Mannatech, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Mannatech sells nutritional supplements, skin-care and weight-management products primarily through network marketing across the Americas, EMEA and Asia/Pacific; it operates a retail e-commerce business in mainland China.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $39.7 million | $43.0 million | $118.3 million | $129.5 million |
| Gross profit / margin | $31.9 million / 80.6% | $34.0 million / 79.0% | $95.1 million / 80.4% | $104.1 million / 80.4% |
| Operating income / margin | $0.6 million / 1.4% | $1.7 million / 3.9% | $3.7 million / 3.1% | $0.4 million / 0.3% |
| Net income (loss) | $(1.5) million | $(1.7) million | $1.2 million | $(2.3) million |
| EPS, basic | $(0.62) | $(0.69) | $0.50 | $(0.89) |
- Cash flow: Nine-month operating cash flow was $6.2 million, versus $1.7 million in 2018. Investing used $1.0 million; financing used $2.1 million. Cash, cash equivalents and restricted cash totaled $32.3 million at period-end, including $25.8 million unrestricted cash.
- Liquidity and debt: Working capital was $9.1 million. Notes payable totaled $1.2 million. Finance lease liabilities were $0.3 million; operating lease liabilities were $7.7 million following adoption of the new lease standard.
- Equity returns: The company paid $0.9 million in dividends during the first nine months and repurchased $0.2 million of shares.
Changes versus comparable periods
- Sales fell 7.8% in Q3 and 8.6% year to date. Excluding currency effects, sales declined 4.9% and 5.2%, respectively. Unfavorable exchange rates reduced reported sales by $1.2 million in Q3 and $4.5 million year to date.
- Product orders declined 5.8% in Q3 and 4.0% year to date; average order value fell to $190 from $194 in Q3 and to $188 from $199 year to date. Active associate and preferred-customer positions were approximately 176,000, down from 202,000.
- Q3 gross margin improved, reflecting lower freight costs partly offset by higher inventory write-offs. Year-to-date operating income improved as operating expenses declined, including lower event, office, travel and legal costs.
- Americas sales decreased 11.3% in Q3 and 18.5% year to date; Asia/Pacific declined 8.6% and 4.4%. EMEA sales increased 16.1% and 3.0%, respectively. The 2019 regional Mannafest reduced year-to-date event revenue by $3.1 million versus the 2018 international event.
Outlook, commentary and risks
- Management gave no specific sales or earnings guidance. It stated that liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months, contingent on maintaining or increasing revenue and/or reducing expenses. Additional funding may be needed if cash resources prove insufficient.
- Q3 net loss included a $1.6 million income tax provision despite $0.1 million of pretax income; the reported effective tax rate was 1,311.4%. Management cited earnings mix by jurisdiction, valuation allowances and a one-time valuation allowance related to shifting procurement from Switzerland to the United States. Year-to-date other income included a $1.1 million VAT refund.
- Foreign-exchange exposure is significant: international operations generated about 70% of sales, and $18.1 million of net assets were concentrated in South Korea. The company does not use financial instruments to hedge currency exposure.
- Colombia operations were suspended effective November 1, 2019. China operations remain limited to a cross-border e-commerce retail model; the subsidiary does not hold a direct-selling license.
- Legal matters include a pending South Korean customs assessment appeal and an open Chinese product-liability claim seeking approximately $50,000. A separate Chinese labeling case seeking approximately $8,000 was settled for $5,381.25; warning labels were added for products containing aloe vera.
- Adoption of lease accounting standards added right-of-use assets and lease liabilities to the balance sheet, with no significant reported impact on earnings or cash flows. Management identified no material change in internal controls and reported disclosure controls as effective.
Investor facts to verify
- Whether declining orders, active network positions and average order value stabilize or continue to weaken.
- How much future performance depends on South Korea and on currency movements, and the business impact of the Colombia suspension.
- Whether the unusually high tax provision and Switzerland-related valuation allowance have further effects on cash taxes or deferred tax assets.
- The outcome and potential financial exposure of the pending customs appeal, product-liability claim and ongoing tax audits.
- Whether operating cash flow can sustain dividends, lease and purchase commitments, and operating needs if revenue continues to decline.