Mannatech, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Mannatech sells nutritional supplements, skin care, anti-aging and weight-management products through network marketing in 25 countries, and operates a retail e-commerce business in mainland China. It reported approximately 175,000 active associate and preferred-customer positions for the 12 months ended June 30, 2019, down from 202,000 a year earlier.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $40.7 | $45.1 | $78.7 | $86.5 |
| Gross profit | $32.6 | $37.0 | $63.1 | $70.1 |
| Gross margin | 80.1% | 82.0% | 80.2% | 81.1% |
| Operating income (loss) | $2.0 | $(0.3) | $3.1 | $(1.2) |
| Net income (loss) | $2.0 | $(0.4) | $2.7 | $(0.6) |
| Diluted EPS | $0.81 | $(0.14) | $1.09 | $(0.24) |
- Sales declined 9.8% in Q2 and 9.1% in the first half. On the company’s non-GAAP constant-currency basis, declines were 5.5% and 5.3%, respectively. Foreign exchange reduced reported sales by $1.9 million in Q2 and $3.2 million in the first half.
- Gross margin fell, which management attributed primarily to higher inventory write-offs. Lower commissions, selling and administrative expenses, and other operating costs helped restore operating profitability.
- Other income included a $1.1 million VAT refund in both the Q2 and first-half results; foreign-exchange gains and losses partly offset it. The refund is an unusual item.
- Cash provided by operating activities was $3.8 million in the first half, versus $1.7 million in 2018. Investing activities used $0.7 million; financing activities used $1.3 million. Net cash, cash equivalents and restricted cash increased $1.2 million to $31.8 million.
Financial position and liquidity
- At June 30, cash and cash equivalents were $25.0 million; restricted cash was $6.7 million. Working capital was $11.5 million, compared with $8.8 million at year-end 2018.
- Total assets were $67.3 million and total liabilities were $40.0 million. Notes payable were approximately $1.5 million; finance-lease liabilities were $0.3 million. Separately, operating-lease liabilities were $5.9 million following adoption of the lease accounting standard.
- Management said existing liquidity and operating cash flows should fund normal operations and possible international expansion costs for the next 12 months. It cautioned that additional funding could be needed if resources or cash flows prove insufficient, and that such funding may not be available on favorable terms.
Material changes and management commentary
- Management’s decision to hold Mannafest as a regional rather than international event reduced event sales by $3.1 million, or 76%, compared with 2018, while also lowering marketing, travel and related costs.
- Americas sales fell 28.3% in Q2 and 21.3% in the first half. Management cited lower Mannafest sales and decreases in active associates and preferred customers. Product sales also weakened: average order value declined and order counts fell in both comparison periods.
- Asia/Pacific sales rose 1.2% in Q2 but declined 2.3% for the first half. EMEA sales rose 6.1% in Q2 and fell 1.5% in the first half. International markets represented about 69% of first-half sales.
- Commissions and incentives included a one-time release of liabilities for vouchers no longer eligible for payout: $0.7 million in Q2 and $1.2 million in the first half.
- The company adopted the new lease accounting standard on January 1, 2019, increasing balance-sheet assets by $4.8 million, net of incentives, and liabilities by $6.1 million, without significant effect on reported earnings or cash flows.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management’s liquidity outlook depends on maintaining or improving revenue and controlling operating expenses.
- Key risks include declining associate/customer positions and sales, foreign-exchange movements, regulatory changes, competition, product and network-marketing publicity, and economic or political conditions in operating countries. Cash and operating activity are concentrated in South Korea; the filing notes that adverse local economic conditions could harm results.
- Two Chinese product-related lawsuits remained open. One alleges tooth decay associated with MannaBears and seeks approximately $50,000; the other alleges labeling or food-safety violations involving Manapol and Truplenish and seeks approximately $8,000. The company disputes the claims; outcomes and potential liabilities cannot be estimated clearly.
- A separate customs assessment appeal in South Korea remained pending before the Supreme Court; the underlying $1.0 million assessment was paid in 2014. The filing also describes ongoing tax audits and other ordinary-course claims, with outcomes uncertain.
- The company paid $0.6 million in dividends during the first half and repurchased 4,039 shares in Q2. It reported effective disclosure controls and no material quarter-over-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and active associate/customer positions stabilize, particularly in the Americas, and whether average order value and order volume recover.
- How much of the return to profitability reflects sustainable cost reductions versus the VAT refund and one-time voucher-liability release.
- Whether inventory write-offs continue to pressure gross margin and whether foreign-exchange movements further reduce reported sales.
- The company’s cash concentration and operational exposure in South Korea, lease commitments, and ability to fund operations from cash flow.
- Developments in the Chinese product lawsuits, South Korean customs appeal, and tax audits.