Mannatech, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Mannatech develops and sells nutritional supplements, skin-care, anti-aging and weight-management products, primarily through network marketing in 25 countries, with a traditional retail e-commerce business in mainland China.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $32.6 million | $35.0 million | $66.7 million | $67.4 million |
| Gross profit / margin | $25.6 million / 78.5% | $27.1 million / 77.4% | $52.3 million / 78.4% | $52.3 million / 77.7% |
| Operating income (loss) / margin | $(1.0) million / (2.9)% | $0.9 million / 2.4% | $(0.2) million / (0.4)% | $0.9 million / 1.3% |
| Net income (loss) | $(1.1) million | $0.7 million | $(0.5) million | $0.8 million |
| Basic EPS | $(0.59) | $0.36 | $(0.27) | $0.43 |
Q2 sales fell 6.8% year over year; first-half sales fell 1.0% in reported dollars but rose 2.8% on a constant-dollar basis. Foreign exchange reduced reported sales by $1.0 million in Q2 and $2.6 million year to date. Gross margin improved, which management attributed to lower freight costs.
Operating costs pressured results: Q2 selling and administrative costs rose 5.0%, and other operating costs rose 12.0%; for the first half, other operating costs increased 13.4%, largely from consulting and travel. These costs included $0.4 million of Q2 and $0.6 million of first-half consulting related to Trulu, a new innovation-hub venture. First-half income tax expense was $0.8 million despite $0.3 million of pretax income; management cited earnings mix across jurisdictions and valuation allowances on certain losses.
Cash, liquidity and obligations
- Cash and cash equivalents were $9.4 million at June 30, 2023, down from $13.8 million at year-end; cash, cash equivalents and restricted cash totaled $10.8 million.
- Working capital was $3.0 million, versus $5.1 million at December 31, 2022. Current assets were $31.3 million and current liabilities $28.2 million.
- Operating activities used $1.3 million in the first half, compared with $1.5 million provided in the prior-year period. Capital spending was $0.4 million. Financing used $1.3 million, including $0.8 million of dividends.
- Total liabilities were $33.8 million. Notes payable were $0.4 million, short-term financing for insurance policies. Lease liabilities totaled $6.6 million ($5.2 million operating and $1.4 million finance); the filing reports no long-term borrowing program.
- Inventory was $15.8 million, up from $14.7 million at year-end. Shareholders’ equity was $11.6 million, down from $14.2 million.
Management believes existing liquidity and operating cash flows are adequate for normal business operations over the next 12 months, while noting that additional funding could be needed if resources or cash flows prove insufficient. No formal earnings or revenue guidance is provided.
Changes, commentary and risks
- Regional trends diverged: Q2 Americas sales rose 15.2% to $10.6 million, while Asia/Pacific fell 15.0% to $19.3 million and EMEA fell 12.9% to $2.7 million. Asia/Pacific and EMEA declines reflected weaker sales activity and adverse currency effects; management also cited the Ukraine war and inflation as factors affecting EMEA.
- The active associate and preferred-customer base was approximately 142,000, down from 152,000 a year earlier. Q2 orders declined 7.8% to 179,437; average order value was $173 versus $176.
- The company recorded an out-of-period loyalty-program breakage adjustment, increasing revenue by $1.2 million for Q2 and $1.4 million for the first half, and commission expense by $0.5 million in each period. The company described the error as immaterial.
- Foreign-currency translation reduced first-half cash by $1.5 million and contributed to a $1.45 million first-half other comprehensive loss. The company does not hedge currency exposure.
- Key disclosed risks include associate recruitment and retention, consumer demand, competition, regulation, supplier availability and quality, inflation, supply-chain disruption, foreign exchange, and economic or political conditions. Operations and cash flows are concentrated in South Korea; the filing notes that adverse local economic conditions could harm results.
- Routine legal claims remain outstanding; management believes they can be resolved without material adverse effect and recorded no legal reserve at June 30. The company also reported ongoing tax audits and other disputes, whose outcomes cannot be predicted.
- The company paid two $0.20-per-share dividends during the first half and repurchased 7,396 shares in Q2. Management reported disclosure controls as effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue, order volume and the associate/customer base stabilize, particularly in Asia/Pacific and EMEA.
- Whether the reported loyalty-program adjustment is fully understood and whether related revenue and commission accounting remain consistent.
- Whether operating cash flow and working capital improve, given lower cash balances, inventory growth and continued dividend payments.
- Whether Trulu and other higher operating costs produce benefits sufficient to support a return to operating profitability.
- Potential effects of currency movements, South Korea concentration, tax audits and any legal or regulatory developments.