Natural Health Trends Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Natural Health Trends is an international direct-selling and e-commerce company selling personal care, wellness, and quality-of-life products under the NHT Global brand. Its business is highly concentrated in Greater China: Hong Kong generated 79% of Q3 sales, and substantially all Hong Kong sales relate to products delivered to members in China. The company reported 34,660 active members at September 30, down from 38,660 at year-end 2022 and 41,170 a year earlier.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $10.615 | $11.716 | $32.987 | $36.622 |
| Gross profit | $7.926 | $8.618 | $24.601 | $27.224 |
| Gross margin | 74.7% | 73.6% | 74.6% | 74.3% |
| Operating expenses | $8.218 | $8.763 | $26.030 | $27.537 |
| Operating income (loss) | $(0.292) | $(0.145) | $(1.429) | $(0.313) |
| Other income, net | $0.585 | $0.187 | $1.708 | $0.472 |
| Net income | $0.172 | $0.047 | $0.210 | $0.125 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(4.209) | $(5.790) |
- Q3 sales fell 9% year over year; nine-month sales fell 10%. Management attributed much of the decline to deferred-revenue timing and lower administrative-fee revenue, while order volume was comparable with the prior-year periods despite tepid China consumer sentiment.
- Q3 gross margin improved, primarily reflecting lower logistics costs; nine-month gross margin was broadly consistent after excluding the effect of lower administrative-fee revenue. Commissions were 41.1% of Q3 sales and 42.0% for both nine-month periods.
- Operating losses widened to $0.292 million in Q3 and $1.429 million year to date. SG&A was broadly flat in dollars, but increased as a percentage of sales because revenue declined.
- Higher interest income on cash equivalents contributed to the increase in other income and helped lift net income despite operating losses.
Liquidity, capital, and balance sheet
- Cash and cash equivalents were $58.4 million at September 30, down $11.3 million from December 31, 2022. Cash, cash equivalents, and restricted cash totaled $58.449 million.
- Current assets were $67.0 million and current liabilities $20.8 million; working capital was $46.2 million and the current ratio was 3.2:1. Working capital declined $10.9 million from year-end.
- The company reported no borrowings in the presented balance sheet. It had $3.721 million of operating lease liabilities, including current and noncurrent amounts, and $9.146 million of income taxes payable, including $5.054 million classified as noncurrent. The latter relates to the U.S. repatriation tax.
- Nine-month operating cash use was $4.2 million; investing cash use was $0.032 million. Financing cash use was $6.9 million, consisting of dividends. Cash used in operations improved from the prior year; management said it would have improved by $3.0 million excluding repatriation-tax payments.
- The company paid quarterly dividends of $0.20 per share during each of the first three quarters, totaling $6.9 million in the nine-month period. The board declared a further $0.20-per-share dividend after quarter-end, payable November 24, 2023. The company said it expected to continue quarterly dividends at that level for the foreseeable future, subject to board discretion and financial and other considerations.
- $21.9 million remained available under the $70 million stock repurchase authorization. No repurchases were reported in the period.
Outlook, commentary, and risks
- Management believes existing liquidity and operating cash flows should fund normal operations and commitments for the foreseeable future, but reported negative operating cash flow and declining cash and working capital.
- The company plans to focus resources on Greater China and selected markets, and expects to continue investing in its China entity, including potential manufacturing capabilities, service stations, offices, staffing, and preparations related to a possible direct-selling license application. It does not hold a China direct-selling license, cannot predict if or when one may be obtained, and says any initial sales benefit may not be material and could be offset by additional costs.
- Management said the more relaxed COVID-19 environment continued through Q3 2023 and that in-person events had resumed in China and Macau, but it remains too early to assess whether improved conditions will endure or their financial impact.
- Key risks include the concentration of revenue in Hong Kong and China; member attrition; China regulatory and direct-selling uncertainty; Hong Kong political and social developments; foreign currency and geopolitical exposure; competition and product acceptance; and reliance on third-party manufacturers and logistics providers. The filing reported no material changes to the risk factors in the 2022 Form 10-K.
- The company disclosed no legal proceedings in this report and stated that disclosure controls and procedures were effective as of September 30, 2023.
Most important facts for investors to verify
- Whether revenue and active-member trends stabilize, particularly given the 79% Q3 sales concentration in Hong Kong and the stated China delivery exposure.
- Whether the improvement in operating cash use is sustainable and how ongoing dividends compare with cash generation; nine-month operating cash flow remained negative.
- How deferred-revenue movements and lower administrative fees affected reported sales, and whether order volume translates into recognized revenue in subsequent periods.
- The status and potential costs of China regulatory and direct-selling-license efforts, alongside the exposure to local regulatory developments.
- The composition, timing, and payment schedule of the $9.146 million income-tax payable balance, including the repatriation-tax liability.