Business context and reporting period
Natural Health Trends Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company sells personal care, wellness and “quality of life” products under the NHT Global brand through direct selling and e-commerce. Its business is highly concentrated in Hong Kong: Hong Kong represented 80.2% of second-quarter sales, substantially all derived from products delivered to members in China. Active members declined to 43,020 from 45,760 at December 31, 2021 and 46,860 a year earlier.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $13.36m | $16.15m | $24.91m | $29.62m |
| Gross profit | $9.97m | $12.22m | $18.61m | $22.43m |
| Gross margin | 74.6% | 75.7% | 74.7% | 75.7% |
| Operating income (loss) | $0.22m | $0.39m | ($0.17m) | $0.61m |
| Net income | $0.18m | $0.23m | $0.08m | $0.38m |
| Diluted EPS | $0.02 | $0.02 | $0.01 | $0.03 |
For the six months ended June 30, operating cash flow was negative $3.50m, compared with positive $0.55m in the prior-year period. Investing activities used $0.08m and dividends used $4.57m. Cash, cash equivalents and restricted cash were $75.71m at period-end, including $75.63m of cash and cash equivalents; cash and cash equivalents included $4.0m held in Chinese banks subject to foreign-currency controls.
At June 30, current assets were $84.23m and current liabilities $22.74m, giving working capital of $61.5m and a 3.7:1 current ratio. The balance sheet reports no borrowings; total liabilities were $33.48m, including $12.1m of income taxes payable for the U.S. repatriation tax ($9.1m noncurrent). Total assets were $88.03m and stockholders’ equity $54.55m.
Material changes versus the prior comparable period
- Second-quarter sales fell 17% year over year; six-month sales fell 16%. Hong Kong sales declined 16% in Q2 and 15% for the first half.
- Six-month operating results shifted from $0.61m operating income to a $0.17m operating loss; net income fell from $0.38m to $0.08m.
- Gross margin declined by 1.1 percentage points in both the quarter and first half. Management attributed pressure, in part, to relatively fixed costs spread over lower sales; lower administrative-fee revenue also affected comparisons.
- SG&A declined to $4.0m in Q2 and $8.3m for the first half, primarily reflecting lower event costs, professional fees and credit-card fees. Commissions remained approximately 42%–43% of sales.
- Cash and cash equivalents decreased $8.2m from year-end 2021. Operating cash flow deteriorated, primarily due to fewer product orders, while dividends remained $0.20 per share each quarter.
Outlook, commentary, risks and unusual items
Management said near-term results are expected to remain adversely affected. COVID-19 Omicron-related restrictions disrupted member interaction and logistics in China and Hong Kong; third-party logistics import and distribution difficulties were largely resolved by the end of June, but management said conditions remained fragile and further restrictions could occur. The company had been unable to sponsor in-person member events in China, Macau or Hong Kong for four consecutive quarters.
The company expects to continue quarterly dividends of $0.20 per share for the foreseeable future, subject to the board’s discretion and the company’s financial condition and other factors. The board declared a further $0.20 dividend on August 1, payable August 26, 2022. The share-repurchase authorization had $21.9m remaining at June 30; the filing does not indicate a commitment to use it. Management stated that existing liquidity should fund normal operations and commitments for the foreseeable future.
Key risks include dependence on Hong Kong/China, where substantially all Hong Kong sales are delivered to members in China; COVID-19 and government restrictions; political and social developments in Hong Kong; China regulatory uncertainty (the company does not hold a China direct-selling license); declining membership; currency exposure; and direct-selling, product and compliance risks. The company reported no material changes to its previously disclosed risk factors and no legal proceedings. Management judged disclosure controls effective as of June 30, 2022.
Unusual items include foreign-currency translation losses of $0.46m for the first half and an amendment to phantom-share awards deeming the June 15, 2022 performance condition satisfied; the committee cited extraordinary circumstances in China beyond the company’s control. A $0.20-per-share dividend was declared in each of the first two quarters, totaling $4.57m in cash paid during the first half.
Important facts for investors to verify
- Whether Hong Kong/China sales and active-member trends stabilize, and how much ongoing COVID-19 restrictions affect orders and member activity.
- Whether operating cash flow recovers after the first-half outflow, and how dividends are funded if sales remain weak.
- The liquidity, accessibility and currency exposure of cash, including the $4.0m held in Chinese banks subject to controls.
- The status and potential costs or benefits of a future China direct-selling license application and related regulatory requirements.
- The composition and settlement timing of the $12.1m repatriation-tax payable and the assumptions supporting future tax provisions.