Mannatech, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited consolidated statements; amounts below are in U.S. dollars. Mannatech sells nutritional supplements, skin-care and weight-management products through a network-marketing model across 16 countries.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $54.9m | $71.3m | $173.1m | $219.6m |
| Gross profit / margin | $23.8m / 43.4% | $24.1m / 33.8% | $73.9m / 42.7% | $68.3m / 31.1% |
| Operating loss | $3.7m | $8.6m | $8.7m | $25.3m |
| Net loss | $1.3m | $9.2m | $7.9m | $19.5m |
| Basic and diluted loss per share | $0.05 | $0.35 | $0.30 | $0.74 |
| Operating cash flow | Not separately presented for the quarter | $4.9m | $(4.7)m |
At September 30, cash and cash equivalents were $21.7m, restricted cash was $6.9m, working capital was $22.4m, and total assets were $85.8m. Current liabilities were $33.4m. Capital-lease obligations totaled approximately $2.6m; the company reported no debt instruments. The quarterly dividend remained suspended.
Changes versus the prior comparable periods
- Sales fell 23.0% in Q3 and 21.2% in the first nine months. The company attributed the decline to difficult economic conditions, competition and weaker recruiting. The U.S. accounted for $10.1m of Q3’s $16.4m sales decline and $32.0m of the nine-month $46.5m decline.
- Pack sales fell 54.8% in Q3 and 50.0% year to date, largely reflecting fewer new associates and lower renewal and upgrade purchases. Product sales declined 13.0% and 11.5%, respectively.
- Current associates and members who purchased packs or products in the trailing 12 months fell to 422,000 from 534,000; new purchasers declined to 93,000 from 151,000.
- Gross margin improved substantially, primarily because of changes to pack economics and the bonus structure, lower product costs, and reduced commissions and incentives. Operating expenses also declined, but remained high relative to sales.
- Nine-month operating cash flow improved to $4.9m from a $4.7m use of cash. The company said the $8.1m federal tax refund received in April and expense controls were key contributors; cash generation also reflected changes in working capital.
Outlook, commentary and risks
- Management expected 2010 operating cash flow to fund current operations and said existing liquidity and operating cash flows should cover normal operations and possible international expansion for the next 12–24 months. This was not a quantified earnings or sales forecast; management cautioned that cash generation is uncertain.
- Mexico sales were planned to begin in early 2011. Recent product launches included Simply Delicious snack bars and Mannatech LIFT skin care products. Management cited new products, cost control and international expansion as priorities.
- A September 2010 agreement provides a conditional equity line of up to $10m over 36 months, subject to agreement terms and an effective resale registration. The investor’s purchase price is set at 96% of the lowest daily VWAP during the specified five-trading-day period. The registration became effective October 28; no shares had been issued under the agreement as of November 3, 2010.
- Material exposures include continued sales and recruiting declines, competition and associate retention, foreign-currency movements, inventory obsolescence, tax-asset realization and regulatory or product-related risks. The company reported a $3.6m valuation allowance on deferred tax assets and $2.1m of liabilities for uncertain tax positions.
- Legal matters include Mannatech’s patent-infringement case, with proceedings continuing against three defendants and trial scheduled for December 2011, and Marinova arbitration. Marinova claimed damages exceeding $5m; Mannatech disputed the claims and asserted counterclaims. The company accrued $0.5m for the described legal matters and cautioned that adverse outcomes could materially affect results.
- Purchase commitments totaled $19.4m. These include commitments under a supplier contract terminated by Mannatech for an asserted breach, for which arbitration was ongoing; the filing identifies $4.7m of 2010 and $2.1m of 2011 commitments under that contract.
- Management attributed Q3’s $1.9m tax benefit partly to changes in estimates, jurisdictional income mix, deferred-tax valuation allowances and uncertain tax positions. This contributed to the smaller reported Q3 net loss and should be distinguished from operating improvement.
Key facts for investors to verify
- Whether sales, pack purchases and the active associate/member base stabilized after the steep year-over-year declines.
- Whether improved gross margins persist without further reductions in commissions or incentives that could affect recruiting and retention.
- How much operating cash flow is recurring, excluding the federal tax refund and working-capital movements.
- Whether the company draws on the equity line, the resulting share dilution and the proceeds actually received.
- Developments and potential financial exposure from the Marinova arbitration, patent litigation and supplier-contract arbitration.
- Whether deferred tax assets are realizable and whether tax estimates or valuation allowances change.