Natural Health Trends Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Natural Health Trends is an international direct-selling and e-commerce company selling NHT Global personal care, wellness and quality-of-life products.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $11.7 million | $14.3 million | $36.6 million | $43.9 million |
| Gross margin | 73.6% | 74.3% | 74.3% | 75.3% |
| Operating income (loss) | $(0.1) million | $0.5 million | $(0.3) million | $1.1 million |
| Net income | $47,000 | $471,000 | $125,000 | $853,000 |
| Operating cash flow | Not separately presented | Not separately presented | $(5.8) million | $(0.6) million |
- Q3 sales declined 18%; nine-month sales declined 17%. Q3 net income fell to $47,000 from $471,000, while nine-month net income decreased to $125,000 from $853,000.
- Q3 operating margin was negative 1.2%, versus positive 3.4% a year earlier; nine-month operating margin was negative 0.9%, versus positive 2.5%.
- Commissions were 41.5% of Q3 sales and 42.0% of nine-month sales, broadly comparable to the prior-year periods. SG&A fell year over year in both periods, but represented a larger share of lower sales.
Balance sheet, cash flow and capital returns
- At September 30, cash and cash equivalents were $70.7 million, down from $83.8 million at December 31, 2021. This included $58.6 million of investments classified as cash equivalents; $3.7 million was held in Chinese banks subject to foreign currency controls.
- Current assets were $79.0 million and current liabilities were $20.2 million, with working capital of $58.8 million and a current ratio of 3.9:1. No interest-bearing borrowings are shown; reported obligations include $12.1 million of income taxes payable and $4.4 million of operating lease liabilities.
- For the first nine months, operating cash use was $5.8 million, compared with $0.6 million in 2021. Investing cash use was $0.1 million; dividends paid were $6.9 million. Cash, cash equivalents and restricted cash decreased by $13.6 million, including a $0.9 million adverse effect from exchange rates.
- The company paid dividends of $0.20 per share in each of the first three quarters and declared another $0.20 quarterly dividend after quarter-end. The board retains discretion over future dividends. $21.9 million remained available under the repurchase authorization.
Material changes, outlook and risks
- Hong Kong produced 80.4% of Q3 sales and 79.0% of nine-month sales; substantially all Hong Kong revenue comes from products delivered to members in China. Hong Kong sales fell 16% in Q3 and 16% over nine months. Active members numbered 41,170, down from 45,760 at year-end 2021 and 45,950 a year earlier.
- Management attributed the sales weakness principally to COVID-19 outbreaks and Chinese government control measures that constrained logistics, member interaction, gatherings and travel. Logistics difficulties largely eased by the end of June, and limited in-person events resumed in China during Q3, but restrictions continued. Management expects near-term financial performance to remain adversely affected; no quantified earnings or revenue guidance is provided.
- Management says existing liquidity should fund normal operations and commitments for the foreseeable future. It also expects to continue quarterly $0.20 dividends for the foreseeable future, subject to board discretion and business conditions.
- Risks include reliance on Hong Kong/China, ongoing pandemic restrictions, Hong Kong political and social conditions, member attrition, foreign exchange, direct-selling and product regulation, and dependence on third-party manufacturers and logistics providers. The company does not currently hold a China direct-selling license and cannot predict if or when one may be obtained.
- Other notable items: nine-month comprehensive loss was $724,000, including $828,000 of foreign currency translation losses. The company carries $12.1 million of income taxes payable related to the U.S. repatriation tax, of which $9.1 million is noncurrent. Management amended phantom-share performance criteria for two 2022 vesting periods, citing extraordinary business circumstances in China. No legal proceedings were reported, and management reported effective disclosure controls.
Most important facts for investors to verify
- Whether sales and active-member trends stabilize, especially in Hong Kong and China, and whether pandemic-related restrictions or logistics disruptions recur.
- Whether cash use improves as revenue changes, and how operating cash flow and working capital develop alongside continued dividends.
- The liquidity and timing of cash held in China, the composition and risk of cash-equivalent investments, and the settlement schedule for tax and lease liabilities.
- Whether the $0.20 quarterly dividend remains sustainable given operating losses and negative operating cash flow.
- Any material change in China licensing prospects, regulatory conditions, or member compensation and phantom-award costs.