Natural Health Trends Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company sells NHT Global personal care, wellness and quality-of-life products through direct selling and e-commerce. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $11.55 million | $13.47 million |
| Gross profit / margin | $8.64 million / 74.8% | $10.21 million / 75.8% |
| Operating income (loss) | $(0.38) million | $0.22 million |
| Net income (loss) | $(0.11) million | $0.15 million |
| Diluted earnings (loss) per share | $(0.01) | $0.01 |
| Operating cash flow | $(2.35) million | $0.41 million |
- Sales fell 14% year over year. Hong Kong generated $8.78 million, or 76% of sales; substantially all Hong Kong revenue came from products shipped to members in China.
- Gross margin declined 1.0 percentage point. Operating expenses were 78.1% of sales versus 74.2% a year earlier, contributing to the operating loss.
- Cash and cash equivalents were $79.38 million at March 31, down from $83.84 million at December 31, 2021. Including restricted cash, the quarter-end total was $79.46 million. The company held $64.3 million of investments classified as cash equivalents; $4.2 million of cash was in Chinese banks subject to foreign-currency controls.
- Working capital was $66.7 million and the current ratio was 4.0. Total liabilities were $36.2 million. No borrowings are reported on the balance sheet; operating lease liabilities totaled $2.87 million.
- Income taxes payable included $12.1 million classified as noncurrent. The filing states total tax payable for the U.S. repatriation tax was $13.7 million.
Material changes and management commentary
- Hong Kong sales declined 15% year over year. Management attributed the decrease primarily to Omicron-related lockdowns and controls in Hong Kong and China, which disrupted product importing and distribution and restricted interaction with members and customers. Lower administrative-fee revenue also contributed.
- Active members fell to 44,490 from 49,420 a year earlier and 45,760 at December 31, 2021.
- Operating cash flow shifted to a use of $2.35 million from cash provided of $0.41 million, primarily because commissions and other expenses accrued in 2021 were paid in the current quarter.
- Cash dividends of $0.20 per share, totaling $2.3 million, were paid in Q1. The board declared another $0.20-per-share dividend on May 2, payable May 27 to holders of record May 17. Management expects to continue quarterly dividends for the foreseeable future, subject to board discretion and financial circumstances.
Outlook, risks and other notable items
- No quantified revenue or earnings guidance was provided. Management expects near-term financial performance to remain adversely affected by COVID-19 restrictions and their effects on business operations and supply chains.
- The business is highly concentrated in Hong Kong-linked sales to China. China’s regulatory environment, direct-selling rules, member activity restrictions, and the company’s lack of a Chinese direct-selling license present material uncertainties. The company says it may reapply for a license when circumstances are appropriate but cannot predict whether or when it will succeed.
- Other stated risks include Hong Kong political and social conditions, member attrition, foreign-currency fluctuations, reliance on third-party manufacturers and logistics providers, and product and direct-selling regulation. The company reported no material changes to the risk factors in its 2021 Form 10-K.
- The company reported no legal proceedings and no material changes in internal control over financial reporting; management concluded disclosure controls were effective as of March 31, 2022.
- Quarterly comprehensive loss was $0.33 million, including $0.21 million of foreign-currency translation loss and $0.02 million of unrealized investment losses. The company also reported $196,000 of phantom-share compensation expense for the quarter.
Important facts for investors to verify
- Whether China and Hong Kong restrictions, logistics constraints, or regulatory developments further affect the company’s dominant sales channel.
- Whether active-member levels stabilize and whether sales recover from the Q1 decline.
- Whether operating cash flow improves, given the quarterly cash use and ongoing dividend payments.
- The accessibility of cash held in China and the market value and credit exposure of investments classified as cash equivalents.
- The status and potential cash impact of the repatriation-tax liability, and the board’s future dividend decisions.