Mannatech(MTEX) - 2022 Q3 - Quarterly Report

Part I Part I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, shareholders' equity, and cash flows, highlighting overall financial declines for 2022 Consolidated Balance Sheets The balance sheet as of September 30, 2022, reflects a decrease in total assets, primarily driven by reduced cash, and a decline in total shareholders' equity Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $15,092 | $24,185 | | Total current assets | $36,442 | $42,838 | | Total assets | $52,500 | $59,625 | | Liabilities & Equity | | | | Total current liabilities | $28,735 | $30,098 | | Total liabilities | $33,889 | $35,213 | | Total shareholders' equity | $18,611 | $24,412 | Consolidated Statements of Operations The statements of operations show a decline in net sales, gross profit, and net income for both the three and nine months ended September 30, 2022 Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $35,513 | $39,446 | $102,873 | $120,269 | | Gross profit | $28,097 | $31,543 | $80,446 | $95,018 | | Income from operations | $1,357 | $3,286 | $2,245 | $8,093 | | Net income | $1,191 | $2,930 | $2,019 | $7,253 | | Basic EPS | $0.62 | $1.54 | $1.05 | $3.63 | | Diluted EPS | $0.61 | $1.44 | $1.01 | $3.47 | Consolidated Statements of Comprehensive (Loss) Income The company reported a comprehensive loss for both periods ended September 30, 2022, primarily due to negative foreign currency translation adjustments Comprehensive (Loss) Income (in thousands) | Period | Net Income | Foreign Currency Translations | Comprehensive (Loss) Income | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30, 2022 | $1,191 | $(2,561) | $(1,370) | | Three Months Ended Sep 30, 2021 | $2,930 | $(1,254) | $1,676 | | Nine Months Ended Sep 30, 2022 | $2,019 | $(5,395) | $(3,376) | | Nine Months Ended Sep 30, 2021 | $7,253 | $(2,538) | $4,715 | Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased for the nine months ended September 30, 2022, with overall cash declining due to investing and financing outflows Net Cash Flows for Nine Months Ended September 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $459 | $10,846 | | Net cash used in investing activities | $(889) | $(513) | | Net cash used in financing activities | $(3,314) | $(6,109) | | Effect of currency exchange rate changes | $(5,417) | $(2,518) | | Net (decrease) increase in cash | $(9,161) | $1,706 | Notes to Unaudited Consolidated Financial Statements These notes provide detailed information on business operations across three regions, revenue recognition, inventory, income taxes, segment sales, and lease obligations, highlighting foreign cash holdings and loyalty program liabilities - The company operates a network marketing model for nutritional and personal care products across three geographic regions: Americas, EMEA, and Asia/Pacific. In mainland China, it operates a non-direct selling, cross-border e-commerce model[27][28] - A significant portion of cash and cash equivalents ($12.4 million of $15.1 million) was held in foreign countries as of September 30, 2022, with a notable concentration in the Republic of Korea[36][37] - Deferred revenue related to the customer loyalty program was $4.2 million as of September 30, 2022. Revenue is recognized as loyalty points are used, forfeited, or expire[54][57] Net Sales by Region (in millions) | Region | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Americas | $11.1 | $11.2 | $30.6 | $34.5 | | Asia/Pacific | $21.4 | $24.2 | $63.2 | $74.0 | | EMEA | $3.0 | $4.0 | $9.1 | $11.8 | | Total | $35.5 | $39.4 | $102.9 | $120.3 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting a significant decline in net sales for Q3 and the first nine months of 2022, primarily due to a strong U.S. dollar, and analyzes regional results, profitability, liquidity, and critical accounting estimates - Overall net sales decreased 10.0% to $35.5 million in Q3 2022 and 14.5% to $102.9 million for the nine months ended September 30, 2022, compared to the same periods in 2021[114] - Foreign currency exchange had a significant negative impact, decreasing GAAP net sales by $3.4 million for Q3 and $7.5 million for the nine-month period[114] - On a non-GAAP Constant Dollar basis, net sales decreased by a smaller margin of 1.3% for Q3 and 8.2% for the nine-month period, indicating underlying operational challenges were exacerbated by currency headwinds[114][120] Results of Operations Operating results declined significantly for the three and nine months ended September 30, 2022, with net sales falling across all regions due to currency fluctuations and geopolitical issues, leading to compressed gross profit margins and reduced net income Net Sales by Region - Q3 2022 vs Q3 2021 (in millions) | Region | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Americas | $11.1 | $11.2 | (0.9)% | | Asia/Pacific | $21.4 | $24.2 | (11.6)% | | EMEA | $3.0 | $4.0 | (25.0)% | | Total | $35.5 | $39.4 | (10.0)% | - Asia/Pacific sales were negatively impacted by $2.9 million from foreign currency exchange in Q3, primarily due to the weakening of the Korean Won, Japanese Yen, and Australian Dollar[127] - EMEA sales decline was attributed to a 25.5% decrease in active associates, with the company believing the war in Ukraine and inflation are impacting business[129] - Gross profit as a percentage of net sales decreased to 79.1% in Q3 2022 from 80.0% in Q3 2021, due to the effects of foreign exchange on product costs and increased freight costs[145] Liquidity and Capital Resources The company's liquidity weakened as cash and cash equivalents decreased to $15.1 million by September 30, 2022, with net cash from operations falling sharply, and cash primarily used for dividends, stock repurchases, and capital expenditures - Cash and cash equivalents decreased by $9.1 million to $15.1 million as of September 30, 2022, from $24.2 million at December 31, 2021[165] Net Cash Flows for Nine Months Ended September 30 (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating activities | $0.5 | $10.8 | | Investing activities | $(0.9) | $(0.5) | | Financing activities | $(3.3) | $(6.1) | - Financing activities for the first nine months of 2022 included $1.2 million in dividend payments and $1.6 million in common stock repurchases[171] - The company has a purchase commitment with a raw material supplier requiring purchases of $0.4 million through the rest of 2022 and $5.1 million annually through 2024[174] Critical Accounting Estimates This section outlines critical accounting estimates requiring significant management judgment, including inventory reserves, uncertain tax positions, revenue recognition, sales returns, stock-based compensation, and litigation contingencies - Management's critical estimates involve inventory reserves, uncertain tax positions, revenue recognition, sales returns, stock-based compensation, and litigation contingencies[182] - Deferred revenue from the customer loyalty program was $4.2 million as of September 30, 2022[190] - The company estimates a sales return reserve based on historical experience, which has averaged 1.5% or less of gross sales[194] - Stock-based compensation is calculated using the Black-Scholes model, which relies on subjective assumptions like stock price volatility (63.6% - 64.9% for recent grants) and expected option life (4.5 years)[195][196] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from foreign currency exchange rate fluctuations impacting international operations, which it manages by monitoring exposure and maintaining local currency cash balances rather than using financial instruments or hedges - The company's main market risk is from changes in foreign currency exchange rates against the U.S. dollar[202] - The company does not use any financial instruments or hedges to manage its exposure to market risk[201][203] - Exposure to currency risk exists in the Americas (Canada, Mexico), EMEA (multiple European countries, South Africa), and Asia/Pacific (Australia, Japan, Korea, China, etc.)[204] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the third quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[205] - There were no changes during the quarter ended September 30, 2022, in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, such controls[206] Part II Part II – OTHER INFORMATION Item 1. Legal Proceedings The company believes ongoing legal claims will not materially affect its financial position, requiring no legal reserve, and notes receipt of an FTC notice regarding potential claims, which was not a determination of wrongdoing - The company believes that ongoing claims from the normal course of business can be resolved without a material adverse effect[90][209] - No legal reserve was deemed necessary at September 30, 2022[92] - On October 28, 2021, the company received a notice from the FTC regarding potential false or misleading income and product claims, which the FTC clarified was not a determination of wrongdoing[199] Item 1A. Risk Factors No new risk factors are disclosed in this report, with readers directed to the detailed discussion in the company's 2021 Annual Report on Form 10-K - The report refers to the risk factors discussed in Part I, "Item 1A. Risk Factors" in the company's 2021 Annual Report[210] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, the company repurchased 46,332 shares of common stock and approved a new $1.5 million share repurchase program through September 2023 Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2022 | 8,839 | $17.53 | | August 2022 | 10,080 | $20.01 | | September 2022 | 27,413 | $20.80 | | Total | 46,332 | | - In September 2022, the Board approved a share repurchase program to acquire up to $1.5 million of common stock through September 18, 2023[211] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[212] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[213]