Mannatech, Inc. — Q3 2011 Form 10-Q
Business context and period. Mannatech sells nutritional supplements, skin-care and weight-management products through independent associates and members in 21 countries. This unaudited report covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $50.5 million | $54.9 million | $152.8 million | $173.1 million |
| Gross profit | $21.1 million | $23.8 million | $64.0 million | $73.9 million |
| Gross margin | 41.7% | 43.4% | 41.9% | 42.7% |
| Operating loss | $1.6 million | $3.7 million | $10.8 million | $8.7 million |
| Net loss | $3.7 million | $1.3 million | $13.7 million | $7.9 million |
| Loss per diluted share | $0.14 | $0.05 | $0.52 | $0.30 |
| Cash from operating activities | Not separately stated for Q3; management reports $2.8 million generated in the quarter | $(0.3) million | $4.9 million |
Q3 operating expenses fell 17.6% to $22.6 million, helping reduce the operating loss year over year. However, the net loss widened, reflecting a $1.6 million other expense versus $0.4 million other income in Q3 2010 and a $0.5 million tax provision versus a $2.0 million tax benefit. For the nine months, operating expenses declined 9.4%, but sales and gross profit fell faster, contributing to a larger operating and net loss.
Financial position and liquidity
- At September 30, cash and cash equivalents were $20.8 million, restricted cash was $4.6 million, total assets were $65.7 million, and shareholders’ equity was $28.4 million. Cash was down $0.8 million from year-end 2010.
- Working capital was $17.1 million, down from $23.0 million at December 31, 2010. Current assets were $47.3 million and current liabilities $30.2 million.
- Capital lease obligations totaled approximately $1.8 million on the balance sheet ($0.7 million current and $1.1 million long-term). The filing says the company funds operations through operating cash flows rather than long-term debt.
- Nine-month investing cash use was $0.4 million and financing cash use was $1.1 million, primarily lease repayments. The quarterly dividend remained suspended.
- The company reported $18.9 million of purchase obligations and $34.0 million of total contractual commitments and obligations. Some purchase commitments relate to a supplier contract the company terminated and is disputing in arbitration.
Material changes and operating drivers
- Sales fell 8.0% in Q3 and 11.7% year to date. U.S. sales declined 14.6% in Q3 and 17.6% year to date; international sales also declined, though less sharply.
- Pack sales were particularly weak: down 21.4% in Q3 and 32.7% year to date. Product sales fell 5.5% and 8.0%, respectively. Management attributed the declines primarily to fewer new and continuing associates and members and fewer orders.
- Current associates and members purchasing packs or products in the trailing 12 months declined 10.2% to approximately 379,000. Orders fell 12% in Q3 and 13% year to date. Higher average product order values partially offset lower order counts.
- Gross margin declined as cost of sales and commissions/incentives increased as a share of revenue. Foreign-exchange movements were favorable to reported sales by approximately $2.5 million in Q3 and $6.9 million year to date.
- Cash from operations was negative for the nine-month period, compared with positive cash generation in 2010; management says working-capital actions and restructuring supported $2.8 million of Q3 operating cash generation.
Outlook, risks, and unusual items
- Management outlook: The stated priorities are restoring sales volume and profitability and generating positive cash flow. The June 2011 U.S. restructuring eliminated 64 employee positions and 34 open positions; management estimated approximately $12 million in annualized savings and said Q3 operating profit improved $2.7 million versus Q2. The filing gives no formal revenue or earnings guidance.
- Liquidity outlook: Management believes liquidity and operating cash flows can support normal operations and possible international expansion for 12–24 months, but cautions that future cash generation is uncertain and additional capital might be needed.
- Nasdaq listing: The company received notice that it failed the $1.00 minimum bid-price requirement, with a February 7, 2012 deadline to regain compliance. The board proposed a 1-for-10 to 1-for-15 reverse split for shareholder consideration in January 2012. The filing warns the split may not secure continued listing or improve liquidity.
- Tax dispute: The IRS proposed adjustments for 2005–2009 totaling $8.5 million in tax deficiencies plus $1.5 million in penalties. Mannatech filed a protest and is pursuing resolution through the IRS Appeals Division. Deferred-tax valuation allowances were $7.7 million at September 30, up from $4.1 million at year-end 2010.
- Legal and supplier contingencies: Marinova claims more than $6 million in damages in a supplier arbitration; Mannatech denies the claims and asserts counterclaims, with a hearing scheduled for February 2012. A separate product-liability suit seeks unspecified damages. The company accrued $0.3 million for legal matters, but says outcomes and potential losses cannot be predicted.
- Other notable items: A supplier contract under arbitration includes $6.9 million of remaining 2011 and $1.5 million of 2012 purchase commitments. The company also began operations in Mexico and four European countries in 2011. Currency movements, associate retention, product demand, regulation, litigation, and supplier obligations are identified risks.
Important facts for investors to verify
- Whether the associate/member base, order volume, and pack sales stabilize, and whether new markets contribute meaningful sales.
- Whether the restructuring produces the projected annualized savings and sustained positive operating cash flow.
- The status and potential financial exposure of the IRS audit, Marinova arbitration, product-liability litigation, and disputed supplier commitments.
- Whether the company regains Nasdaq bid-price compliance and whether shareholders approve the proposed reverse split.
- Whether cash, working capital, tax assets, and contractual commitments remain adequate if operating cash generation does not improve.