Mannatech, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Mannatech sells nutritional, skin-care, anti-aging and weight-management products through network marketing in multiple countries, plus e-commerce retail in mainland China.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $41.4 million | $40.6 million; up 1.8% reported, down 2.5% at constant currency |
| Gross profit / margin | $33.1 million / 80.1% | $31.9 million / 78.4% |
| Operating loss / margin | $0.9 million / 2.1% | $2.0 million / 5.0% |
| Net loss | $0.3 million; $0.10 per diluted share | $1.2 million; $0.46 per diluted share |
| Operating cash flow | $1.0 million | $0.1 million |
| Cash and cash equivalents | $37.9 million | $37.7 million at December 31, 2017 |
| Cash, cash equivalents and restricted cash | $47.0 million | $46.8 million at December 31, 2017 |
| Working capital | $22.0 million | $22.8 million at December 31, 2017 |
| Total liabilities | $38.8 million | $36.0 million at December 31, 2017 |
Investing activities used $0.3 million and financing activities used $0.7 million, including $0.3 million of dividends and $0.4 million of capital-lease repayments. The balance sheet reported $0.9 million of current notes payable and $0.3 million of capital leases. Operating leases and purchase obligations are also significant commitments; total contractual obligations were $28.4 million. The Board declared and paid a $0.125-per-share dividend during the quarter.
Material changes and operating drivers
- Foreign exchange added approximately $1.0 million to reported net sales; excluding currency effects, sales declined $1.8 million. Asia/Pacific sales rose 10.5% reported, while Americas sales fell 11.6%; EMEA sales rose 9.4%.
- Product sales increased 17.1% to $41.0 million, while pack sales and associate fees fell 91.2% to $0.5 million, reflecting the 2017 compensation-plan transition. Average product order value rose 22.4% to $197, while product orders decreased about 4%.
- The active associate and preferred-customer network was approximately 210,000, versus 220,000 a year earlier. New positions in Q1 declined to approximately 18,200 from 22,900.
- Gross margin improved, which management attributed to favorable foreign exchange, tighter inventory management and non-recurring charges in the prior-year period. Lower selling and administrative costs helped, but other operating costs increased 11.3%, including $1.1 million of non-recurring corporate-office move expenses.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said existing liquidity and operating cash flows should fund normal operations and possible international expansion for the next 12 months, conditional on maintaining or increasing revenue and/or reducing expenses.
- Cash and net assets are concentrated in South Korea: net assets there were $34.4 million at quarter-end, and the filing says a concentrated portion of operating cash flows was generated there. Foreign-exchange movements materially affect reported results; the company does not hedge this exposure.
- Other income included $0.3 million of foreign-exchange gains. The company recorded a $0.3 million income-tax benefit despite its pre-tax loss; its effective tax rate was 53.7%, and accounting for the Tax Cuts and Jobs Act was not complete. Deferred tax valuation allowances totaled $12.1 million.
- Management reported no material impact from adopting ASC 606 revenue guidance. Adoption of the new lease standard was still being evaluated, with the financial impact unknown.
- Legal matters include an appealed South Korean customs assessment (the company had paid $1.0 million), a personal-injury claim seeking more than $200,000 that the company submitted to its insurer, and patent and trademark proceedings. Outcomes and potential liabilities were not determinable for certain matters.
- Management identified risks including associate recruitment and retention, competition, regulation, product publicity, changing demand, currency fluctuations and the political and economic conditions in operating markets. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Key facts for investors to verify
- Whether underlying sales and customer/associate recruitment stabilize, particularly after excluding favorable foreign-exchange effects and the compensation-plan transition.
- Whether improved gross margin and lower administrative costs can offset elevated operating costs and support a return to operating profitability.
- How much of reported cash is restricted or held in South Korea, and whether geographic concentration or currency changes affect liquidity.
- Whether the tax benefit, deferred-tax asset assumptions and unresolved tax accounting under the TCJA change in subsequent periods.
- Developments in the Korean customs appeal and other legal matters, and the ongoing cost of office leases and purchase commitments.