Natural Health Trends Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company sells NHT Global personal care, wellness and quality-of-life products through direct selling and e-commerce. Results are compared with Q1 2020; dollar amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $13.5 million | $14.9 million; down 10% |
| Gross profit / margin | $10.2 million / 75.8% | $10.4 million / 69.8% |
| Operating income (loss) | $0.2 million | $(1.4) million |
| Net income (loss) | $0.2 million; $0.01 per diluted share | $(0.6) million; $(0.05) per diluted share |
| Operating cash flow | $0.4 million provided | $1.0 million used |
| Cash and cash equivalents | $90.2 million at March 31, 2021 | $92.4 million at December 31, 2020 |
- Gross margin improved mainly because of lower logistics costs, fewer product promotions and additional eWallet administrative-fee revenue. Commissions were 40.9% of sales versus 44.2%; SG&A fell to $4.5 million from $5.3 million.
- Current assets were $97.2 million and current liabilities $21.4 million, yielding a 4.5:1 current ratio and $75.8 million of working capital. No borrowings are listed; liabilities include $4.0 million of operating lease liabilities and $15.3 million of income taxes payable, current and noncurrent.
- Cash used in financing was $2.3 million, consisting of the $0.20-per-share dividend. Investing activities used $0.1 million. Cash, cash equivalents and restricted cash totaled $90.7 million at quarter-end.
- The company said $12.4 million of cash and cash equivalents was held in banks in China subject to foreign currency controls. It repatriated $9.0 million from China in April 2021.
Changes and business developments
- Hong Kong sales were $10.3 million, approximately 77% of total sales, down 10% year over year. Substantially all Hong Kong revenue comes from products delivered to members in China. China sales were $0.5 million, down from $0.7 million.
- Sales outside Hong Kong declined 11%. Management attributed the overall decrease to COVID-19 restrictions, fewer working days around Chinese New Year, the continuing effects of China’s 2019 health-industry campaign and related review, and pandemic impacts in other markets.
- Active members fell to 49,420 from 52,230 three months earlier and 56,490 a year earlier.
- Deferred revenue increased to $4.2 million from $3.1 million, primarily reflecting a $1.1 million increase in unshipped orders and unredeemed vouchers. The company also recognized higher administrative-fee revenue after changing certain Hong Kong eWallet fees in June 2020.
Outlook, risks and unusual items
- Management expects near-term financial performance may continue to be adversely affected. It cited uncertainty around COVID-19 and related restrictions, the challenging China market environment, Hong Kong political and social developments, and possible disruption to logistics providers.
- The company expects to continue quarterly dividends of $0.20 per share for the remainder of 2021, subject to Board discretion. A subsequent $0.20 dividend was declared May 3, payable May 28. The repurchase program had $21.9 million remaining as of March 31.
- The company has no direct-selling license in China. It withdrew its preliminary application in 2019 after a government recommendation and said it expects to reapply when circumstances are suitable; timing and prospects are uncertain. Management does not expect initial sales from a license to be material and notes that required infrastructure could add fixed costs.
- The SEC is conducting a non-public investigation into possible federal securities-law violations relating to securities trading and/or public disclosures. The company says it is cooperating, but cannot predict the outcome or timing. No legal proceedings were listed in Part II.
- A new cash-settled Phantom Equity Plan was adopted in March 2021; 223,307 phantom shares were granted, with a maximum payment value of $12 per share. Cash settlement of 27,913 shares that vested generated $188,000 of compensation expense in the quarter.
- Management reported effective disclosure controls as of March 31, 2021 and no material changes in internal control over financial reporting during the quarter. The company stated there were no material changes to its previously reported risk factors.
Key facts for investors to verify
- Whether sales and active-member trends stabilize, particularly in Hong Kong and China, and how much revenue depends on deliveries to China.
- Whether pandemic restrictions, the China health-industry review, and Hong Kong developments continue to constrain operations or member activity.
- The status and potential consequences of the SEC investigation, and any developments regarding Chinese regulatory requirements or a future direct-selling license application.
- The sustainability of positive operating cash flow and the quarterly dividend amid declining sales; confirm cash availability given China currency controls and planned capital returns.
- The future cost and vesting outcomes of the cash-settled phantom awards, and any changes to the company’s member base, margins or liquidity.