NHT Global(NHTC) - 2021 Q4 - Annual Report

Part I Business Natural Health Trends Corp. is a Hong Kong-based direct-selling and e-commerce company selling personal care and wellness products, primarily in Greater China - The company is an international direct-selling and e-commerce firm selling personal care, wellness, and 'quality of life' products under the 'NHT Global' brand[10] - The company's main product lines are categorized into wellness, herbal, beauty, lifestyle, home, and daily care[13] Active Members by Market (as of Dec 31) | Market | 2021 | 2020 | | :--- | :--- | :--- | | Americas | 5,650 | 4,760 | | Hong Kong (incl. China residents) | 33,510 | 41,130 | | Taiwan | 2,410 | 2,550 | | South Korea | 80 | 90 | | Japan | 700 | 220 | | Malaysia and Singapore | 420 | 290 | | Russia and Kazakhstan | 1,090 | 1,340 | | Europe | 1,210 | 1,300 | | India | 690 | 550 | | Total | 45,760 | 52,230 | - The company's business operations have been disrupted by the COVID-19 pandemic, a Chinese government campaign targeting health product sales, and political/social developments in Hong Kong[30] - The company utilizes a binary compensation plan with unilevel features, where members earn commissions from product purchases by their down-line network across all geographic markets[40] - The company does not currently hold a direct selling license in China. It withdrew its 2015 application in 2019 upon recommendation from a Chinese governmental authority and received a refund of its consumer protection deposit[53] Risk Factors The company faces significant risks from its reliance on Hong Kong and China markets, pandemic impacts, evolving regulations, and member retention challenges - A substantial portion of the company's business is concentrated in Hong Kong, generating 78% of revenue in 2021, with most sales delivered to members in China. This geographic concentration exposes the company to significant regional risks[73][74] - The COVID-19 pandemic and related control measures have materially and negatively impacted financial results throughout 2020 and 2021, and are expected to continue to do so in the near-term[75] - The company experienced a 12% decrease in active members from year-end 2020 to 2021, following a 9% decrease the prior year. This loss of members is a significant factor in declining sales[97] - The company's business in China is subject to complex laws. Any determination of non-compliance with direct selling, anti-pyramid, or multi-level marketing regulations could result in substantial fines and business interruptions[109][111] - The company relies on a limited number of third-party manufacturers for all its products, and any disruption in supply could lead to an extended interruption and substantial loss of revenue[88] - The company's common stock is subject to extreme volatility due to the nature of the direct selling industry and its significant operations in China and Hong Kong[170] Unresolved Staff Comments This section is not applicable to the company - Not applicable[172] Properties The company leases its Hong Kong headquarters, a California office, and multiple branch offices and retail spaces in China and other international markets - Corporate headquarters are located in a leased 7,300 sq. ft. office space in Hong Kong[172] - The company leases seven branch offices throughout China and additional office space in Peru, Japan, Taiwan, South Korea, Malaysia, Singapore, Thailand, India, and the Cayman Islands[173] Legal Proceedings The company reports no legal proceedings - None[174] Mine Safety Disclosures This section is not applicable to the company - Not applicable[174] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'NHTC', with a quarterly cash dividend of $0.20 per share expected - Common stock is traded on the NASDAQ Capital Market under the symbol 'NHTC'[175] - The company expects to pay a quarterly cash dividend of $0.20 per share, though future dividends are at the discretion of the Board of Directors[175] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, net sales decreased by 3% to $60.0 million due to Hong Kong sales decline, while operating income rose to $1.6 million and gross margin improved to 75.0% Results of Operations Consolidated Results of Operations (% of Net Sales) | Line Item | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | | Cost of sales | 25.0% | 27.4% | | Gross profit | 75.0% | 72.6% | | Commissions expense | 42.6% | 42.2% | | Selling, general and administrative expenses | 29.8% | 29.3% | | Income from operations | 2.6% | 1.1% | | Net income | 1.8% | 1.4% | Net Sales by Market (in thousands) | Market | 2021 | 2020 | | :--- | :--- | :--- | | Hong Kong | $46,699 | $49,169 | | Americas | $4,283 | $3,791 | | Taiwan | $2,706 | $3,034 | | China | $2,237 | $2,940 | | Europe | $1,136 | $1,050 | | Other | $2,944 | $2,117 | | Total | $60,005 | $62,071 | - Net sales decreased by $2.1 million (3%) in 2021 compared to 2020, primarily driven by a $2.5 million (5%) decrease in Hong Kong net sales[199] - Gross profit margin increased to 75.0% in 2021 from 72.6% in 2020, mainly due to lower logistics costs and fewer product promotions[201] - Commissions expense remained relatively stable as a percentage of net sales, at 42.6% in 2021 versus 42.2% in 2020[202] Liquidity and Capital Resources Key Liquidity and Cash Flow Data (in millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $83.8 | $92.4 | | Working capital | $68.8 | $78.2 | | Cash provided by operations (annual) | $1.0 | $1.9 | | Dividends paid (annual) | $9.1 | $9.1 | - The company repatriated $9.0 million from China in April 2021 after adjusting the registered capital of its primary Chinese subsidiary[206] - As of December 31, 2021, $21.9 million remained available for future purchases under the company's $70.0 million stock repurchase program[210] Critical Accounting Policies and Estimates - Management identifies revenue recognition, member commissions, and income taxes as its critical accounting policies and estimates[215] - Revenue is recognized when products are shipped and title passes to members (F.O.B. Shipping Point). Amounts received for unshipped orders and unredeemed product vouchers are recorded as deferred revenue, which totaled $6.5 million at year-end 2021[216] - The company accrues for member commissions and incentives as they are earned. Accrued commissions, including incentive programs, totaled $3.6 million at year-end 2021[219][220] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies under smaller reporting company disclosure rules - Not applicable under smaller reporting company disclosure rules[225] Financial Statements and Supplementary Data Audited consolidated financial statements for 2021 and 2020 are presented, with Marcum LLP providing an unqualified opinion and identifying commissions expense as a critical audit matter Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $93,469 | $99,741 | | Total Assets | $98,355 | $105,942 | | Total Current Liabilities | $24,656 | $21,506 | | Total Liabilities | $38,867 | $38,245 | | Total Stockholders' Equity | $59,488 | $67,697 | Consolidated Statement of Operations Data (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $60,005 | $62,071 | | Gross Profit | $44,995 | $45,081 | | Income from Operations | $1,571 | $669 | | Net Income | $1,085 | $843 | | Diluted EPS | $0.09 | $0.07 | - The independent auditor, Marcum LLP, identified 'Commissions Expense and the Related Accrued Commissions, Including Amounts Held in eWallets' as a critical audit matter due to the specialized skills required to test IT controls and the significant management judgment involved in accruals[233][234] - The Primary Reporting Segment generated operating income of $10.4 million in 2021, while the China segment generated $74,000. After accounting for unallocated corporate expenses of $8.7 million, total income from operations was $1.6 million[327] Changes In and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable to the company - Not applicable[335] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[336] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[338] Other Information The company reports no other information - None[339] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[340] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[341] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[341] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[342] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the definitive proxy statement[343] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements and various corporate and executive exhibits - This section provides an index of all exhibits filed with the Form 10-K, including financial statements, corporate governance documents, and executive certifications[345][346] Form 10-K Summary The company reports no other information - None[349]