Mannatech, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited consolidated results. Mannatech sells nutritional supplements, skin-care and weight-management products through a network-marketing model in 17 countries.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Net sales | $50.9 million | $60.7 million |
| Gross profit / margin | $22.0 million / 43.2% | $25.0 million / 41.3% |
| Operating loss | $4.9 million | $2.9 million |
| Net loss; diluted loss per share | $4.8 million; $0.18 | $2.8 million; $0.11 |
| Cash used in operating activities | $3.4 million | $2.9 million |
| Cash and cash equivalents | $17.0 million | $21.6 million at Dec. 31, 2010 |
| Working capital | $20.2 million | $23.0 million at Dec. 31, 2010 |
| Total assets / liabilities | $72.6 million / $36.2 million | $81.4 million / $40.3 million at Dec. 31, 2010 |
| Capital lease obligations | $2.4 million, including current portion | $2.5 million at Dec. 31, 2010 |
The filing reports no debt instruments; capital leases are the disclosed financing obligations. Cash declined $4.5 million during the quarter. Investing activities used $0.6 million and financing activities used $0.4 million. The quarterly dividend, suspended in August 2009, remained suspended.
Changes versus prior year
- Sales fell 16.1%; U.S. sales declined 19.0% and international sales 13.0%. Foreign exchange had an estimated favorable $1.6 million effect on reported sales.
- Product sales declined 10.9%; pack sales fell 43.3%. Management attributed the decline primarily to fewer new and continuing associates and members, as well as lower average pack value.
- Current associates and members who purchased during the preceding 12 months declined 19.2%, to 392,000 from 485,000. Orders processed fell 15%; average product order value rose 5%, to $153.
- Gross margin improved 1.9 percentage points, partly reflecting lower commissions and incentives as a share of sales. However, operating expenses declined only 3.8% in dollars and rose to 52.8% of sales from 46.0%, contributing to a larger operating loss.
Outlook, risks and unusual items
- Management expected operating cash flows to fund 2011 operations and believed existing liquidity and operating cash flows could support normal operations and possible expansion for 12–24 months, while cautioning that future cash generation was not assured.
- Management identified associate recruitment and retention as major challenges; priorities included expense control, product and marketing initiatives, international expansion, and strengthening financial results. Mexico operations began in January 2011; four additional European market openings were planned for 2011.
- A $10 million equity line with Dutchess Opportunity Fund was available subject to conditions; no shares had been issued under it as of May 5, 2011. The company said it was considering alternative liquidity sources.
- Contractual commitments totaled $37.1 million, including $19.1 million of purchase obligations. Those obligations include $6.9 million for the remainder of 2011 and $1.5 million for 2012 under a supplier contract Mannatech terminated for asserted breach; the parties were in arbitration.
- In separate arbitration, Marinova claimed more than $5 million in damages plus fees and costs; Mannatech disputed the claims and asserted counterclaims. The hearing was scheduled to begin December 6, 2011. The company accrued $0.5 million for legal matters it considered probable and estimable; outcomes remained uncertain.
- The company maintained a $5.1 million valuation allowance for deferred tax assets. Despite its pretax loss, it recorded a $0.1 million tax provision; the reported effective tax rate was negative 2.6%.
- On May 2, 2011, the company entered a two-year aloe vera powder supply agreement at specified prices, with no minimum purchase requirement.
- Key risks include continued sales and associate declines, currency fluctuations, regulatory and product-related matters, supplier disputes and other litigation, and whether cash flows or additional financing will be sufficient. Management reported disclosure controls were effective and no material quarter-end change in internal control.
Investor facts to verify
- Whether associate recruitment, retention, pack sales and total revenue stabilize after the reported declines.
- Whether operating cash use, cash balances and working capital support management’s 12–24-month liquidity outlook; also track any use of the equity line.
- The status and potential financial exposure of the supplier arbitration and Marinova arbitration, compared with recorded reserves and purchase commitments.
- Whether the $5.1 million tax valuation allowance, uncertain tax positions and deferred tax assets change as results and tax assessments evolve.
- Whether planned international expansion, including Mexico and new European markets, contributes sales without adding unsustainable costs.