Mannatech(MTEX) - 2018 Q4 - Annual Report

Part I Business Mannatech is a global wellness company selling proprietary nutritional supplements through network marketing and e-commerce, driven by associates and subject to extensive regulations Overview Mannatech is a global wellness provider of nutritional supplements, skin care, and weight-management products, primarily using network marketing and cross-border e-commerce in China - The company sells nutritional supplements, skin care, and weight-management products through network marketing in 25 countries and via a cross-border e-commerce model in China[17][18][19] - As of December 31, 2018, Mannatech had approximately 200,000 active associate and preferred customer positions, a decrease from 215,000 in the prior year[18][51] - In July 2017, the company implemented a revised Associate Compensation Plan to better utilize commission dollars for growth, which included new income streams and leadership levels[20] Business Segment, Products and Product Development Mannatech operates as a single business segment, offering proprietary glyconutrient-based products with all manufacturing outsourced to third parties for flexibility and cost control Key Product Sales (2018 vs. 2017) | Product | 2018 Sales (in thousands) | % of Net Sales (2018) | 2017 Sales (in thousands) | % of Net Sales (2017) | | :--- | :--- | :--- | :--- | :--- | | Advanced Ambrotose® | $44,054 | 25.4% | $52,592 | 29.8% | | Ambrotose Life™ | $18,824 | 10.9% | — | —% | | TruHealth™ | $17,537 | 10.1% | $16,652 | 9.4% | | Manapol® Powder | $8,636 | 5.0% | $11,183 | 6.3% | | Ambrotose® | $7,695 | 4.4% | $8,459 | 4.8% | | Total | $96,746 | 55.8% | $88,886 | 50.3% | - The company's product development focuses on marketability, demand, regulatory considerations, and scientific data supporting efficacy and safety[32] - All products are manufactured by third-party contractors, allowing for operational flexibility and minimal capital investment. The company identifies alternative suppliers to mitigate risk[33] Operating Strengths and Business Strategy Mannatech's strengths include proprietary products, R&D, quality assurance, and experienced associates, with a strategy focused on financial results and associate retention - Key operating strengths include proprietary products, R&D, quality assurance, a global scientific advisory board, experienced associates, a flexible operating strategy, and an experienced management team[38][39][42] - The business strategy prioritizes improving financial results, attracting and retaining associates, planned international expansion, and developing new and enhanced products[47] Intellectual Property Mannatech protects its products and brand with 36 U.S. and 507 international trademarks, alongside 89 global patents for key product formulations - As of year-end 2018, the company had 36 registered U.S. trademarks and 507 registered foreign trademarks[48] - The company holds 89 patents in major global markets for technology related to its product formulations, with 13 patent applications pending[49] Associate Distribution System Mannatech's sales are driven by approximately 200,000 independent associates and preferred customers, compensated through a global plan with a standard product return policy - The number of active independent associate and preferred customer positions decreased from approximately 215,000 in 2017 to 200,000 in 2018[51] - Commissions and incentives range from approximately 35% to 43% of consolidated net sales, rewarding associates for direct and indirect sales[55] - The company offers a product return policy of up to 180 days in the US/Canada and 90 days in other countries for retail customers, with a similar policy for associates that includes a 10% restocking fee for unopened products[59][61] Government Regulations Mannatech's operations are subject to extensive U.S. and international regulations governing network marketing, product registration, and consumer protection in its 25 operating countries - In the U.S., the company is regulated by the FDA and FTC, particularly under the Dietary Supplement Health and Education Act of 1994 (DSHEA), which governs product safety, labeling, and marketing claims[65][67][71] - The company's network marketing system is subject to regulations in each country to ensure sales are made to consumers and earnings are based on product sales, not recruitment[76] - In China, multi-level marketing is prohibited. Mannatech operates under a cross-border e-commerce model, and its products are not allowed to be sold in physical stores unless registered with the China Food Safety Administration[88] - The company is subject to a wide range of specific regulations in its international markets, including Canada, Colombia, Mexico, Australia, New Zealand, Japan, Singapore, South Korea, Taiwan, Hong Kong, and various countries in the European Union[73][78][80] Competition and Employees Mannatech faces intense competition in the nutritional supplement industry and for independent associates, employing 248 people as of December 31, 2018 - The company competes with other nutritional supplement companies (e.g., Herbalife, Nu Skin) and other network marketing companies (e.g., Amway, Mary Kay) for both customers and independent associates[107][108] Employee Count (2018 vs. 2017) | Region | 2018 Employees | 2017 Employees | | :--- | :--- | :--- | | Americas | 159 | 162 | | Asia/Pacific | 75 | 79 | | EMEA | 14 | 11 | | Total | 248 | 252 | Risk Factors The company faces significant risks related to attracting and retaining associates, evolving government regulations, dependence on key products, international market performance, and cybersecurity threats - The business is highly dependent on its ability to attract and retain independent associates; failure to do so could harm the business. The loss of high-level associate leaders could negatively impact revenue[113][114] - Government regulations for network marketing and dietary supplements are a major risk. Changes in laws or enforcement by bodies like the FTC and FDA could materially limit the business model or lead to penalties[120][121][131] - A significant portion of revenue (55.8% in 2018) is derived from five key products. A decline in sales of these products would materially and adversely affect earnings[151] - International operations (73.9% of 2018 net sales) are subject to risks including currency exchange rate fluctuations, political and economic instability, and complex foreign laws like the FCPA[157][169] - The company's IT systems are vulnerable to failure and cyber-attacks. A compromise of data security could damage its reputation and result in significant costs and litigation, particularly with evolving data privacy laws like GDPR and PIPEDA[161][164][165] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[183] Properties The company leases all its properties, including its corporate headquarters in Flower Mound, Texas, and utilizes third-party facilities for global distribution and fulfillment - The company leases its corporate headquarters in Flower Mound, Texas (52,992 sq. feet, lease expires May 2028) and various other office and training facilities globally[185] - Mannatech utilizes third-party distribution and fulfillment facilities in its three operating regions (Americas, EMEA, Asia/Pacific) to minimize costs and maintain operational flexibility[187] Legal Proceedings The company is involved in an ongoing administrative proceeding in Korea regarding a $1.0 million customs assessment, with a final decision anticipated in Q2 2019 - Mannatech Korea, Ltd. is appealing a decision by the Busan High Court in favor of the Busan Custom Office (BCO) regarding a $1.0 million customs assessment from 2013. A final decision on the appeal is expected in Q2 2019[451] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[190] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Mannatech's common stock trades on Nasdaq under 'MTEX', with 1,275 shareholders of record and an ongoing stock repurchase program with $18.9 million remaining - The company's common stock is traded on Nasdaq under the symbol 'MTEX', with 1,275 shareholders of record as of February 28, 2019[193] Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Shares Purchased | Average Price Paid per Share | Dollar Value of Shares Remaining for Purchase (in thousands) | | :--- | :--- | :--- | :--- | | Oct 2018 | — | $ — | $ — | | Nov 2018 | — | $ — | $ — | | Dec 2018 | 5,095 | $19.63 | $18,902 | | Total | 5,095 | $19.63 | $18,902 | Selected Financial Data This item is not applicable as Mannatech is a Smaller Reporting Company - Not applicable for a Smaller Reporting Company[196] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, net sales decreased 1.8% to $173.6 million, resulting in a net loss of $3.9 million due to an operating loss and high effective tax rate, with cash significantly decreasing from financing activities Results of Operations For 2018, net sales decreased 1.8% to $173.6 million, leading to an operating loss of $0.1 million and a net loss of $3.9 million, primarily due to lower pack sales and a high effective tax rate Consolidated Operating Results (2018 vs. 2017, in thousands) | Metric | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $173,558 | $176,696 | $(3,138) | (1.8)% | | Gross profit | $139,082 | $141,029 | $(1,947) | (1.4)% | | Income (loss) from operations | $(90) | $2,519 | $(2,609) | (103.6)% | | Net loss | $(3,886) | $(1,787) | $(2,099) | (117.5)% | Net Sales by Region (2018 vs. 2017, in millions) | Region | 2018 Sales | % of Total (2018) | 2017 Sales | % of Total (2017) | | :--- | :--- | :--- | :--- | :--- | | Americas | $58.7 | 33.8% | $64.2 | 36.3% | | Asia/Pacific | $101.7 | 58.6% | $98.8 | 55.9% | | EMEA | $13.2 | 7.6% | $13.7 | 7.8% | | Total | $173.6 | 100.0% | $176.7 | 100.0% | - Pack sales and associate fees decreased 82.4% to $2.5 million from $14.2 million in 2017. This was a strategic result of the 2017 Compensation Plan, which replaced higher-priced packs with low-cost annual associate fees in most markets[221][223][225] - Other operating costs increased by $2.8 million (10.6%), largely due to a $1.3 million non-recurring cost for moving to a new corporate headquarters[236][237] - The effective tax rate was 894.7% in 2018, up from 172.7% in 2017, primarily due to the mix of earnings across jurisdictions, valuation allowances, and the impact of Global Intangible Low-Taxed Income (GILTI) from the 2017 Tax Act[248][413] Liquidity and Capital Resources As of December 31, 2018, cash and equivalents decreased by $16.2 million to $30.6 million, primarily due to $12.1 million used in financing activities, including stock repurchases and dividends Net Cash Flows (2018 vs. 2017, in millions) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Operating activities | $(0.2) | $10.3 | | Investing activities | $(2.3) | $(1.3) | | Financing activities | $(12.1) | $(3.1) | - Cash and cash equivalents held in foreign countries totaled $19.9 million at year-end 2018, down from $30.6 million in 2017[178][257] - Cash used in financing activities of $12.1 million in 2018 included $7.5 million for stock repurchases and $3.1 million for dividend payments[256] Contractual Obligations and Off-Balance Sheet Arrangements As of December 31, 2018, the company had total contractual obligations of $20.9 million, mainly from purchase obligations and operating leases, with no off-balance sheet arrangements Summary of Contractual Obligations (as of Dec 31, 2018, in thousands) | Obligation Type | Total Commitment | | :--- | :--- | | Capital lease obligations | $156 | | Purchase obligations | $9,844 | | Operating leases | $7,319 | | Note payable and other financing | $1,692 | | Employment agreements | $420 | | Royalty agreement | $124 | | Tax liability | $177 | | Other obligations | $1,141 | | Total | $20,873 | - The company has a supply agreement requiring minimum purchases of aloe vera-based products totaling $9.8 million through 2020[179][447] - The company reports no off-balance sheet arrangements[266] Critical Accounting Policies and Estimates Mannatech's critical accounting policies involve significant judgment for inventory reserves, asset impairment, income taxes, revenue recognition under ASC 606, and stock-based compensation valuation - A valuation allowance of $12.8 million was maintained against deferred tax assets as of Dec 31, 2018, as they did not meet the 'more likely than not' realization criteria[278][418] - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective approach. The adoption did not have a material impact on financial statements but led to increased disclosures[395] Customer Loyalty Program Deferred Revenue (in thousands) | Description | 2018 | 2017 | | :--- | :--- | :--- | | Beginning Balance | $6,406 | $7,033 | | Points Vested/Unvested | $13,555 | $19,584 | | Points Used/Expired | $(15,730) | $(20,211) | | Ending Balance | $4,231 | $6,406 | - Stock-based compensation expense is calculated using the Black-Scholes model, which requires subjective assumptions for volatility, option life, and interest rates. As of Dec 31, 2018, $0.6 million of unrecognized compensation expense remained[293][444] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exchange rate fluctuations, as 73.9% of 2018 net sales were international, and it does not use derivative financial instruments to manage this risk - The primary market risk is foreign currency exchange rate fluctuations, as 73.9% of 2018 net sales were generated outside the U.S[169][302] - The company does not use any hedging contracts or derivative financial instruments to manage its exposure to market risks[301][303] Financial Statements and Supplementary Data The Consolidated Financial Statements and Supplementary Data required for this item are provided in Item 15 of this report - The required financial statements and supplementary data are filed under Item 15 of this Form 10-K[305] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[306] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes during the quarter - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were effective[307] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[311] - No material changes were made to the internal control over financial reporting during the quarter ended December 31, 2018[308] Other Information The company reports no other information for this item - None[313] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement to be filed within 120 days after the fiscal year-end - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive proxy statement to be filed within 120 days of December 31, 2018[315] Part IV Exhibits and Financial Statement Schedule This section lists the documents filed as part of the annual report, including Consolidated Financial Statements, the Independent Registered Public Accounting Firm's Report, a Financial Statement Schedule, and an Exhibit List - This section contains the index to the Consolidated Financial Statements, which begin on page F-1 of the report[317] - An Exhibit List is provided, detailing all documents filed with or incorporated by reference into the Form 10-K[319][322] Form 10-K Summary This item is not applicable to the company - Not Applicable[320]