Natural Health Trends Corp. — 2019 Form 10-K
Business context and reporting period. The company sells NHT Global wellness, personal-care and lifestyle products through direct-selling members and e-commerce. This annual report covers the fiscal year ended December 31, 2019; fourth-quarter results are also shown. Hong Kong generated 80.8% of annual sales, substantially all from products delivered to members in China.
Financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $77.6 million | $191.9 million |
| Gross profit / margin | $57.5 million / 74.1% | $152.5 million / 79.5% |
| Operating income (loss) | $(7.0) million | $33.7 million |
| Net income (loss) | $(5.6) million | $31.0 million |
| Diluted earnings (loss) per share | $(0.52) | $2.74 |
| Cash from (used in) operations | $(18.6) million | $29.7 million |
At year-end, cash and cash equivalents were $96.0 million, including $82.3 million of available-for-sale investments classified as cash equivalents; restricted cash was $3.4 million. Working capital was $82.1 million and the current ratio was 4.12. Cash and cash equivalents declined $36.6 million during the year. The balance sheet reports no borrowings; it does include $3.2 million of operating lease liabilities. Some cash is subject to restrictions, including $9.1 million held in Chinese banks subject to foreign currency controls.
Material changes versus 2018
- Sales fell $114.3 million, or 60%. Hong Kong sales declined 63% to $62.7 million; sales outside Hong Kong also fell 34%.
- Active members decreased 41%, from 97,840 to 57,410 at year-end.
- Gross margin fell 5.4 percentage points, primarily due to higher logistics costs and product promotions. Commissions remained approximately 46% of sales.
- SG&A declined 13% to $27.2 million, but represented 35.1% of sales versus 16.3% in 2018, as lower sales outpaced cost reductions.
- The company recorded a $1.8 million goodwill impairment and reported an income tax provision of $14,000, compared with $3.5 million in 2018.
- Financing cash outflows included $10.1 million of share repurchases and $7.3 million of dividends. The company also issued 1.1 million restricted shares in lieu of $7.9 million of previously earned long-term incentive cash benefits.
Outlook, risks and unusual items
- Management said lower sales and adverse financial performance were likely to continue for the foreseeable future. It provided no quantified revenue or earnings guidance.
- The Chinese government’s 2019 health-products campaign, related review and the company’s continuing suspension of certain member events and activities adversely affected business. The company withdrew its pending China direct-selling license application in 2019 and expected a refund of a CNY 20 million deposit; timing of the refund was not specified.
- Hong Kong political and social unrest curtailed member meetings and events. The company’s concentration in Hong Kong/China leaves results particularly exposed to regulatory actions, economic conditions, adverse publicity and member attrition.
- COVID-19 disruptions were expected to negatively affect operations and financial results for at least the first quarter of 2020. The company postponed a major event and was adapting marketing and training programs; the full-year effect was uncertain.
- Operating cash flow was negative in 2019. Management considered cash on hand and operating cash flows adequate for foreseeable normal operations, but warned that continued negative cash flow could impair operations, dividends and solvency.
- A securities class action alleging misleading statements about China operations was dismissed with prejudice in January 2020; plaintiff appealed in February 2020. The SEC was conducting a non-public investigation concerning securities trading and/or public disclosures; outcome and timing were uncertain.
- The company recognized the $1.8 million goodwill impairment after early adopting a revised impairment standard. It adopted lease accounting in 2019, recognizing right-of-use assets and lease liabilities. Management and the auditor reported effective internal controls at year-end; a prior-year material weakness concerning shipment documentation was reported as remediated.
- The board expected quarterly dividends of $0.20 per share during 2020 and 2021, subject to board discretion and the company’s financial condition and other factors.
Most important facts for investors to verify
- Whether sales, active-member numbers and operating cash flow stabilize, particularly in the Hong Kong/China business.
- Progress and terms of the expected China consumer-protection-fund refund, and any change in the status of the direct-selling license application or regulatory environment.
- The realized effects of COVID-19 and Hong Kong conditions on sales, logistics, member activity and cash balances.
- Developments in the SEC investigation and the appeal of the dismissed securities lawsuit.
- Whether cash generation supports the planned dividend and any further repurchases without materially reducing liquidity.
- Reliability of supply for three products that each exceeded 10% of revenue and were each sourced from a single supplier.