Mannatech, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Mannatech develops and sells nutritional supplements, skin-care and weight-management products, primarily through a network-marketing model across the Americas, Asia/Pacific, and EMEA. Figures below are in U.S. dollars; financial statements are unaudited.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $38.0 million | $39.7 million | $112.2 million | $118.3 million |
| Gross profit / margin | $28.6 million / 75.4% | $31.9 million / 80.6% | $87.2 million / 77.7% | $95.1 million / 80.4% |
| Operating income / margin | $1.4 million / 3.6% | $0.6 million / 1.4% | $4.5 million / 4.0% | $3.7 million / 3.1% |
| Net income (loss) | $1.6 million | $(1.5) million | $5.5 million | $1.2 million |
| Diluted EPS | $0.76 | $(0.62) | $2.38 | $0.47 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $3.3 million | $6.2 million |
Financial position and liquidity
- At September 30, cash and cash equivalents were $21.2 million; restricted cash was $5.0 million, for combined cash and restricted cash of $26.2 million. Cash and cash equivalents were $24.8 million at December 31, 2019.
- Working capital was $11.6 million, down from $12.1 million at year-end 2019. Current assets were $40.9 million and current liabilities $29.3 million.
- Notes payable totaled $0.7 million, all current; finance lease liabilities totaled $0.2 million. Operating lease liabilities were $8.3 million and are separate from notes payable.
- Inventory increased to $13.5 million from $10.2 million at year-end, while accounts receivable fell to $0.1 million from $1.0 million.
- Nine-month investing cash use was $0.8 million. Financing cash use was $6.9 million, including $5.6 million of share repurchases and $0.9 million of dividends.
Changes versus comparable periods
- Sales fell 4.3% in Q3 and 5.2% in the first nine months. On the company’s non-GAAP constant-currency basis, declines were 3.8% and 2.7%, respectively; currency translation reduced nine-month reported sales by $2.9 million.
- Product sales declined 7.8% in Q3 and 6.1% year to date. Q3 average order value fell to $171 from $190, although order volume rose 4.1%. Nine-month order volume fell 2.0% and average order value declined to $181 from $188.
- Gross margin contracted, which management attributed primarily to increased product promotions. Lower selling and administrative costs helped lift operating income despite lower sales; Q3 selling and administrative expense fell 25.8%, and nine-month expense fell 17.1%.
- Net income improved in both comparisons. The nine-month 2020 tax benefit included a $1.2 million benefit from carrying back U.S. net operating losses under the CARES Act. The effective tax rate was unusually low/negative: 1.3% for Q3 and (15.8)% for the nine months.
- The company repurchased 323,660 shares during the first nine months, including 294,117 shares in a $5.0 million tender offer. Outstanding shares were 2,089,002 at September 30, versus 2,381,131 at December 31, 2019.
Outlook, risks, and unusual items
- Management said existing liquidity and expected operating cash flows should fund normal business operations for the next 12 months, subject to maintaining or improving revenue relative to costs. No specific earnings or revenue guidance was provided.
- COVID-19 could affect distributor engagement, consumer demand, events, and supply chains. The company reported raw-material and packaging shortages and transportation constraints, while stating that it had overcome shipping obstacles. Management cautioned that prolonged disruptions could hurt sales and liquidity.
- Cash flows depend substantially on the independent sales force and on the Republic of Korea, where a significant portion of cash balances and operating cash flows is concentrated. Foreign-currency changes affected reported sales and results; the company does not use financial instruments to hedge this exposure.
- The company received a $2.2 million Paycheck Protection Program loan in April 2020 but repaid it in full on April 30 after subsequent SBA guidance.
- Open matters include a Korean customs assessment dispute (the original $1.0 million assessment was paid; Supreme Court decision timing was uncertain) and product-liability claims in Korea and China. The China trial court ruled for the company, but the plaintiff appealed. The company could not estimate potential liability for the Korean product-liability claim.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification points
- Track whether sales declines and lower product order values persist, particularly in Asia/Pacific and the Americas, and whether associate/customer activity translates into product demand.
- Assess gross-margin recovery and the sustainability of expense reductions; distinguish reported results from constant-currency non-GAAP measures.
- Verify operating cash conversion, inventory growth and cash usage, including the effects of repurchases and dividends on liquidity.
- Monitor COVID-19-related supply and demand conditions, currency exposure, and the company’s reliance on the Republic of Korea.
- Follow tax-rate variability, realization of deferred tax assets, and the outcomes of the disclosed legal and tax matters.