Mannatech, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Mannatech sells nutritional supplements, skin care and other wellness products primarily through a network-marketing business across the Americas, Asia/Pacific and EMEA. It reported approximately 152,000 active associate and preferred-customer positions, down from 176,000 a year earlier.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $35.0 million | $42.5 million | $67.4 million | $80.8 million |
| Gross profit / margin | $27.1 million / 77.4% | $32.4 million / 76.2% | $52.3 million / 77.7% | $63.5 million / 78.5% |
| Operating income / margin | $0.9 million / 2.4% | $2.0 million / 4.7% | $0.9 million / 1.3% | $4.8 million / 5.9% |
| Net income | $0.7 million | $2.1 million | $0.8 million | $4.3 million |
| Diluted EPS | $0.34 | $0.99 | $0.40 | $2.03 |
Q2 sales fell 17.7% year over year; on the company’s non-GAAP constant-dollar basis, sales declined 11.3%. Six-month sales also declined 16.7% as reported and 11.3% on a constant-dollar basis. Foreign exchange reduced reported sales by $2.7 million in Q2 and $4.3 million in the first half. For the six months, product sales declined 16.4% and pack sales and associate fees declined 24.4%.
Q2 gross margin improved year over year, but the six-month gross margin declined. Operating expenses fell in dollars, but more slowly than sales, and operating margin and net income contracted substantially. The average product order value fell to $176 in Q2 from $198; processed orders fell 8.4% to 194,555.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $20.6 million, versus $24.2 million at year-end 2021; restricted cash was $1.4 million. Total cash, cash equivalents and restricted cash declined $3.6 million during the first half, including a $2.8 million adverse currency-translation effect.
- First-half operating cash flow was $1.5 million, compared with $8.3 million in 2021. Capital expenditures were $0.5 million, implying approximate operating cash flow less capital expenditures of $0.9 million. Financing used $1.8 million, including $0.8 million in dividends and $0.6 million in share repurchases.
- Working capital was $9.9 million, down from $12.7 million at December 31, 2021. Current assets were $42.0 million and current liabilities $32.1 million.
- Borrowings were limited: current notes payable were $0.4 million; finance lease liabilities totaled $0.1 million. Operating lease liabilities were $6.2 million. The filing says ordinary operations are funded principally from operating cash flows rather than long-term debt.
- Inventory increased to $13.9 million from $12.0 million. Deferred revenue rose to $6.0 million from $4.9 million; deferred commissions increased to $3.2 million from $2.4 million.
Drivers, outlook and risks
- Sales declined in every region. Asia/Pacific remained the largest, at 64.8% of Q2 sales; the Americas accounted for 26.3% and EMEA 8.9%. Management cited fewer active positions and lower revenue per position, a strong U.S. dollar, and worldwide supply-chain constraints.
- A shortage of an ingredient used in some North American core products affected sales; the company was working with manufacturing partners on an alternative. Hong Kong shipping delays improved during Q2.
- Management said existing liquidity and expected operating cash flows should fund normal operations for the next 12 months, conditional on maintaining or improving revenue relative to expenses. It gave no specific revenue or earnings guidance and warned that additional funding might be needed if resources or cash flows prove insufficient.
- Key uncertainties include inflation, COVID-19 effects, supply disruptions, the Russia-Ukraine conflict, weaker consumer demand, associate recruitment and retention, regulatory changes, and foreign-exchange volatility. The company has substantial cash and net assets concentrated in South Korea and does not hedge currency exposure.
- The company had a $2.1 million minimum raw-material purchase commitment through 2022 and expects to renegotiate the agreement. Failure to maintain exclusivity could adversely affect the business.
- The company received an FTC notice in October 2021 concerning money-making opportunities and endorsement/testimonial claims. The filing says receipt is not a determination of wrongdoing; no legal reserve was considered necessary at June 30. Management also reported ongoing tax audits and routine claims, without estimating potential exposure.
Most important facts to verify
- Whether sales and active associate/customer positions stabilize, particularly in Asia/Pacific and the Americas, and whether average order value recovers.
- Whether the alternative ingredient resolves North American product availability and whether supply constraints or inventory buildup persist.
- How much of reported sales weakness reflects currency translation versus underlying demand, and whether the strong dollar continues to pressure results and cash.
- Whether operating cash flow remains adequate amid lower profitability, higher inventory and continued dividends and repurchases.
- Progress and potential financial consequences, if any, from the FTC notice, tax audits, supplier-agreement renegotiation and other contingencies.