proceedings, on the terms and conditions set forth in the Indemnification Agreement, and subject to repayment in the event of a determination that a director or executive officer is not entitled to indemnification for those expenses.
On February 12, 2015, the Company announced that its common stock had been approved for listing on The NASDAQ Capital Market and began trading under the ticker symbol NHTC on February 17, 2015.
On February 27, 2015, the Board of Directors declared a cash dividend of $0.02 on each share of common stock outstanding. Such dividends are payable on March 27, 2015 to stockholders of record on March 17, 2015. Payment of any future dividends on shares of common stock will be at the discretion of the Company’s Board of Directors.
|
|
|
|
Report on Form 10-K. 2016. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March /s/ Chris T. Sharng Chris T. Sharng President Title Date /s/ Chris T. Sharng President and Director March /s/ Timothy S. Davidson Senior Vice President and Chief Financial Officer March /s/ Randall A. Mason Chairman of the Board and Director March /s/ George K. Broady Director March /s/ Director March /s/ Director March 3.3 By-Laws of Natural Health Trends Corp. (incorporated by reference to Exhibit 3.02 to Current Report on Form 8-K filed on July 12, 2005). 4.1 Specimen Certificate for shares of common stock, $.001 par value per share, of Natural Health Trends Corp. (incorporated by reference to Exhibit 4.01 to Annual Report on Form 10-K filed on May 8, 2006). +10.1 Natural Health Trends Corp. 2016 Equity Incentive Plan (incorporated by reference to Appendix C to Definitive Proxy Statement filed on March 4, 2016). + + Natural Health Trends Corp. 2014 Long-Term Incentive Plan (Restated as of January 1, 2016) (incorporated by reference to + First Amendment to the Natural Health Trends Corp. 2014 Long-Term Incentive Plan (Restated as of January 1, 2016) (filed herewith). + Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Timothy S. Davidson dated April 23, 2007 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on April 26, 2007). + Form of Restricted Stock Notice of Grant and Award Agreement for shares of restricted stock granted on (1) January 20, 2015 to each of Chris T. Sharng, Timothy S. Davidson, Randall A. Mason + Form of Indemnification Agreement dated February 11, 2015, between Natural Health Trends Corp. and each of its directors (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on February 12, 2015). Stock Repurchase Agreement dated January 22, 2015 by and between Natural Health Trends Corp. and George K. Broady (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 26, 2015). Stock Repurchase Agreement dated May 7, 2015 by and between Natural Health Trends Corp. and George K. Broady (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 7, 2015). 21.1 Subsidiaries of Natural Health Trends Corp. (filed herewith). 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 (filed herewith). 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 (filed herewith). 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 (filed herewith). 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.CAL XBRL Taxonomy Extension Calculation 101.DEF XBRL Taxonomy Extension Definition 101.LAB XBRL Taxonomy Extension Labels 101.PRE XBRL Taxonomy Extension Presentation + Management contract or compensatory planthe Company’sour principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’sour disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2014. The Company’s2016. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Companyus in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including the Company’sour principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of December 31, 2014, the Company’s2016, our disclosure controls and procedures were effective.the Company’sour principal executive and principal financial officers and effected by the Company’sour Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:●pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;●provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and●provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.the Company’sour internal control over financial reporting by using the criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO ”)COSO”). Based on this criteria, management concluded that the Company’sour internal control over financial reporting as of December 31, 20142016 was effective.This Annual does not include an attestation report of the Company’sCompany's Independent Registered Public Accounting Firmregarding internal control over financial reporting. Management’s report was not subject toas stated in their attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in “Item 8. Financial Statements and Supplementary Data” of this Annual Report.20142016 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.Item 9B.OTHER INFORMATIONItem 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE2014.2016.Item 11.EXECUTIVE COMPENSATION2014.2016.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS2014.2016.Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE2014.2016.Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES2014.Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES1. Item 8“Item 8. Financial Statements and Supplementary Data” of Part II.this report.2. 3. SIGNATURESNATURAL HEALTH TRENDS CORP. 6, 2015 (Principal Executive Officer) Signature 6, 2015Chris T. Sharng (Principal Executive Officer) 6, 2015Timothy S. Davidson (Principal Financial and Accounting Officer) 6, 2015Randall A. Mason 6, 2015George K. Broady Christopher R. O’Brien 6, 2015Christopher R. O’BrienKin Y. Chung Kin Y. Chung 6, 2015Kin Y. ChungYiu T. Chan ExhibitNumberExhibit Description3.13.1 Certificate of Incorporation of Natural Health Trends Corp. (incorporated by reference to Exhibit 3.01 to Current Report on Form 8-K filed on July 12, 2005). +10.2 Form of Seven Year Warrants to Purchase Shares of CommonRestricted Stock ofAward Agreement under the Company issued by the Company to certain purchasers2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.410.2 to CurrentAnnual Report on Form 8-K10-K filed on October 22, 2007)March 4, 2016).10.2 2007Natural Health Trends Corp. Annual Incentive Plan (Restated as of January 1, 2016) (incorporated by reference to Appendix A to Definitive Proxy Statement filed on October 20, 2006)March 4, 2016).10.3 2007 Equity Incentive Plan, as amended and restated as of November 13, 2008 (incorporated by reference to Appendix A to Definitive Proxy Statement filed on November 25, 2008).+10.4Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Company’s 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q filed on May 11, 2007).+10.5Natural Health Trends Corp. Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 8, 2014).+10.6Exhibit 10.2Appendix B to Current Report on Form 8-KDefinitive Proxy Statement filed on April 8, 2014)March 4, 2016).10.7 +10.6 Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Chris T. Sharng, dated April 23, 2007 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 26, 2007). 10.8 10.9 anyand George K. Broady, and (2) February 11, 2015 to each of Christopher R. O’Brien and Kin Y. Chung (filed herewith)(incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K filed on March 6, 2015).10.10 10.11 Stock Repurchase Agreement dated November 14, 2014 by and between Natural Health Trends Corp. and George K. Broady (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed November 17, 2014).10.1214.1 10.12 Stock Repurchase Agreement dated July 31, 2015 by and between Natural Health Trends Corp. and George K. Broady (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 31, 2015). 10.13 Stock Repurchase Agreement dated October 28, 2015 by and between Natural Health Trends Corp. and George K. Broady (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed October 28, 2015). 14.1 Worldwide Code of Business Conduct, as revised on February 11,November 5, 2015 (incorporated by reference to Exhibit 14.1 to Current Report on Form 8-K filed on February 12, 2015).Subsidiaries of the Company (filed herewith).24.1 23.1 Consent of Lane Gorman Trubitt, LLC (filed herewith). 24.1 Power of Attorney (see signature page). 101.INS XBRL Instance101.SCH101.INS 101.SCH XBRL Taxonomy Extension Schema