Mannatech, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Mannatech sells nutritional supplements, skin care and wellness products through network marketing and e-commerce, across the Americas, Asia/Pacific and EMEA. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
- Q3 revenue: $35.5 million, down 10.0% year over year. On a constant-dollar, non-GAAP basis, revenue declined 1.3%.
- Nine-month revenue: $102.9 million, down 14.5% year over year; down 8.2% on a constant-dollar basis. Foreign exchange reduced reported revenue by $3.4 million in Q3 and $7.5 million over nine months.
- Profitability: Q3 gross profit was $28.1 million (79.1% margin), operating income $1.4 million (3.8% margin), and net income $1.2 million; diluted EPS was $0.61. For nine months, gross profit was $80.4 million (78.2% margin), operating income $2.2 million, net income $2.0 million, and diluted EPS $1.01.
- Cash flow: Operating cash flow was $0.5 million for the first nine months, compared with $10.8 million in 2021. Capital expenditures were $0.9 million. Financing used $3.3 million, including $1.2 million of dividends and $1.6 million of share repurchases.
- Cash and liquidity: Cash and cash equivalents were $15.1 million at September 30, versus $24.2 million at year-end 2021. Including restricted cash, period-end cash was $16.5 million. Working capital was $7.7 million, down from $12.7 million. Management said existing liquidity and operating cash flows should fund normal operations for the next 12 months, conditional on revenue and expense performance.
- Debt and obligations: Current notes payable were $0.3 million. Finance lease liabilities totaled $0.2 million; operating lease liabilities totaled $5.9 million. The filing says operations are funded through operating cash flows rather than long-term debt.
Material changes and operating trends
- Q3 net sales fell across Asia/Pacific and EMEA; Americas sales were nearly flat. For the nine months, sales declined in all three regions. Asia/Pacific generated 60.2% of Q3 revenue and 61.4% of nine-month revenue.
- Management attributed lower sales to weaker order values and order volumes, fewer active associates and preferred customers, supply constraints, and unfavorable currency translation. In Q3, average product order value fell 7.1% to $171; orders processed declined 2.2%. Nine-month average order value fell 7.8% to $175; orders declined 5.5%.
- The approximate active associate and preferred-customer network declined to 150,000 from 166,000 year over year. Q3 recruitment of new positions fell 23.0%.
- Q3 gross margin decreased 0.9 percentage points to 79.1%; nine-month gross margin decreased 0.8 points to 78.2%, primarily due to foreign exchange effects on product costs and higher freight costs.
- Operating income fell 58.7% in Q3 and 72.3% for the nine-month period. Operating expenses declined in dollars, but rose as a share of revenue over nine months.
- Cash and cash equivalents declined by $9.1 million. The cash-flow statement reports a $5.4 million adverse effect from currency movements; inventory investment and payments of accrued liabilities also weighed on operating cash flow.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects liquidity to support normal operations for 12 months, but notes that this depends on maintaining or increasing revenue and/or controlling operating expenses; additional funding might be needed if resources prove insufficient.
- Key risks include foreign-exchange volatility, inflation, supply-chain disruption, COVID-19 impacts, the Russia-Ukraine conflict, reduced consumer demand, and the ability to recruit and retain associates and customers. The company does not use financial instruments to hedge currency exposure.
- Foreign-currency translation losses were $2.6 million in Q3 and $5.4 million for nine months, contributing to comprehensive losses of $1.4 million and $3.4 million, respectively. Other income included foreign-exchange gains of approximately $0.3 million in both reported periods.
- The company received an FTC notice concerning money-making opportunity and endorsement/testimonial claims. The filing says receipt is not a determination of wrongdoing; no formal action is reported. Management says routine litigation claims are not expected to have a material effect and that no legal reserve was necessary at September 30. Ongoing international tax audits were described as not material.
- A supplier agreement requires purchases of $0.4 million through 2022 and $5.1 million annually through 2024. The company continued quarterly dividends of $0.20 per share and authorized up to $1.5 million of repurchases through September 18, 2023.
Important facts for investors to verify
- Whether sales and active-network trends stabilize, particularly in Asia/Pacific and EMEA, and whether constant-dollar performance translates into reported results.
- Whether operating cash generation improves as inventory rises and cash balances decline; review the impact of currency movements and working-capital changes.
- Whether lower revenue and higher freight/product costs continue to pressure margins and operating income.
- Progress and potential exposure, if any, from the FTC notice, tax audits and other contingencies; the filing does not quantify possible outcomes.
- The ability to meet supplier commitments, sustain dividends and repurchases, and maintain adequate liquidity if revenue or cash flow weakens.