Mannatech, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results are compared with the corresponding 2020 periods. Mannatech sells nutritional supplements, skin-care and other wellness products primarily through a network-marketing model; it reported approximately 166,000 active associate and preferred-customer positions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $39.4 million | $38.0 million | $120.3 million | $112.2 million |
| Gross profit / margin | $31.5 million / 80.0% | $28.6 million / 75.4% | $95.0 million / 79.0% | $87.2 million / 77.7% |
| Operating income / margin | $3.3 million / 8.3% | $1.4 million / 3.6% | $8.1 million / 6.7% | $4.5 million / 4.0% |
| Net income | $2.9 million | $1.6 million | $7.3 million | $5.5 million |
| Diluted EPS | $1.44 | $0.76 | $3.47 | $2.38 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $10.8 million | $3.3 million |
Q3 sales grew 3.9%; nine-month sales grew 7.2%. On a constant-currency basis, a non-GAAP measure, growth was 1.3% and 2.9%, respectively. Favorable foreign exchange added approximately $0.9 million to Q3 sales and $4.9 million to nine-month sales. The nine-month income-tax provision was $0.7 million, compared with a $0.8 million tax benefit in 2020; the prior-year period included a $1.2 million benefit associated with CARES Act net-operating-loss carrybacks.
Liquidity, cash flow and capital
- At September 30, cash and cash equivalents were $27.1 million, restricted cash was $2.1 million, working capital was $14.5 million, and total assets were $63.9 million. Working capital was $10.5 million at December 31, 2020.
- Nine-month investing cash use was $0.5 million and financing cash use was $6.1 million. Financing included $5.1 million of share repurchases and $1.0 million of dividends. Cash, cash equivalents and restricted cash increased $1.7 million to $29.2 million; foreign-exchange movements reduced cash by $2.5 million.
- Current notes payable were $0.2 million, with no long-term notes payable reported. Finance lease liabilities were $0.1 million and operating lease liabilities were $6.3 million. The company also reported $3.9 million of purchase obligations and $0.6 million of employment-agreement commitments, among other obligations.
- The company repurchased 190,748 shares in the first nine months, including 171,433 shares through a tender offer at $26 per share for $4.5 million. Shares outstanding were 1,921,761 at September 30, down from 2,071,081 at December 31, 2020.
Changes and management commentary
- Gross margin improved year over year in both reported periods. Management attributed the improvement primarily to price increases in key markets and stronger Korean Won and South African Rand exchange rates.
- Sales growth was led by Asia/Pacific and EMEA; Americas Q3 sales declined 1.8%. In Asia/Pacific, higher revenue per active position was partly offset by fewer active positions. Q3 product orders fell 5.5%, while average order value rose to $184 from $171.
- Nine-month pack sales and associate fees rose 132.1% to $6.5 million, primarily reflecting higher continuing fees and pack sales. The company reported 166,000 active positions versus 180,000 a year earlier; new-position recruitment in Q3 was slightly lower year over year.
- Management said existing liquidity and operating cash flows should fund normal business operations for the next 12 months. This depends on sustaining or improving revenue relative to operating expenses; additional financing, if needed, may not be available on favorable terms.
Risks, contingencies and unusual items
- COVID-19-related restrictions, workforce or supply-chain disruption, and weaker consumer demand could affect sales and liquidity. Foreign-currency fluctuations are also material: operations outside the Americas generated about 71% of nine-month sales, and much cash and net assets were concentrated in South Korea.
- A China product-liability lawsuit alleges violations of food-safety and consumer-protection laws and seeks approximately $286,600. The company disputes jurisdiction and intends to defend the case; the filing says the possible liability cannot currently be estimated. No legal reserve was deemed necessary at September 30.
- After quarter-end, Mannatech received an FTC notice concerning money-making opportunities, endorsements and testimonials. The filing says receipt is not a finding of wrongdoing; a formal action and hearing would be required for penalties. The notice references possible civil penalties of up to $43,792 per violation.
- Other risks include direct-selling and network-marketing regulation, associate recruitment and retention, product claims and publicity, competition, and ongoing tax audits. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether sales and margin gains persist after separating foreign-exchange benefits, price increases and changes in sales mix.
- Whether the declining active-position base and lower Q3 order count affect future product sales.
- Cash generation and liquidity, including the concentration of cash and net assets in South Korea and the impact of currency movements.
- Developments in the China litigation, the FTC notice, and ongoing tax matters, including any resulting financial exposure.
- Capital allocation after the tender offer, including future repurchases and dividends, and the company’s ability to meet lease and purchase commitments.