Natural Health Trends Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company sells personal care, wellness and quality-of-life products under the NHT Global brand through direct selling and e-commerce. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $14.1 | $17.0 | $45.5 | $59.8 |
| Gross profit / margin | $10.5 / 74.3% | $12.7 / 74.3% | $32.5 / 71.5% | $44.8 / 74.9% |
| Operating income (loss) | $0.7 | $(1.1) | $(0.6) | $(3.8) |
| Net income (loss) | $0.6 | $(1.2) | $0.1 | $(2.8) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.5) | $(18.7) |
- Q3 diluted earnings per share were $0.06, versus a loss of $0.12 a year earlier. Nine-month diluted earnings per share were $0.01, versus a loss of $0.25.
- At September 30, cash and cash equivalents were $90.8; cash, cash equivalents and restricted cash totaled $91.3. Cash and cash equivalents declined $5.2 from year-end 2019. The company also reported $68.4 of investments classified as cash equivalents, including $13.4 held in banks in China subject to foreign currency controls.
- Current assets were $100.0 and current liabilities $21.3; the reported current ratio was 4.69 and working capital was $78.7. No borrowings are reported. Operating lease liabilities totaled $4.4, including current and long-term amounts.
- Total assets were $107.1 and stockholders’ equity was $68.7. The company paid $6.9 in dividends during the first nine months; a further $0.20-per-share dividend was declared after quarter-end.
Changes versus the prior comparable periods
- Sales fell 17% in Q3 and 24% for the first nine months. Hong Kong, which generated 78.8% of Q3 sales and 79.7% of nine-month sales, declined 18% in Q3 and about 25% year to date. Substantially all Hong Kong revenue comes from products delivered to members in China.
- Q3 returned to operating and net profitability, while the nine-month period remained slightly profitable overall but had an operating loss. Lower commissions and selling, general and administrative expenses helped results; nine-month SG&A fell to $13.8 from $20.3, primarily due to lower employee-related costs, professional fees and event costs.
- Q3 gross margin held at 74.3%; nine-month gross margin decreased 3.4 percentage points, primarily due to higher logistics costs and product promotions. Q3 administrative-fee revenue increased by $1.2 following a change to fees on certain Hong Kong eWallet accounts, helping offset lower product sales.
- Operating cash outflow improved to $1.5 from $18.7 in the first nine months of 2019, largely reflecting a smaller operating loss and lower accrued commission payments. Cash used in financing included $6.9 of dividends; the prior-year period also included $9.6 of share repurchases.
- Active members fell to 53,300 from 54,370 three months earlier and 68,150 a year earlier.
Outlook, commentary and risks
- Management expects financial results to remain adversely affected for the foreseeable future and anticipates continued lower year-over-year Hong Kong sales. No quantitative revenue or earnings guidance is provided.
- Management attributes pressure to COVID-19 and related restrictions, China’s health-sector regulatory campaign and continuing review, negative sentiment toward the sector, and political and social developments in Hong Kong. The company cancelled its two major 2020 member events and adapted some marketing and training activities.
- The business is highly concentrated: approximately 94% of net sales come from subsidiaries outside the Americas, and Hong Kong represented 79% of Q3 net sales. The company does not hold a China direct-selling license; it withdrew its application in 2019 and says it may reapply when circumstances permit. Timing and success are uncertain.
- Management believes existing liquidity and operating cash flows should fund normal operations and commitments for the foreseeable future, while noting negative operating cash flow and a declining cash balance. Some cash is subject to Chinese currency controls.
- A securities class action was dismissed with prejudice; the plaintiff voluntarily dismissed the appeal in April 2020. A non-public SEC investigation into possible federal securities-law violations relating to securities trading and/or public disclosures remains ongoing; the company says it is cooperating and cannot predict the outcome.
- A new risk factor addresses possible effects of Hong Kong’s national security law and escalating U.S.–China–Hong Kong tensions, including potential disruption, reduced sales or higher operating costs. Other disclosed risks include regulation of direct selling and products, member attrition, currency fluctuations, and third-party logistics impacts.
- The board declared a $0.20-per-share quarterly dividend on November 2, 2020, payable November 27; future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether Hong Kong/China sales and active-member trends stabilize, and how much of Q3 sales performance depended on the $1.2 million eWallet administrative-fee increase.
- Whether operating cash flow improves and whether cash held in China can be accessed when needed; reconcile cash and cash equivalents with total cash including restricted cash.
- Developments in China’s direct-selling licensing environment, the health-sector regulatory review, and the SEC investigation.
- The sustainability of the dividend given ongoing sales declines, operating losses year to date and negative operating cash flow.
- Whether logistics costs, promotions and commission levels continue to pressure margins.