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What changed in NATURAL HEALTH TRENDS CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of NATURAL HEALTH TRENDS CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+118 added−151 removedSource: 10-K (2024-02-28) vs 10-K (2023-03-03)

Top changes in NATURAL HEALTH TRENDS CORP's 2023 10-K

118 paragraphs added · 151 removed · 99 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeThese events are designed to inform and train prospective and existing members about our product lines and new product launches, our latest marketing and promotional plans, and new services improvements. These events also serve as a venue for recognition of member accomplishments. Members typically share their experiences in using our products and developing their business at these events.
Biggest changeWe generally sponsor promotional meetings, product education, motivational and personal development training events for current and potential members. These events are designed to inform and train prospective and existing members about our product lines and new product launches, our latest marketing and promotional plans, and new services improvements. These events also serve as a venue for recognition of member accomplishments.
Supplements and topical gels for improved vitality Alura Lux™ by NHT Global, Valura Lux ™ , LaVie+ ™ , TwinSlim™ Probiotics, NaturalGlo ™ Home Products designed to create a clean and natural living environment for the home. Home appliances Air Purifier, AquaPur Desktop Water Purifier Daily Daily care products designed to cleanse and protect the body and promote personal hygiene.
Supplements and topical gels for improved vitality Alura Lux™ by NHT Global, Valura Lux ™ , LaVie+ ™ , TwinSlim™ Probiotics, NaturalGlo ™ Home Products designed to create a clean and natural living environment for the home. Home appliances AquaPur Desktop Water Purifier Daily Daily care products designed to cleanse and protect the body and promote personal hygiene.
Because they are seeking new opportunities for income, people are often attracted to become members after using our products or after attending introductory seminars. Once a person becomes a member, he or she is able to purchase products directly from us at wholesale prices via the internet.
Because they are seeking new opportunities for supplemental income, people are often attracted to become members after using our products or after attending introductory seminars. Once a person becomes a member, he or she is able to purchase products directly from us at wholesale or discounted prices via the internet.
The Chinese government ministries in charge of this campaign indicated that they are targeting illegal practices in the industry, particularly the manufacture and sale of counterfeit and substandard products, and false advertising and misleading claims as to the health benefits of products and services.
The Chinese government ministries in charge of this campaign indicated that they were targeting illegal practices in the industry, particularly the manufacture and sale of counterfeit and substandard products, and false advertising and misleading claims as to the health benefits of products and services.
Liquid, encapsulated, tableted and powder dietary and nutritional supplements, vitamins, minerals Premium Noni Juice, Triotein™, Cluster X2™, Children’s Chewable Multivitamin, ReStor Silver™, ReStor Vital™, Glucosamine 2200™, FibeRich™, Energin, Enhanced Essential Probiotics, Omega-3 Essential Fatty Acids, StemRenu ® , OcuFocus™, CurcuMore™, Biotic Trio, Ultra B Complex, CalComplex, Colostrum Chewable Tablets, Collagen Supreme Herbal Products formulated incorporating ingredients commonly found in traditional Chinese medicine.
Liquid, encapsulated, tableted and powder dietary and nutritional supplements, vitamins, minerals Premium Noni Juice, Triotein™, Cluster X2™, Children’s Chewable Multivitamin, ReStor Silver™, Glucosamine 2200™, FibeRich™, Energin, Enhanced Essential Probiotics, Omega-3 Essential Fatty Acids, StemRenu ® , OcuFocus™, CurcuMore™, Biotic Trio, Ultra B Complex, CalComplex, Collagen Supreme, MetaBoost, RelaxaPro Herbal Products formulated incorporating ingredients commonly found in traditional Chinese medicine.
We have automated a substantial amount of our financial reporting processes through implementation of Oracle’s E-Business Suite, and have integrated other critical business processes such as inventory management, purchasing and costing in our most significant markets. Employees At December 31, 2022, we employed 140 individuals, including 136 total full-time employees worldwide.
We have automated a substantial amount of our financial reporting processes through implementation of Oracle’s E-Business Suite, and have integrated other critical business processes such as inventory management, purchasing and costing in our most significant markets. Employees At December 31, 2023, we employed 139 individuals, including 138 total full-time employees worldwide.
This type of organizational structure and approa ch to marketing and sales include companies selling lifes tyle enhancement products, cosmetics and dietary supplements, or selling other types of consumer products. Generally, direct selling is based upon an organizational structure in which independent members purchasing a company’s products are compensated for sales made directly to consumers.
This type of organizational structure and approach to marketing and sales include companies selling lifestyle enhancement products, cosmetics and dietary supplements, or selling other types of consumer products. Generally, direct selling is based upon an organizational structure in which independent members purchasing a company’s products are compensated for sales made directly to consumers.
Of the full-time employees, 88 were located in Greater China (Hong Kong, China, and Taiwan), 27 in the Americas (United States, Canada, Cayman Islands, and Peru), six in India, five in Europe, four in Malaysia and Singapore, and two in each of South Korea, Russia and Japan.
Of the full-time employees, 86 were located in Greater China (Hong Kong, China, and Taiwan), 31 in the Americas (United States, Canada, Cayman Islands, and Peru), seven in India, five in Europe, three in Japan, two in Malaysia and Singapore, and two in each of South Korea and Russia.
December 31, 2022 2021 Americas 1 4,410 5,650 Hong Kong (including those members residing in China) 2 28,550 33,510 Taiwan 2,390 2,410 South Korea 70 80 Japan 640 700 Malaysia and Singapore 400 420 Russia and Kazakhstan 730 1,090 Europe 1,060 1,210 India 410 690 Total 38,660 45,760 1 United States, Canada, Mexico and Peru 2 Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.
December 31, 2023 2022 Americas 1 4,040 4,410 Hong Kong (including those members residing in China) 2 23,490 28,550 Taiwan 2,230 2,390 South Korea 80 70 Japan 520 640 Malaysia and Singapore 350 400 Russia and Kazakhstan 530 730 Europe 870 1,060 India 300 410 Total 32,410 38,660 1 United States, Canada, Mexico and Peru 2 Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.
Although the 100-day campaign was due to expire on or about April 18, 2019, we are not aware of any information indicating that the campaign has formally concluded. However, on August 27, 2019, the Chinese government announced that it would conduct a “look-back review” to evaluate the 100-day campaign.
It is understood that the campaign was specifically focused on the business practices of direct selling companies. Although the 100-day campaign was due to expire in April 2019, we are not aware of any information indicating that the campaign has formally concluded. However, the Chinese government subsequently announced that it would conduct a “look-back review” to evaluate the 100-day campaign.
We are continually developing and updating our marketing strategies and programs to motivate our members.
Members typically share their experiences in using our products and developing their business at these events. We are continually developing and updating our marketing strategies and programs to motivate our members.
Accordingly, we carry minimal accounts receivable and credit losses are historically negligible. 4 Table of Contents Although we have been required to modify or curtail some of our marketing strategies and programs in response to the COVID-19 pandemic, we generally sponsor promotional meetings, product education, motivational and personal development training events for current and potential members.
Accordingly, we carry minimal accounts receivable and credit losses are historically negligible. 4 Table of Contents As a result of the COVID-19 pandemic, we modified some of our marketing strategies and programs by offering a hybrid approach of both in-person and virtual or online marketing programs and activities.
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It should be noted, however, that the restrictive measures imposed in response to the COVID-19 pandemic have tempered some of the benefits associated with network marketing.
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It is understood that the campaign is specifically focused on the business practices of direct selling companies. During the campaign, we understand that the government is not issuing any additional direct selling licenses, is not issuing certifications of quality or other approvals of various healthcare products, and is reviewing its regulatory oversight of the industry.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeUnless our operating cash flows improve, this negative financial performance could have a material adverse effect on our business and our stock price. We experienced negative operating cash flows during the year ended December 31, 2022, and only modest positive operating cash flows during the years ended December 31, 2021 and 2020.
Biggest changeWe experienced negative operating cash flows during the years ended December 31, 2023 and 2022, and only modest positive operating cash flows during the years ended December 31, 2021 and 2020. Unless our operating cash flows improve, this negative financial performance could have a material adverse effect on our business and our stock price.
We anticipate that we will be required to expend additional resources in order to continue to enhance our technical and administrative safeguards, and to investigate and remediate any vulnerabilities in our systems, networks and software. 25 Table of Contents In any case, a data breach or other significant disruption of our information systems or those related to our third-party vendors, including as a result of cyber-attacks, could (1) disrupt the proper functioning of our systems and networks and therefore operations, (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of personal, confidential, sensitive or otherwise valuable data or other information, (3) result in a violation of applicable privacy, cybersecurity, data breach notification requirements under applicable laws, regulations and contractual provisions, subjecting us to additional regulatory scrutiny, and exposing us to possible fines, lawsuits and related financial liability, (4) require significant management attention and financial resources to investigate and remedy the breach or disruption, and (5) harm our reputation, cause a decrease in the number of our members and revenue, and otherwise damage our business.
We anticipate that we will be required to expend additional resources in order to continue to enhance our technical and administrative safeguards, and to investigate and remediate any vulnerabilities in our systems, networks and software. 24 Table of Contents In any case, a data breach or other significant disruption of our information systems or those related to our third-party vendors, including as a result of cyber-attacks, could (1) disrupt the proper functioning of our systems and networks and therefore operations, (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of personal, confidential, sensitive or otherwise valuable data or other information, (3) result in a violation of applicable privacy, cybersecurity, data breach notification requirements under applicable laws, regulations and contractual provisions, subjecting us to additional regulatory scrutiny, and exposing us to possible fines, lawsuits and related financial liability, (4) require significant management attention and financial resources to investigate and remedy the breach or disruption, and (5) harm our reputation, cause a decrease in the number of our members and revenue, and otherwise damage our business.
In addition, any actions by non-U.S. markets to implement further trade or economic policy changes, including limiting foreign investment or trade, imposing currency controls restricting the international transfer of funds, increasing regulatory scrutiny or taking other actions which impact U.S. companies' ability to obtain necessary licenses or approvals could negatively impact our business. 19 Table of Contents Trade and economic policy changes are subject to a number of uncertainties and are only one part of the larger dynamic of political and economic relations amongst countries.
In addition, any actions by non-U.S. markets to implement further trade or economic policy changes, including limiting foreign investment or trade, imposing currency controls restricting the international transfer of funds, increasing regulatory scrutiny or taking other actions which impact U.S. companies' ability to obtain necessary licenses or approvals could negatively impact our business. 18 Table of Contents Trade and economic policy changes are subject to a number of uncertainties and are only one part of the larger dynamic of political and economic relations amongst countries.
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. 15 Table of Contents Our recent loss of a significant number of members is adversely affecting our business, and if we cannot stabilize or increase the number of members our business could be further negatively impacted.
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. 14 Table of Contents Our recent loss of a significant number of members is adversely affecting our business, and if we cannot stabilize or increase the number of members our business could be further negatively impacted.
While we have implemented member policies and procedures designed to govern member conduct and to protect the goodwill associated with our trademarks and trade names, it can be difficult to enforce these policies and procedures because of the large number of members and their independent status. 16 Table of Contents Given the size and diversity of our member force, we experience problems with members from time to time, especially with respect to our members in foreign markets.
While we have implemented member policies and procedures designed to govern member conduct and to protect the goodwill associated with our trademarks and trade names, it can be difficult to enforce these policies and procedures because of the large number of members and their independent status. 15 Table of Contents Given the size and diversity of our member force, we experience problems with members from time to time, especially with respect to our members in foreign markets.
The Chinese and Hong Kong governments, like the governments of other countries in which we operate, continue to adjust the restrictive measures that they impose to control COVID-19 based on then-current local circumstances; however, it should be noted that the Chinese and Hong Kong governments have to date imposed some of the most restrictive COVID-19 control measures of any country in the world.
The Chinese and Hong Kong governments, like the governments of other countries in which we operate, continue to adjust the restrictive measures that they impose to control COVID-19 based on then-current local circumstances; however, it should be noted that the Chinese and Hong Kong governments imposed some of the most restrictive COVID-19 control measures of any country in the world.
Even if our practices or those of our third-party vendors are not subject to legal challenge, the perception of data or privacy concerns, whether or not valid, may harm our reputation and brand and adversely affect our business, results of operations and financial condition. 20 Table of Contents Challenges by third parties to the legality of our business operations could harm our business.
Even if our practices or those of our third-party vendors are not subject to legal challenge, the perception of data or privacy concerns, whether or not valid, may harm our reputation and brand and adversely affect our business, results of operations and financial condition. 19 Table of Contents Challenges by third parties to the legality of our business operations could harm our business.
Currency exchange rate fluctuations could lower our revenue and net income. In 2022, 96% 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 generally use the local currency as their functional currency.
Currency exchange rate fluctuations could lower our revenue and net income. In 2023, 96% 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 generally use the local currency as their functional currency.
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. 23 Table of Contents Failure to comply with domestic and foreign laws and regulations governing product claims and advertising could harm our business.
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. 22 Table of Contents Failure to comply with domestic and foreign laws and regulations governing product claims and advertising could harm our business.
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. 24 Table of Contents Intellectual Property, Information Technology and Cybersecurity Risks We may be unable to protect or use our intellectual property rights.
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. 23 Table of Contents Intellectual Property, Information Technology and Cybersecurity Risks We may be unable to protect or use our intellectual property rights.
This market volatility for our common stock may make it more difficult for holders of our stock to sell shares when they want and at prices they find attractive. There can be no assurance that a larger or more liquid market will be developed or maintained for our common stock. 26 Table of Contents Item 1B.
This market volatility for our common stock may make it more difficult for holders of our stock to sell shares when they want and at prices they find attractive. There can be no assurance that a larger or more liquid market will be developed or maintained for our common stock. 25 Table of Contents Item 1B.
Although we have been able to relax some restrictions on member activities in certain markets, it may again in the future be necessary or advisable to suspend member activities or take similar actions, and the resulting periods of reduced activity may have a material adverse effect on our business. 18 Table of Contents Although the 100-day campaign was due to expire on or about April 18, 2019, we are not aware of any information indicating that the campaign has formally concluded.
Although we have been able to relax some restrictions on member activities in certain markets, it may again in the future be necessary or advisable to suspend member activities or take similar actions, and the resulting periods of reduced activity may have a material adverse effect on our business. 17 Table of Contents Although the 100-day campaign was due to expire in April 2019, we are not aware of any information indicating that the campaign has formally concluded.
Compliance with these regulations can create delays and added expense in introducing new products to certain markets. 22 Table of Contents Failure by our members 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.
Compliance with these regulations can create delays and added expense in introducing new products to certain markets. 21 Table of Contents Failure by our members 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.
Chinese members may elect to participate in either or both of the Chinese entity and the Hong Kong entity. 17 Table of Contents We previously submitted a preliminary application for a direct selling license in China, but in 2019 a Chinese governmental authority recommended that we withdraw our application.
Chinese members may elect to participate in either or both of the Chinese entity and the Hong Kong entity. 16 Table of Contents We previously submitted a preliminary application for a direct selling license in China, but in 2019 a Chinese governmental authority recommended that we withdraw our application.
Further, to date we have not attempted to reduce our exposure to short-term exchange rate fluctuations by using foreign currency exchange contracts. 21 Table of Contents Changes in tax or duty laws, and unanticipated tax or duty liabilities, could adversely affect our net income.
Further, to date we have not attempted to reduce our exposure to short-term exchange rate fluctuations by using foreign currency exchange contracts. 20 Table of Contents Changes in tax or duty laws, and unanticipated tax or duty liabilities, could adversely affect our net income.
The Chinese government ministries in charge of this campaign indicated that they are targeting illegal practices in the industry, particularly the manufacture and sale of counterfeit and substandard products, and false advertising and misleading claims as to the health benefits of products and services.
The Chinese government ministries in charge of this campaign indicated that they were targeting illegal practices in the industry, particularly the manufacture and sale of counterfeit and substandard products, and false advertising and misleading claims as to the health benefits of products and services.
Business, Product and Market Risks, Including COVID-19 Risks Because our Hong Kong operations account for a substantial portion of our overall business, and substantially all of our Hong Kong business is derived from the sale of products to members in China, any material adverse change in our business relating to either Hong Kong or China would likely have a material adverse impact on our overall business.
Business, Product and Market Risks Because our Hong Kong operations account for a substantial portion of our overall business, and substantially all of our Hong Kong business is derived from the sale of products to members in China, any material adverse change in our business relating to either Hong Kong or China would likely have a material adverse impact on our overall business.
Our members may terminate their services with us at any time and, like most direct selling organizations, we have a high rate of attrition. We had 16% fewer active members at December 31, 2022 as compared to the end of 2021, and 12% fewer active members at the end of 2021 as compared to the end of 2020.
Our members may terminate their services with us at any time and, like most direct selling organizations, we have a high rate of attrition. We had 16% fewer active members at December 31, 2023 as compared to the end of 2022, and 16% fewer active members at the end of 2022 as compared to the end of 2021.
The continuing effect of any or all of these events could adversely impact demand for our products, harm our business, results of operations and financial condition. We are subject to risks relating to product concentration and lack of revenue diversification.
The continuing effect of any or all of these events could adversely impact demand for our products, harm our business, results of operations and financial condition. 12 Table of Contents We are subject to risks relating to product concentration and lack of revenue diversification.
However, on August 27, 2019, the Chinese government announced that it would conduct a “look-back review” to evaluate the 100-day campaign. As part of this review, we understand that various Chinese governmental agencies formed a working group to assess the 100-day campaign, particularly focusing on the health market and its supervision in certain provinces.
However, the Chinese government subsequently announced that it would conduct a “look-back review” to evaluate the 100-day campaign. As part of this review, we understand that various Chinese governmental agencies formed a working group to assess the 100-day campaign, particularly focusing on the health market and its supervision in certain provinces.
We must overcome significant regulatory and legal barriers before we can begin marketing in any foreign market. 14 Table of Contents Also, it is difficult to assess the extent to which our products and sales techniques would be accepted or successful in any given country.
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.
Our foreign currency exchange rate exposure to the South Korean won, Taiwan dollar, Japanese yen, Chinese yuan, Russian ruble, Kazakhstani tenge, Singaporean dollar, Malaysian ringgit, Vietnamese dong, Thai baht, Indian rupee, Canadian dollar, Mexican peso, Peruvian sol and European euro collectively represented approximately 19% and 20% of our revenue in 2022 and 2021, respectively.
Our foreign currency exchange rate exposure to the South Korean won, Taiwan dollar, Japanese yen, Chinese yuan, Russian ruble, Kazakhstani tenge, Singaporean dollar, Malaysian ringgit, Thai baht, Indian rupee, Canadian dollar, Mexican peso, Peruvian sol and European euro collectively represented approximately 18% and 19% of our revenue in 2023 and 2022, respectively.
We have significant business in China and in 2022 generated approximately 78% of our revenue in Hong Kong, substantially all of which was derived from the sale of products to members in China.
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.
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 this action has negatively affected our operations and financial performance.
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.
We incur significant expense in the payment of compensation to our members, which represented approximately 42% and 43% of net sales during 2022 and 2021, respectively. We compensate our members by paying commissions, bonuses, and certain awards and prizes.
We incur significant expense in the payment of compensation to our members, which represented approximately 42% of net sales during each of 2023 and 2022. We compensate our members by paying commissions, bonuses, and certain awards and prizes.
Although we have in recent years expanded our line of products, we derive at least 10% of our total revenue from each of our Premium Noni Juice, Enhanced Essential Probiotics and Triotein™ products. Further, we currently source each of these products from a single supplier.
Although we have in recent years expanded our line of products, we derive at least 10% of our total revenue from each of our Premium Noni Juice and Triotein™ products, as well as our line of probiotic products comprised of Enhanced Essential Probiotics and Biotic Trio . Further, we currently source each of these products from a single supplier.
In each of 2022 and 2021, approximately 78% of our revenue was generated in Hong Kong. Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.
In 2023 and 2022, approximately 79% and 78% of our revenue was generated in Hong Kong, respectively. Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.
The business of marketing personal care, cosmetic, nutritional supplements, and lifestyle enhancement products is highly competitive. This market segment includes numerous manufacturers, members, marketers, and retailers that actively compete for the business of consumers both in the United States and abroad.
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, members, marketers, and retailers that actively compete for the business of consumers both in the United States and abroad.
Of particular note is that on June 10, 2021, the Standing Committee of the National People's Congress of China promulgated the Data Security Law, which took effect in September 2021.
In addition, on June 10, 2021, the Standing Committee of the National People's Congress of China promulgated the Data Security Law, which took effect in September 2021.
Even if we are able to develop and commercially introduce new products and enhancements, they may not achieve market acceptance and the revenue generated from these new products and enhancements may not offset the costs, which could substantially impair our business, results of operations and financial condition. 13 Table of Contents The high level of competition in our industry could adversely affect our business.
Even if we are able to develop and commercially introduce new products and enhancements, they may not achieve market acceptance and the revenue generated from these new products and enhancements may not offset the costs, which could substantially impair our business, results of operations and financial condition.
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.
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. 13 Table of Contents We rely on a limited number of independent third parties to manufacture and supply our products on a timely basis.
While the Chinese and Hong Kong governments took comprehensive steps to relax many of their COVID-19 control measures in late 2022, 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 related control measures, which we are unable to accurately predict.
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 related control measures, which we are unable to accurately predict.
In January 2019 we, like some of our peers, voluntarily decided to temporarily suspend our member activities, such as product roadshows, product trainings and larger company-sponsored events, in China.
It is understood that the campaign was specifically focused on the business practices of direct selling companies. In January 2019 we, like some of our peers, voluntarily decided to temporarily suspend our member activities, such as product roadshows, product trainings and larger company-sponsored events, in China.
Risk Factors - Our business in China is subject to compliance with a myriad of applicable laws and regulations…”.
There have been several instances where adverse publicity in China has harmed our business. See “Item 1A. Risk Factors - Our business in China is subject to compliance with a myriad of applicable laws and regulations…”.
There is no assurance that our current manufacturers will continue to reliably supply products to us at the level of quality we require or to do so on a timely basis. Some of our third-party manufacturers experience difficulty sourcing product ingredients or components on a timely basis, which can result in delays in the timely delivery of products to us.
All of our products are manufactured by a limited number of 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 or to do so on a timely basis.
This cash flow performance was primarily due to declines in our revenues being greater than the decreases in expenditures that we could manage.
We experienced negative operating cash flows during the years ended December 31, 2023 and 2022, and only modest positive operating cash flows during the years ended December 31, 2021 and 2020. This cash flow performance was primarily due to declines in our revenues being greater than the decreases in expenditures that we could manage.
The Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data and information. Similarly, Hong Kong also has its data privacy legislation that regulates the collection, use and handling of personal data.
Hong Kong also has its data privacy legislation that regulates the collection, use and handling of personal data.
If a key manufacturer suffers liquidity problems or experiences operational or other problems assisting with our products, our results could suffer.
Some of our third-party manufacturers experience difficulty sourcing product ingredients or components on a timely basis, which can result in delays in the timely delivery of products to us. If a key manufacturer suffers liquidity problems or experiences operational or other problems assisting with our products, our results could suffer.
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Regardless, these disruptions have materially negatively impacted our financial results from 2020 through 2022, and we expect that our financial results for the near-term may be adversely affected.
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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.
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These disruptions have also adversely affected the operations of our third-party logistics providers, and we expect that the future operations of these logistics providers and other third parties with whom we work may be adversely affected by these disruptions.
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While the Chinese and Hong Kong governments took comprehensive steps to relax many of their COVID-19 control measures in late 2022, these disruptions materially negatively impacted our financial results from 2020 through 2022. This less restrictive business environment continued throughout 2023.
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The cumulative effect of these developments has adversely affected our Hong Kong operations and may continue to adversely affect our overall business, results of operations and financial condition. 12 Table of Contents We experienced negative operating cash flows during the year ended December 31, 2022, and only modest positive operating cash flows during the years ended December 31, 2021 and 2020.
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We are hopeful that this improved state of affairs will enable us to continue more normal operations in China and Hong Kong, but it is still too early to accurately predict the impact on us of this relaxation of control measures and whether it will prove enduring.
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There have been several instances where adverse publicity in China has harmed our business. For example, in January 2019 Central China Television (CCTV) aired a segment alleging, among other things, that we conduct an illegal pyramid scheme in China, and we believe that this media coverage had a short-term negative impact on our business. See “Item 1A.
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Of particular note is China's Cyber Security Law, which requires companies to take certain measures to ensure that the security of their networks and data stored on their networks.
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We rely on a limited number of independent third parties to manufacture and supply our products on a timely basis. All of our products are manufactured by a limited number of independent third parties.
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Specifically, the Cyber Security Law provides that companies adopt a multi-level protection scheme under which network operators are required to perform obligations of security protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered.
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During the campaign, we understand that the government is not issuing any additional direct selling licenses, is not issuing certifications of quality or other approvals of various healthcare products, and is reviewing its regulatory oversight of the industry. It is further understood that the campaign is specifically focused on the business practices of direct selling companies.
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The Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data and information. Finally, the Standing Committee of the National People's Congress of the China also promulgated the Personal Information Protection Law ("PIPL"), which took effect on November 1, 2021.
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The PIPL expands data protection compliance obligations to cover the processing of personal information of persons by organizations and individuals in China, and the processing of personal information of persons in China, outside of China if such processing is for purposes of providing products and services to, or analyzing and evaluating the behavior of, persons in China.
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The PIPL also provides that critical information infrastructure operators and personal information processing entities that process personal information meeting a volume threshold are also required to store in China personal information generated or collected in China, and to pass a security assessment for any export of such personal information.

Item 2. Properties

Properties — owned and leased real estate

3 edited+0 added−0 removed2 unchanged
Biggest changeWe contract with third parties for fulfillment and distribution operations in all of our international markets. We believe that our existing office space is in good condition, and is suitable and adequate for the conduct of our business. Item 3. LEGAL PROCEEDINGS None.
Biggest changeWe believe that our existing office space is in good condition, and is suitable and adequate for the conduct of our business. Item 3. LEGAL PROCEEDINGS None.
Item 2. PROPERTIES Our corporate headquarters is located in Hong Kong, where we renewed our lease for 7,300 square feet of office space in September 2022 with a term expiring in June 2026. In June 2020, we extended our lease for 4,900 square feet of office space in Rolling Hills Estates, California with a term now expiring in September 2030.
Item 2. PROPERTIES Our corporate headquarters is located in Hong Kong where we lease 7,300 square feet of office space with a term expiring in June 2026. We also lease 4,900 square feet of corporate office space in Rolling Hills Estates, California with a term expiring in September 2030.
We lease seven branch offices throughout China that are used for our China business segment, and additional office space in Peru, Japan, Taiwan, South Korea, Malaysia, Singapore, Thailand, India, and the Cayman Islands (all of which are used for our Primary Reporting Segment). We also lease a factory in Zhongshan, China that is used for all of our business segments.
We lease seven branch offices throughout China that are used for our China business segment, and additional office space in Peru, Japan, Taiwan, South Korea, Malaysia, Thailand, India, and the Cayman Islands (all of which are used for our Primary Reporting Segment). We contract with third parties for fulfillment and distribution operations in all of our international markets.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings 27 Item 4. Mine Safety Disclosures 27 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28 Item 6. [Reserved] 28 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37 Item 8.
Biggest changeItem 3. Legal Proceedings 26 Item 4. Mine Safety Disclosures 26 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6. [Reserved] 27 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAt February 27, 2023, there were approximately 90 record holders of our common stock (although we believe that the number of beneficial owners of our common stock is substantially greater). The Company expects to pay a quarterly cash dividend of $0.20 on each share of common stock outstanding for the foreseeable future .
Biggest changeAt February 23, 2024, there were approximately 110 record holders of our common stock (although we believe that the number of beneficial owners of our common stock is substantially greater). The Company expects to pay a quarterly cash dividend of $0.20 on each share of common stock outstanding for the foreseeable future.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is currently traded on the NASDAQ Capital Market (“Nasdaq”) under the symbol “NHTC.” On February 27, 2023, the closing price of our common stock as reported by Nasdaq was $5.22 per share.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is currently traded on the NASDAQ Capital Market (“Nasdaq”) under the symbol “NHTC.” On February 23, 2024, the closing price of our common stock as reported by Nasdaq was $6.07 per share.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeResults of Operations The following table sets forth our operating results as a percentage of net sales for the periods indicated: Year Ended December 31, 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 25.8 25.0 Gross profit 74.2 75.0 Operating expenses: Commissions expense 42.2 42.6 Selling, general and administrative expenses 32.6 29.8 Total operating expenses 74.8 72.4 Income (loss) from operations (0.6 ) 2.6 Other income (expense), net 1.8 (0.1 ) Income before income taxes 1.2 2.5 Income tax provision 0.6 0.7 Net income 0.6 % 1.8 % 32 Table of Contents Net Sales The following table sets forth revenue by market for the periods indicated (in thousands): Year Ended December 31, 2022 2021 Americas 1 $ 3,256 6.6 % $ 4,283 7.2 % Hong Kong 2 38,436 78.2 46,699 77.8 China 2,017 4.1 2,237 3.7 Taiwan 2,493 5.1 2,706 4.5 South Korea 172 0.4 251 0.4 Japan 676 1.4 938 1.6 Malaysia and Singapore 393 0.8 458 0.8 Russia and Kazakhstan 559 1.1 854 1.4 Europe 891 1.8 1,136 1.9 India 241 0.5 443 0.7 Total $ 49,134 100.0 % $ 60,005 100.0 % 1 United States, Canada, Mexico and Peru. 2 Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.
Biggest changeResults of Operations The following table sets forth our operating results as a percentage of net sales for the periods indicated: Year Ended December 31, 2023 2022 Net sales 100.0 % 100.0 % Cost of sales 25.4 25.8 Gross profit 74.6 74.2 Operating expenses: Commissions expense 41.9 42.2 Selling, general and administrative expenses 36.5 32.6 Total operating expenses 78.4 74.8 Loss from operations (3.8 ) (0.6 ) Other income, net 5.5 1.8 Income before income taxes 1.7 1.2 Income tax provision 0.4 0.6 Net income 1.3 % 0.6 % 31 Table of Contents Net Sales The following table sets forth revenue by market for the periods indicated (in thousands): Year Ended December 31, 2023 2022 Americas 1 $ 3,364 7.7 % $ 3,256 6.6 % Hong Kong 2 34,898 79.4 38,436 78.2 China 1,235 2.8 2,017 4.1 Taiwan 2,181 5.0 2,493 5.1 South Korea 164 0.4 172 0.4 Japan 450 1.0 676 1.4 Malaysia and Singapore 275 0.6 393 0.8 Russia and Kazakhstan 480 1.1 559 1.1 Europe 733 1.7 891 1.8 India 144 0.3 241 0.5 Total $ 43,924 100.0 % $ 49,134 100.0 % 1 United States, Canada, Mexico and Peru. 2 Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China.
Of particular note, the spread of the Omicron variant in Hong Kong and China, along with the imposition of strong government control measures, significantly disrupted our operations and negatively affected our results of operations in 2022. During the first half of the year, our third-party logistics providers experienced substantial difficulties importing and distributing our products in China.
Of particular note, the spread of the Omicron variant in Hong Kong and China, along with the imposition of strong government control measures, significantly disrupted our operations and negatively affected our results of operations in 2022. During the first half of the year, our third-party logistics providers also experienced substantial difficulties importing and distributing our products in China.
We are unable to predict whether and when we will be successful in obtaining a direct selling license to operate in China, and if we are successful, when we will be permitted to conduct direct selling operations and whether such operations would be profitable. 29 Table of Contents In January 2019 the Chinese government announced a 100-day campaign focused on companies involved in the sale of food, equipment, daily necessities, small home electrical appliances and services that are claimed to promote health.
We are unable to predict whether and when we will be successful in obtaining a direct selling license to operate in China, and if we are successful, when we will be permitted to conduct direct selling operations and whether such operations would be profitable. 28 Table of Contents In January 2019 the Chinese government announced a 100-day campaign focused on companies involved in the sale of food, equipment, daily necessities, small home electrical appliances and services that are claimed to promote health.
In determining commissions, the number of levels of down-line members included within the member’s commissionable group increases as the number of memberships directly below the member increases. 31 Table of Contents 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 determining commissions, the number of levels of down-line members included within the member’s commissionable group increases as the number of memberships directly below the member increases. 30 Table of Contents 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.
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.
On January 12, 2016, the Board of Directors authorized an increase to our 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.
The Chinese and Hong Kong governments, like the governments of the other countries in which we operate, continue to adjust the restrictive measures that they impose to control COVID-19 based on then-current local circumstances; however, it should be noted that the Chinese and Hong Kong governments have to date imposed some of the most restrictive COVID-19 control measures of any country in the world.
The Chinese and Hong Kong governments, like the governments of the other countries in which we operate, continue to adjust the restrictive measures that they impose to control COVID-19 based on then-current local circumstances; however, it should be noted that the Chinese and Hong Kong governments imposed some of the most restrictive COVID-19 control measures of any country in the world.
The Chinese government ministries in charge of this campaign indicated that they are targeting illegal practices in the industry, particularly the manufacture and sale of counterfeit and substandard products, and false advertising and misleading claims as to the health benefits of products and services.
The Chinese government ministries in charge of this campaign indicated that they were targeting illegal practices in the industry, particularly the manufacture and sale of counterfeit and substandard products, and false advertising and misleading claims as to the health benefits of products and services.
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 fiscal 2022 and 2021 represented 42% and 43% of net sales, respectively.
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 each of fiscal 2023 and 2022 represented 42% of net sales.
We have significant business in China and in 2022 generated approximately 78% of our revenue in Hong Kong, substantially all of which was derived from the sale of products to members in China.
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.
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 this action has negatively affected our operations and financial performance.
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.
As of December 31, 2022, we were conducting business through 38,660 active members, compared to 45,760 at the end of 2021. We consider a member “active” if they have placed at least one product order with us during the preceding year.
As of December 31, 2023, we were conducting business through 32,410 active members, compared to 38,660 at the end of 2022. We consider a member “active” if they have placed at least one product order with us during the preceding year.
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 year.
We generate approximately 92% of our net sales from subsidiaries located outside the Americas, with sales of our Hong Kong subsidiary representing 79% of net sales in the latest fiscal year.
Income Taxes An income tax provision of $289,000 was recognized for the year ended December 31, 2022 compared with $425,000 for the year ended Decemb er 31, 2021 .
Income Taxes An income tax provision of $177,000 was recognized for the year ended December 31, 2023 compared with $289,000 for the year ended Decemb er 31, 2022 .
As of December 31, 2022, deferred revenue was $5.6 million, which primarily consisted of $3.8 million pertaining to unshipped product orders and unredeemed product vouchers, as well as $1.8 million in auto ship advances.
As of December 31, 2023, deferred revenue was $6.2 million, which primarily consisted of $4.4 million pertaining to unshipped product orders and unredeemed product vouchers, as well as $1.8 million in auto ship advances.
Although the 100-day campaign was due to expire on or about April 18, 2019, we are not aware of any information indicating that the campaign has formally concluded. However, on August 27, 2019, the Chinese government announced that it would conduct a “look-back review” to evaluate the 100-day campaign.
Although the 100-day campaign was due to expire in April 2019, we are not aware of any information indicating that the campaign has formally concluded. However, the Chinese government subsequently announced that it would conduct a “look-back review” to evaluate the 100-day campaign.
Subsequent to December 31, 2022, on February 6, 2023, 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 March 3, 2023 to stockholders of record on February 21, 2023.
Subsequent to December 31, 2023, on February 5, 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 March 1, 2024 to stockholders of record on February 20, 2024.
Further, after four consecutive quarters during which we were unable to sponsor any in-person member events in China, Macau or Hong Kong, we sponsored an in-person event at the end of the third quarter of 2022 in China and are now planning more such events.
Finally, after four consecutive quarters during which we were unable to sponsor any in-person member events in China, Macau or Hong Kong, we sponsored an in-person event at the end of the third quarter of 2022 in China.
Commissions Expense Commissions were 42.2% of net sales for the year ended December 31, 2022 compared with 42.6% of net sales for the year ended December 31, 2021.
Commissions Expense Commissions were 41.9% of net sales for the year ended December 31, 2023 compared with 42.2% of net sales for the year ended December 31, 2022.
We have elected to account for shipping and handling activities performed after title has passed to members as a fulfillment cost, and accrue for the costs of shipping and handling if revenue is recognized before the contractually obligated shipping and handling activities occurs. Event and training revenue is deferred and recognized as the event or training occurs.
We bill members for shipping charges and recognize the freight revenue in net sales. We have elected to account for shipping and handling activities performed after title has passed to members as a fulfillment cost, and accrue for the costs of shipping and handling if revenue is recognized before the contractually obligated shipping and handling activities occurs.
Gross Profit Gross profit was 74.2% of net sales for the year ended December 31, 2022 compared with 75.0% of net sales for the year ended December 31, 2021. Excluding the impact of decreased administrative fee revenue referred to above, gross profit margin decreased slightly in 2022 as compared to 2021, primarily due to higher logistics costs.
Gross Profit Gross profit was 74.6% of net sales for the year ended December 31, 2023 compared with 74.2% of net sales for the year ended December 31, 2022. Excluding the impact of decreased administrative fee revenue referred to above, the gross profit margin percentage in 2023 slightly improved over the prior year primarily due to lower logistics costs.
Cash used in investing activities totaled $143,000 and $225,000 during 2022 and 2021, respectively. 34 Table of Contents Cash used in financing activities during 2022 and 2021 consisted solely of quarterly dividend payments of $0.20 per common share, totaling $9.1 million in each period.
Cash used in investing activities totaled $46,000 and $143,000 during 2023 and 2022, respectively. 33 Table of Contents Cash used in financing activities during 2023 and 2022 consisted solely of quarterly dividend payments of $0.20 per common share, totaling an aggregate of $9.2 million and $9.1 million during 2023 and 2022, respectively.
Excluding the impact of decreased administrative fee revenue referred to above, commissions as a percentage of net sales decreased slightly in 2022 as compared to the prior year due to less supplemental incentive costs. 33 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses were $16.0 million for the year ended December 31, 2022 compared with $17.8 million for the year ended December 31, 2021.
Excluding the impact of decreased administrative fee revenue referred to above, commissions as a percentage of net sales decreased slightly in 2023 as compared to the prior year. 32 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses were $16.0 million for each of the years ended December 31, 2023 and 2022.
See “Item 1A. Risk Factors.” Net sales were $49.1 million for the year ended December 31, 2022 compared with $60.0 million a year ago, a decrease of $10.9 million, or 18%.
See “Item 1A. Risk Factors.” Net sales were $43.9 million for the year ended December 31, 2023 compared with $49.1 million a year ago, a decrease of $5.2 million, or 11%.
As of December 31, 2022, the ratio of current assets to current liabilities was 3.79 to 1.00 and we had $57.1 million of working capital. Working capital as of December 31, 2022 decreased $11.7 million compared to our working capital as of December 31, 2021.
As of December 31, 2023, the ratio of current assets to current liabilities was 3.21 to 1.00 and we had $ 44.2 million of working capital. Working capital as of December 31, 2023 decreased $ 12.9 million compared to our working capital as of December 31, 2022.
Hong Kong net sales, substantially all of which were derived from the sale of products shipped to members residing in China, decreased $8.3 million, or 18%, over the prior year.
Hong Kong net sales, substantially all of which were derived from the sale of products shipped to members residing in China, decreased $3.5 million, or 9%, over the prior year. The decrease in Hong Kong net sales was primarily due to the changes in deferred revenue in the two years.
The scope and impact of the pandemic and related control measures are uncertain, but we have taken 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.
Over the course of the pandemic, we also 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.
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.
For all or a portion of the authorized repurchase amount, we may enter into one or more plans that are compliant with Rule 10b5-1 of the Exchange Act that are designed to facilitate these purchases. The stock repurchase program does not require that we acquire a specific number of shares, and may be suspended from time to time or discontinued.
We will continue to invest in our Mainland China entity for such purposes as establishing China-based manufacturing capabilities, increasing public awareness of our brand and our products, sourcing more Chinese-made products, building a chain of service stations, opening additional Healthy Lifestyle Centers or branch offices, adding local staffing and other requirements for a prospective China direct selling license application. 35 Table of Contents Critical Accounting Policies and Estimates A summary of our significant accounting policies is provided in Note 1 of the Notes to Consolidated Financial Statements in “Item 8.
We will continue to invest in our Mainland China entity for such purposes as establishing China-based manufacturing capabilities, increasing public awareness of our brand and our products, sourcing more Chinese-made products, building a chain of service stations, opening additional Healthy Lifestyle Centers or branch offices, adding local staffing and other requirements for a prospective China direct selling license application. 34 Table of Contents Critical Accounting Estimates We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods.
The decrease in Hong Kong net sales was also due to the recognition of lower administrative fees in 2022, as compared to the prior year.
The decrease in Hong Kong net sales was also due to the recognition of lower administrative fees in 2023 as compared to the prior year, as increased activity within member electronic wallet (eWallet) accounts resulted in less fees assessed during the current year.
We consider all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. As of December 31, 2022, we had $56.8 million in available-for-sale investments classified as cash equivalents. In addition, cash and cash equivalents included $4.2 million held in banks located in China subject to foreign currency controls.
As of December 31, 2023, we had $47.2 million in available-for-sale investments classified as cash equivalents. In addition, cash and cash equivalents included $3.7 million held in banks located in China subject to foreign currency controls.
Substantially all of our product sales are to independent members at published wholesale prices. Product sales are recognized when the products are shipped and title passes to independent members, which generally is upon our delivery to the carrier that completes delivery to the members.
Product sales are recognized when the products are shipped and title passes to independent members, which generally is upon our delivery to the carrier that completes delivery to the members. We estimate and accrue a reserve for product returns based on our return policies and historical experience.
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 December 31, 2022, $21.9 million of the $70.0 million stock repurchase program remained available for future purchases, inclusive of related estimated income tax.
As of December 31, 2023, $21.9 million of the $70.0 million stock repurchase program remained available for future purchases, inclusive of related estimated income tax.
Risk Factors - Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong...”. 30 Table of Contents Our Hong Kong net sales (substantially all of which were derived from products shipped to members residing in China) for 2022 were lower than 2021 .
Risk Factors - Our Hong Kong operations are being adversely affected by recent political and social developments in Hong Kong...”. 29 Table of Contents Statement of Operations Presentation We mainly derive revenue from sales of products. Substantially all of our product sales are to independent members at published wholesale prices.
Since it was implemented, the campaign and associated negative media coverage have had a significant adverse impact on our business, as consumers have widely curtailed their purchases within the affected industries. We, like some of our peers, voluntarily decided in January 2019 to temporarily suspend our member activities, such as product roadshows, product trainings and larger company-sponsored events, in China.
We, like some of our peers, voluntarily decided in January 2019 to temporarily suspend our member activities, such as product roadshows, product trainings and larger company-sponsored events, in China.
We will continue to assess the financial and operational impact of the COVID-19 pandemic, including its impact on the operations of our third-party providers. See “Item 1A. Risk Factors - Epidemics, such as the COVID-19 pandemic, or natural disasters, terrorist attacks or acts of war…”.
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 late 2022, the Chinese and Hong Kong governments took comprehensive steps to relax many of their COVID-19 control measures, which may enable us to resume more normal operations in China and Hong Kong; however, it is still too early to accurately predict the impact on us of this relaxation of control measures and whether it will prove enduring.
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.
The cumulative effect of these developments has adversely affected our Hong Kong operations and may continue to adversely affect our overall business, results of operations and financial condition. See “Item 1A.
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.
However, selling, general and administrative expenses as a percentage of net sales increased to 32.6% of net sales in 2022 from 29.8% of net sales in 2021 primarily due to the impact of relatively fixed costs on a lower level of net sales in 2022.
Selling, general and administrative expenses as a percentage of net sales increased in the current year as compared to the prior year due to the decrease in net sales in the current year and the relatively inelastic nature of these expenses.
The tax provision for 2021 primarily resulted from the impact of the global intangible low-taxed income (“GILTI”) inclusion offset by income tax benefits recognized for GILTI-related return to provision true-ups related to the year ended December 31, 2020, as well as the permanent benefit recognized for carrying back net operating losses generated from the year ended December 31, 2020 to the year ended December 31, 2016.
The tax provision for 2022 primarily resulted from the impact of the global intangible low-taxed income (“GILTI”) inclusion offset by foreign tax credit attributes generated as a result of GILTI, as well as income tax expense from various foreign jurisdictions.
Liquidity and Capital Resources At December 31, 2022, our cash and cash equivalents totaled $69.7 million. Total cash and cash equivalents decreased by $14.2 million from December 31, 2021 to December 31, 2022, primarily due to cash used in operating activities and dividends paid during 2022.
Total cash and cash equivalents decreased by $13.5 million from December 31, 2022 to December 31, 2023, primarily due to cash used in operating activities and dividends paid during 2023. We consider all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents.
The process of determining significant estimates is fact specific and takes into account historical experience and current and expected economic conditions. To the extent that there are material differences between the estimates and actual results, future results of operations will be affected.
To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information.
The Company's effective tax rate for the year ended December 31, 2022 differs from the year ended December 31, 2021 primarily as a result of a reduction in income in our foreign operations during the year ended December 31, 2022 and not having the benefit of the net operating loss carryback.
Our effective tax rate for the year ended December 31, 2023 was lower than in the year ended December 31, 2022 primarily because our reduced income in foreign operations during the year ended December 31, 2023. Liquidity and Capital Resources At December 31, 2023, our cash and cash equivalents totaled $56.2 million.
While the Chinese and Hong Kong governments took comprehensive steps to relax many of the COVID-19 control measures in late 2022, 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 related control measures, which we are unable to accurately predict.
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 these disruptions materially negatively impacted our financial results from 2020 through 2022.
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It is understood that the campaign is specifically focused on the business practices of direct selling companies. During the campaign, we understand that the government is not issuing any additional direct selling licenses, is not issuing certifications of quality or other approvals of various healthcare products, and is reviewing its regulatory oversight of the industry.
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It is understood that the campaign was specifically focused on the business practices of direct selling companies. The campaign and associated negative media coverage resulted in a significant adverse impact on our business, as consumers widely curtailed their purchases within the affected industries.
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We have also canceled or rescheduled a number of in-person member events over the course of the pandemic.
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This less restrictive business environment in China and Hong Kong continued throughout 2023, and we were able to sponsor a number of in-person member events in China during 2023, as well as a large in-person event in Macau during the second quarter of 2023 and a large in-person event in Hong Kong during the fourth quarter of 2023.
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Additionally, we were able to conduct a series of roadshows throughout September, though the size of the gatherings was limited.
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Event and training revenue is deferred and recognized as the event or training occurs.
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The decline in net sales during 2022 resulted in a loss from operations for the year, as well as negative cash flows from operations for the year. We anticipate that our financial performance for the near-term may continue to be adversely impacted. Statement of Operations Presentation We mainly derive revenue from sales of products.
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Deferred revenue increased $569,000 during 2023, but decreased $2.9 million during the prior year as promotional orders from December 2021 were fulfilled and recognized, resulting in a $3.5 million variance. As a result of tepid consumer sentiment in China during 2023, our order volume was down 3% compared with the prior year.
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We estimate and accrue a reserve for product returns based on our return policies and historical experience. We bill members for shipping charges and recognize the freight revenue in net sales.
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Outside of our Hong Kong business, net sales decreased $1.7 million, or 16%, over the prior year, with decreased year-over-year net sales in each other geographic market except the Americas. The decrease in net sales during 2023 resulted in a loss from operations for the year, as well as negative cash flows from operations.
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We believe that the decrease in Hong Kong net sales was primarily due to recurring COVID-19 outbreaks in China and Hong Kong during the year ended December 31, 2022, along with the continued imposition of strong government control measures.
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Other Income, Net Other income increased to $2.4 million for the year ended December 31, 2023 as compared with $872,000 in the prior year. The increase in other income is primarily due to greater interest earned on our cash equivalents as compared to the prior year.
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These measures severely impacted our ability to interact with our members and the ability of our members to interact with each other and their customers, and earlier in 2022 resulted in significant supply chain and distribution challenges.
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Cash used in operations was $4.3 million and $4.9 million during 2023 and 2022, respectively. Income tax paid during April 2023 and 2022 for the repatriation tax on the deemed repatriation of deferred foreign income was $3.0 million and $1.6 million, respectively.
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Late in 2022 the Chinese and Hong Kong governments took comprehensive steps to relax many of their COVID-19 control measures, which may enable us to resume more normal operations in China and Hong Kong; however, it is still too early to accurately predict the impact on us of this relaxation of control measures and whether it will prove enduring.
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Disregarding these payments, cash used in operations improved $2.0 million in 2023 primarily due to an increase in interest earned on our cash equivalents, as well as less employee-related payouts compared to the prior year.
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We believe that our Hong Kong net sales will continue to be negatively impacted by outbreaks of COVID-19 in China and Hong Kong, and the governments’ imposition of related measures to control the virus, including restrictions on business activities, public gatherings and travel.
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We evaluate these estimates on an ongoing basis.
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Outside of our Hong Kong business, net sales decreased $2.6 million, or 20%, compared with the prior year. We believe that this decrease is also largely attributable to the spread of the COVID-19 virus and the imposition of control measures in various markets outside of China and Hong Kong.
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We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
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Selling, general and administrative expenses decreased by $1.9 million, or 1 0%, mainly due to lower professional and credit card fees, as well as lower event costs in 2022, as we held a major event in June 2021.
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There are items within our financial statements that require estimation but are not deemed critical, as defined above. For a detailed discussion of our significant accounting policies and related judgments, see Note 1 of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
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Cash used in operations was $4.9 million during 2022, compared to cash provided by operations of $1.0 million during 2021. The decrease in operating cash flows in 2022 resulted primarily from the reduction in product orders received during 2022 in comparison to the prior year.
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Financial Statements and Supplementary Data” of this report.
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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.
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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.
Removed
Management believes our critical accounting policies and estimates are those related to revenue recognition, as well as those used in the determination of liabilities related to member commissions and income taxes. Revenue Recognition. All revenue is recognized when the performance obligations under a contract, including product vouchers sold on a stand-alone basis in Hong Kong, are satisfied.
Removed
Product sales are recorded when the products are shipped and title passes to independent members. Product sales to members are made pursuant to a member agreement that provides for transfer of both title and risk of loss upon our delivery to the carrier that completes delivery to the members, which is commonly referred to as “F.O.B.
Removed
Shipping Point.” We primarily receive payment by credit card at the time members place orders. Our sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return. Amounts received for unshipped product orders and unredeemed product vouchers are recorded as deferred revenue.
Removed
Such amounts totaled $3.8 million and $6.5 million at December 31, 2022 and 2021, respectively. Shipping charges billed to members are included in net sales. Costs associated with shipments are included in cost of sales. Event and training revenue is deferred and recognized as the event or training occurs. Additionally, deferred revenue includes advances for auto ship orders.
Removed
In certain markets, when a member’s cumulative commission income reaches a certain threshold, a percentage of the member’s weekly commission is held back as an advance and applied to an auto ship order once the accumulated amount of the advances is sufficient to pay for the pre-selected auto ship package of the member.
Removed
Such advances were $1.8 million and $1.9 million at December 31, 2022 and 2021, respectively. 36 Table of Contents Commissions Expense. Independent members earn commissions based on total personal and group bonus volume points per weekly sales period.
Removed
Each of our products are designated a specified number of bonus volume points, which is essentially a percentage of the product’s wholesale price. We accrue commissions when earned and as the related revenue is recognized and pay commissions on product sales generally two weeks following the end of the weekly sales period.
Removed
Independent members may also earn incentives based on meeting certain qualifications during a designated incentive period, which may range from several weeks to up to a year. For each individual incentive, we estimate the total number of qualifiers as well as the expected per qualifier cost and accrue all costs associated with incentives throughout the qualification period.
Removed
We regularly review and update, if necessary, the estimates of both qualifiers and cost as more information is obtained during the qualification period. Any resulting change in total cost is recognized over the remaining qualification period. Long-term promotions and incentives (lasting up to one year) can, in particular, result in uncertain ultimate cost.
Removed
Accrued commissions, including the estimated cost of our international recognition incentive program and other supplemental programs, totaled $2.9 million and $3.6 million at December 31, 2022 and 2021, respectively. Income Taxes.
Removed
Deferred income taxes are recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory rates for the years in which the temporary differences are expected to be recovered or settled.

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