Business Overview
We are an international direct-selling and e-commerce company. Subsidiaries controlled by us sell personal care, wellness, and "quality of life" products under the "NHT Global" brand to an independent distributor network that either uses the products themselves or resells them to consumers.
As of December 31, 2008, we are conducting business through approximately 33,000 active distributors. We consider a distributor "active" if they have placed at least one product order with us during the preceding year. Although we have in prior years expended significant efforts to expand into new markets, we do not intend to devote material resources to opening any additional foreign markets in the near future. Our priority is to focus our resources in our most promising markets, namely Greater China, Europe, in particular Russia, and South Korea. Additionally, we have consolidated underperforming markets in Latin America and Southeast Asia to further improve operating results and free up additional internal resources for our most promising markets.
In 2007 and 2008, we generated approximately 90% and 93% of our net sales from subsidiaries located outside North America, respectively, with sales in Hong Kong representing approximately 62% and 66% of net sales, respectively. Because of the size of our foreign operations, operating results can be impacted negatively or positively by factors such as foreign currency fluctuations, and economic, political and business conditions around the world. In addition, our business is subject to various laws and regulations, in particular regulations related to direct selling activities that create certain risks for our business, including improper claims or activities by our distributors and potential inability to obtain necessary product registrations.
China is currently our most important business development project. In June 2004, NHT Global obtained a general business license in China. The license stipulates a capital requirement of $12 million over a three-year period, including a $1.8 million initial payment we made in January 2005. Direct selling is prohibited in China without a direct selling license that we do not have. In December 2005, we submitted a preliminary application for a direct selling license and fully capitalized our Chinese entity with the remaining capital necessary to fulfill the $12.0 million required cash infusion. In June 2006, we submitted a revised application package in accordance with new requirements issued by the Chinese government. In June 2007, we launched a new e-commerce retail platform in China that does not require a direct selling license and is separate from our current worldwide platform. We believe this model, which offers discounts based on volume purchases, will encourage repeat purchases of our products for personal consumption in the Chinese market. The platform is designed to be in compliance with our understanding of current laws and regulations in China. In November 2007, we filed a new, revised direct selling application incorporating a name change, our new e-commerce model and other developments. These direct selling applications were not approved or rejected by the pertinent authorities, but did not appear to materially progress. By now, the information contained in the most recent application is stale. The Company applied to temporarily withdraw the license application in February 2009 to furnish new information and intends to amend its application with the goal to re-apply in the future. We are unable to predict whether we will be successful in obtaining a direct selling license to operate in China, and if we are successful, when we will be permitted to enhance our e-commerce retail platform with direct selling operations.
Most of the Company's Hong Kong revenue is derived from the sale of products that are delivered to members in China. After consulting with outside professionals, the Company believes that its Hong Kong e-commerce business does not violate any applicable laws in China even though it is used for the internet purchase of our products by buyers in China. But the government in China could, in the future, officially interpret its laws and regulations - or adopt new laws and regulations - to prohibit some or all of our e-commerce activities with China and, if our members engage in illegal activities in China, those actions could be attributable to us. In addition, other Chinese laws regarding how and when members may assemble and the activities that they may conduct, or the conditions under which the activities may be conducted, in China are subject to interpretations and enforcement attitudes that sometimes vary from province to province, among different levels of government, and from time to time. Members sometimes violate one or more of the laws regulating these activities, notwithstanding training that the Company attempts to provide. Enforcement measures regarding these violations, which can include arrests, raise the uncertainty and perceived risk associated with conducting this business, especially among those who are aware of the enforcement actions but not the specific activities leading to the enforcement. The Company believes that this has led some existing members in China - who are signed up as distributors in Hong Kong - to leave the business or curtail their selling activities and has led potential members to choose not to participate. Among other things, the Company is combating this with more training and public relations efforts that are designed, among other things, to distinguish the Company from businesses that make no attempt to comply with the law. This environment creates uncertainty about the future of doing this type of business in China generally and under our business model, specifically. See "Risk Factors-Because our Hong Kong Operations Account For a Majority of Our Overall Business..."

Income Statement Presentation
The Company derives its revenue from sales of its products, sales of its
enrollment packages, and from shipping charges. Substantially all of its product
sales are to independent distributors at published wholesale prices. We
translate revenue from each market's local currency into U.S. dollars using
average rates of exchange during the period. The following table sets forth
revenue by market for the time periods indicated (in thousands).

                                           Year Ended December 31,
                                        2007                     2008

                North America   $  7,743        10.1 %   $  3,247         7.1 %
                Hong Kong         47,240        61.8       30,272        66.1
                China                538         0.7        1,328         2.9
                Taiwan             5,861         7.7        4,444         9.7
                South Korea        9,334        12.2        3,805         8.3
                Japan              2,196         2.9        1,244         2.7
                Europe                 -           -        1,223         2.7
                Other1             3,589         4.6          243         0.5

                Total           $ 76,501       100.0 %   $ 45,806       100.0 %

1 Represents product sales to KGC Networks Ptd. Ltd. as part of a separate agreement entered into effective December 31, 2005 upon the sale of the Company's 51% interest in KGC to Bannks Foundation. Also included are sales from the Latin America, Australia, New Zealand, and Southeast Asia markets.

Cost of sales consist primarily of products purchased from third-party manufacturers, freight cost for shipping products to distributors, import duties, costs of promotional materials sold to the Company's distributors at or near cost, and provisions for slow moving or obsolete inventories. Cost of sales also includes purchasing costs, receiving costs, inspection costs and warehousing costs.
Distributor commissions are typically our most significant expense and are classified as an operating expense. Under our compensation plan, distributors are paid weekly commissions, generally in their home country currency, for product sold by their down-line distributor network across all geographic markets, except China, where in the second quarter of 2007 we launched an e-commerce retail platform and do not pay any commissions. Distributors are not paid commissions on purchases or sales of our products made directly by them. This "seamless" compensation plan enables a distributor located in one country to sponsor other distributors located in other countries where we are authorized to do business. Currently, there are basically two ways in which our distributors can earn income:
• Through retail markups on sales of products purchased by distributors at wholesale prices (in some markets, sales are for personal consumption only and income may not be earned through retail mark-ups on sales in that market); and

• Through commissions paid on product purchases made by their down-line distributors.

Each of our products is designated a specified number of sales volume points, also called bonus volume or "BV". Commissions are based on total personal and group sales volume points per sales period. Sales volume points are essentially a percentage of a product's wholesale cost. As the distributor's business expands from successfully sponsoring other distributors who in turn expand their own businesses by sponsoring other distributors, the distributor receives higher commissions from purchases made by an expanding down-line network. To be eligible to receive commissions, a distributor may be required to make nominal monthly or other periodic purchases of our products. Certain of our subsidiaries do not require these nominal purchases for a distributor to be eligible to receive commissions. In determining commissions, the number of levels of down-line distributors included within the distributor's commissionable group increases as the number of distributorships directly below the distributor increases. Under our current compensation plan, certain of our commission payouts may be limited by a fixed ceiling measured in terms of a specific percentage of total bonus value points. In some markets, commissions may be further limited. Distributor commissions are dependent on the sales mix and, for fiscal 2007 and 2008, represented 46% and 39% of net sales, respectively. From time to time we make modifications and enhancements to our compensation plan to help motivate distributors, which can have an impact on distributor commissions. From time to time we also enter into agreements for business or market development, which may result in additional compensation to specific distributors.
Selling, general and administrative expenses consist of administrative compensation and benefits (including stock-based compensation), travel, credit card fees and assessments, professional fees, certain occupancy costs, and other corporate administrative expenses. In addition, this category includes selling, marketing, and promotion expenses including costs of distributor conventions which are designed to increase both product awareness and distributor recruitment. Because our various distributor conventions are not always held at the same time each year, interim period comparisons will be impacted accordingly.
Provision for income taxes depends on the statutory tax rates in each of the jurisdictions in which we operate. We implemented a foreign holding and operating company structure for our non-United States businesses effective December 1, 2005. This structure re-organized our non-United States subsidiaries into the Cayman Islands. In October 2007, we discontinued our operational use of this structure to reduce costs and because we determined that our United States operating losses will lower our overall effective tax rate. We believe that we operate in compliance with all applicable transfer pricing laws and we intend to continue to operate in compliance with such laws. However, there can be no assurance that we will continue to be found to be operating in compliance with transfer pricing laws, or that those laws would not be modified, which, as a result, may require changes in our operating procedures. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge these agreements, plans, or arrangements, or require changes in our transfer pricing practices, we could be required to pay higher taxes, interest and penalties, and our earnings would be adversely affected.

Results of Operations
The following table sets forth our operating results as a percentage of net sales for the periods indicated.

                                                       Year Ended December 31,
                                                        2007               2008

    Net sales                                              100.0 %          100.0 %
    Cost of sales                                           26.5             27.7

    Gross profit                                            73.5             72.3
    Operating expenses:
    Distributor commissions                                 45.9             38.5
    Selling, general and administrative expenses            41.7             37.5
    Depreciation and amortization                            2.4              3.2
    Impairment of goodwill and long-lived assets            17.2                -
    Recovery of KGC receivable                              (0.7 )              -

    Total operating expenses                               106.5             79.2

    Loss from operations                                   (33.0 )           (6.9 )
    Other income (expense), net                              0.2             (0.5 )

    Loss before income taxes and minority interest         (32.8 )           (7.4 )
    Income tax provision                                    (0.3 )           (1.0 )
    Minority interest                                          -                -

    Net loss                                               (33.1 )%          (8.4 )%

Net Sales. Net sales were $45.8 million for the year ended December 31, 2008 compared to $76.5 million for the year ended December 31, 2007, a decrease of $30.7 million, or 40%. Hong Kong net sales decreased $17.0 million, or 36%, over the prior year. Additionally, net sales for North America and South Korea were down $4.5 million and $5.5 million, respectively. North American sales were slightly impacted by the launch of retail product selling in Italy during June 2008. Prior to the launch, sales into the European market were fulfilled by our North American subsidiaries. Additionally, net sales in Latin America and Southeast Asia were impacted by our efforts to consolidate underperforming markets during 2008. Partly offsetting the decrease, net sales in China from our new e-commerce retail platform increased $790,000 during 2008.
The decrease in net sales was primarily due to the Company's lower product sales as a result of fewer active distributors. The Company's active distributor count has continually declined from reduced promotional spending toward distributors that have been deemed loss-incurring, more competition, the distractions and disruptions caused by management changes in the 18-month period ending February 2007 and the members' reaction to the uncertain regulatory environment in China that is currently impacting the Company's Hong Kong-based business. As of December 31, 2008, the operating subsidiaries of the Company had approximately 33,000 active distributors, compared to 57,000 active distributors at December 31, 2007. Hong Kong experienced a decrease of approximately 13,000 active distributors, or 38%, since December 31, 2007.
As of December 31, 2008, the Company had deferred revenue of approximately $2.8 million, of which approximately $1.9 million pertained to product sales and approximately $964,000 pertained to unamortized enrollment package revenue. Cost of Sales. Cost of sales was $12.7 million, or 27.7% of net sales, for the year ended December 31, 2008 compared with $20.3 million, or 26.5% of net sales, for the year ended December 31, 2007. Cost of sales decreased $7.6 million, or 38%, over the prior year, due primarily to the decrease in net sales. Cost of sales as a percentage of net sales increased primarily due to the decline in enrollment package revenue, specifically in Hong Kong, as this component of net sales does not contain any corresponding charge to cost of sales, and due to Chinese importation costs incurred in Hong Kong, as these costs did not decline at the same rate as net product sales.
Gross Profit. Gross profit was $33.1 million, or 72.3% of net sales, for the twelve months ended December 31, 2008 compared with $56.2 million, or 73.5% of net sales, for the twelve months ended December 31, 2007. This decrease of $23.1 million was mainly due to, as stated above, decreased product sales, the decline in enrollment package revenue, and Chinese importation costs incurred in Hong Kong that did not decrease relative to sales.

Distributor Commissions. Distributor commissions were $17.7 million, or 38.5% of net sales, for the year ended December 31, 2008 compared with $35.1 million, or 45.9% of net sales, for the year ended December 31, 2007. Distributor commissions decreased by $17.4 million, or 50%, mainly due to the decrease in product sales, as well as a decrease in the overall commission rate that resulted from the implementation of a significant commission plan change during the second quarter of 2007, less supplemental commissions paid in North America, Hong Kong and South Korea, and fewer commissions earned in the markets of Japan and Europe.
The result of the commission plan change during the second quarter of 2007 was less than satisfying. While the payout as a percentage of sales was lowered, sales decreased significantly following the effective date of the change. We implemented certain changes to our commission plan in March 2008. Additional enhancements were also added at the same time to improve sales momentum. With these commission changes and enhancements, we targeted a commission payout we expect to eventually settle around 40% of product sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $17.2 million, or 37.5% of net sales, for the year ended December 31, 2008 compared with $31.9 million, or 41.7% of net sales, for the year ended December 31, 2007. Selling, general and administrative expenses decreased by $14.7 million, or 46%, in the twelve months ended December 31, 2008 mainly due to the following:
• lower employee-related expense and severance costs ($1.8 million), travel-related costs ($269,000), insurance costs ($326,000), credit card fees and assessments ($195,000), facility-related costs ($171,000), professional fees ($1.1 million) and litigation settlement costs ($231,000) in North America;

• lower overall expense in Japan ($1.0 million), specifically employee-related expense, due to expense reduction programs during the first nine months of 2007;

• lower employee-related expense ($2.3 million), event costs ($560,000), professional fees ($1.6 million), public relations expense ($489,000), credit card charges and assessments ($384,000), and other miscellaneous costs ($504,000) in Hong Kong and China;

• lower employee-related costs, event costs and other office-related costs ($512,000) in Taiwan;

• lower operating costs due to office closures in Australia ($539,000), Mexico ($725,000), and Southeast Asia ($553,000);

• lower employee-related costs ($561,000), credit card charges and assessments ($220,000), facility-related costs ($156,000), and other miscellaneous costs ($190,000) in South Korea;

• lower stock-based compensation expense ($291,000); partly offset by

• the reversal of the reserve established in fiscal 2004 with respect to the allegations made by the South Korean customs agency regarding importation of Alura into South Korea ($244,000).

Depreciation and Amortization. Depreciation and amortization was $1.5 million, or 3.2% of net sales, for the year ended December 31, 2008 compared with $1.8 million, or 2.4% of net sales, for the year ended December 31, 2007. Depreciation and amortization decreased by $352,000 compared to the prior year, as a result of the Company's slowdown in capital expenditures. Impairment of Goodwill and Long-Lived Assets. Goodwill was reduced by $12.4 million during 2007 as the Company recognized an impairment loss upon completion of its annual impairment analysis. The annual impairment analysis was based on revised expected future sales and earnings due to the Company's less than expected operating performance during the latter half of 2007. The fair value of the Company was estimated using the expected present value of future cash flows, as well as market capitalization. No impairment of goodwill was recorded during 2008.
Impairment of long-lived assets was $30,000 for the year ended December 31, 2008 compared with $795,000 for the year ended December 31, 2007. The impairment expense during 2007 is primarily related to an impairment charge of $273,000 recorded for certain office equipment and leasehold improvements in Mexico as the Company decided to terminate its existing office lease in Mexico City and relocate to a less costly location, and an impairment charge of $246,000 recorded in Japan as the Company determined that it was in its best interest to discontinue the use of certain computer software. Additionally, an impairment charge of $253,000 was recorded as to the overall recoverability of the remaining long-lived assets in both Mexico and Japan.
Recovery of KGC Receivable. Recovery of KGC receivable has declined as the Company did not receive any payments on the receivable from KGC Networks Ptd. Ltd. ("KGC") during the year ended December 31, 2008. KGC became delinquent on its monthly payments to the Company in August 2007. A recovery of KGC receivable was recorded for $565,000 during the year ended December 31, 2007.

Other Income (Expense), Net. Other expense was $226,000 for the year ended December 31, 2008 compared with income of $143,000 for the year ended December 31, 2007. The increase in other expense was primarily due to interest expense of $2.4 million the Company recorded on its convertible debentures, including amortization of debt issuance cost and accretion of debt discount aggregating $2.1 million. Offsetting this expense, the Company de-recognized $2.2 million of commission liabilities in certain of its international markets for previous years as it determined that it is probable that these commission payments will not be claimed. Additionally, interest income declined as the Company has not recognized any imputed interest on the receivable from KGC in 2008. As previously mentioned, KGC became delinquent on its payments to the Company in August 2007. During the year ended December 31, 2007, the Company recognized $228,000 in imputed interest on the KGC receivable.
Income Taxes. The provision for income taxes increased to $456,000 for the year ended December 31, 2008 compared with $200,000 for the year ended December 31, 2007 due to a $351,000 deferred tax liability recorded in Hong Kong upon de-recognition of certain commission liabilities. The Company did not recognize a tax benefit for U.S. tax purposes due to uncertainty that the benefit will be realized.
Net Loss. Net loss was $3.9 million, or 8.4% of net sales, for the year ended December 31, 2008 compared to net loss of $25.3 million, or 33.1% of net sales, for the year ended December 31, 2007. The reduction in losses was primarily due to lower distributor commissions and selling, general and administrative expenses as compared to the comparable period in the prior year and less goodwill impairment.
Liquidity and Capital Resources
The Company has in recent quarters supported its working capital and capital expenditure needs with cash generated from operations as well as capital raised from several private placements.
On May 4, 2007, the Company consummated a private equity placement generating gross proceeds of approximately $3.0 million. The May 2007 financing consisted of the sale of 1,759,307 shares of the Company's Series A convertible preferred stock and the sale of warrants evidencing the right to purchase 1,759,307 shares of the Company's common stock. As partial consideration for placement agency services, the Company issued warrants evidencing the right to purchase an additional 300,000 shares of the Company's common stock to the placement agent that assisted in the financing. The warrants are exercisable at any time through the sixth anniversary following their issuance. The exercise price of the warrants varies from $3.80 to $5.00 per share, depending on the time of exercise.
More recently, on October 19, 2007, the Company raised gross proceeds of $3.7 million in a private placement of variable rate convertible debentures (the "Debentures") having an aggregate face amount of $4,250,000, seven-year warrants to purchase 1,495,952 shares of the Company's common stock, and one-year warrants to purchase 1,495,952 shares of the Company's common stock. The Debentures are convertible by their holders into shares of our common stock at a conversion price of $2.50, subject to adjustment in certain circumstances. The Debentures bear interest at the greater of LIBOR plus 4%, or 10% per annum. Interest is payable quarterly beginning on January 1, 2008. One-half of the original principal amount of the Debentures is payable in 12 equal monthly installments beginning on November 1, 2008, and the balance is payable on October 19, 2009, unless extended by the holders to October 19, 2012. Under certain conditions, the Company may be able to pay principal and interest in shares of its common stock. Under certain conditions, the Company also has certain rights to force conversion or redemption of the debentures. The warrants are exercisable beginning six months and one day after their respective issuance and have an exercise price of $3.52 per share. The placement agent and its assigns also received five-year warrants to purchase 149,595 shares of the Company's common stock at an exercise price of $3.52 per share. The Company has used and plans to continue using the net proceeds from the October 2007 private placement to provide additional working capital.
At December 31, 2008, the Company's cash and cash equivalents totaled approximately $3.5 million. Total cash and cash equivalents decreased by approximately $2.8 million from December 31, 2007 to December 31, 2008. At December 31, 2008, the ratio of current assets to current liabilities was 0.63 to 1.00 and the Company had a working capital deficit of approximately $4.1 million. Current liabilities included deferred revenue of $2.8 million that consisted of amortized enrollment package revenues and unshipped orders. The ratio of current assets to current liabilities excluding deferred revenue would be 0.85 to 1.00. Working capital as of December 31, 2008 decreased $867,000 compared to that as of December 31, 2007 mainly due to cash used in operations and a $1.3 million net increase in the Debentures resulting from a $1.7 million accretion of the debt discount, offset by de-recognition of commission liabilities in certain of our international markets totaling $2.2 million. Cash used in operations for the twelve months ended December 31, 2008 was approximately $2.7 million. Cash was mainly utilized due to the incurrence of net losses and decreases in current liabilities, specifically accounts payable, . . .