SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Form: 10-K
Date Filed: 2012-03-27
Corporate Issuer CIK: 912061
© Copyright 2015, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
or
❑
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-26272
NATURAL HEALTH TRENDS CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
59-2705336
(I.R.S. Employer
Identification No.)
2603 Oak Lawn Avenue
5th Floor
Dallas, Texas 75219
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (972) 241-4080
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of each class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ❑ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ❑ No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ❑
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ❑
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ❑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ❑
Non-accelerated filer ❑ (Do not check if a smaller reporting
company)
Accelerated filer ❑
Small reporting company ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ❑ No ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing
price of such common equity on June 30, 2011: $3,565,128
At March 21, 2012, the number of shares outstanding of the registrant’s common stock was 11,326,323 shares.
RDGPreambleEnd
DOCUMENTS INCORPORATED BY REFERENCE
None.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NATURAL HEALTH TRENDS CORP.
Annual Report on Form 10-K
December 31, 2011
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
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PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, in particular “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and “Item 1. Business,” include “forward-looking statements” within the meaning of section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this report, the words or phrases “will likely
result,” “expect,” “intend,” “will continue,” “anticipate,” “estimate,” “project,” “believe” and similar expressions are intended to identify
“forward-looking statements” within the meaning of the Exchange Act. These statements represent our expectations or beliefs
concerning, among other things, future revenue, earnings, growth strategies, new products and initiatives, future operations and
operating results, and future business and market opportunities.
Forward-looking statements in this report speak only as of the date hereof, and forward looking statements in documents
incorporated by reference speak only as of the date of those documents. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution
and advise readers that these statements are based on certain assumptions that may not be realized and involve risks and
uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein.
For a summary of certain risks related to our business, see “Item 1A. Risk Factors” in this report. Additional factors that could
cause actual results to differ materially from our forward-looking statements are set forth in this report, including under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our financial statements and the
related notes.
Unless otherwise noted, the terms “we,” “our,” “us,” and “Company,” refer to Natural Health Trends Corp. and its
subsidiaries. References to “dollars” and “$” are to United States dollars.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 1. BUSINESS
Overview of Business
Part I
Natural Health Trends Corp. is an international direct-selling and e-commerce company headquartered in Dallas, Texas.
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 distributor network that either uses the products themselves or resells them to
consumers.
Our majority-owned subsidiaries have an active physical presence in the following markets: North America; Greater China, which
consists of Hong Kong, Taiwan and China; Russia; South Korea; Japan; and Europe, which consists of Italy and Slovenia.
We seek to be a leader in the direct selling industry serving the health and wellness marketplace by selling our products into
many markets, primarily through our direct selling marketing operations. Our objectives are to enrich the lives of the users of our
products and enable our distributors to benefit financially from the sale of our products.
We were originally incorporated as a Florida corporation in 1988. We merged into one of our subsidiaries and re-incorporated in
Delaware effective June 29, 2005.
Our common stock is quoted under the trading symbol “NHTC” on the OTCQB tier of the OTC market, a centralized electronic
quotation service run by the OTC Markets Group, Inc.
Available Information
We maintain executive offices at 2603 Oak Lawn Avenue, 5th Floor, Dallas, Texas 75219 and our telephone number is (972) 241-
4080. We maintain a corporate website located at www.naturalhealthtrendscorp.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our website as
soon as reasonably practicable after we file electronically such material with, or furnish it to, the United States Securities and
Exchange Commission, or SEC. Our Code of Ethics for Senior Financial Officers can also be found on our website. The information
provided on our website should not be considered part of this report. The public may read and copy any materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1–800–SEC–0330. The SEC maintains an internet website at
http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC.
Our Principal Products
We offer a line of “NHT Global” branded products in three distinct categories including wellness, skincare and lifestyle. These
three product categories, along with the business opportunity we offer in most of our markets, provide our members a platform to
further their goal of achieving and maintaining healthy, quality lifestyles complete with product supplementation and the opportunity
for financial rewards.
NHT Global Essentials, the wellness and nutritional supplementation product line includes:
·
·
·
Premium Noni Juice™ is a reconstituted morinda citrifolia fruit juice, made from organic noni puree. Noni is a fruit native in the
Samoan Islands of the South Pacific. Marketed as a refreshing and energizing beverage, its natural flavor has been
enhanced with white grape concentrate, concord grape concentrate, pineapple juice puree and other natural flavors.
Triotein™ is a lactose-free whey protein powder that provides amino acid substrates needed to stimulate the body’s
production of an anti-oxidant, intracellular glutathione peroxidase, in an effort to optimize the body’s ability to increase
immunity.
Cluster X2™ is a product created for increased and more efficient cell hydration, improved cellular function and
communication and release of cellular toxins.
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·
Trifusion Max™ is a beverage with a unique blend of exotic fruits and berries rich in antioxidants, lycopene, and more. Its
main ingredients are Acai berry, Goji berry, the Mangosteen fruit, and the Gac fruit; each containing phytonutrients.
Phytonutrients are compounds having antioxidative properties found naturally in plant-based foods such as fruit and
vegetables. The newly formulated Trifusion Max now contains calcium as well for improved health benefits.
· Glucosamine 2200™ is a great source of daily glucosamine to assist with joint and cartilage health and reduce inflammation
and swelling in the joints, the primary cause of pain. The consumption of Glucosamine 2200 can directly stimulate cartilage
cells to produce more collagen and proteoglycan of the articular cartilage and help prevent loss of synovial fluid to support
normal functionality of the joints.
·
·
·
·
FibeRich® is a dietary supplement high in dietary fiber to assist with proper digestive health and more. Every teaspoon of
FibeRich contains more than 6 grams of dietary fiber helping to ease bowel movements and remove toxic substances from
our bodies. FibeRich also contains 8 billion compound high-density probiotics including L. rhamnosus, L. acidophilus, B.
longum and B. bifidum. These probiotics protect the digestive tract and can help the body to absorb vitamins, minerals and
nutrients.
Energin™ is a dietary supplement to help increase metabolism and energy and improve brain function. The key ingredient in
Energin is Korean Ginseng, which helps to promote a healthy physical, as well as active mental lifestyle. Studies show that
Korean ginseng helps stimulate the formation of blood vessels and improves blood circulation in the brain, thereby improving
memory and cognitive abilities.
Essential Probiotics™ helps maintain the ecological balance of intestinal micro flora, helps peristalsis in the intestinal tract
and supports overall intestinal health. Essential Probiotics is a great-tasting powder which dissolves easily and is
conveniently packaged in a foil stick pack for portability. One pouch taken daily following a meal is all that is required to
restore a healthy balance to the intestinal tract.
ReStor™ is a patent-pending liquid dietary supplement targeted to help the body replace a critical enzyme called
Ca2+ATPase, which naturally declines as we age. This enzyme is important for optimal cellular function and has been known
to assist with improved sleep function and efficiency, reduced joint and muscular pain and soreness, improved bladder
function and, increased muscle endurance and strength.
NHT Global Beauty, the skincare product line includes:
·
·
·
·
Skindulgence™ 30-Minute Non-Surgical Facelift System is a skin care system that includes a daily cleanser and moisturizer,
as well as a specialty mask to lift and reduce the appearance of fine lines and wrinkles in just 30 minutes and after just one
use. The 30-Minute Non-Surgical Facelift is designed to help tone and firm facial muscles as it dries and tightens on the skin.
Time Restore™ series is comprised of the Time Restore Essence and Time Restore Eye Cream and is specifically targeted
toward anti-aging benefits and long-term wrinkle reduction. Skindulgence Time Restore products combine the Skindulgence
herbal aromatherapy technology and dermatology technology such as Adenosine, Argireline, Matrixyle3000, Polylift and
Regu-Age to create and sustain healthier, more beautiful, younger looking skin.
BioCell™ is a patented skincare treatment product providing the ultimate in hydration and skin brightening. The patented bio-
cellulose mask material helps BioCell’s essence gel penetrate deep into the skin, locking in moisture and resulting in a more
even skin tone, skin clarity and providing the nutrition a user’s skin needs to maintain a youthful glow.
24K Renaissance Skin Rejuvenation Serum™ facilitates moisture absorption and storage to bring your skin healthy hydration.
Formulated with real 24K gold flakes, NHT Global has found that ingredients EGF and TRF combined with Hyaluronate form
an all-natural bionic protective layer to a user’s skin’s surface increasing water retention and ultimately diminishing the
appearance of fine lines and wrinkles and helping restore elasticity.
NHT Global Lifestyle, the lifestyle enhancing product line includes:
·
·
Alura™ by NHT Global is an intimacy enhancing cream for women.
Valura™ is topical male intimacy enhancing gel to improve and stimulate male sexual performance and desire.
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·
·
La Vie™ is an energy-boosting dietary supplement with a proprietary herbal blend and natural flavors formulated to increase
energy and vitality and assist with mental clarity and focus.
Twin Slim™ is an easy to use weight management program targeted to reduce unwanted pounds and help increase
metabolism, burn fat and curb appetite. Complete with a weight management guide encouraging proper diet and nutrition
along with regular exercise, Twin Slim offers a jump start slimming solution many need to achieve their desired weight loss
goals. The proprietary Twin Slim products, GC Slim and Magic Drop, target subcutaneous fat reduction and increase energy
throughout the day.
In addition, some of our subsidiaries offer products specific to their local markets.
NHT Global continuously sources unique, proprietary and immediate impact products to offer to our members and customers.
Product development is an ongoing process at NHT Global that is fueled by marketplace trends and new scientific findings and
research.
Working closely with raw material manufacturers and leading domestic and international contract manufacturers, NHT Global’s
mission is to co-develop and bring to market the highest quality products. Our manufacturers are primarily located in the United
States and some in Asia. Our raw materials (including botanical ingredients) are sourced from reputable suppliers around the world.
In addition, raw material Certificates of Analysis are reviewed in our effort to assure that the appropriate testing has been performed
and are within ingredient specification requirements.
Operations of the Business
Operating Strategy
Our objective is to help our members succeed in achieving their life objectives; be it personal health, beauty, happiness or
financial security. The Company consists of professionals who focus on assisting our members in attaining their goals.
We believe that, since early 2010, we have completely changed our corporate identity and are building a competitive business
model applicable to the markets we operate in based on six key competencies:
· Our field leaders are experienced and culturally coherent. They work effectively with the Company’s management,
·
implementing our strategies and providing continuous feedback to improve the Company’s services. Most of them have
been with the Company for seven years or more and are fiercely loyal to the Company.
The Company has implemented a commission structure that makes it as easy as possible to join the Company’s
business, while giving existing members a chance to start making money as quickly as possible in a number of different
ways.
· We have developed and rolled out a comprehensive training system that provides a complete career path appropriate for
our members. Our training material covers the needs of all of our members, be they prospects, new recruits, product
evangelists, sales leaders or dream builders.
The continuously improving mentality and methodology we have instilled in our field leaders and personnel have not only
distinguished us as an organization, but have also given us a constant flow of information as to how we can do better to
service our members.
·
· We have developed a year-round, multi-faceted promotional plan that targets different segments of our membership and
·
has proven most effective in the last couple of years.
Last, but perhaps most importantly, a discipline and capability has been established to continue launching high-quality
consumer products that are designed to facilitate the accomplishment of our corporate objective.
Sourcing of Products
Our corporate staff works with research and development personnel of our manufacturers and other prospective vendors to
create product concepts and develop the product ideas into actual products. Each of our three current major product lines -
Skindulgence™, Alura™ and Premium Noni Juice™ - were originally conceived by our manufacturing vendors. We then enter into
supply agreements with the vendors pursuant to which we obtain rights to sell the products under private labels (or trademarks) that
are owned by us. Because 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, 2011. 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.
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We or certain of our subsidiaries generally purchase finished goods from manufacturers and sell them to our distributors for their
resale or personal consumption. Alix Technologies (for Skindulgence™ and LaVie™), 40Js LLC (for Alura™) and Two Harbors
Trading Company (for Premium Noni Juice™) are our three most significant vendors, accounting for a majority of our product
purchases. 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 that has
annual renewal rights and a contract with 40Js LLC through December 2014. We do not currently have a long term contract with Alix
Technologies.
Marketing and Distribution
We distribute our products internationally primarily through a network marketing system, which is a form of person-to-person
direct selling. Under this system, distributors purchase products at wholesale prices for resale to consumers and for personal
consumption. 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 some markets, like China, we distribute our products directly
to consumers using an e-commerce platform.
Our distributors are independent full-time or part-time contractors who purchase products directly from our subsidiaries via the
internet for resale to retail consumers (other than in China, parts of Europe, and certain other markets) or for their own personal
consumption. Purchasers of our products in China, Europe and certain other markets may purchase only for their own personal
consumption and not for resale. The growth of a distributor’s business depends largely upon their ability to recruit a down-line
network of distributors and the popularity of our products in the marketplace.
The following table sets forth the number of active distributors by market for the time periods indicated. We consider a distributor
“active” if they have placed at least one product order with us during the preceding year.
North America
Hong Kong
Taiwan
South Korea
Japan
Russia
Europe
Total
December 31,
2010
2011
550
9,770
1,630
950
440
2,520
490
16,350
1,190
11,960
1,380
450
220
2,880
330
18,410
To become a NHT Global distributor, a prospective distributor must agree to the terms and conditions of our distributor agreement
posted on our website. NHT Global distributors generally pay an annual enrollment fee. The distributor agreement sets forth our
policies and procedures, and we may elect to terminate a distributor for non-compliance.
We pay commissions to eligible NHT Global distributors based on sales by such distributors’ down-line distributors during a given
commission period. To be eligible to receive commissions, distributors in some countries may be required to make nominal monthly
or other periodic purchases of products. We believe that the uniqueness and desirability of our NHT Global products, combined with
a high commission rate, creates a highly desirable business opportunity and work environment for our NHT Global distributors. See
“Working with Distributors.”
Distributors generally place orders through the internet and pay by credit card prior to shipment. Accordingly, we carry minimal
accounts receivable and credit losses are historically minimal.
We sponsor promotional meetings and motivational training events in key cities in our markets for current and potential NHT
Global distributors. These events are designed to inform prospective and existing distributors about both existing and new product
lines as well as selling techniques. Distributors typically share their direct selling experiences, their individual selling styles and their
recruiting methods at these promotional or training events. Prospective distributors are educated about the structure, dynamics and
benefits of the direct selling industry. We are continually developing or updating our marketing strategies and programs to motivate
our distributors. These programs are designed to increase distributors' monthly product sales and the recruiting of new distributors in
their down-lines.
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Management Information Systems
The NHT Global business uses a proprietary web-based system to process orders and to communicate business volume activity
and commissions to distributors. Other than this proprietary system, we have not fully automated and integrated other critical
business processes such as inventory management. We automated a substantial amount of our financial reporting processes with
the implementation of Oracle’s E-Business Suite in the fourth quarter of 2005. We expect to implement further functionality provided
we have adequate operating cash flows to reinvest.
Employees
At December 31, 2011, we employed 90 total employees worldwide, of which 13 were located in the United States, 56 in Hong
Kong and China, 15 in Taiwan, 3 in Europe, 2 in South Korea, and 1 in Japan.
Seasonality
From quarter to quarter, we are somewhat impacted by seasonal factors and trends such as major cultural events and vacation
patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a
significant negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third
quarter, when many individuals, including our distributors, traditionally take time off for vacations. In addition, the national holidays in
Hong Kong, China and Taiwan in early October tend to have a significant adverse effect on sales in those markets.
Our spending is materially affected by the major events planned for 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.
Intellectual Property
Most of our products are packaged under a "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
into. 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 registration 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.
In 2005, we implemented a foreign holding and operating company structure for our non-United States businesses, which
involved the division of our United States and non-United States operations. As part of implementing this structure, we and some of
our United States subsidiaries 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.
Working with Distributors
Sponsorship
Sponsoring new distributors creates multiple levels in the direct selling structure of NHT Global. The persons that a distributor
sponsors within the network are referred to as "sponsored" distributors. Persons newly recruited are assigned by sponsoring
distributors into network positions that can be “under” other distributors, thus they can be called “down-line” distributors. If down-line
distributors also sponsor new distributors, they create additional levels within the structure, but their down-line distributors remain in
the same down-line network as their original sponsoring distributor.
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We rely on our distributors to recruit and sponsor new distributors. Our top up-line distributors tend to focus on building their
network of “down-line” distributors and assisting them with the sale of our products. While we provide product samples, brochures
and other sales materials, distributors are primarily responsible for recruiting and educating their new distributors with respect to
products, the compensation plan and how to build a successful distributorship network.
Distributors are not required to sponsor other distributors as their down-line, and we do not pay any commissions for sponsoring
new distributors. However, because of the financial incentives provided to those who succeed in building a distributor network that
consumes and resells products, we believe that many of our distributors attempt, with varying degrees of effort and success, to
sponsor additional distributors. Because they are seeking new opportunities for income, people are often attracted to become
distributors after using our products or after attending introductory seminars. Once a person becomes a distributor, he or she is able
to purchase products directly from us at wholesale prices via the internet. The distributor is also entitled to sponsor other distributors
in order to build a network of distributors and product users.
Compensation Plans
NHT Global employs what is commonly referred to as a binary compensation plan. We believe that one of our key competitive
advantages within the direct selling industry is our compensation plan for distributors. Under the NHT Global compensation plan,
distributors are paid weekly commissions, generally in their home country currency, for product sold by their down-line distributor
network across all geographic markets, except China, where in the second quarter of 2007 we launched an e-commerce retail
platform and do not pay any commissions. Distributors are not paid commissions on purchases or sales of our products made
directly by them. This “seamless” compensation plan enables a distributor located in one country to sponsor other distributors
located in other countries where we are authorized to conduct our business. Currently, there are basically two ways in which NHT
Global distributors 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.
Each of our products is designated a specified number of sales volume points, also called bonus volume or “BV.” Commissions
are based on total personal and group sales volume points per sales period. Sales volume points are essentially a percentage of a
product’s wholesale price. As the distributor’s business expands from successfully sponsoring other distributors who in turn expand
their own businesses by sponsoring other distributors, the distributor receives higher commissions from purchases made by an
expanding down-line network. To be eligible to receive commissions, a distributor 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 distributor to be eligible
to receive commissions. In determining commissions, the number of levels of down-line distributors included within the distributor's
commissionable group increases as the number of distributorships directly below the distributor increases. Under our current
compensation plan, certain of our commission payout may be limited to a hard cap in terms of a specific percentage of the total
product sales. In some markets, commissions may be further limited.
In some markets, we also pay certain bonuses on purchase by several generations of personally sponsored distributors, as well
as bonuses on commissions earned by several generations of personally sponsored distributors. Distributors can also earn income,
trips and other prizes in specific time-limited promotions and contests we hold from time to time.
From time to time we make modifications and enhancements to our compensation plan to help motivate distributors, which can
have an impact on distributor commissions. From time to time we also enter into agreements for business or market development,
which may result in additional compensation to specific distributors.
Distributor Support
We are committed to providing a high level of support services tailored to the needs of our distributors in each marketplace we
are serving. We attempt to meet the needs and build the loyalty of distributors by providing personalized distributor services and by
maintaining a generous product return policy (see “Product Warranties and Returns”). We believe that maximizing a distributor’s
efforts by providing effective distributor support has been, and could continue to be, important to our success.
Through training meetings, annual conventions, web-based messages, distributor focus groups, regular telephone conference
calls and other personal contacts with distributors, we seek to understand and satisfy the needs of our distributors. Via our websites,
we provide product fulfillment and tracking services that result in user-friendly and timely product distribution.
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To help maintain communication with our distributors, we offer the following support programs:
·
·
·
·
Teleconferences – we hold teleconferences with company management and 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 order.
Product Literature – we offer a variety of literature to distributors, including product catalogs, informational brochures,
pamphlets and posters for individual products.
Broadcast E-mail – we send announcements via e-mail to all active distributors.
Technology and Internet Initiatives
We believe that the internet has become increasingly important to our business as more consumers communicate online and
purchase products over the internet as opposed to traditional retail and direct sales channels. As a result, we have committed
significant resources to our e-commerce capabilities and the abilities of our distributors to take advantage of the
internet. Substantially all of our sales have occurred via the internet. NHT Global offers a global web page that allows a distributor to
have a personalized 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 distributors at www.nhtglobal.com. The information provided on these websites should
not be considered part of this report.
Rules Affecting Distributors
Our distributor policies and procedures establish the rules that distributors must follow in each market. We also monitor distributor
activity in an attempt to provide our distributors with a “level playing field” so that one distributor may not be disadvantaged by the
activities of another. We require our distributors to present products and business opportunities in an ethical and professional
manner. Distributors further agree that their presentations to customers must be consistent with, and limited to, the product claims
and representations made in our literature.
We require that we produce or pre-approve all sales aids used by distributors such as videotapes, audiotapes, brochures and
promotional clothing. Further, distributors 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. Distributors are not entitled
to use our trademarks or other intellectual property without our prior consent.
Our compliance department reviews reports of alleged distributor misbehavior. If we determine that a distributor has violated our
distributor policies or procedures, we may terminate the distributor’s rights completely. Alternatively, we may impose sanctions, such
as warnings, probation, withdrawal or denial of an award, suspension of privileges of the distributorship, fines, withholding
commissions, until specified conditions are satisfied or other appropriate injunctive relief. Our distributors are independent
contractors, not employees, and may act independently of us. Further, our distributors may resign or terminate their distributorship at
any time without notice. See “Item 1A. Risk Factors.”
Government Regulations
Direct Selling Activities
Direct selling, or multi-level marketing, activities are regulated by various federal, state and local governmental agencies in the
United States and foreign countries. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as “pyramid” schemes, which compensate participants for recruiting additional participants irrespective of product
sales, use high-pressure recruiting methods and/or do not involve legitimate products. The laws and regulations in our current
markets often:
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impose cancellation/product return, inventory buy-backs and cooling-off rights for consumers and distributors;
require us or our distributors to register with governmental agencies;
impose reporting requirements; and
impose upon us requirements, such as requiring distributors to maintain levels of retail sales to qualify to receive
commissions, to ensure that distributors are being compensated for sales of products and not for recruiting new distributors.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The laws and regulations governing direct selling are modified from time to time, and, like other direct selling companies, we are
subject from time to time to government investigations in our various markets related to our direct selling activities. This can require
us to make changes to our business model and aspects of our global compensation plan in the markets impacted by such changes
and investigations.
Based on advice of our engaged outside professionals in existing markets, the nature and scope of inquiries from government
regulatory authorities and our history of operations in those markets to date, we believe our method of distribution complies in all
material respects with the laws and regulations related to direct selling of the countries in which we currently operate.
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 web site 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 attracted constant and significant regulatory and media scrutiny. At the end of 2005, China adopted new direct selling and anti-
pyramiding regulations that are restrictive and contain various limitations, including a restriction on the ability to pay multi-level
compensation to independent distributors. Regulations are subject to discretionary interpretation by municipal and provincial level
regulators. Interpretations of what constitutes permissible activities by regulators can vary from province to province and can change
from time to time because of the lack of clearly defined rules regarding direct selling activities.
Because of the Chinese government’s significant concerns about direct selling activities, it scrutinizes very closely activities of
direct selling companies. The scrutiny has increased following adoption of the new direct selling and anti-pyramiding regulations and
our business continues to be subject to reviews and investigations by municipal and provincial level regulators. At times,
investigations and related actions by government regulators have caused an obstruction to our members’ activities in certain
locations, and have resulted in a few cases of enforcement actions. In each of these cases, we helped our members with their
defense in the legality of their conduct. So far, no material changes to our business model have been required. We expect to
receive continued guidance and direction as we work with regulators to address our business model and any changes that need to
be made to comply with the new direct selling regulations.
In accordance with the direct selling regulations, our Chinese subsidiary applied for a direct selling license first in 2005, provided
a revised version in June 2006, and then updated again our application in November 2007. After the approval from the municipal and
the provincial authorities, the application did not progress further with the central government. Eventually, the information contained
in our most recent application became stale and we withdrew the license application in February 2009 with the intention of filing an
updated application in the future. As the Company continues to experience changes in the management, location and nature of its
business in China, the Company plans to re-apply but has not yet filed an updated application.
Regulation of Our Products
Our products and related promotional and marketing activities are subject to extensive governmental regulation by numerous
governmental agencies and authorities in the United States, including the U.S. Food and Drug Administration (the “FDA”), the
Federal Trade Commission (the “FTC”), the Consumer Product Safety Commission, the United States Department of Agriculture,
State Attorneys General and other state regulatory agencies. In our foreign markets, the products are generally regulated by similar
government agencies, such as the Ministry of Health, Labour and Welfare in Japan and the Department of Health in Taiwan.
Our personal care products are subject to various laws and regulations that regulate cosmetic products and set forth regulations
for determining whether a product can be marketed as a “cosmetic” or requires further approval as an over-the-counter drug. In the
United States, regulation of cosmetics is under the jurisdiction of the FDA. The Food, Drug and Cosmetic Act defines cosmetics by
their intended use, as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the
human body . . . for cleansing, beautifying, promoting attractiveness, or altering the appearance.” Among the products included in
this definition are skin moisturizers, eye and facial makeup preparations, perfumes, lipsticks, fingernail polishes, shampoos,
permanent waves, hair colors, toothpastes and deodorants, as well as any material intended for use as a component of a cosmetic
product. Conversely, a product will not be considered a cosmetic, but may be considered a drug if it is intended for use in the
diagnosis, cure, mitigation, treatment, or prevention of disease, or is intended to affect the structure or any function of the body. A
product’s intended use can be inferred from marketing or product claims. The other markets in which we operate have similar
regulations. In Japan, the Ministry of Health, Labour and Welfare regulates the sale and distribution of cosmetics and requires us to
have an import business license and to register each personal care product imported into Japan. In Taiwan, all “medicated” cosmetic
products require registration. In China, personal care products are placed into one of two categories, “general” and “drug.” Products
in both categories require submission of formulas and other information with the health authorities, and drug products require human
clinical studies. The product registration process in China for these products can take from nine to more than 18 months or
longer. 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. The sale of cosmetic products is regulated in the European Union
under the European Union Cosmetics Directive, which requires a uniform application for foreign companies making personal care
product sales.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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The markets in which we operate all have varied regulations that distinguish foods and nutritional health supplements from
“drugs” or “pharmaceutical products.” Because of the varied regulations, some products or ingredients that are recognized as a
“food” in certain markets may be treated as a “pharmaceutical” in other markets. That sometimes requires us to either modify a
product or refrain from selling the product in that market. As a result, we must often modify the ingredients and/or the levels of
ingredients in our products for certain markets. In some circumstances, the regulations in foreign markets may require us to obtain
regulatory approval prior to introduction of a new product or limit our uses of certain ingredients altogether. Because of negative
publicity associated with some supplements, there has been an increased movement in the United States and other markets to
expand the regulation of dietary supplements, which could impose additional restrictions or requirements in the future. In general, the
regulatory environment is becoming more complex with increasingly strict regulations each year.
Effective June 2008, the FDA established regulations to require current good manufacturing practices (cGMP) for dietary
supplements. The regulations ensure that dietary supplements are produced in a quality manner, do not contain contaminants or
impurities, and are accurately labeled. The regulations include requirements for establishing quality control procedures for us and our
vendors and suppliers, designing and constructing manufacturing plants, and testing ingredients and finished products. The
regulations also include requirements for record keeping and handling consumer product complaints. If dietary supplements contain
contaminants or do not contain the type or quantity of dietary ingredient they are represented to contain, the FDA would consider
those products to be adulterated or misbranded.
Our business is subject to additional FDA regulations, such as those implementing an adverse event reporting system (“AER’s”)
effective December 2007, which requires us to document and track adverse events and report serious adverse events, which are
events involving hospitalization or death, associated with consumers’ use of our products.
Most of our major markets also regulate advertising and product claims regarding the efficacy of products. This is particularly true
with respect to our dietary supplements because we typically market them as foods or health foods. For example, in the United
States, we are unable to claim that any of our nutritional supplements will diagnose, cure, mitigate, treat or prevent disease. In the
United States, the Dietary Supplement Health and Education Act, however, permits substantiated, truthful and non-misleading
statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption
of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or a function of the body.
Most of the other markets in which we operate have not adopted similar legislation and we may be subject to more restrictive
limitations on the claims we can make about our products in these markets.
Other Regulatory Issues
As a United States entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control,
transfer pricing and custom laws that regulate the flow of funds between our subsidiaries and us for product purchases, management
services and contractual obligations, such as the payment of distributor commissions. As is the case with most companies that
operate in our product categories, we might receive inquiries from time to time from government regulatory authorities regarding the
nature of our business and other issues, such as compliance with local direct selling, transfer pricing, customs, taxation, foreign
exchange control, securities and other laws.
Product Warranties and Returns
NHT Global refund policies and procedures closely follow industry and country-specific standards, which vary greatly by
country. For example, in the United States, the Direct Selling Association recommends that direct sellers permit returns during the
twelve-month period following the sale, while in Hong Kong the standard return policy is 14 days following the sale. Our return
policies have conformed to local laws or the recommendation of the local direct selling association. In most cases, distributors 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,
we may alter our return policy in response to special circumstances.
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Our Industry
We are engaged in the direct selling industry, selling lifestyle enhancement products, cosmetics, personal care and dietary
supplements. 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, such as Tupperware Corporation and Amway Corp. Generally,
direct selling is based upon an organizational structure in which independent distributors of a company’s products are compensated
for sales made directly to consumers.
NHT Global distributors are compensated for sales generated by distributors they have recruited and all subsequent distributors
recruited by their "down-line" network of distributors. The experience of the direct selling industry has been that once a sizeable
network of distributors is established, new and alternative products and services can be offered to those distributors for sale to
consumers and additional distributors. The successful introduction of new products can dramatically increase sales and profits for
both distributors and the direct selling marketing organization.
Competition
We compete with a significant number of other retailers that are engaged in similar lines of business, including sellers of health-
related products and other network marketing companies such as Nu Skin Enterprises, Inc., USANA Health Sciences, Inc.,
Mannatech, Inc., Reliv’ International, Inc, and Herbalife, Ltd. Many of our competitors have greater name recognition and financial
resources than we do and also have many more distributors. A number of our former employees and distributors now work for
competitors, and sometimes try to use relationships and knowledge obtained with us to compete with us.
Our ability to compete with other network marketing companies depends, in significant part, on our success in attracting and
retaining distributors. There can be no assurance that our programs for attracting and retaining distributors 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, there can be no assurance that other network marketing companies will not be able to recruit our existing distributors
or deplete the pool of potential distributors in a given market.
The direct selling channel tends to sell products at a higher price compared to traditional retailers, which poses a degree of
competitive risk. There is no assurance that we would continue to compete effectively against retail stores, internet-based retailers or
other direct sellers.
Item 1A. RISK FACTORS
We are exposed to a variety of risks that are present in our business and industry. The following are some of the more significant
factors that could affect our business, results of operations and financial condition.
Difficult economic conditions could harm our business.
Global economic conditions continue to be challenging, and it is not possible for us to predict the extent and timing of any
improvement in global economic conditions. The economic downturn could adversely impact our business in the future by causing a
decline in demand for our products, particularly if the economic conditions are prolonged or worsen. In addition, such economic
conditions may adversely impact access to capital for us and our suppliers, may decrease our distributors' ability to obtain or maintain
credit cards or otherwise afford to purchase our products, and may otherwise adversely impact our operations and overall financial
condition.
We may experience substantial negative cash flows, which may have a significant adverse effect on our business and could
threaten our solvency.
We experienced substantial negative cash flows during the years ended December 31, 2009 and 2010, primarily due to declines
in our revenues without proportional decreases in expenditures. If we again experience negative cash flows, our 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 distributors 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
If we experience negative cash flows, we may need to seek additional debt or equity financing, which may not be available
on acceptable terms or at all. If available, it could have a highly dilutive effect on the holdings of existing stockholders.
Unless we are able to stabilize or grow 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 anti-dilution provisions of warrants to purchase 1,645,547 shares of our common stock would, if triggered, cause substantial
dilution and may, therefore, make it particularly difficult to obtain new equity financing. The warrants were originally issued under a
Securities Purchase Agreement dated October 19, 2007. The warrants have an exercise price of $3.52 per share, subject to certain
anti-dilution provisions that reduce the exercise price and increase the number of shares underlying the warrants if the Company
issues its common stock or equivalent securities at below the exercise price for the warrants (with certain transactions
exempted). Warrants to purchase 149,595 shares of our common stock expire on April 21, 2013, and the remaining warrants for the
purchase of 1,495,952 shares of our common stock expire on April 21, 2015.
We could be adversely affected by additional management changes or an inability to attract and retain key management,
directors and consultants.
Our future success depends to a significant degree on the skills, experience and efforts of our top management and directors. A
series of changes in top management since November 2005 may have had, and may in the future have, a material adverse effect on
our business, results of operations and financial condition. We also depend on the ability of our executive officers and other members
of senior management to work effectively as a team. The loss of one or more of our executive officers, members of our senior
management or directors could have a material adverse effect on our business, results of operations and financial
condition. Moreover, as our business evolves, we may require additional or different management members, directors or
consultants, and there can be no assurance that we will be able to locate, attract and retain them if and when they are needed.
Because our Hong Kong operations account for a majority of our overall business, and most 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.
In 2010 and 2011 approximately 59% and 68% of our revenue, respectively, was generated in Hong Kong. Most 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.
In contrast to our operations in other parts of the world, we have not implemented a direct sales model in China. The Chinese
government permits direct selling only by organizations that have a license that we do not have, 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 by us 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 we sell products in China using an e-commerce retail model. The Chinese entity operates
separately from the Hong Kong entity, although a Chinese member may elect to participate separately in both.
We believe that the laws and regulations in China regarding direct selling and multi-level marketing are not specifically applicable
to our Hong Kong based e-commerce activity, and that our Chinese entity 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 violates 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Because of the Chinese government’s significant concerns about direct selling activities, it scrutinizes very closely activities of
direct selling companies. At times, investigations and related actions by government regulators have resulted in a few cases where
we have paid substantial fines. In each of these cases, we have been allowed to recommence operations after the government’s
investigation, and no material changes to our business model were required in connection with these fines and impediments.
Although we attempt to work closely with both national and local Chinese governmental agencies in conducting our business, our
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, and
activities by individual distributors that may violate laws notwithstanding our strict policies prohibiting such activities. Any
determination that our operations 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.
Various other factors could harm our business in Hong Kong and China, such as worsening economic conditions in Hong Kong
or China, adverse local publicity or other events that may be out of our control. For example, we were advised to voluntarily suspend
marketing activities in China during the third quarter of 2007 when the Chinese government was expected to impose a more intense
enforcement program against illegal chain sales activities. We did not want to run the risk of being inadvertently entangled in the
government enforcement actions and voluntarily withdrew all marketing activities from China during that period. It may be necessary
or advisable to repeat this or similar actions from time to time in the future, and such periods of reduced activity could have a material
adverse effect on our business.
As a network marketing company, we rely on an independent sales force and we do not have direct control over the
marketing of our products.
We rely on non-employee, independent distributors to market and sell our products. We have a large number of distributors and a
relatively small corporate staff to implement our marketing programs and to provide motivational support and training to our
distributors. Distributors may voluntarily terminate their agreements with us at any time, and there is typically significant turnover in
our distributor ranks.
Our failure to maintain and expand our distributor relationships could adversely affect our business.
We distribute our products through independent distributors, 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. Our direct selling organization is headed by a relatively small number of key distributors. The loss of a significant
number of distributors, including any key distributors, could materially and adversely affect sales of our products and could impair our
ability to attract new distributors. Moreover, the replacement of distributors could be difficult because, in our efforts to attract and
retain distributors, we compete with other direct selling organizations, including but not limited to those in the personal care, cosmetic
product and nutritional supplement industries. Our distributors may terminate their services with us at any time and, in fact, like most
direct selling organizations we have a high rate of attrition.
Despite an increase in distributors during 2011, we experienced a 37% and 20% decrease in active distributors during 2009 and
2010, respectively. The number of active distributors or their productivity may not increase and could further decline in the
future. Distributors may terminate their services at any time, and, like most direct selling companies, we experience a high turnover in
our distributor ranks. We cannot accurately predict any fluctuation in the number and productivity of distributors because we primarily
rely upon existing distributors to sponsor and train new distributors and to motivate new and existing distributors. 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 distributors and to attract new distributors.
The number and productivity of our distributors could be harmed by several factors, including:
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adverse publicity or negative perceptions regarding us, our products, our distribution channel, our method of distribution or
our competitors;
lack of interest 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The high level of competition in our industry could adversely affect our business.
The 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 for
the business of consumers both in the 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.
We are subject to significant competition for the recruitment of distributors from other direct selling organizations, including those
that market similar products. Many of our competitors are substantially larger than we are, offer a wider array of products, have far
greater financial resources and many more active distributors than we have. Our ability to remain competitive depends, in significant
part, on our success in recruiting and retaining distributors through an attractive compensation plan and other incentives. We believe
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, there can be no assurance that we will timely learn of such
activity, have the resources to attempt to stop it, 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 to our distributors, which represented approximately 37% and 38% of net
sales during 2010 and 2011, respectively. 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 on distributor compensation paid out as a percentage of product sales. We have enforced
that cap from December 2008, which diluted commissions payable to certain highly-paid distributors. 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 work elsewhere.
Failure of new products to gain distributor and market acceptance could harm our business.
An important component of our business is our ability to develop new products that create enthusiasm among our distributor
force. If we fail to introduce new products on a timely basis, our distributor productivity 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.
Direct-selling laws and regulations may prohibit or severely restrict our direct sales efforts and cause our revenue and
profitability to decline, and regulators could adopt new regulations that harm our business.
Our direct selling system is subject to extensive laws, governmental regulations, administrative determinations, court decisions
and similar constraints. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred
to as “pyramid” schemes, which compensate participants for recruiting additional participants irrespective of product sales, use high
pressure recruiting methods and/or do not involve legitimate products.
Complying with these widely varying and sometimes inconsistent rules and regulations can be difficult and may require the
devotion of significant resources on our part. There can be no assurance that we or our distributors are in compliance with all of
these regulations. Our failure or our distributors’ 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.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We are also subject to the risk that new laws or regulations might be implemented or that current laws or regulations might
change, which could require us to change or modify the way we conduct our business in certain markets. This could be particularly
detrimental to us if we had to change or modify the way we conduct business in markets that represent a significant percentage of our
net sales. For example, the FTC released a proposed New Business Opportunity Rule in April 2006. As initially drafted, the
proposed rule would have required pre-sale disclosures for all business opportunities, which may have included network marketing
compensation plans such as ours. However, in November 2011, the FTC issued a final rule that will not apply to multi-level
marketing companies that do not represent that they or another designated person will do any of the following: (a) provide locations
for the operation of equipment, displays, vending machines or similar devices owned, leased, controlled or paid for by the purchaser
of the opportunity; (b) provide outlets, accounts, or customers (including but not limited 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 the Company understands the final regulation, it does not make any of these representations and therefore is not
covered by the final rule, which took effect on March 1, 2012.
Challenges by third parties to the form of our business model could harm our business.
We are also subject to the risk of private party challenges to the legality of our direct selling system. The regulatory requirements
concerning direct selling systems do not include “bright line” rules and are inherently fact-based and subject to judicial interpretation.
An adverse judicial determination against us with respect to our direct selling system, or in proceedings not involving us directly but
which challenge the legality of other direct selling marketing systems, could have a material adverse effect on our
business. Moreover, there is a risk that such challenges and settlements involving other parties could provide incentives for similar
actions by distributors against us and other direct selling companies. Any challenges regarding us or others in our industry could
harm our business if such challenges result in the imposition of any fines or damages on our business, create adverse publicity,
increase scrutiny of our industry, detrimentally affect our efforts to recruit or motivate distributors and attract customers, or interpret
laws in a manner inconsistent with our current business practices.
Our products and related activities are subject to extensive government regulation, which could delay, limit or prevent the
sale of some of our products in some markets.
The formulation, manufacturing, packaging, labeling, importation, advertising, distribution, sale and storage of certain of our
products are subject to extensive regulation by various federal agencies, including the FDA, the FTC, the Consumer Product Safety
Commission and the United States Department of Agriculture and by various agencies of the states, localities and foreign countries in
which our products are manufactured, distributed and sold. For example, the FDA requires us and our suppliers to meet relevant
current good manufacturing practice, or cGMP, regulations for the preparation, packing and storage of foods and over-the-counter
(OTC) drugs. We are also now required to report serious adverse events associated with consumer use of certain of our
products. Other laws and regulations govern or restrict the claims that may be made about our products and the information that must
be included and excluded on labels.
In markets outside the United States, prior to commencing operations or marketing new products, we may be required to obtain
approvals, licenses, or certifications from a ministry of health or a comparable agency. Moreover, a foreign jurisdiction may pass
laws that would prohibit the use of certain ingredients in their particular market. Compliance with these regulations can create delays
and added expense in introducing new products to certain markets.
Failure by our distributors 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 sales revenues.
We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect
additional governmental regulations or administrative orders, when and if promulgated, could have on our business. These potential
effects could include, however, requirements for the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products, additional record keeping and reporting requirements, expanded documentation of the properties
of certain products, expanded or different labeling, or additional scientific substantiation. Any or all of these requirements could have
a material adverse effect on our business, financial condition, or results of operations.
14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
New regulations governing the marketing and sale of nutritional supplements could harm our business.
There has been an increasing movement in the United States and other markets to increase the regulation of dietary
supplements, which could impose additional restrictions or requirements in the future. In the United States, for example, some
legislators and industry critics continue to push for increased regulatory authority by the FDA over nutritional supplements. Our
business could be harmed if more restrictive legislation is successfully introduced and adopted in the future. In particular, the
adoption of legislation requiring FDA approval of supplements or ingredients could delay or inhibit our ability to introduce new
supplements. We face similar pressures in our other markets, including Europe, which is expected to adopt additional regulations
setting new limits on acceptable maximum levels of vitamins and minerals. In the United States, effective December 1, 2009, the
FTC approved revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, that require
disclosure of material connections between an endorser and the company they are endorsing and do not allow marketing using
atypical results. 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 distributors 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.
Regulations governing the production and marketing of our personal care products could harm our business.
Our personal care products are subject to various domestic and foreign laws and regulations that regulate cosmetic products and
set forth regulations for determining whether a product can be marketed as a “cosmetic” or requires further approval as an over-the-
counter drug. A determination that our cosmetic products impact the structure or function of the human body, or improper marketing
claims by our distributors 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.
If we are found not to be in compliance with good manufacturing practices our operations could be harmed.
FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements for the nutritional supplement
industry have recently gone into effect and require good manufacturing processes for us and our vendors, including stringent vendor
qualifications, ingredient identification, manufacturing controls and record keeping. We are also now 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.
Failure to comply with domestic and foreign laws and regulations governing product claims and advertising could harm our
business.
Our failure to comply with FTC or state regulations, or with regulations in foreign markets that cover our product claims and
advertising, including direct claims and advertising by us, as well as claims and advertising by distributors 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. Distributor 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 distributor force, we cannot
ensure that our distributors would comply with applicable legal requirements.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 independent 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 independent distributors. If any of these events occur, the value of an investment in our common shares could be
impaired.
Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies,
could harm our financial condition and operating results.
Adverse publicity concerning any actual or claimed failure by us or our distributors 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, which would negatively impact our ability to generate revenue. We cannot ensure that all distributors
will comply with applicable legal requirements relating to the advertising, labeling, licensing or distribution of our products.
In addition, our distributors’ 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.
We have a limited product line.
We offer a limited number of products under our NHT Global brand. Our Premium Noni Juice™ , Skindulgence™ , Alura™ and La
Vie™ products each account for a significant portion of our total sales and, together, account for a significant majority of our total
sales. If demand for any of these four products decreases significantly, government regulation restricts the sale of these products,
we are unable to adequately source or deliver these products (we currently source two of these products from a single supplier and
the other two products from two other suppliers), or we cease offering any of these products for any reason without a suitable
replacement, our business, financial condition and results of operations could be materially and adversely affected.
We do not manufacture our own products so we must rely on independent third parties for the manufacturing and supply of
our products.
All of our products are manufactured by independent third parties. There is no assurance that our current manufacturers will
continue to reliably supply products to us at the level of quality we require. In particular, the ongoing economic crisis creates risk for
us if any of these third parties suffer liquidity or operational problems. If a key manufacturer becomes insolvent or is forced to lay off
employees assisting with our projects, our results could suffer. In the event any of our third-party manufacturers become unable or
unwilling to continue to provide the products in required volumes and quality levels at acceptable prices, we will be required to identify
and obtain acceptable replacement manufacturing sources or replacement products. There is no assurance that we will be able to
obtain alternative manufacturing sources or products or be able to do so on a timely basis. An extended interruption in the supply of
our products will result in a substantial loss of sales. In addition, any actual or perceived degradation of product quality as a result of
our reliance on third party manufacturers may have an adverse effect on sales or result in increased product returns and buybacks.
16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Growth may be impeded by the political and economic risks of entering and operating foreign markets.
Our ability to achieve future growth is dependent, in part, on our ability to continue our international expansion efforts. However,
there can be no assurance that we would be able to grow in our existing international markets, enter new international markets on a
timely basis, or that new markets would be profitable. We must overcome significant regulatory and legal barriers before we can
begin marketing in any foreign market.
Also, it is difficult to assess the extent to which our products and sales techniques would be accepted or successful in any given
country. In addition to significant regulatory barriers, we may also encounter problems conducting operations in new markets with
different cultures and legal systems from those encountered elsewhere. We may be required to reformulate certain of our products
before commencing sales in a given country. Once we have entered a market, we must adhere to the regulatory and legal
requirements of that market. No assurance can be given that we would be able to successfully reformulate our products in any of our
current or potential international markets to meet local regulatory requirements or attract local customers. The failure to do so could
have a material adverse effect on our business, financial condition, and results of operations. There can be no assurance that we
would be able to obtain and retain necessary permits and approvals.
In many markets, other direct selling companies already have significant market penetration, the effect of which could be to
desensitize the local distributor population to a new opportunity, or to make it more difficult for us to recruit qualified distributors.
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 distributors 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 distributor 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 2010 and 2011, approximately 95% 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 almost all inventories in U.S. dollars. Our foreign currency exchange rate exposure, mainly to South
Korean won, Taiwan dollar, Japanese yen, Chinese yuan, Russian ruble and European euro, represented approximately 36% and
28% of our revenue in 2010 and 2011, respectively. Our foreign currency exchange rate exposure may increase in the near future as
our Greater China, Russia and European subsidiaries expand operations and we develop new markets. 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.
Transfer pricing, duties and other tax regulations affect our business.
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. 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.
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.
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. In 2005, we
implemented a foreign holding and operating company structure for our non-United States businesses, although we have since
discontinued our operational use of this structure to reduce costs and because we determined that our United States operating losses
will lower our overall effective tax rate.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
17
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.
Failure to properly pay business taxes or customs duties, including those in China, could have a material adverse effect.
In the course of doing business we may be subject to various taxes, such as sales and use, value-added, franchise, income, and
import duties. The failure to properly calculate, report and pay such taxes or duties when we are subject to them could have a
material adverse effect on our financial condition and results of operations. Moreover, any change in the law or regulations regarding
such taxes or duties, or any interpretation thereof, could result in an increase in the cost of doing business.
We may be held responsible for certain taxes or assessments relating to the activities of our distributors, which could harm
our financial condition and operating results.
Our distributors are subject to taxation, and in some instances, legislation or governmental agencies impose an obligation on us
to collect the taxes, such as value added taxes, and to maintain appropriate records. In addition, we are subject to the risk in some
jurisdictions of being responsible for social security and similar taxes with respect to our distributors.
We may face litigation that could harm our business.
We have been parties to lawsuits and other proceedings in the past. Prosecuting and defending potential litigation and other
governmental proceedings may continue to 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.
We rely on trade secret, copyright and trademark laws and confidentiality agreements with employees and third parties, all of
which offer only limited protection of our confidential information and trademarks. Moreover, the laws of some countries in which we
market our products may afford little or no effective protection of our intellectual property rights. The unauthorized copying, use or
other misappropriation of our confidential information, trademarks and other intellectual property could enable third parties to benefit
from such property without paying us for it. This could have a material adverse effect on our business, operating results and financial
condition. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome,
expensive and result in inadequate remedies. It is also possible that our use of our intellectual property rights could be found to
infringe on prior rights of others and, in that event, we could be compelled to stop or modify the infringing use, which could be
burdensome and expensive.
We do not have product liability insurance and product liability claims could hurt our business.
Currently, we do not have product liability insurance, although the insurance carried by our suppliers may cover certain product
liability claims against us. As a marketer of dietary supplements, cosmetics and other products that are ingested by consumers or
applied to their bodies, we may become subjected to various product liability claims, including that:
·
·
·
our products contain contaminants or unsafe ingredients;
our products include inadequate instructions as to their uses; or
our products include inadequate warnings concerning side effects and interactions with other substances.
If our suppliers’ product liability insurance fails to cover product liability claims or other product liability claims, or any product
liability claims exceeds the amount of coverage provided by such policies or if we are unsuccessful in any third party claim against
the manufacturer or if we are unsuccessful in collecting any judgment that may be recovered by us against the manufacturer, we
could be required to pay substantial monetary damages which could materially harm our business, financial condition and results of
operations. As a result, we may become required to pay higher premiums and accept higher deductibles in order to secure adequate
insurance coverage in the future. Especially since we do not have direct product liability insurance, it is possible that product liability
claims and the resulting adverse publicity could negatively affect our business.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our internal controls and accounting methods may require modification.
We continue to develop controls and procedures and plan to implement additional controls and procedures sufficient to accurately
report our financial performance on a timely basis in the foreseeable future. If we do not develop and implement effective controls
and procedures, we may not be able to report our financial performance on a timely basis and our business and stock price would be
adversely affected.
If we fail to achieve and maintain an effective system of internal controls in the future, we may not be able to accurately
report our financial results or prevent fraud. As a result, investors may lose confidence in our financial reporting.
The Sarbanes-Oxley Act of 2002 requires that we report annually on the effectiveness of our internal control over financial
reporting. Among other things, we must perform systems and processes evaluation and testing. We must also conduct an
assessment of our internal controls to allow management to report on our assessment of our internal control over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. We are required to provide management’s assessment of internal controls in
conjunction with the filing of this report. As disclosed under Item 9A of this report, our management concluded that our internal
control over financial reporting was effective at December 31, 2011. In the future, our continued assessment, or the assessment by
our independent registered public accounting firm, could reveal significant deficiencies or material weaknesses in our internal
controls, which may need to be disclosed in future Annual Reports on Form 10-K. We believe, at the current time, that we are taking
appropriate steps to mitigate these risks. However, disclosures of this type can cause investors to lose confidence in our financial
reporting and may negatively affect the price of our common stock. Moreover, effective internal controls are necessary to produce
reliable financial reports and to prevent fraud. Deficiencies in our internal controls over financial reporting may negatively impact our
business and operations.
We rely on and are subject to risks associated with our reliance upon information technology systems.
Our success is dependent on the accuracy, reliability, and proper use of information processing systems and management
information technology. Our information technology systems are designed and selected to facilitate order entry and customer billing,
maintain distributor records, accurately track purchases and distributor 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.
Although we believe that the members of our software development team have the qualifications, know-how and experience to
perform the necessary software development and other information technology services, there can be no assurance that there will
not be delays or interruptions in these services. An interruption or delay in availability of these services could, if it lasted long enough,
prevent us from making sales, cause distributors to leave our business, or otherwise materially adversely affect our business.
System failures and attacks could harm our business.
Because of our diverse geographic operations and our internationally applicable distributor compensation plans, our business is
highly dependent on efficiently 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.
Moreover, hackers could attack our system seeking to retrieve personal or confidential information of the company or of third
parties, such as credit card information used to purchase our products on-line. Although we take steps to prevent such loss of
information, there can be no assurance that our system will not be successfully hacked. Laws in the United States and other
jurisdictions where we do business require prompt notice of any such loss of information. Failure to comply with those reporting
obligations could result in material penalties. In addition, if our system were hacked, we could incur material costs in investigating the
incidents and could be liable for damages. Any such damages may or may not be covered by insurance.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Terrorist attacks, cyber attacks, acts of war, epidemics or other communicable diseases or any other natural disasters may
seriously harm our business.
Terrorist attacks, cyber attacks, or acts of war or natural disasters may cause damage or disruption to us, our employees, our
facilities and our 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 the Chinese objection
to the Taiwan independence movement and its 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.
Disappointing quarterly revenue or operating results could cause the price of our common stock to fall.
Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If our
quarterly revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock
could fall substantially.
Our common stock is particularly subject to volatility because of the industry in which we operate.
The market prices of securities of direct selling companies have been extremely volatile, and have experienced fluctuations that
have often been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations
could adversely affect the market price of our common stock.
There is no assurance that an active public trading market will continue.
There can be no assurance that an active public trading market for our common stock will be sustained. If for any reason an
active public trading market does not continue, purchasers of the shares of our common stock may have difficulty in selling their
securities should they desire to do so and the price of our common stock may decline.
The exercise of our warrants may result in substantial dilution and may depress the market price of our common stock.
As of March 21, 2012, we had outstanding 11,326,323 shares of common stock and also (i) warrants outstanding from our
May 2007 private placement exercisable for 2,059,307 shares of our common stock at an exercise price of $5.00 per share,
(ii) 138,400 shares of Series A preferred stock, convertible into the same number of shares of common stock and (iii) warrants issued
in our October 2007 private placement exercisable for 1,645,547 shares of common stock at an exercise price of $3.52 per share. If
these convertible securities are exercised or converted, and the shares of common stock issued upon such exercise or conversion
are sold, our common stockholders may experience substantial dilution and the market price of our shares of common stock could
decline. Further, the perception that such convertible securities might be exercised or converted could adversely affect the market
price of our shares of common stock. In addition, holders of our warrants and options are likely to exercise them when, in all
likelihood, we could obtain additional capital on terms more favorable to us than those provided by the warrants and options. The
anti-dilution provisions of warrants to purchase 1,645,547 shares of our common stock would, if triggered, cause substantial dilution
and may, therefore, make it particularly difficult to obtain new equity financing.
Future sales by us or our existing stockholders could depress the market price of our common stock.
If we or our existing stockholders sell a large number of shares of our common stock, the market price of our common stock could
decline significantly. Further, even the perception in the public market that we or our existing stockholders might sell shares of
common stock could depress the market price of the common stock.
Penny stock regulations are applicable to investment in our shares of common stock
Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by
the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain
national securities exchanges, provided that current prices and volume information with respect to transactions in such securities are
provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition, penny stock rules generally require that prior to a
transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock that becomes subject to penny stock rules. Many brokers
will not deal with penny stocks, restricting the market for our shares of common stock.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2. PROPERTIES
We lease approximately 4,400 square feet in Dallas, Texas for our corporate headquarters. Outside the United States, we lease
office space in Hong Kong, China, Japan, Taiwan and South Korea. In China, we also lease a building north of the city of Dalian with
the intention of developing a multi-purposed facility serving the needs of consumers in northern China. We contract with third parties
for fulfillment and distribution operations in most of our international markets. We believe that our existing properties are in good
condition, suitable and adequate for the conduct of our business.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Part II
Item
5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market Information
Our common stock is currently quoted under the trading symbol “NHTC” on the OTCQB tier of the OTC market. Prior to August
13, 2010, our common stock was quoted under the trading symbol “BHIP.” The following table sets forth the composite of the high
and low bid quotations of our common stock as reported by the OTC Markets Group, Inc. The bid quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
March 31
June 30
September 30
December 31
2010
2011
High
Low
High
Low
$
$
0.30
0.35
0.30
0.17
$
0.13
0.21
0.17
0.05
$
0.20
0.88
0.71
1.00
0.09
0.14
0.30
0.50
On March 21, 2012, the last reported closing price of our common stock on the OTCQB was $1.32 per share.
Holders of Record
At March 21, 2012, there were approximately 190 record holders of our common stock (although we believe that the number of
beneficial owners of our common stock is substantially greater).
Dividends
We have never declared or paid any cash dividend on our common stock. We currently intend to retain earnings, if any, to
finance the growth and development of our business. We do not expect to pay any dividends in the foreseeable future. Payment of
any future dividends on shares of our common stock will be at the discretion of our Board of Directors. At December 31, 2011, we
had accrued unpaid dividends of $157,000 with respect to the Series A preferred stock, but such dividends have not been declared
and we are under no obligation to pay such accrued dividends except in certain extraordinary circumstances.
Equity Compensation Plan Information
The following table sets forth information regarding all compensation plans under which Company equity securities are authorized
for issuance as of December 31, 2011:
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)
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
$
–
–
–
–
–
–
1,083
–
1,083
Item 6. SELECTED FINANCIAL DATA
Not applicable under smaller reporting company disclosure rules.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
22
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
We are an international direct-selling and e-commerce company. Subsidiaries controlled by us sell personal care, wellness, and
“quality of life” products under the “NHT Global” brand. In most markets, we sell our products to an independent distributor network
that either uses the products themselves or resells them to consumers. Our majority-owned subsidiaries have an active physical
presence in the following markets: North America; Greater China, which consists of Hong Kong, Taiwan and China; Russia; South
Korea; Japan; and Europe, which consists of Italy and Slovenia.
Our distributor network operates in a seamless manner from market to market, except for the Chinese market. We believe that
each of our operating segments should be aggregated into a single reportable segment as they have similar economic
characteristics. Additionally, we believe that each of the 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. Our e-commerce retail business in China does not require a direct selling license and allows for discounts
on volume purchases. There is no separate segment manager who is held accountable 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.
As of December 31, 2011, we were conducting business through approximately 18,410 active distributors. We consider a
distributor “active” if they have placed at least one product order with us during the preceding year. Currently we do not intend to
devote material resources to opening any additional foreign markets in the near future. Our priority is to focus our resources in our
most promising markets, namely Greater China and Russia.
We generate about 95% of our net sales from subsidiaries located outside North America, with sales in Hong Kong representing
68% 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
certain risks for our business, including improper claims or activities by our distributors and potential inability to obtain necessary
product registrations.
China has been and continues to be our most important business development project. In June 2004, NHT Global obtained a
general business license in China. Direct selling is prohibited in China without a direct selling license that we do not have. In
December 2005, we submitted a preliminary application for a direct selling license. In June 2006, we submitted a revised application
package in accordance with new requirements issued by the Chinese government. In June 2007, we launched a new e-commerce
retail platform in China that does not require a direct selling license and is separate from our current worldwide platform. 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 to 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 rejected by the pertinent
authorities, but did not appear to materially progress. By now, the information contained in the most recent application is stale. The
Company applied to temporarily withdraw the license application in February 2009 to furnish new information and intends to amend
its application with the goal to re-apply in the future. We are unable to predict whether 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
with direct selling operations.
Most of the Company’s Hong Kong revenue is derived from the sale of products that are delivered to members in China. After
consulting with outside professionals, the Company believes that its 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 laws 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 could be attributable 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 the Company attempts 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. The Company believes 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 potential members to choose not to participate. Among other
things, the Company is 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….”
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Income Statement Presentation
We derive revenue from sales of products, enrollment packages, and shipping charges. Substantially all of our product sales are
to independent distributors at published wholesale prices. Product sales are recorded when the products are shipped and title
passes to independent distributors, which generally is upon our delivery to the carrier that completes delivery to the distributors. 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.
Cost of sales consist primarily of products purchased from third-party manufacturers, freight cost for shipping products to
distributors, import duties, costs of promotional materials sold to the Company’s distributors 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 commissions are typically our most significant expense and are classified as an operating expense. Under our
compensation plan, distributors are paid weekly commissions, generally in their home country currency, for product sold by their
down-line distributor network across all geographic markets, except China, where we launched an e-commerce retail platform and do
not pay any commissions. Distributors are not paid commissions on purchases or sales of our products made directly by them. This
"seamless" compensation plan enables a distributor located in one country to sponsor other distributors located in other countries
where we are authorized to conduct our business. Currently, there are basically two ways in which our distributors 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.
Each of our products is designated a specified number of sales volume points, also called bonus volume or “BV.” Commissions
are based on total personal and group sales volume points per sales period. Sales volume points are essentially a percentage of a
product’s wholesale cost. As the distributor’s business expands from successfully sponsoring other distributors who in turn expand
their own businesses by sponsoring other distributors, the distributor receives higher commissions from purchases made by an
expanding down-line network. To be eligible to receive commissions, a distributor 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 distributor to be eligible
to receive commissions. In determining commissions, the number of levels of down-line distributors included within the distributor's
commissionable group increases as the number of distributorships directly below the distributor increases. Under our current
compensation plan, certain of our commission payouts may be limited to a hard cap in terms of 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
several generations of personally sponsored distributors, as well as bonuses on commissions earned by several generations of
personally sponsored distributors. Distributors can also earn income, trips and other prizes in specific time-limited promotions and
contests we hold from time to time. Distributor commissions are dependent on the sales mix and, for fiscal 2010 and 2011,
represented 37% and 38% of net sales, respectively. From time to time we make modifications and enhancements to our
compensation plan to help motivate distributors, which can have an impact on distributor commissions. From time to time we also
enter into agreements for business or market development, which may result in additional compensation to specific distributors.
Selling, general and administrative expenses consist of administrative compensation and benefits (including stock-based
compensation), travel, credit card fees and assessments, professional fees, certain occupancy costs, and other corporate
administrative expenses. In addition, this category includes selling, marketing, and promotion expenses including costs of distributor
conventions, which are designed to increase both product awareness and distributor recruitment. Because our various distributor
conventions are not always held at the same time each year, interim period comparisons will be impacted accordingly.
The functional currency of our international subsidiaries is generally their local currency. Local currency assets and liabilities are
translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average
rates of exchange during the period. Equity accounts are translated at historical rates. The resulting translation adjustments are
recorded directly into a separate component of stockholders’ equity and represent the only component of accumulated other
comprehensive income.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Sales to customers outside the United States are transacted in the respective local currencies and are translated into U.S. dollars
using average rates of exchange for each monthly accounting period to which they relate. Most of our product purchases from third-
party manufacturers are transacted in U.S. dollars. Consequently, our sales and net earnings are affected by changes in currency
exchange rates, with sales and earnings generally increasing with a weakening U.S. dollar and decreasing with a strengthening U.S.
dollar.
Results of Operations
The following table sets forth our operating results as a percentage of net sales for the periods indicated.
Net sales
Cost of sales
Gross profit
Operating expenses:
Distributor commissions
Selling, general and administrative expenses
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income, net
Income (loss) before income taxes
Income tax benefit
Net income (loss)
Net Sales
Year Ended December 31,
2011
2010
100.0%
29.6
70.4
36.8
41.6
5.1
83.5
(13.1)
2.5
(10.6)
(0.1)
(10.5)%
100.0%
26.2
73.8
38.0
29.0
1.0
68.0
5.8
1.1
6.9
(0.9)
7.8%
The following table sets forth revenue by market for the periods indicated (in thousands):
North America
Hong Kong
China
Taiwan
South Korea
Japan
Russia
Europe
Total
Year Ended December 31,
2010
2011
$
$
1,214
13,930
1,202
1,870
828
428
3,541
563
23,576
5.2% $
59.1
5.1
7.9
3.5
1.8
15.0
2.4
100.0% $
1,487
21,038
1,131
1,931
445
240
4,537
353
31,162
4.8%
67.5
3.6
6.2
1.4
0.8
14.6
1.1
100.0%
Net sales were $31.2 million for the year ended December 31, 2011 compared with $23.6 million a year ago. Hong Kong net
sales increased $7.1 million, or 51%, over the comparable period a year ago. The increase in Hong Kong can be attributed to
successful product launch and a series of local market events to support its introduction as well as a robust incentive program
developed for distributors leading up to the Hong Kong 10th Anniversary event, which occurred in July 2011. Additional increase is
due to ticket sales for the Hong Kong 10th Anniversary event. The first quarter of 2010 included $708,000 of product orders taken
during 2009, but recognized as revenue in Hong Kong during 2010 when operational issues with our third party logistics partners
were resolved. Aside from the increase in Hong Kong, Russia net sales increased $1.0 million, or 28%, for the same time frame due
to local market events held in St. Petersburg, Rostov and Khabarovsk, Russia as well an incentive program building toward the 10th
Anniversary event held in Hong Kong in July 2011 that Russian distributors were able to attend.
25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of December 31, 2011, the operating subsidiaries of the Company had 18,410 active distributors, compared to 16,350 active
distributors at December 31, 2010. Hong Kong experienced an increase of 2,190 active distributors, or 22%, from December 31,
2010 to December 31, 2011.
As of December 31, 2011, the Company had deferred revenue of approximately $967,000, of which $776,000 pertained to
product sales and $191,000 pertained to unamortized enrollment package revenue.
Gross Profit
Gross profit was 73.8% of net sales for the year ended December 31, 2011 compared with 70.4% of net sales for the year ended
December 31, 2010. The margin increase was mainly derived from a price increase implemented in Russia, ticket sales for the 10th
Anniversary event held in Hong Kong in July 2011, higher margin pre-assorted product offerings in Hong Kong leading up to the 10th
Anniversary event, and less fees paid to our third-party logistics provider in Russia due to a rate reduction effective in June 2011.
Distributor Commissions
Distributor commissions were slightly higher during the year ended December 31, 2011 as the percentage to net sales was
38.0% compared with 36.8% a year ago. The increase as a percent of net sales is primarily due to modifications and enhancements
to the Hong Kong and Russian compensation plans in June 2010 and February 2011, respectively, to add among other things, both a
generational and matching bonus. Additionally, payout increased somewhat due to sales goals reached by distributor-owned healthy
lifestyle centers (“HLCs”) that began operating in China in the third quarter of 2010. This additional payout was slightly offset by the
immediate, nonrecurring one-time commission payout from the adoption of lower commission payout thresholds in Hong Kong and
Russia in February 2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $750,000 for the year ended December 31, 2011, compared with the
prior year, mainly due to the following:
·
·
·
·
·
·
·
·
·
·
lower salaries, employee-related costs, and consulting fees at the corporate office totaling $333,000 mainly due to the
elimination of several administrative positions in the first quarter of 2011;
lower rent, utilities, and other business expenses in North America totaling $77,000 as a result of our corporate office move in
the prior year;
lower rent and utilities in China totaling $84,000 due to the on-going transition of our facility in Zhuhai, China to northern
China;
lower overall costs in South Korea and Japan aggregating $438,000 and $205,000, respectively, as a result of management
changes and other cost reductions in South Korea that occurred in 2010 and cost reductions in Japan that occurred in early
2011;
impact of agreements with vendors to settle outstanding amounts at $477,000 less than carrying value; and
lower stock-based compensation expense in the amount of $96,000 as certain shares of restricted stock began to fully vest in
2010; partially offset by
event-related costs increased $395,000 primarily due to the Hong Kong 10th Anniversary event held in July 2011;
credit card fees and assessments in Hong Kong and Russia increased $176,000 and $50,000, respectively, due to the
increase in sales;
professional fees increased $167,000 due to the audit of our consolidated financial statements for fiscal years 2009 and 2010;
and
additional costs incurred in China and Russia totaling $88,000 and $67,000, respectively to further develop local market
presence.
Other Income, Net
Gain on foreign exchange totaling $226,000 was recognized in the year ended December 31, 2011 due primarily to the impact of
the Japanese yen, South Korean won and European euro on inter-company balances. Gain on foreign exchange was $524,000
during the year ended December 31, 2010 also mainly due to the impact of the Japanese yen and European euro on inter-company
balances. During December 2011, a gain of $65,000 was recognized upon liquidation of MyLexxus Europe AG, in which we held a
51% ownership interest.
26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Income Taxes
An income tax benefit of $298,000 was recorded during the year ended December 31, 2011, related to our operations outside the
United States. The Company reversed a previously established tax liability related to its European subsidiary, MyLexxus Europe AG,
prior to its liquidation in December 2011 and a portion of the deferred tax liability initially recorded in 2008 upon de-recognition of
unclaimed, aged commission checks in Hong Kong reversed, the aggregate of which resulted in an overall income tax benefit for the
year. The Company did not recognize a tax benefit for U.S. tax purposes due to uncertainty that the benefit will be realized.
Liquidity and Capital Resources
In 2007 through 2010, the Company supplemented its working capital and capital expenditure needs with capital raised from
several private placements and advances from a director.
On May 4, 2007, the Company consummated a private equity placement generating gross proceeds of approximately $3.0
million. The May 2007 financing consisted of the sale of 1,759,307 shares of the Company’s Series A convertible preferred stock and
the sale of warrants evidencing the right to purchase 1,759,307 shares of the Company’s common stock. As partial consideration for
placement agency services, the Company issued warrants evidencing the right to purchase an additional 300,000 shares of the
Company’s common stock to the placement agent that assisted in the financing. The warrants are exercisable at any time during the
period beginning November 4, 2007 (six months after their issuance) and ending May 4, 2013 (six years after their issuance). The
exercise price of the warrants is $5.00 per share.
On October 19, 2007, the Company raised gross proceeds of $3.7 million in a private placement of variable rate convertible
debentures (the “Debentures”) having an aggregate face amount of $4,250,000, seven-year warrants to purchase 1,495,952 shares
of the Company’s common stock, and one-year warrants to purchase 1,495,952 shares of the Company’s common stock. One-half of
the original principal amount of the Debentures was payable in 12 equal monthly installments beginning on November 1, 2008, and
the balance was payable on October 19, 2009, unless extended by the holders to October 19, 2012. The warrants are exercisable
beginning six months and one day after their respective issuance and have an exercise price of $3.52 per share. The placement
agent and its assigns also received five-year warrants to purchase 149,595 shares of the Company’s common stock at an exercise
price of $3.52 per share. Such one-year warrants expired unexercised on April 21, 2009.
At December 31, 2011, the Company’s cash and cash equivalents totaled $1.6 million. Total cash and cash equivalents
decreased by approximately $904,000 during 2010, but increased by $969,000 during 2011.
At December 31, 2011, the ratio of current assets to current liabilities was 0.55 to 1.00 and the Company had a working capital
deficit of approximately $3.1 million. Current liabilities included deferred revenue of $967,000 that consisted of amortized enrollment
package revenues and unshipped orders. The ratio of current assets to current liabilities excluding deferred revenue would be 0.64
to 1.00. Working capital as of December 31, 2011 increased $2.5 million compared to that as of December 31, 2010 mainly due to
cash generated from operations, but also due to effect of negotiated settlements with certain legacy and on-going vendors.
Cash provided by operations during 2011 was $1.5 million compared to cash used in operations of $292,000 during 2010. Cash
generated from operations directly resulted from the net sales increase during 2011, while we simultaneously maintained our ability to
control operating expenses.
Cash used in investing activities during 2011 was $136,000, of which $72,000 was due to an increase in restricted cash. In April
2010, the Company’s primary credit card processing company required that the Company gradually increase to and maintain the
reserve balance at $500,000. The Company reached the necessary reserve requirement during the second quarter of 2011. In
January 2012, 50% of the reserve balance was returned to the Company. The Company’s expectation is that its reserve requirement
will revert back to a percentage of sales calculation in the near future. Also, during December 2011, a net cash reduction of $57,000
occurred upon liquidation and de-consolidation of MyLexxus Europe AG, in which we held a 51% ownership interest, as this cash
was paid to the noncontrolling interest. No significant cash flows from investing activities occurred during 2010.
Financing during 2011 was provided by George Broady, a director of the Company and owner of more than 5% of its outstanding
common stock. Mr. Broady advanced $2,500 on January 13, 2011 and $30,000 on March 14, 2011 to settle certain claims against
the Company. The aggregate amount of these advances, plus a $4,000 advance on December 17, 2010, totaling $36,500 was
repaid on August 8, 2011. Additionally, Mr. Broady advanced $100,000 to the Company on February 28, 2011 and an additional
$100,000 on March 14, 2011. The Company agreed to pay Mr. Broady interest of 9% per annum on the aggregate amount of these
advances. The Company repaid Mr. Broady in full, plus accumulated interest, during the third and fourth quarters of 2011. Other
than a $62,000 dividend paid to a noncontrolling interest during 2010, no significant cash flows from financing activities occurred
during 2010.
27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company believes that its existing internal liquidity, supported by cash on hand and cash flows from operations should be
adequate to fund normal business operations and address its financial commitments for at least the next 12 months, assuming no
significant unforeseen expense or further 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 does not have any significant unused sources of liquid assets. Potentially the Company might receive additional
external funding if currently outstanding warrants are exercised. Furthermore, if necessary, the Company may attempt to generate
more funding from the capital markets, but currently does not believe that will be necessary.
We do not intend to devote material resources to opening any additional foreign markets in the near future. Our priority is to
focus our resources in our most promising markets, namely Greater China and Russia.
The Company has entered into non-cancelable operating lease agreements for locations within the United States and for its
international subsidiaries, with expirations through July 2013.
The Company has entered into an agreement with one of its suppliers to purchase its product through December 2014. To
maintain this agreement, the Company is required to purchase a minimum of $220,000 of product in 2012. The minimum purchase
requirement in the following two years is dependent on the volume in the preceding year plus an incremental amount not to exceed
$40,000.
The Company has employment agreements with certain members of its management team that can be terminated by either the
employee or the Company upon four weeks’ notice. The employment agreements entered into with the management team contain
provisions that guarantee the 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. As of December 31, 2011, no outstanding obligations existed under any severance
agreements.
Critical Accounting Policies and Estimates
The Company has identified certain policies and estimates that are important to the portrayal of its financial condition and results
of operations. Critical accounting policies and estimates are defined as both those that are material to the portrayal of our financial
condition and results of operations and as those that require management’s most subjective judgments. These policies and
estimates require the application of significant judgment by the Company’s management.
The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates
associated with obsolete inventory and the fair value of acquired intangible assets, including goodwill, as well as those used in the
determination of liabilities related to sales returns 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. The Company’s critical accounting policies at December 31, 2010 and 2011 include the following:
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, 2010 and 2011, the Company’s inventory value was $751,000
and $1.1 million, respectively, net of reserves of $59,000 and $43,000, respectively. No significant provision was recorded during
2010 and 2011.
28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Valuation of Goodwill and Other Intangible Assets. In accordance with accounting principles generally accepted in the United
States of America, the value of indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually
for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived
intangibles. During the fourth quarter of 2011, the Company early adopted new guidance which simplifies the goodwill impairment
test by allowing the option to first assess 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. We test individual
indefinite-lived intangibles by reviewing the individual book values compared to the fair value. The Company’s policy is to test for
impairment annually during the fourth quarter. At December 31, 2010 and 2011, goodwill of approximately $1.8 million was reflected
on the Company’s balance sheet. No impairment of goodwill or intangible assets 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 approximately 1% to 5% of sales. Sales returns were approximately 2% of sales for the years ended December 31, 2010 and
2011. The allowance for sales returns was approximately $380,000 and $205,000 at December 31, 2010 and 2011, respectively. No
material changes in estimates have been recognized during the periods presented.
Revenue Recognition. Product sales are recorded when the products are shipped and title passes to independent
distributors. Product sales to distributors are made pursuant to a distributor agreement that provides for transfer of both title and risk
of loss upon our delivery to the carrier that completes delivery to the distributors, which is commonly referred to as “F.O.B. Shipping
Point.” The Company primarily receives payment by credit card at the time distributors place orders. The Company’s 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 $776,000 at December 31, 2010 and 2011,
respectively. Shipping charges billed to distributors are included in net sales. Costs associated with shipments are included in cost
of sales.
Enrollment package revenue, including any nonrefundable set-up fees, is deferred and recognized over the term of the
arrangement, generally twelve months. Enrollment packages provide distributors 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, 2010 and 2011,
enrollment package revenue totaling $253,000 and $191,000 was deferred, respectively. Although the Company has 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.
Tax Valuation Allowance. The Company evaluates the probability of realizing the future benefits of any of its deferred tax assets
and records a valuation allowance when it believes a portion or all of its deferred tax assets may not be realized. The Company
increased the valuation allowance to equal its net deferred tax assets during 2005 due to the uncertainty of future operating
results. 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 2010 and 2011, no such reduction in the valuation allowance occurred. Any reductions in the
valuation allowance will reduce future income tax provisions.
Provision for income taxes depends on the statutory tax rates in each of the jurisdictions in which we operate. 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. 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 require changes in our transfer pricing practices, we could be required to pay higher taxes, interest and penalties,
and our earnings would be adversely affected.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable under smaller reporting company disclosure rules.
29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NATURAL HEALTH TRENDS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Lane Gorman Trubitt, PLLC, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Deficit and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
30
Page
31
32
33
34
35
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Natural Health Trends Corp.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Natural Health Trends Corp. (the “Company”) as of December
31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ deficit and comprehensive income (loss),
and cash flows for each of the years in the two-year period ended December 31, 2011. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes 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 as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Natural Health Trends Corp. as of December 31, 2011 and 2010, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2011, in conformity with accounting principles generally
accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of Natural Health Trends Corp.’s internal control
over financial reporting as of December 31, 2011 included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ Lane Gorman Trubitt, PLLC
Dallas, Texas
March 27, 2012
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
RDGXBRLParseBegin
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable
Inventories, net
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Restricted cash
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
Income taxes payable
Accrued distributor commissions
Other accrued expenses
Deferred revenue
Deferred tax liability
Other current liabilities
Total current liabilities
Commitments and contingencies
Stockholders’ deficit:
Natural Health Trends stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,761,900 shares
designated Series A convertible preferred stock, 138,400 shares issued and
outstanding at December 31, 2010 and 2011, aggregate liquidation value of $312
Common stock, $0.001 par value; 50,000,000 shares authorized; 10,725,899, and
11,326,323 shares issued and outstanding at December 31, 2010 and 2011,
respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments
Total Natural Health Trends stockholders’ deficit
Noncontrolling interest
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
December 31,
2010
2011
$
$
$
648
422
105
751
639
2,565
203
1,764
200
225
406
5,363
3,115
330
723
1,792
1,029
178
1,017
8,184
1,617
494
93
1,089
537
3,830
68
1,764
–
220
241
6,123
2,208
11
1,177
1,471
967
148
950
6,932
124
124
11
80,414
(83,643)
366
(2,728)
(93)
(2,821)
$
5,363
11
80,493
(81,338)
(99)
(809)
–
(809)
6,123
$
$
$
$
See accompanying notes to consolidated financial statements.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Net sales
Cost of sales
Gross profit
Operating expenses:
Distributor commissions
Selling, general and administrative expenses (including stock-based compensation
expense of $175 and $79 during 2010 and 2011, respectively)
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income, net:
Gain on foreign exchange
Interest income
Interest expense
Other
Total other income, net
Income (loss) before income taxes
Income tax benefit
Net income (loss)
Net (income) loss attributable to noncontrolling interest
Net income (loss) attributable to Natural Health Trends
Preferred stock dividends
Net income (loss) attributable to common stockholders of Natural Health Trends
Income (loss) per share of Natural Health Trends – basic and diluted
Weighted-average number of shares outstanding – basic
Weighted-average number of shares outstanding – diluted
$
$
$
Year Ended December 31,
2011
2010
$
23,576
6,969
16,607
8,671
9,802
1,213
19,686
(3,079)
524
9
(18)
68
583
(2,496)
(27)
(2,469)
21
(2,448)
(16)
(2,464) $
31,162
8,172
22,990
11,857
9,052
298
21,207
1,783
226
5
(16)
129
344
2,127
(298)
2,425
(120)
2,305
(16)
2,289
(0.23) $
0.21
10,507
10,507
10,704
10,825
See accompanying notes to consolidated financial statements.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Share Data)
Additional
Accumulated
Other
Preferred Stock Common Stock
Shares Amount Shares
Amount Capital
Deficit
Paid-In Accumulated
Comprehensive Total
Income (Loss) NHT
Noncontrolling
Interest
Total
BALANCE,
December 31,
2009
Net loss
Foreign
currency
translation
adjustments
Total
comprehensive
loss
Cancellation of
restricted stock
Stock-based
compensation
BALANCE,
December 31,
2010
Net income
Foreign
currency
translation
adjustments
Total
comprehensive
income
Issuance of
restricted
stock, net
Stock-based
compensation
BALANCE,
December 31,
2011
138,400 $
–
124 10,809,751 $
–
–
11 $ 80,239 $
–
–
(81,195) $
(2,448)
911 $
90 $
– (2,448)
(7) $
83
(21) (2,469)
–
–
–
–
–
–
(545)
(545)
(65)
(610)
–
–
–
(83,852)
–
–
–
–
–
175
–
–
–
–
–
–
–
175
–
175
(2,993)
(86) (3,079)
138,400
–
124 10,725,899
–
–
11 80,414
–
–
(83,643)
2,305
366 (2,728)
– 2,305
(93) (2,821)
120 2,425
–
–
–
–
–
–
(465)
(465)
(27)
(492)
–
–
–
600,424
–
–
–
–
–
79
–
–
–
–
–
–
–
79
–
79
1,840
93 1,933
138,400 $
124 11,326,323 $
11 $ 80,493 $
(81,338) $
(99) $ (809) $
– $ (809)
See accompanying notes to consolidated financial statements.
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization of property and equipment
Amortization of intangibles
Stock-based compensation
Loss on disposal of property and equipment
Gain on liquidation of MyLexxus Europe
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
Other current liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net
Increase in restricted cash
Net cash reduction from liquidation of MyLexxus Europe
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from related party
Repayment to related party
Dividend paid to noncontrolling interest
Net cash used in financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
Year Ended December 31,
2011
2010
$
(2,469) $
2,425
413
800
175
58
–
(28)
38
270
568
500
640
(40)
206
209
(1,553)
(79)
(292)
(2)
(1)
–
(3)
4
–
(62)
(58)
(551)
(904)
1,552
648
$
98
200
79
47
(65)
(30)
10
(345)
107
169
(908)
(332)
462
(319)
(67)
(68)
1,463
(7)
(72)
(57)
(136)
233
(237)
–
(4)
(354)
969
648
1,617
$
See accompanying notes to consolidated financial statements.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Natural Health Trends Corp. (the “Company”), a Delaware corporation, is an international direct-selling and e-commerce
company headquartered in Dallas, Texas. 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 distributor network that either uses
the products themselves or resells them to consumers.
Our majority-owned subsidiaries have an active physical presence in the following markets: North America; Greater China, which
consists of Hong Kong, Taiwan and China; Russia; South Korea; Japan; and Europe, which consists of Italy and Slovenia. In
July 2009, the Company activated an engagement with a service provider in Russia to provide storage, distribution and order
processing services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in consolidation.
In December 2011, the Company completed the liquidation of its non-operating, 51%-owned subsidiary MyLexxus Europe AG, a
Swiss corporation, and thereupon recognized a gain of $65,000 within other income. Cash of $57,000 was distributed to the
noncontrolling interest. As such, no noncontrolling interests are held in any consolidated subsidiary at December 31, 2011.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reported period.
The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates
associated with obsolete inventory and the fair value of acquired intangible assets, including goodwill, as well as those used in the
determination of liabilities related to sales returns and income taxes. Various assumptions and other factors prompt the
determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account
historical experience and current and expected economic conditions. The actual results may differ materially and adversely from the
Company’s estimates. To the extent that there are material differences between the estimates and actual results, future results of
operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash
equivalents. The Company includes in its cash and cash equivalents credit card receivables due from its major credit card processor,
which serves the Hong Kong, North America, Europe, and Japan markets, as the cash proceeds from credit card receivables are
received within two to five days.
The Company maintains certain cash balances at several institutions located in the United States which at times may exceed
insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit
risk.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Restricted Cash
The Company maintains a cash reserve with certain credit card processing companies to provide for potential uncollectible
amounts and chargebacks. Historically, cash reserves held by the Company’s primary credit card processor were generally
calculated as a percentage of sales over a rolling monthly time period. In April 2010, the processing company required that the
Company gradually increase to and maintain the reserve balance at $500,000. In January 2012, 50% of the reserve balance was
returned to the Company. The Company’s expectation is that its reserve requirement will revert back to a percentage of sales
calculation in the near future. These cash reserves are included in current assets.
Those cash reserves held by credit card companies located in South Korea are reflected in noncurrent assets since those cards
require the Company to provide 100% collateral before processing transactions, which must be maintained indefinitely.
Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost or market, using the first-in, first-out
method. 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. At December 31, 2010 and 2011, the reserve for obsolescence totaled
$59,000 and $43,000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally three to five years for office equipment and office
software, five to seven years for furniture and fixtures, and five years for plant equipment. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the assets. Expenditures for maintenance and repairs are charged to
expense as incurred.
Goodwill
The value of residual goodwill is not amortized, but is tested at least annually for impairment. During the fourth quarter of 2011,
the Company early adopted new guidance which simplifies the goodwill impairment test by allowing the option to first assess
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. Considerable management judgment is necessary to measure fair value. We did not recognize any
impairment charges for goodwill during the periods presented.
Impairment of Long-Lived Assets
The Company reviews property and equipment and determinable-lived intangibles for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by
comparison of its carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment
and determinable-lived intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the
carrying value of the asset exceeds its fair value.
Income Taxes
The Company recognizes income taxes under the liability method of accounting for income taxes. Deferred income taxes are
recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be ultimately realized. The Company recognizes tax benefits from uncertain tax
positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on
the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes
interest and penalties related to unrecognized tax benefits as a component of income tax expense. Deferred taxes are not provided
on the portion of undistributed earnings of subsidiaries outside of the United States when these earnings are considered permanently
reinvested.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 2008, and is no longer subject to state
income tax examinations for years prior to 2007. No jurisdictions are currently examining any income tax returns of the Company or
its subsidiaries.
Foreign Currency
The functional currency of the Company’s international subsidiaries is generally their local currency. Local currency assets and
liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Equity accounts are translated at historical rates. The resulting translation
adjustments are recorded directly into a separate component of stockholders’ equity and represents the only component of
accumulated other comprehensive income.
Revenue Recognition
Product sales are recorded when the products are shipped and title passes to independent distributors. Product sales to
distributors are made pursuant to a distributor agreement that provides for transfer of both title and risk of loss upon our delivery to
the carrier that completes delivery to the distributors, which is commonly referred to as “F.O.B. Shipping Point.” The Company
primarily receives payment by credit card at the time distributors place orders. Amounts received for unshipped product are recorded
as deferred revenue. The Company’s sales arrangements do not contain right of inspection or customer acceptance provisions other
than general rights of return.
Actual product returns are recorded as a reduction to net sales. The Company estimates and accrues a reserve for product
returns based on its return policies and historical experience.
Enrollment package revenue, including any nonrefundable set-up fees, is deferred and recognized over the term of the
arrangement, generally twelve months. Enrollment packages provide distributors access to both a personalized marketing website
and a business management system. No upfront costs are deferred as the amount is nominal.
Shipping charges billed to distributors are included in net sales. Costs associated with shipments are included in cost of sales.
Various taxes on the sale of products and enrollment packages to distributors 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 Commissions
Independent distributors earn commissions paid on product purchases made by their down-line distributors. Each of our
products are designated a specified number of sales volume points, which is essentially a percentage of the product’s wholesale
price, and commissions are based on total personal and group sales volume points per sales period. The Company accrues
commissions when earned and pays commissions on product sales generally two weeks following the end of the sales period.
Independent distributors may also earn incentives based on meeting certain qualifications during a designated incentive period,
which may range from several weeks to several months. These incentives may be both monetary and non-monetary in nature. The
Company accrues all costs associated with the incentives as the distributors meet the qualification requirements.
Selling, General and Administrative Expenses
During 2011 the Company successfully negotiated and entered into agreements with certain legacy and on-going vendors to
settle prior outstanding payable balances. The impact of such agreements to settle outstanding payable balances was $477,000 less
than carrying value, or $0.04 per share, which was immediately recognized as a credit to selling, general and administrative expenses
upon settlement.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock-Based Compensation
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.
Income Per Share
Basic income per share is computed by dividing net income applicable to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted income per share is determined using the weighted-average number of
common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of non-vested
restricted stock and shares that might be issued upon the exercise of outstanding stock options and warrants and the conversion of
preferred stock.
The dilutive effect of non-vested restricted stock, stock options and warrants is reflected by application of the treasury stock
method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of
compensation cost for future service that the Company has not yet recognized, and the amount of tax benefit that would be recorded
in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. The potential tax
benefit derived from exercise of non-qualified stock options has been excluded from the treasury stock calculation as the Company is
uncertain that the benefit will be realized.
The following tables illustrate the computation of basic and diluted income per share for the periods indicated (in thousands,
except per share data):
Year Ended December 31,
Loss
(Numerator)
2010
Shares
(Denominator)
Per Share
Amount
Income
(Numerator)
2011
Shares
(Denominator)
Per Share
Amount
$
(2,464)
10,507
$
(0.23) $
2,289
10,704
$
0.21
–
121
$
(2,464)
10,507
$
(0.23) $
2,289
10,825
$
0.21
Basic EPS:
Net income (loss) attributable to
common stockholders of
Natural Health Trends
Effect of dilutive securities:
Non-vested restricted stock
Diluted EPS:
Net income (loss) attributable to
common stockholders of
Natural Health Trends plus
assumed conversions
In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock
equivalents because their inclusion would be anti-dilutive. In periods where income is reported, certain non-vested restricted stock is
anti-dilutive upon applying the treasury stock method since the amount of compensation cost for future service results in the
hypothetical repurchase of shares exceeding the actual number of shares to be vested. Other common stock equivalents are also
anti-dilutive since the average market price of the related common stock for the period exceeds the exercise price.
The following securities were not included for the time periods indicated as their effect would have been anti-dilutive:
Options to purchase common stock
Warrants to purchase common stock
Non-vested restricted stock
Convertible preferred stock
Year Ended December 31,
2010
2011
27,500
3,704,854
412,112
138,400
22,500
3,704,854
40,415
138,400
Warrants to purchase 3,704,854 shares of common stock were still outstanding at December 31, 2011. Such warrants have
expirations through April 21, 2015.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
39
Certain Risks and Concentrations
A substantial portion of the Company’s sales are generated in Hong Kong (see Note 11). Most of the Company’s Hong Kong
revenue is 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 that the Company does not have, 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 to a third party that acts as the importer of record under an agreement to pay applicable duties. In addition, through a
Chinese entity the Company has launched an e-commerce retail platform in China. The Chinese entity operates separately from the
Hong Kong entity, although a Chinese member may elect to participate separately in both.
The Company believes that the laws and regulations in China regarding direct selling and multi-level marketing are not
specifically applicable to the Company’s Hong Kong based e-commerce activity, and that the Company’s Chinese entity 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 violates 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.
Although the Company attempts to work closely with both national and local Chinese governmental agencies in conducting the
Company’s 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, and activities by individual distributors 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’s 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 the Company’s
future ability to obtain business licenses or expand into new locations, changes to the Company’s 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.
Four major product lines - Premium Noni Juice™, Skindulgence™, Alura™ and La Vie™ - generated a significant majority of the
Company’s sales for 2010 and 2011. The Company obtains Skindulgence™ and La Vie™ product from a single supplier, and
Premium Noni Juice™ and Alura™ from two other suppliers. The Company believes that, in the event it is unable to source products
from these suppliers or other suppliers of its products, its revenue, income and cash flow could be adversely and materially impacted.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, restricted cash, 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.
Accounting standards permit companies, at their option, to choose to measure many financial instruments and certain other items
at fair value. The Company has elected to not fair value existing eligible items.
Recently Issued and Adopted Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-
08, Intangibles—Goodwill and Other (Topic 350) — Testing Goodwill for Impairment, to allow entities to use a qualitative approach to
test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary
to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not
required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011, with early adoption permitted. The Company adopted the amended accounting standard in the fourth quarter of
2011. The adoption did not have an impact on the Company's financial position or results of operations.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) —Presentation of Comprehensive
Income, to require an entity to present the total of comprehensive income, the components of net income, and the components of
other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement
of equity. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) — Deferral of the Effective
Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05, to defer the requirement for entities to present reclassification adjustments on the face of
the financial statements where net income is presented, by component of net income, and on the face of the financial statements
where other comprehensive income is presented, by component of other comprehensive income. All other requirements in ASU
2011-05 are not affected. Both ASU 2011-05 and ASU 2011-12 are effective for interim and annual financial periods beginning after
December 15, 2011. The Company does not expect adoption of this standard to have a material impact on its consolidated financial
statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 provides a consistent definition of fair value and
ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial
Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements
particularly for level 3 fair value measurements. This guidance will be effective for interim and annual reporting periods beginning
after December 15, 2011, and will be applied prospectively. The Company is currently evaluating the impact of adopting ASU 2011-
04, but believes there will be no significant impact on its consolidated financial statements.
Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the
Company’s present or future financial statements.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2. BALANCE SHEET COMPONENTS
The components of certain balance sheet amounts are as follows (in thousands):
Other current assets:
Product-related deposits
Prepaid insurance
Deferred commissions
Due from Russian service provider
Other
Property and equipment:
Office equipment
Office software
Furniture and fixtures
Plant equipment
Leasehold improvements
Property and equipment, at cost
Accumulated depreciation and amortization
Other accrued expenses:
Sales returns
Employee-related expense
Professional fees
Warehousing and inventory-related expense
Other
Deferred revenue:
Unshipped product
Enrollment package revenue
Other current liabilities:
Unclaimed checks
Other
42
December 31,
2010
2011
163
46
–
152
278
639
$
$
$
1,018
566
171
11
1,349
3,115
(2,912)
$
203
380
650
91
391
280
1,792
$
$
776
253
1,029
$
$
877
140
1,017
$
$
98
48
156
–
235
537
445
522
122
–
222
1,311
(1,243)
68
205
991
65
98
112
1,471
776
191
967
845
105
950
$
$
$
$
$
$
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
No changes occurred in the carrying amount of goodwill during 2010 and 2011. Intangible assets consist entirely of acquired
computer software and programs and are stated as follows (in thousands):
Gross carrying amount
Accumulated amortization
Net
Amortization expense was $800,000 and $200,000 during 2010 and 2011.
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
December 31,
2010
2011
$
$
$
5,600
(5,400)
$
200
5,600
(5,600)
–
The Company has entered into non-cancelable operating lease agreements for locations within the United States and for its
international subsidiaries, with expirations through July 2013. Rent expense in connection with operating leases was $1.1 million and
$744,000 during 2010 and 2011, respectively.
Future minimum lease obligations as of December 31, 2011, are as follows (in thousands):
2012
2013
Total minimum lease obligations
Purchase Commitment
$
$
487
103
590
The Company has entered into an agreement with one of its suppliers to purchase its product through December 2014. To
maintain this agreement, the Company is required to purchase a minimum of $220,000 of product in 2012. The minimum purchase
requirement in the following two years is dependent on the volume in the preceding year plus an incremental amount not to exceed
$40,000.
Employment Agreements
The Company has employment agreements with certain members of its management team that can be terminated by either the
employee or the Company upon four weeks’ notice. The employment agreements entered into with the management team contain
provisions that guarantee the 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. As of December 31, 2011, no outstanding obligations existed under any severance
agreements.
Consumer Indemnity
As required by the Door-to-Door Sales Act in South Korea, the Company maintains insurance for consumer indemnity claims with
a mutual aid cooperative by possessing a mutual aid contract with Mutual Aid Cooperative & Consumer (the “Cooperative”). The
contract secures payment to distributors in the event that the Company is unable to provide refunds to distributors. 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 distributor claims under the contract is equivalent to three months of rolling sales. At December 31, 2010 and 2011,
non-current other assets include KRW 260 million (USD $229,000) and KRW 100 million (USD $86,000), respectively, underlying the
contract, which can be utilized by the Cooperative to fund any outstanding distributor claims. The Company believes that the
likelihood of utilizing these funds to provide for distributors claims is remote.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
43
Registration Payment Arrangements
Pursuant to the agreement with the original investors and the placement agent in the May 2007 financing for the sale of 1,759,307
shares of Series A preferred stock and warrants representing the right to purchase 1,759,307 shares of common stock (see Note 5),
the Company is obligated for a specified period of time to maintain the effectiveness of the registration statement that was filed with
the Securities and Exchange Commission (the “SEC”) covering the resale of the shares of common stock issuable upon the exercise
of warrants issued in the financing. On March 18, 2010, the Company filed a post-effective amendment withdrawing unsold shares
from registration. If the Company fails to file a new registration statement, and maintain its effectiveness, then it may be liable for
payment in cash of an amount equal to 2% of the product of $1.70 times the number of shares of Series A preferred stock sold in the
financing to the relevant purchasers, or up to approximately $60,000, but only if the quoted closing price of the Company’s common
stock exceeds the warrant exercise price of the warrants. The exercise price of the warrants is $5.00 per share. Such warrants
expire May 4, 2013.
Pursuant to the agreement with the investors in the Company’s October 2007 financing of variable rate convertible debentures
having an aggregate face amount of $4,250,000, seven-year warrants to purchase 1,495,952 shares of the Company’s common
stock, 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, and
149,595 shares of common stock underlying certain five-year warrants issued to the placement agent in the transaction, were not
deemed Registrable Securities and were not included in the Registration Statement. If they are subsequently deemed Registrable
Securities and we fail to file a new registration statement covering them, 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.
As of December 31, 2011, no contingent obligations have been recognized under registration payment arrangements.
Legal Matters
On or about January 4, 2010, Steve Francisco sued the Company’s subsidiary, NHT Global, Inc., in the Superior Court for Orange
County, California, in Case No. 30-2010-00333395, styled Steve Francisco, Starsearch International, LLC, and Healthlik Resources,
LLC v. NHT Global, Inc., eKaire.com, Inc. and Does 1 through 20. Mr. Francisco sought damages for the alleged breach of a prior
settlement agreement under which NHT Global had agreed to pay Mr. Francisco payments of not less than $10,000 and not more
than $30,000 per month unless and until Mr. Francisco violated NHT Global’s policies and procedures. On March 12, 2009, NHT
Global had terminated payments to Mr. Francisco for violating the policies and procedures. Mr. Francisco sought recovery of
$100,000 in damages accrued through the date of filing of the lawsuit and an order requiring NHT Global to continue making the
monthly payments required by the settlement agreement, as well as an accounting, attorneys’ fees and costs. Mr. Francisco’s lawsuit
also sought payment of certain promissory notes in the aggregate amount of $102,000 made by eKaire.com, Inc., a former subsidiary
no longer affiliated with the Company, who separately answered the lawsuit. Trial of this lawsuit was set for February 14, 2011. On
February 14, 2011, the parties announced to the court that they had reached an oral settlement agreement that was pending
documentation. On or about March 8, 2011, NHT Global, Inc. and the plaintiffs in this lawsuit signed a Confidential Settlement
Agreement and Mutual Release, containing a mutually agreeable, confidential settlement of the case.
On or about June 9, 2010, the Company vacated the premises it leased at 2050 Diplomat Drive, Dallas, Texas, so that it could be
leased to a new tenant. The landlord, CLP Properties Texas, LP (the “Landlord”), terminated the lease as of June 17, 2010 and
entered into a lease with a new tenant. On or about August 17, 2010, the Company received the Landlord’s written demand for
payment of $413,000 for unpaid rent and other charges due under the lease through June 17, 2010. On September 30, 2010, CLP
Properties Texas, LP, sued the Company in the 116th Judicial District Court, Dallas County, Texas, in Cause No. 10-13043, styled
CLP Properties Texas, LP v. Natural Health Trends Corp. The lawsuit alleged breach of the lease and sought actual damages,
interest, costs and attorneys’ fees. The Company answered with a general denial, and gave notice to the Landlord that it intended to
assert an affirmative defense of failure to mitigate damages. On or about June 2, 2011, the parties signed a Settlement Agreement
under which the Company agreed to pay the Landlord $50,000 by June 3, 2011 and an additional $75,000 by September 15,
2011. These amounts were timely paid, and the lawsuit was dismissed with prejudice.
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Currently, there is no litigation pending against the Company. From time to time, the Company may become a party to litigation
and subject to claims incident to the ordinary course of the Company’s business. Although the results of such litigation and claims in
the ordinary course of business cannot be predicted with certainty, the Company believes that the final outcome of such matters will
not have a material adverse effect on the Company’s business, results of operations or financial condition. Regardless of outcome,
litigation can have an adverse impact on the Company because of defense costs, diversion of management resources and other
factors.
5. STOCKHOLDERS’ EQUITY
Authorized Shares
The Company is authorized to issue two classes of capital stock consisting of up to 5,000,000 shares of preferred stock, $0.001
par value, and 50,000,000 shares of common stock, $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:
·
·
·
·
·
Priority – the Series A preferred stock shall rank, in all respects, including the payment of dividends and upon liquidation,
senior and prior to the common stock and other equity of the Company not expressly made senior or pari passu with the
Series A preferred stock.
Dividends –dividends at the rate per annum of $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.
Liquidation preference – in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the
Company, then, before any distribution or payment shall be made to the holders of any junior securities, the holders of the
Series A preferred stock then outstanding shall be entitled to be paid in cash out of the assets of the Company available for
distribution to its stockholders (on a pari passu basis with the holders of any series of preferred stock ranking on liquidation on
a parity with the Series A preferred stock) an amount per share equal to the sum of the Series A Original Issue Price plus any
dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid
thereon. If the assets of the Company are insufficient to pay the aggregate liquidation preference and the liquidation
preference of any series of preferred stock ranking on liquidation on a parity with the Series A preferred stock, the holders of
the Series A preferred stock and the holders of any series of preferred stock ranking on liquidation on a parity with the
Series A preferred stock shall share ratably with one another in any such distribution or payment in proportion to the full
amounts to which they would otherwise be respectively entitled before any distribution shall be made to the holders of the
junior securities. The “Series A Original Issue Price” shall mean $1.70 per share, subject to adjustment.
Voting rights – the holders of shares of Series A preferred stock shall be entitled to vote with the holders of the common
stock, and with the holders of any other series of preferred stock, voting together as a single class, upon all matters submitted
to a vote of stockholders of the Company. Each holder of shares of Series A preferred stock shall be entitled to the number of
votes equal to the product (rounded down to the nearest number of whole shares) of 0.729 times the largest number of shares
of common stock into which all shares of Series A preferred stock held of record by such holder could then be converted.
Conversion – each share of Series A preferred stock shall be convertible, subject to adjustment only in the event of stock
splits, stock dividends, recapitalizations and similar events that would affect all of stockholders, 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.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On May 4, 2007, the Company consummated a private placement financing which included the sale of 1,759,307 shares of
Series A preferred stock at a price of $1.70 per share. During September and October 2007, an aggregate of 1,620,907 shares of
Series A preferred stock were converted into an equivalent number of shares of common stock. Cumulative unpaid dividends and the
liquidation preference relating to the Series A preferred stock at December 31, 2011 was $157,000 and $312,000, respectively. As of
December 31, 2011, 138,400 shares of Series A preferred stock were outstanding.
Common Stock Purchase Warrants
On May 4, 2007, the Company issued warrants to purchase 2,059,307 shares of common stock as a component of the May 2007
private equity placement. The warrants are exercisable at any time during the period beginning November 4, 2007 (six months after
their issuance) and ending May 4, 2013 (six years after their issuance). The exercise price of the warrants is $5.00 per share. The
number of shares of common stock for which the warrants are exercisable, and the related exercise price per share, are subject to
adjustment only in the event of stock splits, stock dividends, recapitalizations and similar events that would affect all stockholders.
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 have an exercise
price of $3.52 per share. The exercise price and the number of shares underlying the warrants are subject to adjustment for stock
dividends and splits, combinations, and reclassifications, certain rights offerings and distributions to common stockholders, and
mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share
exchanges. In addition, subject to certain exceptions, the exercise price and number of shares underlying the warrants are subject to
anti-dilution adjustments from time to time if the Company issues its common stock or equivalent securities at below the exercise price
for the warrants. If, at any time after the earlier of October 19, 2008 and the completion of the then applicable holding period under
Rule 144, there is no effective registration statement for the underlying shares of common stock that are then required to be
registered, the warrants may be exercised by means of a cashless exercise. Such one-year warrants expired unexercised on April
21, 2009.
At December 31, 2011, warrants to purchase 3,704,854 shares of common stock were outstanding. The weighted-average
remaining contractual life of outstanding warrants as of December 31, 2011 was 2.1 years.
6. STOCK-BASED COMPENSATION
The 2002 Stock Option Plan (the “2002 Plan”) provided for the granting of incentive and nonqualified stock options to employees,
officers of the Company, members of the Board of Directors, or consultants. The terms of any particular grant were determined by
the Board of Directors or a committee appointed by the Board of Directors. Historically, the terms ranged from five to ten
years. Stock options granted to employees and officers of the Company generally vested over three years, and stock options granted
to members of the Board of Directors generally vested immediately.
On 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 replaces in its entirety the 2002 Plan which was deemed terminated on November 17, 2006, the
date the Company’s stockholders approved the 2007 Plan. Awards made under the 2002 Plan, however, shall continue to be subject
to the terms of the 2002 Plan, except to the extent that either there is no conflict between the terms of the 2002 Plan and the terms of
the 2007 Plan with respect to such awards or the recipient consents to the applicability of the terms of the 2007 Plan to such awards.
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 of 1,550,000 shares of common stock replaces
those 1,550,000 shares available under the 2002 Plan. At our 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, 2011, 1,083 shares remain available to be granted under the 2007 Plan.
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Valuation and Expense Information under FASB ASC Topic 718
Stock-based compensation expense totaled approximately $175,000 and $79,000 for 2010 and 2011, respectively. No tax benefits
were attributed to the stock-based compensation because a valuation allowance was maintained for substantially all net deferred tax
assets.
The following table summarizes the Company’s stock option activity:
Shares
Wtd. Avg.
Exercise Price
Wtd. Avg.
Remaining
Contractual Life
Aggregate
Intrinsic Value1
Outstanding at December 31, 2009
Cancelled, forfeited or expired
Outstanding at December 31, 2010
Cancelled, forfeited or expired
Outstanding at December 31, 2011
27,500
$
(5,000)
22,500
(22,500)
–
1.80
1.80
1.80
1.80
–
–
$
–
1 Aggregate intrinsic value is defined as the positive difference between the current market value and the exercise price and is
estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates
indicated (in thousands).
47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
No stock options vested during 2010 and 2011. As of December 31, 2011, no unrecognized stock-based compensation expense
related to stock options is remaining.
A following table summarizes the Company’s restricted stock activity:
Outstanding at December 31, 2009
Granted
Vested
Forfeited
Outstanding at December 31, 2010
Granted
Vested
Forfeited
Outstanding at December 31, 2011
Wtd. Avg. Price
at Date of
Issuance
Shares
412,122
–
$
(224,693)
(72,816)
114,613
620,000
(242,177)
(18,748)
473,688
0.71
–
0.85
0.69
0.45
0.37
0.38
0.69
0.37
On May 12, 2011, the Company granted 600,000 shares of restricted stock under the 2007 Equity Incentive Plan to its executive
officers, directors, and certain key employees. An additional 20,000 shares were granted on October 19, 2011 to another key
employee. The restricted stock vests quarterly on a pro rata basis over a three-year period.
As of December 31, 2011, total unrecognized stock-based compensation expense related to non-vested restricted stock was
approximately $187,000, which is expected to be recognized over a weighted-average period of 2.2 years.
7. INCOME TAXES
The components of income (loss) before income taxes consist of the following (in thousands):
Domestic
Foreign
Income (loss) before income taxes
The components of the benefit from income taxes consist of the following (in thousands):
Current foreign taxes
Deferred taxes
Income tax benefit
48
Year Ended December 31,
2011
2010
(2,613) $
117
(2,496) $
(1,226)
3,353
2,127
Year Ended December 31,
2011
2010
2
$
(29)
(27) $
(268)
(30)
(298)
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A reconciliation of the reported benefit from income taxes to the amount that would result from applying the domestic federal
statutory tax rate to pretax income is as follows (in thousands):
Income tax at federal statutory rate
Effect of permanent differences
Increase (decrease) in valuation allowance
Foreign rate differential
True up of foreign tax balances
Change in enacted foreign rates
Other reconciling items
Income tax benefit
Deferred income taxes consist of the following (in thousands):
Deferred tax assets:
Net operating losses
Stock-based compensation
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
Year Ended December 31,
2011
2010
(849) $
3
678
(207)
–
340
8
(27) $
723
3
(109)
(485)
(424)
10
(16)
(298)
December 31,
2010
2011
$
14,871
391
39
501
76
84
15,962
(15,826)
136
(111)
(182)
(14)
(7)
(314)
(178) $
14,955
377
120
501
76
91
16,120
(16,055)
65
(43)
(148)
(15)
(7)
(213)
(148)
$
$
$
$
The Company increased the valuation allowance to equal its net deferred tax assets during 2005 due to the uncertainty of future
operating results. 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.
At December 31, 2011, the Company has net operating loss carryforwards of approximately $29.8 million that begin to expire in
2021, if not utilized. The Company also has foreign net operating loss carryforwards totaling $25.4 million in various jurisdictions with
various expirations. The Company has not provided for U.S. federal and foreign withholding taxes on the undistributed earnings of its
foreign subsidiaries as of December 31, 2011. Such earnings are intended to be reinvested indefinitely.
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes, net of refunds
Interest
9. RELATED PARTY TRANSACTIONS
Year Ended December 31,
2011
2010
(In Thousands)
$
$
21
18
53
16
On December 17, 2010, George Broady, a director of the Company and owner of more than 5% of its outstanding common stock,
advanced $4,000 to settle a claim against the Company. Mr. Broady advanced an additional $2,500 on January 13, 2011, and
$30,000 on March 14, 2011 to settle certain other claims against the Company. The aggregate amount of these advances totaling
$36,500 was repaid on August 8, 2011.
Additionally, Mr. Broady advanced $100,000 to the Company on February 28, 2011 and $100,000 on March 14, 2011. The
Company agreed to pay Mr. Broady interest of 9% per annum on the aggregate amount of the advances. The Company repaid Mr.
Broady in full, plus accumulated interest, during the third and fourth quarters of 2011.
The Company is considering entering into a Royalty Agreement and License Agreement with Broady Health Sciences, L.L.C.
(“BHS”) regarding the manufacture and sale of a new product called Restor™. BHS has patents pending on that product. Mr. Broady
is a member of BHS, a Texas limited liability company. During 2011, BHS permitted the Company to manufacture (or have
manufactured), market and sell the Restor™ product. To continue selling Restor™ and obtain certain exclusive rights outside of the
United States, BHS has requested that the Company reimburse up to $25,000 in expenses incurred in 2011and pay a royalty of
2.5% of sales revenues for 2011 and subsequent years. The Company is considering that proposal and discussing the terms of a
definitive agreement. At a royalty of 2.5% of net sales, the Company calculates that royalties for 2011 would be less than $12,000.
Royalties for 2012 would depend on sales of the Restor™ product in 2012.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan which permits participating employees in the United States to defer up to a
maximum of 90% of their compensation, subject to limitations established by the Internal Revenue Service. Employees age 21 and
older are eligible to contribute to the plan starting the first day of the following month of employment. Participating employees are
eligible to receive discretionary matching contributions and profit sharing, subject to certain conditions, from the Company. In 2010
and 2011 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 $47,000 and $62,000 for 2010 and 2011,
respectively, related to its matching contributions to the plan.
11. SEGMENT INFORMATION
The Company sells products to a distributor network that operates in a seamless manner from market to market, except for the
Chinese market. The Company believes that each of its operating segments should be aggregated into a single reportable segment
as they have similar economic characteristics. In making this determination, the Company believes that each of the 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.
The Company’s e-commerce retail business launched in China during June 2007 does not require a direct selling license and
allows for discounts on volume purchases. There is no separate segment manager who is held accountable 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.
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company’s net sales by market are as follows (in thousands):
Net sales to external customers:
North America
Hong Kong
China
Taiwan
South Korea
Japan
Russia
Europe
Total net sales
Year Ended December 31,
2011
2010
$
$
1,214
13,930
1,202
1,870
828
428
3,541
563
23,576
$
$
1,487
21,038
1,131
1,931
445
240
4,537
353
31,162
The Company’s long-lived assets, which consist of property and equipment and intangible assets, including goodwill, by market
are as follows (in thousands):
Long-lived assets:
North America
Hong Kong
China
Other foreign countries
Total long-lived assets
December 31,
2010
2011
$
$
1,995
39
79
54
2,167
$
$
1,768
9
41
14
1,832
Due to system constraints, it is impracticable for the Company to separately disclose product and enrollment package revenue for
the years presented.
12. LIQUIDITY
At December 31, 2011, the Company had cash and cash equivalents of $1.6 million and a working capital deficit of $3.1 million,
or $2.1 million excluding deferred revenue. Despite this working capital deficit, the Company believes that its existing internal
liquidity, supported by cash on hand and cash flows from operations should be adequate to fund normal business operations and
address its financial commitments for at least the next 12 months, assuming no significant unforeseen expense or further 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.
RDGXBRLParseEnd
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2011. The Company’s disclosure controls
and procedures are designed to ensure that information required to be disclosed by the Company 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’s 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,
2011, the Company’s disclosure controls and procedures were effective.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s 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.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluates the effectiveness of the Company’s internal control over financial reporting by using the criteria
established in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this criteria, management concluded that the Company’s internal control over financial reporting as
of December 31, 2011 was effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting
firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in
this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended December 31,
2011 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The biographical information for each director of the Company is set forth below:
Randall A. Mason. Mr. Mason has been a director of the Company since May 2003 and has served as Chairman of the Board of
Directors since March 2006. Mr. Mason founded and has served as President and Chief Executive Officer of Marden Rehabilitation
Associates, Inc. since 1989. Marden Rehabilitation Associates, Inc. is a private, Midwest U.S. ancillary provider of rehabilitative
therapy services and home healthcare. Mr. Mason is 53 years of age. He has a bachelor degree in chemical engineering from the
University of Pittsburgh.
Mr. Mason is an experienced businessman with valued insight into management, operations, finances and governance issues.
As a long-time member of the Company’s Board of Directors, Mr. Mason understands the business of the Company and potential
risks and pitfalls.
George Broady. Mr. Broady has served as a director of the Company since October 2008. He has been active in business for
more than 40 years, and he is currently the principal owner and chairman of several privately held companies in the fields of
telecommunications, enterprise software applications for time & attendance and security access control. Previously, he founded
Network Security Corporation, Interactive Technologies Inc. and Ultrak Inc., and brought each of them public on The NASDAQ Stock
Market. He was chairman of all three organizations and CEO of both Network Security and Ultrak. All three companies were
involved in electronic security, including CCTV and access control. Earlier in his career, Mr. Broady was an investment analyst with
both a private investment firm, Campbell Henderson & Co., and with the First National Bank in Dallas. Mr. Broady served twice in the
U.S. Army and holds a Bachelor of Science degree from Iowa State University. Mr. Broady is 73 years of age.
Mr. Broady is an experienced investor and businessman who also brings welcome insight into management, operations, and
finances. As a long-time investor in the Company, and incumbent director, Mr. Broady also understands the business of the
Company and its industry.
Executive Officers
Biographical information regarding the Company’s executive officers is as follows:
Chris T. Sharng. Mr. Sharng has served as President of the Company since February 2007. He previously served as Executive
Vice President and Chief Financial Officer of the Company from August 2004 to February 2007, although Mr. Sharng also performed
the functions of the principal executive officer of the Company from April 2006 to August 2006. From March 2006 to August 2006,
Mr. Sharng also served as a member of the Company’s Executive Management Committee, which was charged with managing the
Company’s day-to-day operations while a search was conducted for a new chief executive officer for the Company. From
March 2004 through July 2004, Mr. Sharng was the Chief Financial Officer of NorthPole Limited, a privately held Hong Kong-based
manufacturer and distributor of outdoor recreational equipment. From October 2000 through February 2004, Mr. Sharng was the
Senior Vice President and Chief Financial Officer of Ultrak Inc., which changed its name to American Building Control Inc. in 2002, a
Texas-based, publicly traded company listed on The NASDAQ Stock Market that designed and manufactured security systems and
products. From March 1989 through July 2000, Mr. Sharng worked at Mattel, Inc., most recently as the Vice President of
International Finance. Mr. Sharng is 48 years of age. Mr. Sharng has an MBA from Columbia University and received his bachelor
degree from National Taiwan University.
Timothy S. Davidson. Mr. Davidson has served as the Company’s Senior Vice President and Chief Financial Officer since
February 2007. He previously served as the Company’s Chief Accounting Officer from September 2004 to February 2007. From
February 2000 to February 2001, Mr. Davidson was Manager of Financial Reporting for a Dallas-based telecommunications
company, IP Communications, Inc. From March 2001 to September 2004, Mr. Davidson was Corporate Controller for another
telecommunications company, Celion Networks, Inc., located in Richardson, Texas. From December 1994 through January 2000,
Mr. Davidson was employed by Arthur Andersen, LLP, most recently as an Audit Manager. Mr. Davidson is 41 years of age.
Mr. Davidson has a master degree in professional accounting from the University of Texas at Austin and received his bachelor
degree from Texas A&M University at Commerce.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Gary C. Wallace. Mr. Wallace has served as the Company’s General Counsel, Chief Ethics and Compliance Officer and
Secretary since January 2006. Prior to that, Mr. Wallace was a shareholder in the Dallas, Texas law firm of de la Garza & Wallace,
PC since March 2001. Mr. Wallace has practiced business and corporate law in Dallas, Texas since 1982. Mr. Wallace is 55 years
of age. Mr. Wallace received his law degree and bachelor degree from the University of Texas at Austin.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive officers, and persons who own
more than 10% of a registered class of the Company’ equity securities, to file with the Securities and Exchange Commission (“SEC”)
initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company.
Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such reports furnished to the Company, during the fiscal year ended December 31,
2011, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied
with, except that, in November 2011, (a) Randall A. Mason, George Broady, Chris T. Sharng, Timothy S. Davidson and Gary C.
Wallace each filed a late Form 4 regarding the issuance to them of restricted common stock subject to vesting under the Company’s
2007 Equity Incentive Plan and (b) Mr. Broady filed two Form 4s reporting 39 additional late transactions.
Code of Ethics
The Company has a Code of Business Conduct that applies to our employees, officers (including its principal executive officer,
principal financial officer and principal accounting officer or controller) and directors and a Code of Ethics for Senior Financial Officers
(collectively, the “Codes”). The Codes are intended to establish standards necessary to deter wrongdoing and to promote compliance
with applicable governmental laws, rules and regulations and honest and ethical conduct. The Codes cover all areas of professional
conduct, including conflicts of interest, fair dealing, financial reporting and disclosure, protection of Company assets and
confidentiality. Employees have an obligation to promptly report any known or suspected violation of the Codes without fear of
retaliation. Waiver of any provision of the Codes for executive officers may only be granted by the Board of Directors or one of its
committees and any such waiver or modification of the Codes relating to such individuals will be disclosed by the Company on its
website. The Codes are available on the Company’s website, www.naturalhealthtrendscorp.com.
Audit Committee Matters
The Board of Directors maintains an Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act. Stefan W. Zuckut served as Chairman of the Audit Committee until February 17, 2010, when he resigned from the
Board of Directors. Mr. Mason and Mr. Broady continued to serve as members, although they did not meet as the Audit Committee,
or elect a new Chairman, until Mr. Mason was elected as Chairman on October 18, 2011. The Board of Directors has determined
that Mr. Mason meets the SEC criteria of an “audit committee financial expert.”
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 11. EXECUTIVE COMPENSATION
The following table provides information concerning the compensation for the years ended December 31, 2010 and 2011, for our
principal executive officer and two other executive officers (collectively, the “Named Executive Officers”):
Name and Principal Position
Chris T. Sharng, President
Timothy S. Davidson, Senior Vice
President and
Chief Financial Officer
Gary C. Wallace, General Counsel
Year
2010
2011
2010
2011
2010
2011
Summary Compensation Table
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
All Other
Compensation
($)
Total
($)
$
250,000
307,692
$
$
–
22,500
$
–
45,000
11,025 (2) $
39,237 (3)
261,025
414,429
180,000
201,154
190,000
213,077
–
16,200
–
17,100
–
27,000
–
27,000
8,100 (2)
20,721 (4)
188,100
265,075
1,900 (2)
21,734 (5)
191,900
278,911
(1) The amounts appearing in the Stock Awards column represent the aggregate grant date fair value computed in accordance with
FASB ASC Topic 718. See Note 6 of Notes to Consolidated Financial Statements included in “Part II. Item 8. Financial
Statements and Supplementary Data,” and “Named Executive Officer Compensation Arrangements” below.
(2) Represents employer matching contributions under the Company’s defined contribution plan.
(3) Represents $11,025 in employer matching contributions under the Company’s defined contribution plan and $28,212 in tax gross-
up payments.
(4) Represents $9,052 in employer matching contributions under the Company’s defined contribution plan and $11,669 in tax gross-
up payments.
(5) Represents $8,049 in employer matching contributions under the Company’s defined contribution plan and $13,685 in tax gross-
up payments.
The following tables summarize all outstanding equity awards held by our Named Executive Officers as of December 31, 2011:
Outstanding Equity Awards at December 31, 2011
Number of Shares
or Units of Stock
That Have Not
Vested (#)
Market Value of
Shares or Units of
Stock That Have
Not Vested ($)(1)
Equity Incentive Plan
Awards: Number of
Unearned Shares, Units or
Other Rights That Have
Not Vested
(#)
Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares, Units
or Other Rights That
Have Not Vested
($)
Chris T. Sharng
Timothy S. Davidson
Gary C. Wallace
1,663 (2) $
93,749 (3)
782 (2)
56,250 (3)
413 (2)
56,250 (3)
1,081
60,937
508
36,563
268
36,563
(1) Market value is computed by multiplying the closing market price of the Company’s stock as of December 31, 2011 of $0.65
per share by the number of shares of stock that have not vested.
(2) One-twelfth of the original grant of shares will vest quarterly on March 15, June 15, September 15, and December 15 through
March 15, 2012.
(3) One-twelfth of the original grant of will vest quarterly on March 15, June 15, September 15, and December 15 through
March 15, 2014.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Named Executive Officer Compensation Arrangements
Chris T. Sharng. On April 23, 2007, we entered into an employment agreement with Mr. Sharng that provides for a base annual
salary of $250,000. Mr. Sharng is also entitled to participate in our annual incentive plan, equity incentive plan and other standard
U.S. employee benefit programs. During 2011, Mr. Sharng received a gross-up payment for federal taxes incurred for each restricted
stock vesting date from June 15, 2009 to June 15, 2011. Mr. Sharng is also entitled to receive certain gross-up payments on federal
taxes due upon vesting of restricted stock grants on or after September 15, 2011. Mr. Sharng’s base annual salary was raised to
$400,000 effective August 1, 2011. Mr. Sharng was awarded discretionary bonuses in the aggregate amount of $22,500 in 2011.
Timothy S. Davidson. On April 23, 2007, we entered into an employment agreement with Mr. Davidson that provides for a base
annual salary of $180,000. Mr. Davidson is also entitled to participate in our annual incentive plan, equity incentive plan and other
standard U.S. employee benefit programs. During 2011, Mr. Davidson received a gross-up payment for federal taxes incurred for
each restricted stock vesting date from September 15, 2009 to June 15, 2011. Mr. Davidson is also entitled to receive certain gross-
up payments on federal taxes due upon vesting of restricted stock grants on or after September 15, 2011. Mr. Davidson’s base annual
salary was raised to $235,000 effective August 1, 2011. Mr. Davidson was awarded discretionary bonuses in the aggregate amount
of $16,200 in 2011.
Gary C. Wallace. On April 23, 2007, we entered into an employment agreement with Mr. Wallace that provides for a base annual
salary of $190,000. Mr. Wallace is also entitled to participate in our annual incentive plan, equity incentive plan and other standard
U.S. employee benefit programs. During 2011, Mr. Wallace received a gross-up payment for federal taxes incurred for each
restricted stock vesting date from June 15, 2009 to June 15, 2011. Mr. Wallace is also entitled to receive certain gross-up payments
on federal taxes due upon vesting of restricted stock grants on or after September 15, 2011. Mr. Wallace’s base annual salary was
raised to $250,000 effective August 1, 2011. Mr. Wallace was awarded discretionary bonuses in the aggregate amount of $17,100 in
2011.
On and after September 15, 2011, the aggregate amount of all tax gross-up payments to executive officers and directors may not
exceed $30,000 per quarter, provided that the unused portion of each quarter’s cap is rolled over to future quarters.
In January 2012, the Compensation Committee awarded bonuses of $150,000 to Mr. Sharng, $50,000 to Mr. Davidson, and
$24,000 to Mr. Wallace. These bonuses are payable over 12 months beginning in January 2012, and each payment is contingent
upon the award recipient being employed at the time of payment. The unpaid portion of any bonus at the time that employment is
terminated is forfeited. In awarding these bonuses, the Compensation Committee awarded discretionary amounts after finding that
the estimated financial results for fiscal 2011 achieved the Committee’s revenue and earnings performance goals for 2011.
Restricted Stock Grants. On May 12, 2011, the Company awarded 125,000, 75,000 and 75,000 shares of restricted stock to
Messrs. Sharng, Davidson, and Wallace, respectively, under the Company’s 2007 Equity Incentive Plan. No shares of restricted
stock were awarded to our Named Executive Officers during 2010.
Severance and Post-Termination Payment Arrangements
We have entered into employment agreements with each of our Named Executive Officers. Under these agreements, we may be
required to provide compensation to these officers in the event of the termination of the executive’s employment. Details for each
named executive officer are set forth below.
Chris T. Sharng. Our current employment agreement with Mr. Sharng that was entered into on April 23, 2007 provides that if
Mr. Sharng’s employment with us is terminated voluntarily by him for “good reason” that has not been cured by us within 30 days of
such notice, or is terminated by us without cause, other than in connection with a change of control, then Mr. Sharng will be entitled
to the continuation of the payment of his salary, plus health and medical insurance coverage, for a period of up to one year following
the termination date, or until the earlier date upon which he becomes engaged in any “competitive activity” or breaches the terms of
his Non-Competition Agreement with us.
If Mr. Sharng’s employment with us is terminated by us without cause during the period commencing on the date that is 30 days
prior to a change of control through and including a date that is 18 months following the change of control, he is entitled to the
continuation of the payment of his salary, plus health and medical insurance coverage for a period of up to two years, plus health and
medical insurance coverage for the same two year period following the termination date. This payment is due in a lump sum 30 days
after the termination date.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In order to be entitled to receive the severance amount in either of the above scenarios, Mr. Sharng must execute a full general
release of all claims against us and our affiliates.
A “change of control” is defined as: (i) When any “person” as defined in Section 3(a)(9) of the Securities and Exchange Act of
1934, as amended, and as used in Section 13(d) and 14(d) thereof including a “group” as defined in Section 13(d) of the Exchange
Act, but excluding the Company or any subsidiary or any affiliate of the Company or any employee benefit plan sponsored or
maintained by the Company or any subsidiary of the Company (including any trustee of such plan acting as trustee), becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing more than 50% of
the combined voting power of the Company’s then outstanding securities; or (ii) when, during any period of 24 consecutive months,
the individuals who, at the beginning of such period constituted the Board of Directors (the “Incumbent Directors”) cease for any
reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if
such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24 month period) or through the
operation of this provision; or (iii) the occurrence of a transaction requiring stockholder approval under applicable state law for the
acquisition of the Company by an entity other than the Company or a subsidiary or an affiliated company of the Company through
purchase of assets, or by merger, or otherwise; provided however, that none of the foregoing shall constitute a change of control if
such transaction, event or occurrence is approved by, or consented to, by Mr. Sharng.
Mr. Sharng will be subject to a covenant not to compete for one year, and a non-solicitation covenant for two years, following his
termination and thereafter as long as his severance payments continue (other than severance in connection with a change of
control).
Timothy S. Davidson. Our employment agreement with Mr. Davidson that was entered into on April 23, 2007, contains the same
severance, change of control, non-competition and non-solicitation provisions as those set out in our agreement with Mr. Sharng
dated April 23, 2007.
Gary C. Wallace. Our employment agreement with Mr. Wallace that was entered into on April 23, 2007, contains the same
severance, change of control, non-competition and non-solicitation provisions as those set out in our agreement with Mr. Sharng
dated April 23, 2007.
Director Compensation
In 2011, each member of our Board of Directors earned a cash retainer of $3,333 per month, plus the reimbursement of their
respective out-of-pocket expenses incurred in connection with the performance of their duties as directors, as well as a discretionary
restricted stock award. In addition, Mr. Mason earned an additional retainer of $2,000 per month as Chairman of the Board. Starting
in 2011, directors are also entitled to receive certain gross-up payments on federal taxes due upon vesting of restricted stock grants to
them. In addition, as additional compensation for his services as the Chairman of the Board, Mr. Mason is entitled to receive $54,000
as a gross-up payment for federal taxes incurred with respect to restricted stock granted in 2007, payable in quarterly installments of
$4,500 beginning September 15, 2011. On and after September 15, 2011, the aggregate amount of all tax gross-up payments to
executive officers and directors may not exceed $30,000 per quarter, provided that the unused portion of each quarter’s cap is rolled
over to future quarters.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table shows the 2011 compensation earned by each member of the Company’s Board of Directors:
2011 Director Compensation
Name
Randall A. Mason
George K. Broady
Fees Earned
or Paid in
Cash ($)
Stock
Awards ($)(1)
All Other
Compensation
($)
Total ($)
$
$
64,000
40,000
18,000 (2) $
18,000 (3)
13,985 (4) $
4,985 (5)
95,985
62,985
(1) The amounts appearing in the Stock Awards column represent the aggregate grant date fair value computed in accordance
with FASB ASC Topic 718. See Note 6 of Notes to Consolidated Financial Statements included in “Part II. Item 8. Financial
Statements and Supplementary Data.”
(2) The aggregate number of stock awards to Mr. Mason outstanding as of December 31, 2011 was 38,749 shares.
(3) The aggregate number of stock awards to Mr. Broady outstanding as of December 31, 2011 was 38,749 shares.
(4) Represents $9,000 in tax gross-up payments for restricted stock granted in 2007 and $4,985 in tax gross-up payments for
2011.
(5) Represents tax gross-up payments for 2011.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table shows the amount of the Company’s common stock beneficially owned (unless otherwise indicated) as of
March 21, 2012 by (i) each stockholder we know is the beneficial owner of more than 5% of the Company’s common stock, (ii) each
director or director nominee, (iii) each of the executive officers named in the Summary Compensation Table set forth under
“Compensation of Named Executive Officers” and (iv) all executive officers and directors as a group. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities and Exchange Commission and generally includes those
persons who have voting or investment power with respect to the securities. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and investment power with respect to all shares of the
Company’s common stock beneficially owned by them.
Name and Address of Beneficial Owner (1)
Executive Officers and Directors:
Chris T. Sharng
Timothy S. Davidson
Gary C. Wallace
Randall A. Mason
George K. Broady
All executive officers and directors as a group (5 persons)
5% of More Stockholders:
Robert L. Frome
Park Avenue Tower
65 East 55th Street
New York, NY 10022
Big Rich International Ltd.
4010 Gloucester Tower, The Landmark
11 Pedder Street
Central
Hong Kong
Amount and Nature
of Beneficial
Ownership (2)
Percent of Class (2)
413,311 (3)
194,150 (4)
173,542 (5)
262,400 (6)
2,542,136 (7)
3,585,539 (8)
3.6%
1.7%
1.5%
2.3%
22.3%
31.5%
734,925 (9)
6.5%
941,171 (10)
7.7%
(1) Unless otherwise indicated, the address of each beneficial owner is c/o Natural Health Trends Corp., 2603 Oak Lawn
Avenue, 5th Floor, Dallas, Texas 75219.
(2) Any securities not outstanding that are subject to options or conversion privileges exercisable within 60 days of March 21,
2012 are deemed outstanding for the purpose of computing the percentage of outstanding securities of the class owned by
any person holding such securities, but are not deemed outstanding for the purpose of computing the percentage of the class
owned by any other person in accordance with Item 403 of Regulation S-K of the Securities Exchange Act of 1933 and
Rules 13(d)-3 of the Securities Exchange Act, and based upon 11,326,323 shares of common stock outstanding as of March
21, 2012.
Includes (i) 83,332 shares of restricted stock subject to vesting. Mr. Sharng shares voting and investment power over 15,500
of the shares with his wife.
Includes 50,000 shares of restricted stock subject to vesting.
Includes 50,000 shares of restricted stock subject to vesting.
Includes (i) 27,399 shares owned by Marden Rehabilitation Associates, Inc., an entity controlled by Mr. Mason, and
(ii) 33,332 shares of restricted stock subject to vesting.
Includes (i) 61,693 shares of common stock issuable upon the conversion of shares of Series A preferred stock, (ii) 61,693
shares of common stock issuable upon the exercise of warrants held by Mr. Broady, and (iii) 33,332 shares of restricted stock
subject to vesting.
Includes (i) 61,693 shares of common stock issuable upon the conversion of shares of Series A preferred stock held by Mr.
Broady, (ii) 61,693 shares of common stock issuable upon the exercise of warrants held by Mr. Broady, and (iii) 249,996
shares of restricted stock held by our directors and executive officers that are subject to vesting.
Includes (i) 14,707 shares of common stock issuable upon the conversion of shares of Series A preferred stock; (ii) 14,707
shares of common stock issuable upon the exercise of warrants held by Mr. Frome; (iii) 100,000 shares owned by Frome &
Co., a family partnership, which Mr. Frome is the general partner; (iv) 30,000 shares held by the Jennifer Frome Trust, which
Mr. Frome is the trustee; and (v) 30,000 shares owned by his wife. Information is based in part on the Amendment No. 2 to
Schedule 13G filed by Mr. Frome with the U.S. Securities and Exchange Commission (the "SEC") on February 9, 2012.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(10)
Includes 941,171 shares of common stock issuable upon the exercise of warrants held by Big Rich International, Ltd., a
limited partnership organized under the laws of the British Virgin Islands (“Big Rich”). Xiaoli Duan is the general partner of Big
Rich and as such may be deemed to be the beneficial owner of such shares. Information is based on the Schedule 13G filed
by Big Rich with the SEC on November 5, 2007.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
On December 17, 2010, George Broady, a director of the Company and owner of more than 5% of its outstanding common stock,
advanced $4,000 to settle a claim against the Company. Mr. Broady advanced an additional $2,500 on January 13, 2011, and
$30,000 on March 14, 2011 to settle certain other claims against the Company. The aggregate amount of these advances totaling
$36,500 was repaid on August 8, 2011.
Additionally, Mr. Broady advanced $100,000 to the Company on February 28, 2011 and $100,000 on March 14, 2011. The
Company agreed to pay Mr. Broady interest of 9% per annum on the aggregate amount of these advances. The Company repaid
Mr. Broady in full, plus accumulated interest, during the third and fourth quarters of 2011.
The Company is considering entering into a Royalty Agreement and License Agreement with Broady Health Sciences, L.L.C.
(“BHS”) regarding the manufacture and sale of a new product called Restor™. BHS has patents pending on that product. Mr. Broady
is a member of BHS, a Texas limited liability company. During 2011, BHS permitted the Company to manufacture (or have
manufactured), market and sell the Restor™ product. To continue selling Restor™ and obtain certain exclusive rights outside of the
United States, BHS has requested that the Company reimburse up to $25,000 in expenses incurred in 2011and pay a royalty of
2.5% of sales revenues for 2011 and subsequent years. The Company is considering that proposal and discussing the terms of a
definitive agreement. At a royalty of 2.5% of net sales, the Company calculates that royalties for 2011 would be less than $12,000.
Royalties for 2012 would depend on sales of the Restor™ product in 2012. The transaction will be subject to review and approval by
the non-interested member of the Board of Directors.
Director Independence
The Board of Directors has adopted the requirements in Nasdaq Marketplace Rule 4200(a)(15) as its standard in determining the
“independence” of members of its Board of Directors. The Board of Directors has determined that Randall A. Mason, who served as a
director of the Company during all of 2011, qualifies as an “independent director” under these standards.
Messrs. Mason and Broady are the only current members of the Board of Directors of the Company, and each of them serves as
a member of the Company’s Audit Committee and Compensation Committee. Mr. Mason is the Chairman of both of those
committees and is currently the Chairman and only member of the Nominating Committee.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During 2010 and 2011, approximate fees billed to the Company for services provided by Lane Gorman Trubitt, PLLC (“Lane
Gorman”), were as follows:
Audit Fees. Fees billed to the Company by Lane Gorman for the audit of our annual financial statements and review of our
quarterly financial statements during the year ended December 31, 2011 totaled $150,000. No fees were billed to the Company by
Lane Gorman during the year ended December 31, 2010.
Audit-Related Fees. No audit-related fees were billed to the Company by Lane Gorman for services rendered during the years
ended December 31, 2010 or 2011.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Tax Fees. There were no fees billed to the Company by Lane Gorman for services rendered in connection with tax compliance,
planning and advice during the years ended December 31, 2010 or 2011.
All Other Fees. There were no fees billed by Lane Gorman for services other than audit fees, audit-related fees or tax fees
during the years ended December 31, 2010 or 2011.
Pre-approval Policies and Procedures for Audit and Non-Audit Services
Consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit
services require pre-approval by the Audit Committee. All audit and permitted non-audit services performed by Lane Gorman during
2010 and 2011 were pre-approved.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Form 10-K:
Part IV
1. Financial Statements. See Index to Consolidated Financial Statements under Item 8 of Part II.
2. Financial Statement Schedules. Except as provided below, all financial statement schedules have been omitted because
they are not required, not applicable, or because the required information is shown in the financial statements or notes
thereto.
Schedule II – Valuation and Qualifying Accounts
Column A
Column B Column C Column D Column E
Description
Reserve for obsolete inventory
Year ended December 31, 2011
Year ended December 31, 2010
Accrual for sales returns
Year ended December 31, 2011
Year ended December 31, 2010
Balance at
Beginning of
Period
Charged to
Costs and
Expenses/
Against Net
Sales (1)
Deductions
(2)
Balance at
End of Period
(In Thousands)
$
$
$
$
59
273
$
$
23
16
$
$
(39) $
(230) $
380
268
$
$
548
646
$
$
(723) $
(534) $
43
59
205
380
(1) Additions to the reserve for obsolete inventory are charged to cost of sales. Additions to the accrual for sales returns are
recorded as a reduction to net sales.
(2) Deductions to the reserve for obsolete inventory reflect disposals of obsolete inventory. Deductions to the accrual for sales
returns reflect amounts refunded.
3. Exhibits. The exhibits listed on the accompanying Exhibit Index are filed as a part of, and are incorporated by reference into,
this report.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
SIGNATURES
Date: March 27, 2012
NATURAL HEALTH TRENDS CORP.
/s/ Chris T. Sharng
Chris T. Sharng
President
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Natural Health Trends Corp., a Delaware corporation, and the undersigned
directors and officers of Natural Health Trends Corp., hereby constitutes and appoints Chris T. Sharng and Gary C. Wallace, or any
one of them, its, his or her true and lawful attorney-in-fact and agent, for it, him or her and in its, his or her name, place and stead, in
any and all capacities, with full power to act alone, to sign any and all amendments to this report, and to file each such amendment to
the report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it, he or she might or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Chris T. Sharng
Chris T. Sharng
/s/ Timothy S. Davidson
Timothy S. Davidson
/s/ Randall A. Mason
Randall A. Mason
/s/ George K. Broady
George K. Broady
President
(Principal Executive Officer)
March 27, 2012
Senior Vice President and Chief Financial Officer March 27, 2012
(Principal Financial and Accounting Officer)
Chairman of the Board and Director
March 27, 2012
Director
March 27, 2012
62
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Exhibit
Number
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit Description
3.1 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).
3.2 Certificate of Designations, Rights and Preferences of the Series A Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on May 9, 2007).
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 Form of Warrant to Purchase Shares of Common Stock of the Company, dated May 4, 2007 and issued to certain
Purchasers (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on May 9, 2007).
10.2 Form of Seven Year and Five Year Warrants to Purchase Shares of Common Stock of the Company issued by the
Company to certain purchasers (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on
October 22, 2007).
+10.3 2002 Stock Plan, as amended (incorporated by reference to Appendix C to Definitive Proxy Statement filed on April 27,
2005).
+10.4 Form of Notice of Grant of Stock Option Agreement under the Company’s 2002 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 1, 2005).
+10.5 2007 Annual Incentive Plan (incorporated by reference to Appendix A to Definitive Proxy Statement filed on October 20,
2006).
+10.6 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).
+10.7 Form 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).
+10.8 Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Chris
Sharng, dated April 23, 2007 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 26,
2007).
+10.9 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).
+10.10 Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Gary C.
Wallace dated April 23, 2007 (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on April 26,
2007).
+10.11 Form of Indemnification Agreement dated December 13, 2005, 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 December 13, 2005).
14.1 Worldwide Code of Business Conduct, as revised (incorporated by reference to Exhibit 14.1 to Annual Report on Form 10-
K filed on March 28, 2007).
14.2 Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.2 to Annual Report on Form 10-K filed
on March 31, 2005).
21.1 Subsidiaries of the Company (filed herewith).
24.1 Power of Attorney (see signature page).
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).
101 The following financial information from Natural Health Trends Corp.’s Annual Report on Form 10-K for the year ended
December 31, 2011 filed with the SEC on March 27, 2012, formatted in XBRL includes: (i) Consolidated Balance Sheets
as of December 31, 2010 and 2011, (ii) Consolidated Statements of Operations for the years ended December 31, 2010
and 2011, (iii) Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss for the years ended December
31, 2010 and 2011, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2011, and (v)
the Notes to Consolidated Financial Statements.
+ Management contract or compensatory plan
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SUBSIDIARIES OF THE REGISTRANT
NATURAL HEALTH TRENDS CORP.
A DELAWARE CORPORATION
EXHIBIT 21.1
Jurisdiction
United States (Delaware)
United States (Delaware)
Canada
Cayman Islands
Cayman Islands
Cayman Islands
Cayman Islands
China
Hong Kong
Japan
South Korea
Slovenia
Italy
Name
NHT Global, Inc.
NHTC International, LLC
NHT Global (Canada) Company
NHTC Holding Company
NHT Global Taiwan Company
NHTC Trading Company
NHT Global CIS Company
NHT Global (China) Corporation
NHT Global Hong Kong Limited
Natural Health Trends Japan, Inc.
NHTK Ltd.
NHT Slovenia, Ltd.
NHT Global Europe S.R.L.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION
EXHIBIT 31.1
I, Chris T. Sharng, certify that:
1. I have reviewed this report on Form 10-K of Natural Health Trends Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 27, 2012
/s/ Chris T. Sharng
Chris T. Sharng
President
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION
EXHIBIT 31.2
I, Timothy S. Davidson, certify that:
1. I have reviewed this report on Form 10-K of Natural Health Trends Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 27, 2012
/s/ Timothy S. Davidson
Timothy S. Davidson
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Natural Health Trends Corp. (the “Company”) on Form 10-K for the period ended
December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Chris T. Sharng,
and Timothy S. Davidson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to the best of our knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 27, 2012
/s/ Chris T. Sharng
Chris T. Sharng
President
(Principal Executive Officer)
Date: March 27, 2012
/s/ Timothy S. Davidson
Timothy S. Davidson
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.