Mannatech, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited consolidated results. Mannatech sells nutritional supplements, skin-care and weight-management products through a network-marketing business operating in 25 countries.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $40.7 million | $44.4 million; down 8.3% reported and 3.6% at constant currency |
| Gross profit / margin | $32.3 million / 79.4% | $35.8 million / 80.7% |
| Operating income / margin | $0.5 million / 1.3% | $2.5 million / 5.7% |
| Net income / diluted EPS | $0.6 million / $0.21 | $1.1 million / $0.40 |
| Operating cash flow | $2.2 million | $1.2 million |
| Cash and cash equivalents | $33.6 million at March 31 | $32.0 million at December 31, 2015 |
| Working capital | $24.1 million | $23.5 million at December 31, 2015 |
Operating expenses totaled $31.8 million, versus $33.3 million a year earlier. Lower commissions and selling and administrative costs were partly offset by a $1.0 million increase in other operating costs, including higher travel and legal expenses. Other income was $0.3 million, compared with a $0.9 million expense in Q1 2015, primarily reflecting foreign-exchange gains versus losses.
Investing activities used $0.7 million, mainly for software projects and leasehold improvements; financing activities used $0.4 million, primarily for financing repayments. At March 31, notes payable were approximately $1.95 million and capital-lease liabilities were approximately $0.94 million. Restricted cash totaled $8.3 million and is not freely available for general use.
Changes and operating drivers
- Foreign-exchange translation reduced reported sales by approximately $2.1 million. Sales declined across all three regions: Americas $16.0 million, Asia/Pacific $21.4 million and EMEA $3.3 million.
- Pack sales fell 34.8% to $5.8 million, including a 49.3% decline in continuing-associate pack sales. Total packs sold decreased 22% to 29,400. Product sales declined 1.5% to $33.7 million.
- Active associate and member positions were approximately 218,000, down 5.2% year over year. Americas positions declined 16.5%; Asia/Pacific and EMEA positions increased 1.9% and 6.9%, respectively.
- Gross margin fell 1.3 percentage points, which management attributed to higher transportation costs. Other operating costs rose 15.6%, including increases in travel and legal costs.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects to begin a non-direct-selling business in China by the end of Q3 2016 and says existing liquidity and anticipated operating cash flows should fund normal operations and possible expansion for the next 12 months. This depends on maintaining or increasing revenue and/or controlling expenses; additional financing might be needed if resources prove insufficient.
- Management identifies recruiting and retaining associates and members, new-market growth, product development, competition, regulation, publicity and foreign-exchange movements as important business risks. International operations generated about 60.7% of Q1 sales; the company does not hedge currency exposure.
- Open matters include a contract suit seeking damages exceeding $1 million, a trademark opposition, a patent dispute on appeal, an arbitration in which Mannatech is seeking $0.5 million to $3.5 million, and a Korean customs assessment dispute concerning $1.0 million already paid. Outcomes and potential financial effects are uncertain; the company says it has reserved for matters considered probable and reasonably estimable.
- Deferred revenue was $9.9 million, including $8.4 million associated with the loyalty program. The company’s estimates for returns, inventory obsolescence, tax assets and litigation could affect reported results if actual outcomes differ.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. The quarterly dividend has been suspended since 2009.
Important facts for investors to verify
- Whether sales, pack purchases and active network positions stabilize, particularly in the Americas, and whether the China launch proceeds as planned.
- Whether lower reported sales and margins persist, and how transportation, travel and legal costs develop.
- How much of reported cash is restricted or held overseas; restricted cash was $8.3 million and $30.4 million of cash was held in foreign countries.
- Developments and possible financial effects from the listed litigation, customs matter and ongoing international tax audits.
- Management’s liquidity assumptions, including operating cash generation and the ability to fund expansion without additional capital.