Mannatech, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Mannatech sells nutritional supplements, skin care and other wellness products through network marketing in multiple countries, and through retail e-commerce in mainland China.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $38.0 million | $41.4 million |
| Gross profit / margin | $30.5 million / 80.4% | $33.1 million / 80.1% |
| Operating income (loss) / margin | $1.1 million / 2.9% | $(0.9) million / (2.1)% |
| Net income (loss) | $0.7 million | $(0.3) million |
| Diluted EPS | $0.28 | $(0.10) |
| Operating cash flow | $(0.1) million | $1.0 million |
Sales declined 8.2% reported and 4.8% on the company’s constant-currency basis; unfavorable currency translation reduced reported sales by about $1.4 million. Product sales fell 8.6%. Gross margin improved slightly, while operating expenses fell 13.5%, mainly from lower other operating costs, commissions and marketing expenses. The company recorded a $0.3 million income tax provision, versus a $0.3 million tax benefit in Q1 2018.
Balance sheet and liquidity
- Cash and cash equivalents were $19.6 million at March 31, down from $21.8 million at year-end. Total cash, cash equivalents and restricted cash were $29.1 million, versus $30.6 million at year-end; restricted cash totaled $9.5 million.
- Working capital was $7.2 million, down from $8.8 million at December 31, 2018. Total assets were $65.4 million and shareholders’ equity was $25.6 million.
- Notes payable totaled approximately $1.7 million; finance lease liabilities were $0.2 million. Operating lease liabilities had a present value of $6.7 million. The filing reports $19.6 million of total contractual commitments and obligations.
- Investing activities used $0.4 million, primarily for software and leasehold improvements. Financing activities used $0.6 million, including $0.3 million in dividends. The quarterly dividend was $0.125 per share.
Changes, outlook and risks
- Sales fell in all three regions: Americas 13.1%, Asia/Pacific 5.8% and EMEA 5.7%. The average product order value fell 8.1% to $181 and order count fell 2.2%; pack sales and associate fees rose 20.0% to $0.6 million. Active associate and preferred-customer positions over the prior 12 months declined to about 203,000 from 210,000.
- Management said existing liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months, but noted this depends on maintaining or increasing revenue and/or reducing expenses. No specific earnings or revenue guidance was provided.
- Currency exposure is material: foreign exchange reduced Q1 sales, and a concentrated portion of cash and operating cash flow is tied to South Korea. The company does not use financial instruments to hedge currency exposure.
- Legal matters include an appealed South Korean customs assessment, with a final decision anticipated in the second half of 2019, and a newly reported China product-liability claim seeking about $50,000. The company says the claim is insured, believes it has a defense, and cannot yet estimate potential liability.
- Adoption of the new lease standard on January 1, 2019 brought operating lease assets and liabilities onto the balance sheet; management reported no significant impact on earnings or cash flows. The company also identified ongoing tax audits and possible adverse outcomes as liquidity risks.
Important facts for investors to verify
- Whether the decline in order value, order volume and active customer/associate positions continues, particularly in the Americas and Asia/Pacific.
- Whether cost reductions and the improved operating result are sustainable as sales remain lower.
- Cash generation, working-capital movements and the availability of restricted cash, including South Korean cash concentration.
- Developments and potential financial exposure from the customs appeal, product-liability claim and tax audits.
- The effect of foreign exchange and the ongoing costs and commitments associated with operating leases.