DALLAS, Aug 11, 2005 (BUSINESS WIRE) -- Natural Health Trends Corp. (NASDAQ NMS: BHIP), an international direct-selling company, today announced its financial results for the second quarter ended June 30, 2005.
Net sales in the second quarter of 2005 were approximately $49.9 million, up 182% from the $17.7 million for the comparable period a year ago. This increase was largely due to significant growth in the Hong Kong-based business, which recorded approximately $32.0 million net sales in the three months ended June 30, 2005, up from $2.9 million during the comparable period last year. For the six months ended June 30, 2005, net sales rose 64% to approximately $92.7 million compared to $56.4 million for the same period during 2004.
For the second quarter of 2005, the Company recorded a net loss of approximately $2.2 million, or $0.32 per fully diluted share. In the second quarter of 2004, the Company had a net loss of $6.7 million, or $1.24 per fully diluted share.
Mark Woodburn, President of Natural Health Trends Corp., said, "Our loss in the quarter relates directly to the Company's aggressive investments in growing our business in our most promising markets: China, Japan, Mexico and the U.S. Spending for our market and product expansion is expensed as they are incurred, even though the benefits do not occur in the same quarter."
The growth in sales in 2005 over 2004 was also attributable to a 5% product price increase in January 2005 and an increase in the number of independent distributors. As of June 30, 2005, the operating subsidiaries of Natural Health Trends Corp. had approximately 152,000 active distributors, compared to 133,000 at the end of 2004 and 101,000 a year ago.
At the end of the second quarter, the Company had deferred revenue of approximately $13.7 million of which $7.5 million pertained to product orders and $6.2 million to enrollment package revenue. During April 2005, the Company launched a new product line, Gourmet Coffee Cafe, with its coffee machines, coffee and tea pods, in the North American market. Since the Gourmet Coffee Cafe is a very different product than the Company's other products, relevant accounting rules require that none of the revenue generated from the sale of the coffee machines be recognized until sufficient experience on the product has been established.
Gross profit margin for the second quarter was 75.1% of revenue, versus 72.5% for the same period a year ago. The percentage of revenue improved over a year ago, mainly due to the 5% price increase instituted in January 2005 and significant revenue being deferred a year ago related to the Hong Kong market. Compared to the first quarter of 2005, when gross margin was 80.9%, the Company's second quarter gross margin was adversely affected as the Company took a more aggressive position to importing products into China and to preparing for a China-based manufacturing plant.
Distributor commissions were 55.3% of net sales for the three months ended June 30, 2005 compared with 71.1% of net sales for the same period in the prior year. The decrease in distributor commissions as a percentage of sales over a year ago was primarily related to special events that occurred during the second quarter of 2004 with respect to our Hong Kong based business. However, during the first quarter of 2005, distributor commissions were 49.8% of sales. This increase can be attributed to the continued, significant increase in the number of distributors as well as promotional programs conducted during the second quarter of 2005 in Hong Kong, South Korea and North America.
Selling, general and administrative expenses ("SG&A") were approximately $12.3 million or 24.6% of net sales for the three months ended June 30, 2005 compared with approximately $8.2 million or 46.3% of net sales for the same period in the prior year. This increase of approximately $4.1 million or 50% was mainly attributable to additional marketing-related expenses primarily in Eastern Europe ($1.8 million), preparing the opening of new markets in Mexico and Japan ($0.9 million), increased personnel costs in Hong Kong ($0.4 million) and higher professional fees and personnel costs in North America ($1.0 million). SG&A are expected to continue to increase for the balance of the year as spending on new markets and marketing events increase.
Other expense was approximately $0.4 million for the three months ended June 30, 2005 compared with an expense of approximately $0.2 million for the same period in the prior year. This unfavorable variance was mainly due to exchange losses caused by a strengthening of the U.S. dollar since December 31, 2004, in particular against the euro.
Mr. Woodburn said, "In Hong Kong, we took better control of logistics processes and invested in our top producing distributors in order to sustain the phenomenal revenue increase we are seeing so far this year. These measures negatively affected our second quarter results. But, we believe these are important for our long-term vitality and sustainable growth. We expect that the margin should improve somewhat in the second half."
The revenue increase for the first half over a year ago was due to growth in Hong Kong, the anticipated opening of the Japanese office, and additional sales from our KGC subsidiary and Lexxus business in North America.
Gross profit was 77.8% of net sales for the six months ended June 30, 2005 compared with 76.8% of net sales for the same period in the prior year. This margin increase in gross profit percentage was primarily driven by the 5% price increase as well as the elimination of the commissions paid to MarketVision Communications Corp. after its acquisition by the Company on March 31, 2004.
SG&A were approximately $21.6 million or 23.3% of net sales for the six months ended June 30, 2005 compared with approximately $14.2 million or 25.1% of net sales for the same period in the prior year. The increase of approximately $7.4 million was due to increased marketing in Eastern Europe by our KGC subsidiary and in North America, higher professional fees and personnel cost in North America, preparing the opening of new markets in Mexico and Japan, and increased personnel costs in Hong Kong.
Mr. Woodburn said, "We are pleased with the incredible top-line growth we are experiencing. With $29 million of cash at the end of the quarter, our business is generating cash and acquiring new distributors at a rapid pace. We are also confident that our investment in the top line will ultimately benefit the bottom line. Our Hong Kong office just celebrated the grand opening of our first Chinese experience center in Guangzhou and a new customer service facility in Hong Kong. We are also preparing a new factory in Zhuhai, China and expect it to be operating and producing products in a few months. We expect this factory to help reduce costs and improve customer services. After a brief delay, our Mexico office started generating revenue in July, and we eagerly await the opening of our Japanese business in the fourth quarter."
Natural Health Trends Corp. is an international direct-selling company operating in more than 30 markets throughout Asia, North America, Eastern Europe and Latin America. The Company markets premium quality personal care products under the Lexxus brand and markets its nutritional supplement products under the Kaire brand. Additional information can be found on the Company's website, and management encourages interested parties to register for updated corporate information via e-mail on the Company's homepage, www.naturalhealthtrendscorp.com.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 -- Forward-looking statements in this release do not constitute guarantees of future performance. Such forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those anticipated. Such statements may relate, among other things, to our relationship with our distributors; our need to continually recruit new distributors; our internal controls and accounting methods that may require further modification; regulatory matters governing our products and network marketing system; our ability to recruit and maintain key management; adverse publicity associated with our products or direct selling organizations; product liability claims; our reliance on outside manufacturers; risks associated with operating internationally, including foreign exchange risks; product concentration; dependence on increased penetration of existing markets; the competitive nature of our business; and our ability to generate sufficient cash to operate and expand our business. For a more detailed discussion of the risks and uncertainties of our business, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking information contained in this press release or with respect to the announcements described herein.