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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _______
Commission File Number: 001-36849
NATURAL HEALTH TRENDS CORP.
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 59-2705336 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
Units 1205-07, 12F
Mira Place Tower A
132 Nathan Road, Tsimshatsui
Kowloon, Hong Kong
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: +852-3107-0800
Securities registered pursuant to Section 12(b) of the Exchange Act:
|
| | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | NHTC | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer | o | | Accelerated filer | þ |
Non-accelerated filer | o | | Smaller reporting company | ☑ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þ
At November 1, 2019, the number of shares outstanding of the registrant’s common stock was 11,520,324 shares.
NATURAL HEALTH TRENDS CORP.
Quarterly Report on Form 10-Q
September 30, 2019
INDEX
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, in particular “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this report, the words or phrases “will likely result,” “expect,” “intend,” “will continue,” “anticipate,” “estimate,” “project,” “believe” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Exchange Act. These statements represent our expectations or beliefs concerning, among other things, future revenue, earnings, growth strategies, new products and initiatives, future operations and operating results, and future business and market opportunities.
Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution and advise readers that these statements are based on certain assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein.
For a summary of certain risks related to our business, see “Part I, Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K, which includes the following:
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• | We could be adversely affected by management changes or an inability to attract and retain key management, directors and consultants; |
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• | Because our Hong Kong operations account for a substantial portion of our overall business, and substantially all of our Hong Kong business is derived from the sale of products to members in China, any material adverse change in our business relating to either Hong Kong or China would likely have a material adverse impact on our overall business; |
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• | Our operations in China are subject to compliance with a myriad of applicable laws and regulations, and any actual or alleged violations of those laws or government actions otherwise directed at us could have a material adverse impact on our business and the value of our company; |
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• | Our failure to maintain and expand our member relationships could adversely affect our business; |
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• | We are currently involved in, and may in the future face, lawsuits, claims, and governmental proceedings and inquiries that could harm our business; |
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• | Although virtually all of our members are independent contractors, improper member actions that violate laws or regulations could harm our business; |
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• | Direct-selling laws and regulations may prohibit or severely restrict our direct sales efforts and cause our revenue and profitability to decline, and regulators could adopt new regulations that harm our business; |
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• | The high level of competition in our industry could adversely affect our business; |
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• | Challenges by third parties to the legality of our business operations could harm our business; |
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• | An increase in the amount of compensation paid to members would reduce profitability; |
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• | Currency exchange rate fluctuations could lower our revenue and net income; |
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• | Changes in tax or duty laws, and unanticipated tax or duty liabilities, could adversely affect our net income; |
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• | Transfer pricing regulations affect our business and results of operations; |
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• | Our products and related activities are subject to extensive government regulation, which could delay, limit or prevent the sale of some of our products in some markets; |
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• | Failure of new products to gain member and market acceptance could harm our business; |
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• | New regulations governing the marketing and sale of nutritional supplements could harm our business; |
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• | Regulations governing the production and marketing of our personal care products could harm our business; |
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• | If we are found not to be in compliance with good manufacturing practices our operations could be harmed; |
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• | Failure to comply with domestic and foreign laws and regulations governing product claims and advertising could harm our business; |
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• | Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results; |
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• | We are subject to risks relating to product concentration and lack of revenue diversification; |
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• | We rely on a limited number of independent third parties to manufacture and supply our products; |
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• | Growth may be impeded by the political and economic risks of entering and operating in foreign markets; |
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• | We are subject to anti-bribery laws, including the U.S. Foreign Corrupt Practices Act; |
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• | Recently enacted tariffs, other potential changes to tariff and import/export regulations, and ongoing trade disputes between the United States and other jurisdictions, particularly China, may have a negative effect on global economic conditions and our business, financial results and financial condition; |
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• | We may be held responsible for certain taxes or assessments relating to the activities of our members and service providers, which could harm our financial condition and operating results; |
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• | We may be unable to protect or use our intellectual property rights; |
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• | We do not have a comprehensive product liability insurance program and product liability claims could hurt our business; |
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• | We identified a material weakness in our internal control over financial reporting. If we do not adequately address this material weakness or if other material weaknesses or significant deficiencies in our internal control over financial reporting are discovered, our financial statements could contain material misstatements and our business, operations and stock price may be adversely affected; |
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• | We rely on and are subject to risks associated with our reliance upon information technology systems; |
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• | System disruptions or failures, cybersecurity risks, and compromises of data could harm our business; |
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• | Our systems, software and data reside on third-party servers, exposing us to risks that disruption or intrusion of those servers could temporarily or permanently interrupt our access and damage our business; |
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• | Terrorist attacks, acts of war, epidemics or natural disasters may seriously harm our business; |
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• | We may experience negative cash flows, which may require that we seek debt or equity financing and could have a significant adverse effect on our business and threaten our solvency; |
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• | Disappointing quarterly revenue or operating results could cause the price of our common stock to fall; |
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• | Our common stock is particularly subject to volatility because of the industry in which we operate; |
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• | Our common stock continues to experience wide fluctuations in trading volumes and prices. This may make it more difficult for holders of our common stock to sell shares when they want and at prices they find attractive; and |
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• | Future sales by us or our existing stockholders could depress the market price of our common stock. |
Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this report, including under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our financial statements and the related notes.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 101,113 |
| | $ | 132,653 |
|
Inventories | 7,999 |
| | 12,165 |
|
Other current assets | 6,997 |
| | 5,369 |
|
Total current assets | 116,109 |
| | 150,187 |
|
Property and equipment, net | 821 |
| | 934 |
|
Operating lease right-of-use assets | 3,515 |
|
| — |
|
Goodwill | 1,764 |
| | 1,764 |
|
Restricted cash | 2,881 |
| | 2,998 |
|
Deferred tax asset | 1,210 |
| | 1,207 |
|
Other assets | 807 |
| | 831 |
|
Total assets | $ | 127,107 |
| | $ | 157,921 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 627 |
| | $ | 1,631 |
|
Accrued commissions | 3,798 |
| | 12,502 |
|
Other accrued expenses | 3,392 |
| | 6,121 |
|
Deferred revenue | 3,302 |
| | 6,795 |
|
Amounts held in eWallets | 13,090 |
| | 14,611 |
|
Operating lease liabilities | 1,689 |
|
| — |
|
Other current liabilities | 1,188 |
| | 1,424 |
|
Total current liabilities | 27,086 |
| | 43,084 |
|
Income taxes payable | 15,365 |
| | 16,982 |
|
Deferred tax liability | 186 |
| | 186 |
|
Long-term incentive | — |
| | 7,808 |
|
Operating lease liabilities | 1,903 |
|
| — |
|
Total liabilities | 44,540 |
| | 68,060 |
|
Commitments and contingencies (Note 9) |
| |
|
Stockholders’ equity: | | | |
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding | — |
| | — |
|
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,979,414 shares issued at September 30, 2019 and December 31, 2018 | 13 |
| | 13 |
|
Additional paid-in capital | 86,102 |
| | 86,415 |
|
Retained earnings | 23,567 |
| | 44,431 |
|
Accumulated other comprehensive loss | (1,764 | ) | | (1,250 | ) |
Treasury stock, at cost; 1,459,090 and 1,603,322 shares at September 30, 2019 and December 31, 2018, respectively | (25,351 | ) | | (39,748 | ) |
Total stockholders’ equity | 82,567 |
| | 89,861 |
|
Total liabilities and stockholders’ equity | $ | 127,107 |
| | $ | 157,921 |
|
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 17,023 |
| | $ | 47,043 |
| | $ | 59,779 |
| | $ | 150,320 |
|
Cost of sales | 4,371 |
| | 9,926 |
| | 15,002 |
| | 30,546 |
|
Gross profit | 12,652 |
| | 37,117 |
| | 44,777 |
| | 119,774 |
|
Operating expenses: | | | | | | | |
Commissions expense | 7,362 |
| | 22,001 |
| | 28,258 |
| | 67,291 |
|
Selling, general and administrative expenses | 6,354 |
| | 7,269 |
| | 20,296 |
| | 24,484 |
|
Total operating expenses | 13,716 |
| | 29,270 |
| | 48,554 |
| | 91,775 |
|
Income (loss) from operations | (1,064 | ) | | 7,847 |
| | (3,777 | ) | | 27,999 |
|
Other income, net | 323 |
| | 249 |
| | 1,128 |
| | 465 |
|
Income (loss) before income taxes | (741 | ) | | 8,096 |
| | (2,649 | ) | | 28,464 |
|
Income tax provision | 502 |
| | 467 |
| | 120 |
| | 2,988 |
|
Net income (loss) | $ | (1,243 | ) | | $ | 7,629 |
| | $ | (2,769 | ) | | $ | 25,476 |
|
Net income (loss) per common share: | | | | | | | |
Basic | $ | (0.12 | ) | | $ | 0.67 |
| | $ | (0.25 | ) | | $ | 2.25 |
|
Diluted | $ | (0.12 | ) | | $ | 0.67 |
| | $ | (0.25 | ) | | $ | 2.25 |
|
Weighted-average number of common shares outstanding: | | | | | | | |
Basic | 10,623 |
| | 11,309 |
| | 11,010 |
| | 11,298 |
|
Diluted | 10,623 |
| | 11,322 |
| | 11,010 |
| | 11,307 |
|
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | $ | (1,243 | ) | | $ | 7,629 |
| | $ | (2,769 | ) | | $ | 25,476 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment | (584 | ) | | (433 | ) | | (537 | ) | | (798 | ) |
Unrealized gains on available-for-sale securities | 12 |
| | 5 |
| | 23 |
| | 9 |
|
Comprehensive income (loss) | $ | (1,815 | ) | | $ | 7,201 |
| | $ | (3,283 | ) | | $ | 24,687 |
|
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In Thousands, Except Share Data)
Nine months ended September 30, 2019
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | |
| Shares | | Amount | | Shares | | Amount | | | | | Shares | | Amount | | Total |
BALANCE, December 31, 2018 | — |
| | $ | — |
| | 12,979,414 |
| | $ | 13 |
| | $ | 86,415 |
| | $ | 44,431 |
| | $ | (1,250 | ) | | (1,603,322 | ) | | $ | (39,748 | ) | | $ | 89,861 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (1,923 | ) | | — |
| | — |
| | — |
| | (1,923 | ) |
Common stock issued | — |
| | — |
| | — |
| | — |
| | (166 | ) | | — |
| | — |
| | 22,603 |
| | 543 |
| | 377 |
|
Dividends declared, $0.24/share | — |
| | — |
| | — |
| | — |
| | — |
| | (2,736 | ) | | — |
| | — |
| | — |
| | (2,736 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 259 |
| | — |
| | — |
| | 259 |
|
Unrealized gains on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
|
BALANCE, March 31, 2019 | — |
| | — |
| | 12,979,414 |
| | 13 |
| | 86,249 |
| | 39,772 |
| | (974 | ) | | (1,580,719 | ) | | (39,205 | ) | | 85,855 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 397 |
| | — |
| | — |
| | — |
| | 397 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (612,729 | ) | | (6,682 | ) | | (6,682 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (212 | ) | | — |
| | — |
| | (212 | ) |
Unrealized losses on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) |
BALANCE, June 30, 2019 | — |
| | — |
| | 12,979,414 |
| | 13 |
| | 86,249 |
| | 40,169 |
| | (1,192 | ) | | (2,193,448 | ) | | (45,887 | ) | | 79,352 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (1,243 | ) | | — |
| | — |
| | — |
| | (1,243 | ) |
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (383,127 | ) | | (2,882 | ) | | (2,882 | ) |
Common stock issued | — |
| | — |
| | — |
| | — |
| | (147 | ) | | (15,359 | ) | | — |
| | 1,117,485 |
| | 23,418 |
| | 7,912 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (584 | ) | | — |
| | — |
| | (584 | ) |
Unrealized gains on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
BALANCE, September 30, 2019 | — |
| | $ | — |
| | 12,979,414 |
| | $ | 13 |
| | $ | 86,102 |
| | $ | 23,567 |
| | $ | (1,764 | ) | | (1,459,090 | ) | | $ | (25,351 | ) | | $ | 82,567 |
|
Nine months ended September 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Treasury Stock | | |
| Shares | | Amount | | Shares | | Amount | | | | | Shares | | Amount | | Total |
BALANCE, December 31, 2017 | — |
| | $ | — |
| | 12,979,414 |
| | $ | 13 |
| | $ | 86,683 |
| | $ | 44,908 |
| | $ | (413 | ) | | (1,637,524 | ) | | $ | (40,570 | ) | | $ | 90,621 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 8,824 |
| | — |
| | — |
| | — |
| | 8,824 |
|
Common stock issued | — |
| | — |
| | — |
| | — |
| | (268 | ) | | — |
| | — |
| | 34,202 |
| | 822 |
| | 554 |
|
Dividends declared, $0.13/share | — |
| | — |
| | — |
| | — |
| | — |
| | (1,479 | ) | | — |
| | — |
| | — |
| | (1,479 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 397 |
| | — |
| | — |
| | 397 |
|
Unrealized losses on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) |
BALANCE, March 31, 2018 | — |
| | — |
| | 12,979,414 |
| | 13 |
| | 86,415 |
| | 52,253 |
| | (27 | ) | | (1,603,322 | ) | | (39,748 | ) | | 98,906 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 9,023 |
| | — |
| | — |
| | — |
| | 9,023 |
|
Dividends declared, $1.90/share | — |
| | — |
| | — |
| | — |
| | — |
| | (21,614 | ) | | — |
| | — |
| | — |
| | (21,614 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (762 | ) | | — |
| | — |
| | (762 | ) |
Unrealized gains on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
BALANCE, June 30, 2018 | — |
| | — |
| | 12,979,414 |
| | 13 |
| | 86,415 |
| | 39,662 |
| | (774 | ) | | (1,603,322 | ) | | (39,748 | ) | | 85,568 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 7,629 |
| | — |
| | — |
| | — |
| | 7,629 |
|
Dividends declared, $0.40/share | — |
| | — |
| | — |
| | — |
| | — |
| | (4,551 | ) | | — |
| | — |
| | — |
| | (4,551 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (433 | ) | | — |
| | — |
| | (433 | ) |
Unrealized gains on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
BALANCE, September 30, 2018 | — |
| | $ | — |
| | 12,979,414 |
| | $ | 13 |
| | $ | 86,415 |
| | $ | 42,740 |
| | $ | (1,202 | ) | | (1,603,322 | ) | | $ | (39,748 | ) | | $ | 88,218 |
|
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income (loss) | $ | (2,769 | ) | | $ | 25,476 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 290 |
| | 332 |
|
Noncash lease expense | 1,336 |
|
| — |
|
Deferred income taxes | (3 | ) | | — |
|
Changes in assets and liabilities: | | | |
Inventories | 4,104 |
| | (2,828 | ) |
Other current assets | (1,674 | ) | | 2,548 |
|
Other assets | 2 |
| | (83 | ) |
Accounts payable | (1,002 | ) | | 967 |
|
Accrued commissions | (8,683 | ) | | 2,003 |
|
Other accrued expenses | (1,779 | ) | | 314 |
|
Deferred revenue | (3,485 | ) | | 26 |
|
Amounts held in eWallets | (1,508 | ) | | (930 | ) |
Operating lease liabilities | (1,392 | ) |
| — |
|
Income taxes payable | (1,617 | ) |
| (2,201 | ) |
Other current liabilities | (235 | ) | | 438 |
|
Long-term incentive | (333 | ) | | (800 | ) |
Net cash provided by (used in) operating activities | (18,748 | ) | | 25,262 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property and equipment | (181 | ) | | (176 | ) |
Net cash used in investing activities | (181 | ) | | (176 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Repurchase of common stock | (9,564 | ) | | — |
|
Dividends paid | (2,736 | ) | | (27,644 | ) |
Net cash used in financing activities | (12,300 | ) | | (27,644 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash | (428 | ) | | (711 | ) |
Net decrease in cash, cash equivalents and restricted cash | (31,657 | ) | | (3,269 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | 135,651 |
| | 138,478 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | 103,994 |
| | $ | 135,209 |
|
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION: | | | |
Issuance of treasury stock for employee awards, net | $ | 8,289 |
| | $ | 554 |
|
Right-of-use assets obtained in exchange for operating lease liabilities | $ | 5,058 |
|
| $ | — |
|
See accompanying notes to consolidated financial statements.
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND CONSOLIDATION
Nature of Operations
Natural Health Trends Corp., a Delaware corporation (whether or not including its subsidiaries, the “Company”), is an international direct-selling and e-commerce company. Subsidiaries controlled by the Company sell personal care, wellness, and “quality of life” products under the “NHT Global” brand.
The Company’s wholly-owned subsidiaries have an active physical presence in the following markets: the Americas, which consists of the United States, Canada, Cayman Islands, Mexico and Peru; Greater China, which consists of Hong Kong, Taiwan and China; Southeast Asia, which consists of Singapore, Malaysia, Thailand and Vietnam; South Korea; Japan; India; and Europe. The Company also operates in Russia and Kazakhstan through an engagement with a local service provider.
Basis of Presentation
The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2018 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on April 26, 2019.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Reclassification
Certain prior year amounts in the balance sheet have been reclassified to conform to current year presentation.
Recent Accounting Pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. Effective January 1, 2019, the Company adopted the new standard using the effective date as its date of initial application. The new standard provided a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. Upon adoption, the Company recognized operating lease liabilities on its balance sheet for $4.5 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. See Note 7 for additional information.
In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the requirement to disclose in interim periods on Form 10-Q the changes in stockholder’s equity as prescribed by Rule 3-04 of Regulation S-X.
Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
2. REVENUE
Revenue Recognition
All revenue is recognized when the performance obligations under a contract are satisfied. Product sales are recognized when the products are shipped and title passes to independent members. Product sales to members are made pursuant to a member agreement that provides for transfer of both title and risk of loss upon the Company’s delivery to the carrier that completes delivery to the members, which is commonly referred to as “F.O.B. Shipping Point.” The Company’s sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return. These contracts are generally short-term in nature.
Actual product returns are recorded as a reduction to net sales. The Company estimates and accrues a reserve for product returns based on its return policies and historical experience. The reserve is based upon the return policy of each country, which varies from 14 days to one year, and their historical return rates, which range from 1% to 5% of sales. Sales returns were 2% of sales for each of the nine months ended September 30, 2019 and 2018, respectively. No material changes in estimates have been recognized during the periods presented. See Note 4 for additional information.
The Company has elected to account for shipping and handling activities performed after title has passed to members as a fulfillment cost, and accrues for the costs of shipping and handling if revenue is recognized before the contractually obligated shipping and handling activities occurs. Shipping charges billed to members are included in net sales. Costs associated with shipments are included in cost of sales. Event and training revenue is deferred and recognized as the event or training occurs. Costs of events and member training are included within selling, general and administrative expenses.
Various taxes on the sale of products to members are collected by the Company as an agent and remitted to the respective taxing authority. These taxes are presented on a net basis and recorded as a liability until remitted to the respective taxing authority.
Deferred Revenue
The Company primarily receives payment by credit card at the time members place orders. Amounts received for unshipped product are considered a contract liability and are recorded as deferred revenue. The decrease in deferred revenue for the three months ended September 30, 2019 is primarily due to $1.2 million of revenue recognized during the quarter that was included in deferred revenue as of June 30, 2019 offset by $1.1 million of cash payments received for unshipped product during the third quarter. See Note 4 for additional information.
Disaggregation of Revenue
The Company sells products to a member network that operates in a seamless manner from market to market, except for the Chinese market where it sells to consumers through an e-commerce retail platform and the Russia and Kazakhstan market where the Company operates through an engagement of a third-party service provider.
The following table sets forth revenue by market for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Americas1 | $ | 1,445 |
| | 8.5 | % | | $ | 1,970 |
| | 4.2 | % | | $ | 4,353 |
| | 7.3 | % | | $ | 5,361 |
| | 3.6 | % |
Hong Kong2 | 13,575 |
| | 79.7 |
| | 41,447 |
| | 88.1 |
| | 48,465 |
| | 81.0 |
| | 133,681 |
| | 88.9 |
|
China | 525 |
| | 3.1 |
| | 1,698 |
| | 3.6 |
| | 2,138 |
| | 3.6 |
| | 5,510 |
| | 3.7 |
|
Taiwan | 649 |
| | 3.8 |
| | 935 |
| | 2.0 |
| | 2,340 |
| | 3.9 |
| | 2,933 |
| | 1.9 |
|
South Korea | 98 |
| | 0.6 |
| | 133 |
| | 0.3 |
| | 288 |
| | 0.5 |
| | 392 |
| | 0.3 |
|
Japan | 47 |
| | 0.3 |
| | 51 |
| | 0.1 |
| | 141 |
| | 0.2 |
| | 160 |
| | 0.1 |
|
Singapore | 13 |
| | 0.1 |
| | 52 |
| | 0.1 |
| | 43 |
| | 0.1 |
| | 134 |
| | 0.1 |
|
Malaysia | 51 |
| | 0.3 |
| | 216 |
| | 0.5 |
| | 170 |
| | 0.3 |
| | 316 |
| | 0.2 |
|
Russia and Kazakhstan | 244 |
| | 1.4 |
| | 184 |
| | 0.4 |
| | 662 |
| | 1.1 |
| | 626 |
| | 0.4 |
|
Europe | 343 |
| | 2.0 |
| | 357 |
| | 0.7 |
| | 1,017 |
| | 1.7 |
| | 1,207 |
| | 0.8 |
|
India | 33 |
| | 0.2 |
| | — |
| | — |
| | 162 |
| | 0.3 |
| | — |
| | — |
|
Total | $ | 17,023 |
| | 100.0 | % | | $ | 47,043 |
| | 100.0 | % | | $ | 59,779 |
| | 100.0 | % | | $ | 150,320 |
| | 100.0 | % |
1 United States, Canada, Mexico and Peru
2 Substantially all of our Hong Kong revenues are derived from the sale of products that are delivered to members in China. See “Item 1A. Risk Factors” in this report and in our most recent Annual Report on Form 10-K.
The Company’s net sales by product and service are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Product sales | $ | 15,732 |
| | $ | 44,434 |
| | $ | 56,355 |
| | $ | 142,258 |
|
Freight and other | 1,468 |
| | 3,365 |
| | 4,713 |
| | 10,550 |
|
Less: sales returns | (177 | ) | | (756 | ) | | (1,289 | ) | | (2,488 | ) |
Total net sales | $ | 17,023 |
| | $ | 47,043 |
| | $ | 59,779 |
| | $ | 150,320 |
|
Concentration
No single market other than Hong Kong had net sales greater than 10% of total net sales. Sales are made to the Company’s members and no single customer accounted for 10% or more of net sales for the three and nine months ended September 30, 2019 and 2018. However, the Company’s business model can result in a concentration of sales to several different members and their network of members. Although no single member accounted for 10% or more of net sales, the loss of a key member or that member’s network could have an adverse effect on the Company’s net sales and financial results.
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged for individual products to similar customers.
Practical Expedients
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded in commissions expense.
The Company does not provide certain disclosures about unsatisfied performance obligations for contracts with an original expected length of one year or less.
3. NET INCOME (LOSS) PER COMMON SHARE
Diluted net income per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. The dilutive effect of non-vested restricted stock is reflected by application of the treasury stock method. Under the treasury stock method, the amount of compensation cost for future service that the Company has not yet recognized, if any, is assumed to be used to repurchase shares.
The following tables illustrate the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2019 | | 2018 |
| Income (loss) (Numerator) | | Shares (Denominator) | | Per Share Amount | | Income (loss) (Numerator) | | Shares (Denominator) | | Per Share Amount |
Basic net income (loss) per common share: | | | | | | | | | | | |
Net income (loss) available to common stockholders | $ | (1,243 | ) | | 10,623 |
| | $ | (0.12 | ) | | $ | 7,629 |
| | 11,309 |
| | $ | 0.67 |
|
Effect of dilutive securities: | | | | | | | | | | | |
Non-vested restricted stock | — |
| | — |
| | |
| | — |
| | 13 |
| | |
|
Diluted net income per common share: | | | | | | | | | | | |
Net income available to common stockholders plus assumed conversions | $ | (1,243 | ) | | 10,623 |
| | $ | (0.12 | ) | | $ | 7,629 |
| | 11,322 |
| | $ | 0.67 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
| Income (Numerator) | | Shares (Denominator) | | Per Share Amount | | Income (Numerator) | | Shares (Denominator) | | Per Share Amount |
Basic net income (loss) per common share: | | | | | | | | | | | |
Net income (loss) available to common stockholders | $ | (2,769 | ) | | 11,010 |
| | $ | (0.25 | ) | | $ | 25,476 |
| | 11,298 |
| | $ | 2.25 |
|
Effect of dilutive securities: | | | | | | | | | | | |
Non-vested restricted stock | — |
| | — |
| | |
| | — |
| | 9 |
| | |
|
Diluted net income per common share: | | | | | | | | | | | |
Net income (loss) available to common stockholders plus assumed conversions | $ | (2,769 | ) | | 11,010 |
| | $ | (0.25 | ) | | $ | 25,476 |
| | 11,307 |
| | $ | 2.25 |
|
In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. As such, non-vested restricted stock totaling 672,231 and 263,289 shares were not included for the three and nine months ended September 30, 2019, respectively.
4. BALANCE SHEET COMPONENTS
The components of certain balance sheet amounts are as follows (in thousands):
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Cash, cash equivalents and restricted cash: | | | |
Cash | $ | 17,711 |
| | $ | 47,323 |
|
Cash equivalents | 83,402 |
| | 85,330 |
|
| 101,113 |
| | 132,653 |
|
Restricted cash | 2,881 |
| | 2,998 |
|
| $ | 103,994 |
| | $ | 135,651 |
|
Inventories: | | | |
Finished goods | $ | 7,817 |
| | $ | 11,171 |
|
Raw materials | 1,104 |
| | 1,145 |
|
Reserve for obsolescence | (922 | ) | | (151 | ) |
| $ | 7,999 |
| | $ | 12,165 |
|
Other accrued expenses: | | | |
Sales returns | $ | 290 |
| | $ | 801 |
|
Employee-related expense | 1,998 |
| | 4,051 |
|
Warehousing, inventory-related and other | 1,104 |
| | 1,269 |
|
| $ | 3,392 |
| | $ | 6,121 |
|
Deferred revenue: | | | |
Unshipped product | $ | 1,171 |
| | $ | 4,574 |
|
Auto ship advances | 1,983 |
| | 1,876 |
|
Other | 148 |
| | 345 |
|
| $ | 3,302 |
| | $ | 6,795 |
|
5. FAIR VALUE MEASUREMENTS
As of September 30, 2019, cash and cash equivalents include the Company’s investments in municipal and corporate debt securities, money market funds, and time deposits. The Company considers all highly liquid investments with original maturities of three months or less when purchased and have insignificant interest rate risk to be cash equivalents. Debt securities classified as cash equivalents are required to be accounted for in accordance with the FASB Accounting Standards Codification (“ASC”) 320, Investments - Debt and Equity Securities. As such, the Company determined its investments in debt securities held at September 30, 2019 should be classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income in stockholders’ equity. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in other income. Realized gains and losses, as well as interest income, are also included in other income. The fair values of securities are based on quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs.
The carrying amounts of the Company’s financial instruments, including cash and accounts payable, approximate fair value because of their short maturities. The carrying amount of the noncurrent restricted cash approximates fair value since, absent the restrictions, the underlying assets would be included in cash and cash equivalents.
Accounting standards permit companies, at their option, to choose to measure many financial instruments and certain other items at fair value. The Company has elected to not fair value existing eligible items.
Investments by significant category included in cash equivalents at the end of each period were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Fair Value Level1 | Adjusted Cost | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | |