NATURAL HEALTH TRENDS CORP MANAGEMENT REPORT OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Form 10-Q)

Company Overview



We are an international direct-selling and e-commerce company. Subsidiaries
controlled by us sell personal care, wellness, and "quality of life" products
under the "NHT Global" brand. Our wholly-owned subsidiaries have an active
physical presence in the following markets: the Americas, which consists of the
United States, Canada, Cayman Islands, Mexico and Peru; Greater China, which
consists of Hong Kong, Taiwan and China; Southeast Asia, which consists of
Malaysia, Singapore and Thailand; South Korea; Japan; India; and Europe. We also
operate in Russia and Kazakhstan through our engagement with a local service
provider.



As of June 30, 2022, we were conducting business through 43,020 active members,
compared to 45,760 at December 31, 2021 and 46,860 at June 30, 2021. 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.



We generate approximately 94% of our net sales from subsidiaries located outside
the Americas, with sales of our Hong Kong subsidiary representing 80% 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, 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, 2021, and more specifically under the captions "Epidemics, such as
the COVID-19 pandemic, or natural disasters, terrorist attacks or acts of
war...", "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...".



China has been and continues to be our most important business development
project. We operate an e-commerce direct selling platform in Hong Kong that
generates revenue derived from the sale of products to members in Hong Kong and
elsewhere, including China. Substantially all of our Hong Kong revenues are
derived from the sale of products that are delivered to members in China.
Through a separate Chinese entity, we operate an e-commerce retail platform in
China. We believe that neither of these activities require a direct selling
license in China, which we do not currently hold. We previously submitted a
preliminary application for a direct selling license in China in August 2015,
but in 2019 a Chinese governmental authority recommended that we withdraw our
application. We understand that the governmental authorities recommended that
other companies with pending direct selling license applications also withdraw
their applications. We applied to withdraw our application in November 2019, and
the governmental authorities approved the withdrawal of our application shortly
thereafter. In connection with the withdrawal of our application, we received a
refund in March 2020 of a consumer protection fund deposit of CNY 20 million
($2.9 million) that we made upon the submission of our application. We expect to
reapply for a direct selling license in China when we believe that circumstances
are again ripe for doing so. If we are ultimately able to obtain a direct
selling license in China, we believe that the incentives inherent in the direct
selling model in China would incrementally benefit our existing business. We do
not expect that any increased sales in China derived from obtaining a direct
selling license would initially be material and, in any event may be partially
offset by the higher fixed costs associated with the establishment and
maintenance of required service centers, branch offices, manufacturing
facilities, certification programs and other legal requirements. 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.





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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. 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. 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. 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 did this because we learned that the
100-day campaign was announced in broad outlines by the central government, and
the interpretation and enforcement of the campaign was delegated to the
provincial and local governments. We consider it a top priority for our business
to develop an understanding of and cooperate with all levels and jurisdictions
of the government agencies, and did not want to run the risk of being
inadvertently entangled in government enforcement actions as the provincial and
local governments formulate and implement their interpretive guidance and
rule-making. Although we have recently 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 from time to
time, and such periods of reduced activity may have a material adverse effect on
our business.



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. 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 understand that
during September 2019 the working group evaluated the performance and results of
a number of organizations and governmental departments in these provinces and
made recommendations for various improvements. It was noted that each province
had opened a number of investigative cases, had successfully closed numerous
cases, and had imposed various fines and penalties. We understand that the
look-back review continued after September 2019, and we are not aware that this
review has been completed. As a result, the business environment in China for
health product companies continues to be challenging, which has been exacerbated
by negative social media sentiment expressed for these types of companies. We
believe that the campaign, as well as its extension and aftermath (including the
look-back review), will continue to negatively impact our business in China in
the near-term, but will ultimately benefit us and Chinese consumers in the
long-term as purveyors of substandard products are driven from the market.



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 2021 generated approximately 78% of
our revenue in Hong Kong, substantially all of which was derived from the sale
of products to members in China. The Chinese government continues to adjust the
restrictive measures that it imposes to control COVID-19 based on then-current
local circumstances, as have the governments of the other countries in which we
operate. 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. We have also canceled
or rescheduled a number of in-person member events over the course of the
pandemic. The ultimate 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.



The business disruptions wrought by the COVID-19 pandemic have materially
negatively impacted our financial results throughout 2020, 2021, and the first
six months of 2022, and we expect that our financial results for the near-term
may be adversely affected. 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 the first half of 2022. During the first half of the
year, our third-party logistics providers experienced substantial difficulties
importing and distributing our products in China. However, by early June
2022 the Chinese government began relaxing some of its more stringent policies
and we found that the difficulties encountered by our third-party logistics
providers were largely resolved by the end of the month. This improved state of
affairs nevertheless remains fragile, as many restrictions continue in effect
and the potential for more disruptive measures remains. The restrictions imposed
to control the spread of COVID-19 have also severely impacted our ability to
interact with our members, and the second quarter of 2022 marked the fourth
consecutive quarter that we have been unable to sponsor any in-person member
events in China, Macau or Hong Kong. In addition, restrictions on mobility in
China are negatively impacting the ability of our members to interact with each
other and their customers. 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…" in our most recent Annual Report on Form 10-K.



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
this action has negatively affected our operations and financial performance. If
current conditions continue or further deteriorate, we anticipate that our
business, financial condition and results of operations will be adversely
affected. 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.



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Our Hong Kong net sales (substantially all of which were derived from products
shipped to members residing in China) for the first six months of 2022 were
lower than the comparable period in 2021. The decline in net sales during the
first six months of 2022 resulted in a loss from operations for the period, as
well as negative cash flows from operations. We anticipate that our financial
performance for the near-term will continue to be adversely impacted.





Operation Status Overview



We mainly derive revenue from sales of products. 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. 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. 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.



Cost of sales consists primarily of products purchased from third-party
manufacturers, freight cost for transporting products to our foreign
subsidiaries and shipping products to members, import duties, packing materials,
product royalties, costs of promotional materials sold to our members at or near
cost, and provisions for slow moving or obsolete inventories. Cost of sales also
includes purchasing costs, receiving costs, inspection costs and warehousing
costs.



Member commissions are our most significant expense and are classified as an
operating expense. Under our compensation plan, members are paid weekly
commissions by our subsidiary in which they are enrolled, generally in their
home country currency, for product purchases by their down-line member network
across all geographic markets. Our China subsidiary maintains an e-commerce
retail platform and does not pay commissions, although our Chinese members may
participate in our compensation plan through our other subsidiaries. This
"seamless" compensation plan enables a member located in one country to enroll
other members located in other countries where we are authorized to conduct our
business. Currently, there are basically two ways in which our members can earn
income:



  • through commissions paid on the accumulated bonus volume from product
    purchases made by their down-line members and customers; and



• through retail profits on sales of products purchased by wholesale members

price and resold at retail price (for buyers of some of our smaller

markets and buyers of our China affiliate, sales are for personal use

    consumption only and income may not be earned through retail profits).




Each of our products is designated a specified number of bonus volume points.
Commissions are based on total personal and group bonus volume points per weekly
sales period. Bonus volume points are essentially a percentage of a product's
wholesale price. As the member's business expands from successfully enrolling
other members who in turn expand their own businesses by selling product to
other members, the member receives higher commissions from purchases made by an
expanding down-line network. In some of our markets, to be eligible to receive
commissions, a member may be required to make nominal monthly or other periodic
purchases of our products. Certain of our subsidiaries do not require these
nominal purchases for a member to be eligible to receive commissions. 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.



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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 2022 and 2021, represented 42% of net
sales. 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.



Selling, general and administrative expenses include administrative compensation and benefits, travel, credit card fees and appraisals, professional fees, certain occupancy costs and other corporate administrative expenses (including including stock-based compensation). In addition, this category includes sales, marketing and promotional expenses (including the costs of member education events and conventions designed to increase both product awareness and member recruitment). Since our various member conventions do not always take place at the same time each year, comparisons of interim periods will be affected accordingly.



The functional currency of our international subsidiaries is generally their
local currency. Local currency assets and liabilities are translated at the
rates of exchange on the balance sheet date, and local currency revenues and
expenses are translated at average rates of exchange during the period. Equity
accounts are translated at historical rates. The resulting translation
adjustments are recorded directly into stockholders' equity.



Sales by our foreign subsidiaries are generally transacted in the respective
local currencies and are translated into U.S. dollars using average rates of
exchange for each monthly accounting period to which they relate. Most of our
product purchases from third-party manufacturers are transacted in U.S. dollars.
Consequently, our sales and net earnings are affected by changes in currency
exchange rates, with sales and earnings generally increasing with a weakening
U.S. dollar and decreasing with a strengthening U.S. dollar.





Results of Operations


The following table shows our results of operations as a percentage of net sales for the periods indicated.



                                                  Three Months Ended June 30,           Six Months Ended June 30,
                                                   2022                2021              2022               2021
Net sales                                              100.0 %             100.0 %          100.0 %            100.0 %
Cost of sales                                           25.4                24.3             25.3               24.3
Gross profit                                            74.6                75.7             74.7               75.7
Operating expenses:
Commissions expense                                     43.2                42.9             42.2               42.0
Selling, general and administrative expenses            29.8                30.4             33.2               31.7
Total operating expenses                                73.0                73.3             75.4               73.7
Income (loss) from operations                            1.6                 2.4             (0.7 )              2.0
Other income (expense), net                              1.3                (0.4 )            1.2               (0.1 )
Income before income taxes                               2.9                 2.0              0.5                1.9
Income tax provision                                     1.5                 0.6              0.2                0.6
Net income                                               1.4 %               1.4 %            0.3 %              1.3 %






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Net Sales



The following table sets forth revenue by market for the periods indicated (in
thousands):



                            Three Months Ended June 30,                        Six Months Ended June 30,
                           2022                     2021                     2022                     2021

Americas1 $763 5.7% $1,126 7.0% $1,638 6.5% $2,124 7.2% Hong Kong2

           10,716        80.2       12,704        78.7       19,492        78.3       23,026        77.7
China                   486         3.6          587         3.6          967         3.9        1,095         3.7
Taiwan                  624         4.7          715         4.4        1,193         4.8        1,406         4.8
South Korea              46         0.4           83         0.5           92         0.4          151         0.5
Japan                   136         1.0          187         1.2          371         1.5          336         1.1
Malaysia and
Singapore                95         0.7          131         0.8          220         0.9          206         0.7
Russia and
Kazakhstan              104         0.8          232         1.4          292         1.2          423         1.4
Europe                  304         2.3          261         1.6          505         2.0          611         2.1
India                    86         0.6          126         0.8          136         0.5          243         0.8
Total              $ 13,360       100.0 %   $ 16,152       100.0 %   $ 24,906       100.0 %   $ 29,621       100.0 %



1 United States, Canada, Mexico and Peru

2 Almost all of our hong kong revenue comes from the sale of products that are delivered to members within China. See “Item 1A. Risk Factors” in this report and in our most recent Annual Report on Form 10-K.



Net sales were $13.4 million for the three months ended June 30, 2022 compared
with $16.2 million for the comparable period a year ago, a decrease of
$2.8 million, or 17%. Hong Kong net sales, substantially all of which were
derived from the sale of products shipped to members residing in China,
decreased $2.0 million, or 16%, over the comparable period a year ago. We
believe that the decrease in Hong Kong net sales was primarily due to the spread
of the COVID-19 Omicron variant in Hong Kong and China, along with the
imposition of strong government control measures during most of the quarter
ended June 30, 2022 as the restrictions severely impacted our ability to
interact with our members and the ability of our members to interact with each
other and their customers. The decrease in Hong Kong net sales was also due to
the recognition of lower administrative fees in the current-year quarter, as
compared to the prior year quarter. We believe that our Hong Kong net sales will
continue to be negatively impacted by scattered outbreaks of COVID-19 in
China and the Chinese government's imposition of related measures to control the
virus, including further restrictions on business activities, public gatherings
and travel. Outside of our Hong Kong business, net sales decreased $804,000, or
23%, over the comparable three-month period a year ago. We believe that this
decrease is also largely attributable to the spread of the COVID-19 Omicron
variant and the imposition of control measures in various markets outside of
China.



Net sales were $24.9 million for the six months ended June 30, 2022 compared
with $29.6 million for the comparable period a year ago, a decrease
of $4.7 million, or 16%, due to substantially the same factors that adversely
affected Hong Kong net sales for the three months ended June 30, 2022. Outside
of our Hong Kong business, net sales decreased $1.2 million, or 18%, over the
comparable six-month period a year ago. As of June 30, 2022, deferred revenue
was $6.7 million, which primarily consisted of $4.8 million pertaining to
unshipped product orders and unredeemed product vouchers, as well as
$1.8 million in auto ship advances.



Gross Profit



Gross profit was 74.6% of net sales for the three months ended June 30,
2022 compared with 75.7% of net sales for the three months ended June 30, 2021,
and 74.7% of net sales for the six months ended June 30, 2022 compared
with 75.7% of net sales for the six months ended June 30, 2021. Excluding the
impact of decreased administrative fee revenue referred to above, gross profit
margin decreased for the three and six month periods ended June 30, 2022 due to
the impact of relatively fixed costs on a lower level of net sales.



Commissions Expense



Commissions were 43.2% of net sales for the three months ended June 30,
2022 compared with 42.9% of net sales for the three months ended June 30, 2021,
and 42.2% of net sales for the six months ended June 30, 2022 compared with
42.0% of net sales for the six months ended June 30, 2021. Excluding the impact
of decreased administrative fee revenue referred to above, commissions as a
percentage of net sales for the three and six month periods ended June 30, 2022
was relatively consistent as compared to the comparable periods in the prior
year.


Selling, general and administrative expenses



Selling, general and administrative expenses of $4.0 million for the three
months ended June 30, 2022 compared with $4.9 million in the same period a year
ago. For the six months ended June 30, 2022, selling, general and administrative
expenses were $8.3 million compared with $9.4 million for the comparable period
a year ago. The decrease in selling, general and administrative expenses for the
three and six month periods ended June 30, 2022 as compared to the comparable
periods in the prior year is primarily due to lower event costs as we held a
major event in June 2021, as well as lower professional and credit card fees.



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Income Taxes



An income tax provision of $207,000 and $97,000 was recognized during the three
months ended June 30, 2022 and 2021, respectively. An income tax provision of
$39,000 and $184,000 was recognized during the six months ended June 30,
2022 and 2021, respectively. The effective tax rate for the six months ended
June 30, 2022 was relatively consistent as compared to the comparable prior year
rate.




Cash and capital resources



At June 30, 2022, our cash and cash equivalents totaled $75.6 million. Total
cash and cash equivalents decreased by $8.2 million from December 31, 2021 to
June 30, 2022, primarily due to cash used in operating activities and the
dividends paid during the first six months of 2022. We consider all highly
liquid investments with original maturities of three months or less, when
purchased, to be cash equivalents. As of June 30, 2022, we had $60.6 million in
available-for-sale investments classified as cash equivalents. In addition, cash
and cash equivalents included $4.0 million held in banks located within China
subject to foreign currency controls.



From June 30, 2022the ratio of current assets to current liabilities was 3.7 to 1.0 and we had $61.5 million working capital. Working capital at
June 30, 2022 decreases $7.3 million compared to our working capital at
December 31, 2021.



Cash used in operations was $3.5 million for the first six months of 2022,
compared with cash provided by operations of $548,000 in the comparable period
of 2021. The decrease in operating cash flows resulted primarily from the
reduction in product orders received in comparison to the comparable period in
the prior year.


Cash flows used in investing activities totaled $78,000 and $147,000 in the first six months of 2022 and 2021, respectively.



Cash flows used in financing activities during the first six months of 2022 and
2021 consisted solely of quarterly dividend payments of $0.20 per common share,
totaling $4.6 million in each period. Subsequent to June 30, 2022, on August 1,
2022, 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 26, 2022 to stockholders of record on August 16, 2022. 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.



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,
2022, $21.9 million of the $70.0 million stock repurchase program remained
available for future purchases, inclusive of related estimated income tax.



We believe that our existing internal liquidity, supported by cash and cash flow from operations, should be sufficient to fund normal business activities and meet our financial commitments for the foreseeable future.



We do not have any significant unused sources of liquid assets. If necessary, we
may attempt to generate more funding from the capital markets, but currently we
do not believe that will be necessary.



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Our priority is to focus our resources on investing in our most important
markets, which we consider to be Greater China and countries where our existing
members may have the connections to recruit prospects and sell our products,
such as Southeast Asia, India, South America and Europe. 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.



Significant 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. Financial Statements and
Supplementary Data" of our Annual Report on Form 10-K filed with the United
States Securities and Exchange Commission (SEC) on February 25, 2022. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reported period. The process of determining significant
estimates is fact specific and takes into account historical experience and
current and expected economic conditions. To the extent that there are material
differences between the estimates and actual results, future results of
operations will be affected.



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.  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. 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. 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. Such amounts
totaled $4.8 million and $6.5 million at June 30, 2022 and December 31, 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. 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.  Such advances were $1.8 million and $1.9 million at June 30, 2022 and
December 31, 2021, respectively.



Commissions Expense. Independent members earn commissions based on total
personal and group bonus volume points per weekly sales period.  Each of our
products are designated a specified number of bonus volume points, which is
essentially a percentage of the product's wholesale price.  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.



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. 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. Accrued commissions, including
the estimated cost of our international recognition incentive program and other
supplemental programs, totaled $3.1 million and $3.6 million at June 30,
2022 and December 31, 2021, respectively.



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Income Taxes. 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. We evaluate the probability of realizing the future
benefits of any of our deferred tax assets and record a valuation allowance when
we believe a portion or all of our deferred tax assets may not be realized.
Deferred tax expense or benefit is a result of changes in deferred tax assets
and liabilities. Based on the technical merits of our tax position, tax benefits
may be recognized if we determine it is more likely than not that our position
will be sustained on examination by tax authorities. The complex nature of these
estimates requires us to anticipate the likely application of tax law and make
judgments on the largest benefit that has a greater than fifty percent
likelihood of being realized prior to the completion and filing of tax returns
for such periods. As of June 30, 2022, we do not have a valuation allowance
against our U.S. deferred tax assets. We maintain a valuation allowance in
certain foreign jurisdictions with an overall tax loss. The valuation allowance
will be reduced at such time as management believes it is more likely than not
that the deferred tax assets will be realized. Any reductions in the valuation
allowance will reduce future income tax provision.



Provision for income taxes depends on the statutory tax rates in each of the
jurisdictions in which we operate. As a result of capital return activities, we
determined that a portion of our current undistributed foreign earnings are no
longer deemed reinvested indefinitely by our non-U.S. subsidiaries. The U.S. Tax
Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017 by the U.S.
government, required a one-time repatriation tax on certain un-repatriated
earnings of foreign subsidiaries at a rate of 15.5% tax on post-1986 foreign
earnings held in cash and an 8% rate on all other post-1986 earnings. Due to the
adoption of a territorial tax regime, any foreign source portion of a qualified
dividend received by a 10% U.S. corporate shareholder is exempt from U.S.
federal tax, therefore resulting in any future repatriation having a minimal
effect on our effective tax rate. For state income tax purposes, we will
continue to periodically reassess the needs of our foreign subsidiaries and
update our indefinite reinvestment assertion as necessary. To the extent that
additional foreign earnings are not deemed permanently reinvested, we expect to
recognize additional income tax provision at the applicable U.S. state corporate
tax rate(s). As of June 30, 2022, we have not recorded a state deferred tax
liability for earnings to be repatriated in the future because the portion of
all earnings which are no longer deemed reinvested indefinitely as of June 30,
2022 have already been repatriated. All undistributed earnings in excess of 50%
of current earnings on an annual basis are intended to be reinvested
indefinitely as of June 30, 2022.



The U.S. Coronavirus Aid, Relief, and Economic Security ("CARES") Act was
enacted on March 27, 2020. The CARES Act was enacted to provide tax relief to
companies impacted by the COVID-19 pandemic. In addition to other broad changes,
the CARES Act allows for a 5-year carryback period for net operating losses
arising in tax years beginning after 2017 and before 2021, effectively taking
advantage of differences in tax rate as a result of enactment of the Tax Act. We
booked a tax benefit of $84,000 during 2021 due to the net operating loss
generated in the tax year ended December 31, 2020 for the rate differential
resulting from the carryback.



The Company has analyzed the recently finalized U.S. tax regulations published
by the U.S. Treasury and Internal Revenue Service on January 4, 2022. These
regulations overhaul various components of the foreign tax credit regime
including the determination of creditable foreign taxes and limit the amount of
foreign taxes that are creditable against U.S. income taxes. While these
regulations are generally effective on March 7, 2022, some provisions are
retroactive and may limit the Company's ability to claim credits on certain
foreign taxes. Although the Company is still analyzing the full impact of the
new regulations, the Company does not expect a material impact to the Company's
financial statements as a result of these final regulations.



We estimate what our effective tax rate will be for the full fiscal year at each
interim reporting period and record a quarterly tax provision based on that
estimated effective tax rate. Throughout the year that estimated rate may change
based on variations in our business, changes in our corporate structure, changes
in the geographic mix and amount of income, applicable tax laws and regulations,
communications with tax authorities, as well as our estimated and actual level
of annual pre-tax income. We adjust our income tax provision in the reporting
period in which the change in our estimated rate occurs so that the year-to-date
provision is consistent with the anticipated annual tax rate. The Company's
effective tax rate projected for the year ending December 31, 2022 differs from
its actual tax rate for the year ended December 31, 2021 primarily as a result
of an anticipated reduction in income in our foreign operations during the year
ended December 31, 2022.

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