NATURAL HEALTH TRENDS CORP

Previous wording

As of June 30, 2024, we were conducting business through 31,110 active members, compared to 32,410 at December 31, 2023 and 36,730 at June 30, 2023. We consider a member “active” if they have placed at least one product order with us during the preceding year. Our priority is to focus our resources in our most promising markets, which we consider to be Greater China and countries where our existing members have the connections to recruit prospects and sell our products, such as Southeast Asia, India, South America and Europe.

Current wording

As of September 30, 2024, we were conducting business through 30,880 active members, compared to 32,410 at December 31, 2023 and 34,660 at September 30, 2023. We consider a member “active” if they have placed at least one product order with us during the preceding year. Our priority is to focus our resources in our most promising markets, which we consider to be Greater China and countries where our existing members have the connections to recruit prospects and sell our products, such as Southeast Asia, India, South America and Europe.

Previous wording

We generate approximately 93% of our net sales from subsidiaries located outside the Americas, with sales of our Hong Kong subsidiary representing 81% of net sales in the latest fiscal quarter. Because of the size of our foreign operations, operating results can be impacted negatively or positively by factors such as foreign currency fluctuations, inflation rates, 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 uncertain risks for our business, including improper claims or activities by our members and our potential inability to obtain necessary product registrations. We continually evaluate our business for compliance with applicable laws and regulations, and this process can and has resulted in the identification of certain matters of potential noncompliance, which we work to satisfactorily address. For further information regarding some of the risks associated with the conduct of our business in China and Hong Kong, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and more specifically under the captions “Because our Hong Kong operations account for a substantial portion of our overall business...”, “Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong...”, and “Our business in China is subject to compliance with a myriad of applicable laws and regulations...”.

Current wording

We generate approximately 93% of our net sales from subsidiaries located outside the Americas, with sales of our Hong Kong subsidiary representing 78% of net sales in the latest fiscal quarter. Because of the size of our foreign operations, operating results can be impacted negatively or positively by factors such as foreign currency fluctuations, inflation rates, 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 uncertain risks for our business, including improper claims or activities by our members and our potential inability to obtain necessary product registrations. We continually evaluate our business for compliance with applicable laws and regulations, and this process can and has resulted in the identification of certain matters of potential noncompliance, which we work to satisfactorily address. For further information regarding some of the risks associated with the conduct of our business in China and Hong Kong, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and more specifically under the captions “Because our Hong Kong operations account for a substantial portion of our overall business...”, “Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong...”, and “Our business in China is subject to compliance with a myriad of applicable laws and regulations...”.

Previous wording

In late 2019 or early 2020 an outbreak of COVID-19 was first identified in China and subsequently spread around the world. On March 11, 2020 the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak caused the Chinese government to implement powerful measures to control the virus, such as requiring businesses to close throughout various areas of China and restricting public gatherings and certain travel within the country. We have significant business in China and in 2023 generated approximately 79% of our revenue in Hong Kong, substantially all of which was derived from the sale of products to members in China. Over the course of the pandemic, we took steps to adapt some of our marketing programs, such as relying on certain product promotions and webcast training, to overcome the physical restrictions imposed in response to the pandemic. In late 2022, the Chinese and Hong Kong governments took comprehensive steps to relax many of their COVID-19 control measures, although the cumulative effect of the disruptions associated with the pandemic materially negatively impacted our financial results from 2020 through 2022. This less restrictive business environment in China and Hong Kong continued throughout 2023 and the first six months of 2024, and we have been able to sponsor a number of in-person member events in China, Hong Kong and/or Macau during each quarter since the first quarter of 2023. We are planning more such events and are hopeful that we will continue to normalize operations in China and Hong Kong. Nevertheless, it is still too early to accurately predict the impact on us and our third-party providers of this relaxation of control measures and whether it will prove enduring. Ultimately, the severity of the impact on us of the COVID-19 pandemic will depend on future developments, including the duration and spread of the virus, and the related control measures, which we are unable to accurately predict. See “Item 1A. Risk Factors - Epidemics, such as the COVID-19 pandemic, or natural disasters, terrorist attacks or acts of war…” in our most recent Annual Report on Form 10-K.

Current wording

In late 2019 or early 2020 an outbreak of COVID-19 was first identified in China and subsequently spread around the world. On March 11, 2020 the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak caused the Chinese government to implement powerful measures to control the virus, such as requiring businesses to close throughout various areas of China and restricting public gatherings and certain travel within the country. We have significant business in China and in 2023 generated approximately 79% of our revenue in Hong Kong, substantially all of which was derived from the sale of products to members in China. Over the course of the pandemic, we took steps to adapt some of our marketing programs, such as relying on certain product promotions and webcast training, to overcome the physical restrictions imposed in response to the pandemic. In late 2022, the Chinese and Hong Kong governments took comprehensive steps to relax many of their COVID-19 control measures, although the cumulative effect of the disruptions associated with the pandemic materially negatively impacted our financial results from 2020 through 2022. This less restrictive business environment in China and Hong Kong continued throughout 2023 and the first nine months of 2024, and we have been able to sponsor in-person member events in China, Hong Kong and/or Macau during each quarter since the first quarter of 2023. We are continuing to plan and sponsor more such events consistent with normal operations. Nevertheless, it may be too early to accurately predict the impact on us and our third-party providers of this relaxation of control measures and whether it will prove enduring. Ultimately, the severity of the impact on us of the COVID-19 pandemic will depend on future developments, including the duration and spread of the virus, and the related control measures, which we are unable to accurately predict. See “Item 1A. Risk Factors - Epidemics, such as the COVID-19 pandemic, or natural disasters, terrorist attacks or acts of war…” in our most recent Annual Report on Form 10-K.

Previous wording

Recent political and social developments in Hong Kong, along with the impact of the COVID-19 pandemic and related government control measures, are also adversely affecting our Hong Kong operations and led us in 2020 to cease sponsoring member meetings and events in Hong Kong. Inasmuch as member meetings and events located in Hong Kong have in the past served as an important component of our product marketing and distribution efforts, we believe that these developments have negatively affected our operations and financial performance. Although we were able to sponsor a large in-person member event in Hong Kong in the fourth quarter of 2023, it is too early to predict whether these developments will continue to adversely affect our overall business, results of operations and financial condition. See “Item 1A. Risk Factors - Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong...” in our most recent Annual Report on Form 10-K.

Current wording

Recent political and social developments in Hong Kong, along with the impact of the COVID-19 pandemic and related government control measures, are also adversely affecting our Hong Kong operations and led us in 2020 to cease sponsoring member meetings and events in Hong Kong. Inasmuch as member meetings and events located in Hong Kong have in the past served as an important component of our product marketing and distribution efforts, we believe that these developments negatively affected our past operations and financial performance. Although we have been able to sponsor in-person member events in Hong Kong in recent quarters, it may be too early to predict whether these developments will continue to adversely affect our overall business, results of operations and financial condition. See “Item 1A. Risk Factors - Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong...” in our most recent Annual Report on Form 10-K.

Previous wording

Under our current compensation plan, certain of our commission payouts may be limited to a hard cap dollar amount per week or a specific percentage of total product sales. In some markets, commissions may be further limited. In some markets, we also pay certain bonuses on purchases by up to three generations of personally sponsored members, as well as bonuses on commissions earned by up to seven generations of personally sponsored members. Members can also earn additional income, trips and other prizes in specific time-limited promotions and contests we hold from time to time. Member commissions are dependent on the sales mix and, for the first six months of 2024 and 2023, represented 41% and 43% of net sales, respectively. Occasionally, we make modifications and enhancements to our compensation plan to help motivate members, which can have an impact on member commissions. We may also enter into performance-based agreements for business or market development, which can result in additional compensation to specific members.

Current wording

Under our current compensation plan, certain of our commission payouts may be limited to a hard cap dollar amount per week or a specific percentage of total product sales. In some markets, commissions may be further limited. In some markets, we also pay certain bonuses on purchases by up to three generations of personally sponsored members, as well as bonuses on commissions earned by up to seven generations of personally sponsored members. Members can also earn additional income, trips and other prizes in specific time-limited promotions and contests we hold from time to time. Member commissions are dependent on the sales mix and, for the first nine months of 2024 and 2023, represented 41% and 42% of net sales, respectively. Occasionally, we make modifications and enhancements to our compensation plan to help motivate members, which can have an impact on member commissions. We may also enter into performance-based agreements for business or market development, which can result in additional compensation to specific members.

Previous wording

Net sales were$10.5 million for each of the three-month periods ended June 30, 2024 and 2023. Hong Kong net sales, substantially all of which were derived from the sale of products shipped to members residing in China, increased $162,000, or 2%, over the comparable period a year ago. The relatively modest increase in Hong Kong net sales was primarily due to timing differences in the two quarters associated with our promotion of sales incentives and subsequent receipt of related orders. Hong Kong net sales were adversely impacted by the recognition of lower administrative fees in the current-year quarter, as compared to the prior-year quarter, as increased activity within member electronic wallet (eWallet) accounts resulted in less fees assessed during the current-year quarter. Outside of our Hong Kong business, net sales decreased $198,000, or 9%, over the comparable three-month period a year ago, primarily due to the decreased quarter-over-quarter net sales in our Peruvian business.

Current wording

Net sales were$10.7 million for the three months ended September 30, 2024 compared with $10.6 million for the comparable period a year ago, an increase of $76,000, or 1%. Hong Kong net sales, substantially all of which were derived from the sale of products shipped to members residing in China, were almost the same for each of the three-month periods, decreasing $56,000, or less than 1%, over the comparable period a year ago. Outside of our Hong Kong business, net sales increased $132,000, or 6%, over the comparable three-month period a year ago, primarily due to the increased quarter-over-quarter net sales in our Chinese e-commerce retail business.

Previous wording

Net sales were $21.4 million for thesix months ended June 30, 2024 compared with $22.4 million for the comparable period a year ago, a decrease of $946,000, or 4%. Hong Kong net sales, substantially all of which were derived from the sale of products shipped to members residing in China, decreased $337,000, or 2%, over the comparable period a year ago. The relatively modest decrease in Hong Kong net sales was primarily due to timing differences in the year-over-year periods associated with our promotion of sales incentives and subsequent receipt of related orders. Hong Kong net sales were also adversely affected by the recognition of lower administrative fees in the current-year period, as compared to the prior-year period last year, as increased activity within member electronic wallet (eWallet) accounts resulted in less fees assessed during the current-year period. Outside of our Hong Kong business, net sales decreased $609,000, or 14%, over the comparablesix-month period a year ago, primarily due to the decreased period-over-period net sales in our Peruvian business. As of June 30, 2024, deferred revenue was $7.6 million, which consisted of $5.9 million pertaining to unshipped product orders and unredeemed product vouchers, as well as $1.7 million in auto ship advances.

Current wording

Net sales were $32.1 million for thenine months ended September 30, 2024 compared with $33.0 million for the comparable period a year ago, a decrease of $870,000, or 3%. Hong Kong net sales, substantially all of which were derived from the sale of products shipped to members residing in China, were almost the same for each of the nine-month periods, decreasing $393,000, or 1%, over the comparable period a year ago. Hong Kong net sales were also adversely affected by the recognition of lower administrative fees in the current-year period, as compared to the prior-year period last year, as increased activity within member electronic wallet (eWallet) accounts resulted in less fees assessed during the current-year period. Outside of our Hong Kong business, net sales decreased $477,000, or 7%, over the comparable nine-month period a year ago, primarily due to the decreased period-over-period net sales in our business in the Americas (which was somewhat offset by increased period-over-period net sales in our Chinese e-commerce retail business). As of September 30, 2024, deferred revenue was $6.8 million, which consisted of $5.2 million pertaining to unshipped product orders and unredeemed product vouchers, as well as $1.6 million in auto ship advances.

Previous wording

Gross profit was 74.2% of net sales for the three months ended June 30, 2024 compared with 74.6% of net sales for the three months ended June 30, 2023. Gross profit was 73.8% of net sales for thesix months ended June 30, 2024 compared with 74.5% of net sales for thesix months ended June 30, 2023. Excluding the impact of decreased administrative fee revenue referred to above, the decline ingross profit margin for both the three and six-month periods ended June 30, 2024 was primarily attributable to higher costs related to our Premium Noni Juice product.

Current wording

Gross profit was 74.1% of net sales for the three months ended September 30, 2024 compared with 74.7% of net sales forthe three months ended September 30, 2023. Gross profit was 73.9% of net sales for thenine months ended September 30, 2024 compared with 74.6% of net sales for thenine months ended September 30, 2023. The decline in gross profit margin for both the three andnine-month periods ended September 30, 2024 was primarily attributable to higher costs related to our Premium Noni Juice product.

Previous wording

Commissions were 40.1% of net sales for the three months ended June 30, 2024 compared with 42.9% of net sales for the three months ended June 30, 2023. Commissions were 40.5% of net sales for thesix months ended June 30, 2024 compared with 42.5% of net sales for thesix months ended June 30, 2023. Excluding the impact of decreased administrative fee revenue referred to above, the decline in commissions as a percentage of net sales during both the three and six-month periods ended June 30, 2024 was primarily due to lower weekly commissions earned outside of our Hong Kong business, as well as lower supplemental commissions recognized during the three-month period ended June 30, 2024.

Current wording

Commissions were 40.5% of net sales for the three months ended September 30, 2024 compared with 41.1% of net sales for the three months ended September 30, 2023. Commissions were 40.5% of net sales for the nine months ended September 30, 2024 compared with 42.0% of net sales for thenine months ended September 30, 2023. The decline in commissions as a percentage of net sales during both the three andnine-month periods ended September 30, 2024 was primarily due to lower weekly commissions earned outside of our Hong Kong business.

Previous wording

Selling, general and administrative expenses declined slightly to $3.8 million for the three-month period ended June 30, 2024, as compared to $4.1 million in the same period a year ago. Selling, general and administra tive expenses decreased to $7.7 million for thesix-month period ended June 30, 2024, as compared to $8.3 million in the same period a year ago. The decrease for the six-month period was primarily due to lower employee-related costs and professional fees. Selling, general and administrative expenses as a percentage of net sales for both the three- and six-month periods ended June 30, 2024 were modestly lower than the same periods a year ago.

Current wording

Selling, general and administrative expenses were $3.9 million for each of the three-month periods ended September 30, 2024 and 2023. Selling, general and administra tive expenses decreased to $11.6 million for thenine-month period ended September 30, 2024, as compared to $12.2 million in the same period a year ago. The decrease for thenine-month period was primarily due to lower professional fees and insurance expense. Selling, general and administrative expenses as a percentage of net sales for the three-month period ended September 30, 2024 were roughly the same as the comparable period in the prior year and were modestly lower for the nine-month period ended September 30, 2024 than the same period a year ago.

Previous wording

Other income was $519,000 for the three months ended June 30, 2024 compared with $442,000 in the same period a year ago. Other income was $1.1 million for each of thesix-month periods ended June 30, 2024 and 2023. The increase for the three months ended June 30, 2024 was primarily due to less foreign currency expense recognized on intercompany balances pertaining to the Hong Kong dollar than during the second quarter last year, partially offset by less interest income earned during the second quarter this year.

Current wording

Other income was $441,000 for the three months ended September 30, 2024 compared with $585,000 in the same period a year ago. Other income was $1.5 million and $1.7 million for each of thenine-month periods ended September 30, 2024 and 2023, respectively. The decrease for both the three- and nine-month periods ended September 30, 2024 was primarily due to less interest income earned during each of the current year periods.

Previous wording

An income tax provision of $108,000 and and income tax benefit of $82,000 were recognized during the three months ended June 30, 2024 and 2023, respectively. An income tax provision of $118,000 and an income tax benefit of $52,000 were recognized during thesix months ended June 30, 2024 and 2023, respectively. The tax provision during each of the three- and six-month periods ended June 30, 2024 and 2023 primarily resulted from foreign income inclusions, such as global intangible low-taxed income (“GILTI”) and Subpart F income, tax benefits in foreign jurisdictions and year-to-date consolidated income through June 30, 2024 and 2023, respectively.

Current wording

An income tax provision of $131,000 and $121,000 were recognized during the three months ended September 30, 2024 and 2023, respectively. An income tax provision of $249,000 and $69,000 were recognized during thenine months ended September 30, 2024 and 2023, respectively. The tax provision during each of the three- and nine-month periods ended September 30, 2024 and 2023 primarily resulted from foreign income inclusions, such as global intangible low-taxed income (“GILTI”) and Subpart F income, tax benefits in foreign jurisdictions and year-to-date consolidated income through September 30, 2024 and 2023, respectively.

Previous wording

At June 30, 2024, our cash, cash equivalents and marketable securities totaled $48.7 million. Total cash, cash equivalents and marketable securities decreased by $7.5 million from December 31, 2023 to June 30, 2024 due to the dividends paid during the first six months of 2024 and the payment of the repatriation tax on the deemed repatriation of deferred foreign income as required by the U.S. Tax Cuts and Jobs Act. We consider all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. As of June 30, 2024, we had $39.7 million in available-for-sale investments classified as either cash equivalents and marketable securities. In addition, cash and cash equivalents included $3.5 million held in banks located within China subject to foreign currency controls.

Current wording

At September 30, 2024, our cash, cash equivalents and marketable securities totaled $46.3 million. Total cash, cash equivalents and marketable securities decreased by $9.9 million from December 31, 2023 to September 30, 2024 due to the dividends paid during the first nine months of 2024 and the payment of the repatriation tax on the deemed repatriation of deferred foreign income as required by the U.S. Tax Cuts and Jobs Act. We consider all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. As of September 30, 2024, we had $37.9 million in available-for-sale investments classified as either cash equivalents or marketable securities. In addition, cash and cash equivalents included $3.8 million held in banks located within China subject to foreign currency controls.

Previous wording

As of June 30, 2024, the ratio of current assets to current liabilities was 2.6 to 1.0 and we had $34.8 million of working capital. Working capital as of June 30, 2024 decreased $9.5 million compared to our working capital as of December 31, 2023.

Current wording

As of September 30, 2024, the ratio of current assets to current liabilities was 2.6 to 1.0 and we had $32.7 million of working capital. Working capital as of September 30, 2024 decreased $11.5 million compared to our working capital as of December 31, 2023.

Previous wording

Cash used in operations was$3.0 million for the first six months of 2024 compared with $3.3 million for the first six months of 2023. Income tax paid during April 2024 and 2023 for the repatriation tax on the deemed repatriation of deferred foreign income was $4.0 million and $3.0 million, respectively. Disregarding these payments, cash flows from operations improved $1.3 million primarily due to improved management of operating costs during the first six months of 2024 as compared to the same period last year, as well as a timing difference related to weekly commission outflows.

Current wording

Cash used in operations was$3.5 million for the first nine months of 2024 compared with $4.2 million for the first nine months of 2023. Income tax paid during April 2024 and April 2023 for the repatriation tax on the deemed repatriation of deferred foreign income was $4.0 million and $3.0 million, respectively. Disregarding these payments, cash flows from operations improved $1.7 million primarily due to improved management of inventories and operating costs during the first nine months of 2024 as compared to the same period last year, as well as a timing difference related to weekly commission outflows.

Previous wording

Cash flows used in investing activities totaled $32.9 million and $14,000 during the first six months of 2024 and 2023, respectively. During the first six months of 2024, we purchased $36.2 million in marketable securities with original maturities greater than three months, and as such, reflect these purchases as an investing activity. These purchases of marketable securities were offset by $3.3 million of proceeds received from maturities of marketable securities.

Current wording

Cash flows used in investing activities totaled $23.1 million and $32,000 during the first nine months of 2024 and 2023, respectively. During the first nine months of 2024, we purchased $44.8 million in marketable securities with original maturities greater than three months, and as such, reflect these purchases as an investing activity. These purchases of marketable securities were offset by $21.8 million of proceeds received from maturities of marketable securities.

Previous wording

Cash flows used in financing activities during the first six months of 2024 and 2023 consisted solely of quarterly dividend payments of $0.20 per common share, totaling $4.6 million in each period. Subsequent to June 30, 2024, on July 29, 2024, the Board of Directors declared another quarterly cash dividend of $0.20 on each share of common stock outstanding. The dividend will be payable on August 23, 2024 to stockholders of record on August 13, 2024. We expect to continue paying a quarterly cash dividend of $0.20 on each share of common stock outstanding for the foreseeable future. However, any future cash dividends will be at the sole discretion of the Company’s Board of Directors, and will depend on our financial condition, results of operations, capital requirements and other factors considered relevant by the Board of Directors.

Current wording

Cash flows used in financing activities during the first nine months of 2024 and 2023 consisted solely of quarterly dividend payments of $0.20 per common share, totaling $6.9 million in each period. Subsequent to September 30, 2024, on October 28, 2024, the Board of Directors declared another quarterly cash dividend of $0.20 on each share of common stock outstanding. The dividend will be payable on November 22, 2024 to stockholders of record on November 12, 2024. We expect to continue paying a quarterly cash dividend of $0.20 on each share of common stock outstanding for the foreseeable future. However, any future cash dividends will be at the sole discretion of the Company’s Board of Directors, and will depend on our financial condition, results of operations, capital requirements and other factors considered relevant by the Board of Directors.

Previous wording

On January 12, 2016, the Board of Directors authorized an increase to the Company’s stock repurchase program first approved on July 28, 2015 from $15.0 million to $70.0 million. Any repurchases will be made in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. For all or a portion of the authorized repurchase amount, the Company may enter into one or more plans that are compliant with Rule 10b5-1 of the Exchange Act that are designed to facilitate these purchases. The stock repurchase program does not require the Company to acquire a specific number of shares, and may be suspended from time to time or discontinued. As of June 30, 2024, $21.9 million of the $70.0 million stock repurchase program remained available for future purchases, inclusive of related estimated income tax.

Current wording

In 2016, the Board of Directors authorized an increase to the Company’s stock repurchase program first approved in 2015 from $15.0 million to $70.0 million. Any repurchases will be made in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. For all or a portion of the authorized repurchase amount, the Company may enter into one or more plans that are compliant with Rule 10b5-1 of the Exchange Act that are designed to facilitate these purchases. The stock repurchase program does not require the Company to acquire a specific number of shares, and may be suspended from time to time or discontinued. As of September 30, 2024, $21.9 million of the $70.0 million stock repurchase program remained available for future purchases, inclusive of related estimated income tax.