Natural Health Trends Corp. — Q2 2020 Form 10-Q
Business context and reporting period
International direct-selling and e-commerce company selling personal care, wellness and “quality of life” products under the NHT Global brand. This unaudited report covers the three and six months ended June 30, 2020; financial amounts below are in U.S. dollars. Hong Kong sales, substantially all delivered to members in China, represented 83.5% of Q2 revenue. The company had 54,370 active members, down from 56,490 three months earlier and 78,280 a year earlier.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $16.4 million | $23.4 million | $31.4 million | $42.8 million |
| Gross profit / margin | $11.6 million / 70.6% | $18.0 million / 76.9% | $22.0 million / 70.2% | $32.1 million / 75.1% |
| Operating income (loss) | $183,000 | $(4,000) | $(1.3) million | $(2.7) million |
| Net income (loss) | $34,000 | $397,000 | $(539,000) | $(1.5) million |
| Diluted earnings (loss) per share | $0.00 | $0.04 | $(0.05) | $(0.14) |
| Operating cash flow | Not presented by quarter | $(1.0) million | $(15.1) million |
Q2 sales declined 30% year over year; first-half sales declined 27%. For the first half, commissions were 43.7% of sales versus 48.9%, and SG&A was $9.6 million versus $13.9 million. Lower incentive-program estimates reduced commissions as a share of sales; lower employee costs, professional fees and event expenses reduced SG&A. Higher logistics costs and product promotions contributed to lower gross margins.
At June 30, cash and cash equivalents were $93.2 million, including $79.2 million of investments classified as cash equivalents; an additional $513,000 was restricted cash. Cash and cash equivalents were down $2.8 million from year-end. Working capital was $79.6 million and the current ratio was 4.50:1. Cash, cash equivalents and restricted cash totaled $93.7 million. The balance sheet reports no conventional borrowings; operating lease liabilities totaled $3.2 million. First-half investing cash use was $68,000 and financing cash use was $4.6 million, mainly dividends. The company paid $0.40 per share in first-half dividends and declared a further $0.20 per share dividend payable August 28, 2020.
Material changes, outlook and risks
- Management attributed the sales decline principally to COVID-19 restrictions in China and other markets, plus the continuing impact of China’s 2019 “100-day campaign” and related regulatory review. The company canceled both major member events planned for 2020 and shifted some promotion and training online.
- Management said pandemic disruptions materially hurt first-half results and may adversely affect the remaining 2020 quarters. Hong Kong sales were substantially lower year over year, and management expected lower sales on a year-over-year basis for the foreseeable future. No specific revenue or earnings guidance was provided.
- The company’s China direct-selling license application was withdrawn in 2019 at a government authority’s recommendation; the related CNY 20 million deposit was refunded in March 2020. The company may reapply but cannot predict if or when it will obtain a license or whether future operations would be profitable.
- Hong Kong political developments and China’s national security law may intensify U.S.-China-Hong Kong tensions, disrupting operations, distribution or sales. The company also cited foreign-exchange, regulatory, member-retention and third-party logistics risks. It reported identifying potential compliance matters and said it was working to address them.
- An SEC non-public investigation into possible federal securities-law violations relating to securities trading and/or public disclosures remained ongoing; the company said it was cooperating and could not predict the outcome. A securities class action was dismissed with prejudice, and the plaintiff voluntarily dismissed the appeal in April 2020.
- Management believed available liquidity and operating cash flows should fund normal operations and commitments for the foreseeable future, while noting that first-half results included negative operating cash flow and a decreasing cash balance. The company disclosed $12.3 million of cash and cash equivalents held in Chinese banks subject to foreign-currency controls.
- Management reported disclosure controls were effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether active-member losses stabilize and whether the company’s highly concentrated Hong Kong/China-linked sales recover.
- Subsequent quarterly sales, margins and operating cash flow, including the effects of pandemic restrictions, logistics costs and promotions.
- Developments in China’s regulatory environment and any direct-selling license application, as well as the status and potential consequences of the SEC investigation.
- Availability of cash held in China, ongoing dividend sustainability, and the effect of lease commitments and other obligations on liquidity.
- Potential effects of Hong Kong political and trade tensions, currency movements and member or logistics disruptions.