Natural Health Trends Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial amounts below are in U.S. dollars; statements report amounts in thousands unless noted. The company sells NHT Global personal care, wellness and quality-of-life products through direct selling and e-commerce.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $14.276m | $14.124m | $43.897m | $45.476m |
| Gross profit / margin | $10.608m / 74.3% | $10.489m / 74.3% | $33.040m / 75.3% | $32.510m / 71.5% |
| Operating income (loss) | $0.479m | $0.668m | $1.084m | $(0.597)m |
| Net income | $0.471m | $0.635m | $0.853m | $0.096m |
| Diluted EPS | $0.04 | $0.06 | $0.07 | $0.01 |
- Q3 operating margin was 3.4% versus 4.8%; net margin was 3.3% versus 4.5%. Nine-month operating margin improved to 2.5% from (1.3%); net margin was 2.0% versus 0.2%.
- Operating cash flow was negative $0.557m for the first nine months, an improvement from negative $1.530m a year earlier. Investing cash outflow was $0.165m; financing cash outflow was $6.855m, consisting of dividends.
- Cash and cash equivalents were $84.640m at quarter-end, down $7.727m from December 31, 2020; restricted cash was $0.524m. The company reported $70.5m working capital and a 4.1-to-1 current ratio. About $3.8m of cash was held in Chinese banks subject to foreign-currency controls.
- No borrowings are reported on the balance sheet. Operating lease liabilities totaled $3.513m; total liabilities were $37.421m.
Material changes and business developments
- Q3 sales rose 1% year over year, while nine-month sales declined 3%. Hong Kong sales were $11.201m in Q3 and $34.227m for nine months; substantially all Hong Kong revenue came from products delivered to members in China.
- Nine-month sales were affected by a $3.0m increase in deferred revenue from unshipped orders and unredeemed vouchers. Deferred revenue was $6.038m at September 30, including $4.023m for unshipped products/vouchers and $1.909m in auto-ship advances.
- Gross margin for the nine-month period improved, which management attributed, excluding administrative-fee effects, to lower logistics costs and fewer product promotions. Q3 commissions rose to 42.2% of sales from 39.8%; nine-month commissions were 42.1% versus 42.5%.
- Active members fell to 45,950 from 46,860 three months earlier and 53,300 a year earlier. Hong Kong represented 78% of Q3 sales; the company generated approximately 93% of net sales from subsidiaries outside the Americas.
- Cash declined mainly because of dividends. The company paid $0.20 per share each quarter during the first nine months, totaling $6.855m.
Outlook, risks and notable items
- Management said near-term financial performance may remain adversely affected. COVID-19 restrictions and scattered outbreaks prevented the company from sponsoring in-person member events in China, Macau or Hong Kong during Q3; management believes this weighed on sales. Third-party logistics operations may also be affected.
- Management said existing liquidity and operating cash flows should be adequate for foreseeable normal operations and commitments. It expected to continue quarterly dividends of $0.20 per share for the foreseeable future, subject to board discretion. A further $0.20 dividend was declared November 1, 2021, payable November 26.
- China and Hong Kong concentration, political and regulatory uncertainty, China’s challenging health-products environment, member attrition, currency movements, COVID-19 and direct-selling regulation are key risks. The company does not hold a China direct-selling license; its prior application was withdrawn in 2019, and it may reapply when circumstances permit.
- The IRS completed its audit of tax years 2016–2019 with no changes to previously reported tax. The SEC notified the company on September 30, 2021 that its investigation had concluded and that it did not intend to recommend enforcement action. The filing reports no legal proceedings.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No quantified revenue or earnings guidance was provided.
Investor verification points
- Track deferred revenue and shipment timing to determine how much represents delayed sales versus future demand.
- Monitor active-member trends and Hong Kong/China exposure, including the effect of restrictions on events and member activity.
- Assess whether operating cash flow can turn positive while the company maintains its dividend; verify the $0.20-per-share dividend remains within board discretion.
- Review liquidity access, including cash subject to Chinese currency controls, lease commitments and the absence of reported borrowings.
- Follow China licensing and regulatory developments, COVID-19 impacts, and currency and geopolitical risks.