Mannatech, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report; quarterly figures below identify Q4 where relevant. Mannatech sells nutritional supplements, skin-care and weight-management products through a global network-marketing business. It reported one operating segment and approximately 403,000 associates and members who purchased products during the year.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net sales | $228.1 million | $289.7 million | Down 21.3% |
| Gross profit / margin | $98.0 million / 43.0% | $96.5 million / 33.3% | Profit up 1.6%; margin up 9.7 percentage points |
| Operating loss | $11.5 million | $25.6 million | Loss narrowed $14.1 million |
| Net loss / diluted EPS | $10.6 million / $(0.40) | $17.4 million / $(0.66) | Loss narrowed $6.8 million |
| Cash from operating activities | $4.0 million | $(10.3) million | Improved $14.3 million |
| Cash and cash equivalents | $21.6 million | $17.4 million | Up $4.2 million |
| Working capital | $23.0 million | $21.8 million | Up $1.2 million |
- Q4 2010 net sales were $54.9 million versus $70.1 million in Q4 2009. The company recorded a Q4 net loss of $2.7 million, compared with net income of $2.1 million a year earlier.
- Operating expenses fell 10.3% to $109.5 million, but rose to 48.0% of sales from 42.1% as revenue contracted. Commissions and incentives were $97.3 million, or 42.7% of sales, versus $146.4 million, or 50.5%.
- Cash from operations included a $7.2 million positive cash-flow contribution from the reduction in income-tax receivable; the company separately reported receipt of an $8.1 million federal tax refund in April 2010. Inventory reductions and other working-capital movements also affected cash flow.
- Total liabilities were $40.3 million. The filing reports no debt instruments; capital-lease obligations had a $2.5 million present value. Restricted cash totaled $4.8 million, in addition to $21.6 million of cash and cash equivalents.
Material changes and management commentary
- Sales fell across the business amid weak economic conditions, competition for associate leaders, and fewer recruits and active associates. The purchasing associate/member base declined 21.4% to 403,000; new purchasers fell to 89,000 from 145,000.
- Product sales declined 12.5% to $187.2 million; pack sales fell 49.6% to $31.3 million. U.S. sales declined $39.9 million and international sales declined $21.7 million. Currency translation benefited reported sales by approximately $9.0 million.
- Core Ambrotose products generated $80.5 million, or 35.3% of sales, compared with $90.8 million, or 31.4%, in 2009. Advanced Ambrotose alone represented 26.9% of sales.
- Management attributed improved gross margin primarily to lower pack costs and changes to pack bonuses and commission rates. It cited cost controls, new products and international expansion as priorities, while emphasizing that future revenue and profitability depend substantially on recruiting and retaining associates.
- Mannatech began selling in Mexico in January 2011. Mexico launch expenses were $1.1 million in 2010; the company described the market as having significant potential. It plans up to $3.0 million of capital expenditures in 2011 and expects operating cash flows to fund current operations, while cautioning that this is not assured.
Outlook, risks and unusual items
- No quantified sales or earnings guidance is provided. Management stated that existing liquidity and operating cash flows should fund normal operations and possible expansion for the next 12–24 months, subject to business conditions and sustained cost control.
- The company entered a conditional, 36-month equity line with Dutchess for up to $10 million, subject to a 5 million-share limit and other conditions. As of March 10, 2011, no shares had been issued. Drawdowns could dilute shareholders; the purchase price is set at 96% of the lowest daily VWAP during the applicable five-trading-day period.
- Purchase obligations totaled $20.1 million, including $6.9 million due in 2011 and $1.5 million in 2012 under a supplier contract Mannatech terminated for asserted breach. The dispute is in arbitration. The supplier alleges damages exceeding $5 million; Mannatech asserts counterclaims. The filing reports $0.2 million accrued for legal matters overall.
- Other material risks include regulatory oversight of supplements, product claims and network marketing; dependence on third-party suppliers (including a lack of an alternative Arabinogalactan source); foreign-exchange exposure (no hedging); competition and associate attrition; and reliance on Ambrotose products. A $4.1 million valuation allowance against deferred tax assets and $2.1 million of uncertain tax positions were reported.
- The company’s prior Texas Attorney General enforcement matter was settled: without admitting wrongdoing, Mannatech agreed to refunds of up to $4 million to certain members and paid $2 million for regulators’ fees and expenses. The filing states the matter is resolved.
- Quarterly dividends were suspended in August 2009 and remained suspended through 2010. The company reported effective disclosure controls and management concluded internal control over financial reporting was effective; the independent auditor did not issue an opinion on internal control.
Important facts for investors to verify
- Whether associate recruitment and retention—and especially the sharp decline in pack sales—recover after the Mexico launch and compensation-plan changes.
- How much operating cash flow is sustainable after separating the tax refund and working-capital effects from recurring operating performance.
- The status and potential financial exposure of the Marinova arbitration, associated purchase commitments, and replacement supply arrangements.
- Whether core Ambrotose sales stabilize, given their 35.3% share of revenue and the disclosed decline in core-product dollars.
- Whether the equity line is used, its resulting share dilution and pricing, and whether the company maintains adequate unrestricted liquidity.
- Developments in tax audits and deferred-tax-asset recoverability, as well as regulatory or litigation developments affecting products and network marketing.