Natural Health Trends Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with the three months ended March 31, 2019 unless otherwise noted. The company sells NHT Global personal care, wellness and quality-of-life products through direct selling and e-commerce. It reported 56,490 active members, down from 57,410 at year-end 2019 and 87,340 a year earlier.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $14.948 million | $19.328 million |
| Gross profit / margin | $10.434 million / 69.8% | $14.104 million / 73.0% |
| Operating expenses | $11.882 million | $16.813 million |
| Operating loss | $1.448 million | $2.709 million |
| Net loss | $573,000; $0.05 per share | $1.923 million; $0.17 per share |
| Operating cash flow | $(990,000) | $(11.350) million |
- Sales declined 23%. Hong Kong sales fell 26% to $11.413 million and represented 76.3% of revenue; substantially all were from products delivered to members in China.
- Gross margin declined 3.2 percentage points, primarily from higher logistics costs and product promotions. Commissions fell to 44.2% of sales from 49.1%, largely due to lower estimated costs for ongoing incentives. SG&A decreased to $5.279 million from $7.315 million, reflecting lower event costs, employee-related expenses and professional fees.
- The income tax benefit was $782,000, versus $354,000. The company attributed the increase primarily to the CARES Act-related treatment of prior-year net operating losses.
- Cash and cash equivalents were $95.393 million at March 31, 2020, versus $96.035 million at December 31, 2019. Including $505,000 of restricted cash, cash, cash equivalents and restricted cash totaled $95.898 million. Working capital was $82.9 million and the current ratio was 4.34:1.
- Cash used in investing was $12,000; cash used in financing was $2.285 million, consisting of dividends. The quarter-end cash decrease including restricted cash was $3.527 million. No interest-bearing borrowings are identified in the presented balance sheet; operating lease liabilities totaled $2.952 million, and income taxes payable were $15.365 million.
- Total assets were $113.669 million and total liabilities were $41.772 million at quarter-end. Stockholders’ equity was $71.897 million.
Changes, outlook and notable matters
- Management said Q1 results were materially negatively affected by COVID-19, including Chinese business closures and restrictions on gatherings and travel, and by China’s continuing 100-day campaign and related regulatory review. Hong Kong political and social developments also curtailed member meetings and events.
- The company canceled its first-half 2020 major event, shifted some marketing and training to promotions and webcasts, and said it hoped to hold a second-half event if health and safety conditions allowed. Management warned that the pandemic and related disruptions could adversely affect the remaining 2020 quarters and that lower year-over-year sales could continue for the foreseeable future. No quantified earnings or revenue guidance was provided.
- Management expects existing liquidity and operating cash flows to fund normal operations and commitments for the foreseeable future, while noting that the business had negative operating cash flow in Q1. It reported $11.9 million of cash and cash equivalents held in Chinese banks subject to foreign currency controls.
- The company withdrew its pending China direct-selling-license application after a government recommendation and received a CNY 20 million (about $2.9 million) consumer-protection deposit refund in March. It said it may reapply when circumstances are suitable; timing and success are uncertain.
- The board declared and paid a $0.20-per-share quarterly dividend during Q1 and declared another $0.20 dividend on May 4, payable May 29, 2020. Future dividends remain at the board’s discretion. $21.9 million remained under the authorized share-repurchase program.
- A securities class action was dismissed with prejudice; the plaintiff voluntarily dismissed the appeal on April 9, 2020, concluding the matter. Separately, an SEC non-public investigation concerning securities trading and/or public disclosures remained ongoing; the company said it was cooperating and could not predict the outcome.
- Other watch items include the IRS audit, expanded to tax years 2016–2018, with no adjustments proposed at the time of filing; foreign-exchange exposure; member attrition; regulatory and direct-selling risks in China; and dependence on Hong Kong/China sales. The company reported no material changes to the risk factors in its 2019 Form 10-K.
Investor verification priorities
- Track sales, member counts and cash generation, particularly Hong Kong revenue tied to members in China and the effects of COVID-19, regulatory restrictions and currency movements.
- Monitor gross margin, logistics costs, promotional spending and commission accruals, as well as whether operating cash flow improves or remains negative.
- Assess liquidity quality and access, including China-held cash subject to foreign currency controls, lease and tax obligations, and the sustainability of dividends and repurchases.
- Follow developments in the China license application and regulatory environment, the SEC investigation and IRS audit; the filing provides no predictable outcome or timetable for these matters.