Mannatech, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2017. Mannatech develops and sells nutritional supplements, skin-care and anti-aging, and weight-management products, primarily through independent associates and members in international markets. It also operates a cross-border e-commerce retail business in China. The company reported one operating segment.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $40.6 million | $40.7 million; down 0.2% reported and 2.5% at constant currency |
| Gross profit / margin | $31.9 million / 78.4% | $32.3 million / 79.4% |
| Operating income (loss) | $(2.0) million | $0.5 million |
| Net income (loss) | $(1.2) million; $(0.46) per diluted share | $0.6 million; $0.21 per diluted share |
| Operating cash flow | $0.1 million | $2.2 million |
Sales by region were $15.5 million in the Americas (down 3.1%), $21.9 million in Asia/Pacific (up 2.3%), and $3.2 million in EMEA (down 3%). Foreign-currency translation increased reported net sales by approximately $0.9 million; without that benefit, sales declined about $1.0 million.
At March 31, 2017, cash and cash equivalents were $29.4 million, with restricted cash of $8.4 million. Working capital was $21.1 million. Total assets were $72.7 million and total liabilities $32.6 million. Notes payable were approximately $1.4 million and capital lease obligations approximately $0.6 million. Cash increased $0.8 million during the quarter, including a $1.7 million favorable currency effect. Investing activities used $0.4 million; financing activities used $0.7 million, including $0.3 million of dividends and $0.4 million of capital-lease repayments.
Comprehensive income was $1.1 million despite the net loss, primarily reflecting $2.4 million of favorable foreign-currency translation. The board declared a $0.125-per-share dividend, paid March 29, 2017.
Material changes and management commentary
- Sales were supported by a $0.4 million year-over-year benefit from the loyalty program and higher average order values, but order volume fell 6.8%, to approximately 262,000. The number of new associate and member positions in Q1 declined to about 22,900 from 23,800.
- Operating expenses rose 6.7%, to $33.9 million. Commissions and incentives increased to $17.1 million, including higher commission costs associated with a product pre-launch in certain Asia/Pacific markets and increased growth-market incentives.
- Gross margin declined partly because Q1 2016 benefited from lower raw-material costs; the company also reported non-recurring charges in Q1 2017. Legal and consulting costs included approximately $0.5 million related to a settlement.
- Management stated that existing liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months. This depends on maintaining or increasing revenue and/or controlling expenses; additional financing, if needed, may not be available on favorable terms.
Risks, contingencies, and unusual items
- A confidential settlement was reached on April 13, 2017, after quarter-end, in the Anselmo contract dispute. Approximately $0.5 million was accrued. The matter remained open pending performance of the settlement and expected dismissal proceedings.
- Other matters include a Korean customs assessment appeal, patent-infringement damages proceedings, and a trademark dispute. Outcomes and any additional liabilities are uncertain; management says current probable and estimable matters are adequately reserved.
- Foreign-exchange movements can materially affect reported results; the company does not use financial instruments to hedge this exposure. Cash held in foreign bank accounts was $27.7 million at quarter-end.
- Deferred tax assets include an $8.2 million valuation allowance. The company also reported ongoing tax audits and uncertain tax positions.
- The company adopted updated deferred-tax classification and stock-compensation accounting standards in Q1, with no material financial-statement impact. It was evaluating the forthcoming revenue-recognition and lease standards.
Important facts for investors to verify
- Whether order volume and new associate/member recruitment stabilize, and whether constant-currency sales trends improve.
- Whether higher commissions, incentives, legal costs, and other operating expenses persist, and how margins respond to product launches and input costs.
- Whether operating cash flow recovers from Q1’s $0.1 million and whether foreign-exchange effects continue to influence cash and reported performance.
- Whether the Anselmo settlement is fully performed and the case dismissed, and the progress and potential exposure in other legal and tax matters.
- Whether the company maintains sufficient liquidity while meeting purchase commitments, lease obligations, and dividend payments.