Mannatech, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Mannatech develops and sells nutritional supplements, skin-care, and weight-management products through a global network-marketing business operating in 22 countries. The company reports as one operating segment.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $44.5 million | $50.9 million; down 12.6% |
| Gross profit / margin | $19.1 million / 43.0% | $22.0 million / 43.2% |
| Operating expenses | $21.2 million | $26.9 million; down 21.2% |
| Operating loss | $2.1 million | $4.9 million loss |
| Net loss / diluted loss per share | $1.4 million / $0.53 | $4.8 million / $1.81 |
| Cash used in operations | $3.6 million | $3.4 million |
| Cash and cash equivalents | $12.6 million at March 31 | $18.1 million at December 31, 2011 |
| Working capital | $11.6 million at March 31 | $11.9 million at December 31, 2011 |
Cost of sales was 14.4% of sales versus 14.2%; commissions and incentives were 42.6% in both periods. Selling and administrative expense fell to $11.5 million from $16.0 million, principally reflecting lower payroll costs after the 2011 U.S. restructuring, as well as reduced marketing, freight, and contract labor costs. Other income, net, was $0.9 million, compared with $0.3 million, primarily reflecting foreign-currency gains. The company recorded an income-tax provision of $0.2 million despite its pretax loss.
Cash declined by $5.5 million during the quarter. The filing attributes much of the decline to the $2.6 million Marinova settlement payment, a $0.4 million increase in restricted cash, and a $1.0 million adverse currency effect. Total restricted cash was $5.1 million. Investing activities used $0.5 million; financing activities used $0.4 million, including capital-lease repayments.
Total assets were $51.9 million and total liabilities were $32.4 million at March 31. Capital-lease liabilities totaled approximately $2.1 million, including current and long-term portions; the company reported no issued debt instruments. Contractual commitments and obligations totaled $23.5 million, including purchase obligations of $10.4 million, operating leases of $8.2 million, and capital leases of $2.4 million. The quarterly dividend remained suspended.
Material changes and operating drivers
- Product sales decreased 7.6% to $39.9 million; pack sales fell 43.6% to $3.1 million, and other sales declined 31.8% to $1.5 million.
- Management linked lower product sales mainly to fewer new and existing associates and fewer orders. Orders declined 10.7%; average order value rose 3.9% to $159, partly offsetting the volume decline.
- Pack sales were affected by both fewer packs sold (down 10.1%) and a lower average pack value ($150 versus $242). The number of current associates and members over the preceding 12 months fell 5.1% to approximately 372,000.
- U.S. sales declined 17.0% to $18.6 million; international sales declined 9.0% to $25.9 million. Currency movements had an approximately $0.1 million favorable effect on sales.
- Gross margin slipped 0.2 percentage point. Operating expenses declined faster than sales, narrowing the operating loss to $2.1 million.
- A 1-for-10 reverse stock split took effect in January 2012 to address Nasdaq’s minimum bid-price requirement. Mannatech reported that Nasdaq confirmed the company regained compliance on January 31.
Outlook, risks, and unusual items
Management stated a 2012 goal of restoring profitability and said it would continue global expense reductions. It expected operating cash flows for the remainder of 2012 to fund current operations, and believed existing liquidity and anticipated return to positive operating cash flow could support normal operations and possible expansion for the next 12–24 months. These expectations are not assurances; management cautioned that cash generation could fall short, and additional financing might be needed on uncertain terms.
Management cited NutriVerus, launched in the United States on May 1, 2012, and the Navig8 associate business-building system introduced at an April convention as initiatives intended to support future sales and cash flow. The filing provides no quantified revenue or earnings guidance.
- Tax dispute: The IRS proposed $8.5 million of tax deficiencies plus $1.5 million of penalties for 2005–2009. Mannatech challenged the proposed adjustments and was pursuing IRS Appeals; the outcome and potential cash impact remain uncertain. The company also reported $9.8 million in deferred-tax-asset valuation allowances.
- Litigation: The Marinova matter was settled in March for a one-time $2.6 million payment; the company said it had recorded the amount in its December 31, 2011 financial statements. A product-liability matter was settled for $200,000, of which $79,000 was insured. A new associate-related lawsuit filed in April had not been served; the company said the likelihood of an unfavorable outcome was uncertain. Accrued legal contingencies were $0.1 million at quarter-end.
- Other exposures: The company is exposed to foreign-currency fluctuations and does not use financial instruments to hedge that exposure. Risks identified include declining associate recruitment or retention, competition, regulation, adverse publicity, demand, and economic conditions.
- Product claims: Mannatech stated that its products are not intended to diagnose, cure, treat, or prevent disease and that product statements in the filing had not been evaluated by the FDA.
Important facts for investors to verify
- Whether sales, order volume, pack sales, and associate/member counts stabilize or continue to decline.
- Whether expense reductions and the NutriVerus and Navig8 initiatives translate into sustained profitability and positive operating cash flow.
- Available liquidity after considering restricted cash, operating cash needs, lease and purchase commitments, and potential financing requirements.
- Developments in the IRS appeal, related tax reserves, and the potential effect on cash and earnings.
- Outcomes and potential costs of pending or future litigation and regulatory matters.
- Post-reverse-split Nasdaq listing compliance and the effect of the split on trading and liquidity.